-----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, FMVtL7rvzZsZQit12hxAAbL9CJEh9rqxdeJZpFo5NhKucUfRgLUrh9ledOMEUvRd C5uN6dWRIQiko9zzEBSJfA== 0001013564-97-000004.txt : 19970416 0001013564-97-000004.hdr.sgml : 19970416 ACCESSION NUMBER: 0001013564-97-000004 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARM FAMILY HOLDINGS INC CENTRAL INDEX KEY: 0001013564 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 141789227 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11941 FILM NUMBER: 97580752 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 10-K/A 1 FARM FAMILY HOLDINGS, INC. - 1996 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 1) ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission File No. 1-11941 FARM FAMILY HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware IRS No. 14-1789227 344 Route 9W, Glenmont, New York 12077 Registrant's telephone number: (518) 431-5000 Securities registered pursuant to Section 12(b)of the Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, par value $0.01 New York Stock Exchange per share (the "Common Stock") Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. On February 24, 1997, Registrant had 5,253,813 shares of Common Stock outstanding. Of these, 5,242,002 shares, having an aggregate market value (based on the closing price of these shares as reported in a summary of composite transactions in the Wall Street Journal for stocks listed on the New York Stock Exchange February 24, 1997) of approximately $117,945,000, were owned by stockholders other than directors and executive officers of the Registrant. Documents Incorporated By Reference Portions of the following documents are incorporated by reference as follows: Documents Incorporated Part of Form 10K ---------------------- ---------------- Farm Family Holdings, Inc. I and II Annual Report to Stockholders for the fiscal year ended December 31, 1996 (the "Annual Report") Farm Family Holdings, Inc. III Proxy Statement for the 1997 Annual Meeting of Stockholders (the "Proxy Statement") The registrant hereby amends the following items, financial statements, exhibits or other portions of its Annual Report on Form 10-K for the year ended December 31, 1996, filed on March 31, 1997, as set forth in the pages attached hereto: Part IV: Item 14(a)3. Exhibits: Exhibit 13 - Farm Family Holdings, Inc. 1996 Annual Report SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Farm Family Holdings, Inc. Registrant By: /s/ Philip P. Weber ------------------------- Philip P. Weber, President April 10, 1997 Exhibit 13 Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL Corporate Profile - ----------------- The following discussion and analysis of financial condition and results of operations includes the operations of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiary, Farm Family Casualty Insurance Company ("Farm Family Casualty") and Farm Family Casualty's wholly owned subsidiary, Rural Agency and Brokerage, Inc. (collectively referred to as the "Company"). The operations of the Company are also closely related with those of its affiliates, Farm Family Life Insurance Company and Farm Family Life Insurance Company's wholly owned subsidiary, United Farm Family Insurance Company. Conversion and Initial Public Offering - -------------------------------------- On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family Mutual") converted from a mutual property and casualty insurance company to a stockholder owned property and casualty insurance company and became a wholly owned subsidiary of Farm Family Holdings pursuant to a Plan of Reorganization and Conversion (the "Plan of Conversion"). In addition, Farm Family Mutual was renamed Farm Family Casualty Insurance Company. As part of the Plan of Conversion, Farm Family Holdings was formed and the Farm Family Mutual policyholders received 2,237,000 shares of Farm Family Holding's common stock and $11,735,000 in cash in exchange for their membership interest in Farm Family Mutual. On July 23, 1996, Farm Family Holdings made an initial public offering of its common stock at a price of $16 per share. Farm Family Holdings received net proceeds of $41,453,000 for 2,786,000 shares sold in the initial public offering. In addition, Farm Family Holdings received $3,427,000 for 214,000 shares purchased by policyholders of Farm Family Mutual in a subscription offering. In addition, pursuant to the Plan of Conversion, holders of Farm Family Mutual debt could elect to exchange their debt instruments for shares of common stock or cash. As a result, there were 17,000 common shares and $1,107,000 in cash exchanged for debt with an outstanding principal amount of $1,371,000. Farm Family - ----------- Farm Family Casualty is a specialized property and casualty insurer of farms, other generally related businesses and residents of rural and suburban communities principally in the Northeastern United States. Farm Family Casualty provides property and casualty insurance coverages to members of the state Farm Bureau(R) organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states. Membership in a state Farm Bureau organization is a prerequisite for voluntary insurance coverage (except for employees of the Company and its affiliates). Associate Farm Bureau memberships are generally available to persons not engaged in agricultural businesses. Operating Environment - --------------------- The operating results of companies in the property and casualty insurance industry have historically been subject to fluctuations due to competition, economic conditions, weather and various other factors. Factors affecting the results of operations of the property and casualty industry include price competition and aggressive marketing which historically have resulted in higher combined loss and expense ratios. The Company's premium revenue is a function of changes in average premiums per policy and the growth in the number of policies. Premium rates are regulated by the state insurance departments in the states in which the Company operates. Because of the nature of the property and casualty insurance industry, it is difficult to predict future trends in the industry's overall 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. Residual market premium rates for automobile insurance have generally been inadequate. The amount of future losses or assessments from residual market mechanisms can not be predicted with certainty and could have a material adverse effect on the Company's results of operations. For the years ended December 31, 1996, 1995, and 1994, 38.6%, 39.1% and 38.5%, respectively, of the Company's direct written premiums were derived from policies written in New York and 22.6%, 20.8%, and 19.6%, respectively, were derived from policies written in New Jersey. For these periods, no other state accounted for more than 10.0% of the Company's direct written premiums. As a result of the concentration of the Company's business in the states of New York and New Jersey and more generally in the Northeastern United States, the Company's results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States. Products - -------- The Special Farm Package is a flexible, multi-line package of insurance coverages which the Company regards as its "flagship" product. For the year ended December 31, 1996, 24.5% of the Company's total direct written premiums were derived from the Special Farm Package product. The Company concentrates on its primary products: personal and commercial automobile, the Special Farm Package, businessowners, and homeowners policies. The Company underwrites its commercial and personal lines risks by evaluating historical loss experience, current prevailing market conditions, and product profitability with consistently applied standards. The adequacy of premium rates is affected mainly by the severity and frequency of claims and changes in the competitive, legal and regulatory environment in which the Company operates. Expense Management - ------------------ During the fourth quarter of 1996, the Company announced the implementation of a voluntary early retirement program and other changes to the Company's benefit plans as part of its continuous expense management program. The Company recorded a nonrecurring charge, net of an income tax benefit of $412,000, of $765,000 for the Company's share of the costs of this voluntary early retirement program. Eligibility for the program was based on age and years of service. In addition, effective January 1, 1997, the Company froze benefits available through its defined benefit plan and enhanced its defined contribution plan. As a result, the Company's contributions to the defined contribution plan will vary to a greater extent based upon the Company's profitability than the contributions previously required to fund its defined benefit plan. The Board of Directors also approved a stock option plan, subject to shareholder approval, and an annual incentive plan for officers. RESULTS OF OPERATIONS The Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995 Premiums - -------- Premium revenue increased $13.9 million or 11.8%, during the year ended December 31, 1996 to $130.8 million from $116.9 million in 1995. The increase in premium revenue in 1996 resulted from an increase of $11.1 million in earned premiums on additional business directly written by the Company (principally in New York and New Jersey) and an increase of $2.4 million in earned premiums retained by the Company and not ceded to reinsurers, in addition to an increase of $0.4 million in earned premiums assumed. The $11.1 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $9.9 million, or 9.2%, in earned premiums from the Company's primary products (personal and commercial automobile policies other than assigned risk business, the Special Farm Package, businessowners policies, homeowners policies, and Special Home Package) and to an increase of $0.7 million in earned premiums on workers' compensation business. The number of policies in force related to the Company's primary products increased by 8.6% to approximately 114,000 in 1996 from approximately 105,000 in 1995 and the average premium earned for each such policy increased by 0.6% in 1996. The $2.4 million increase in earned premiums retained by the Company was primarily the result of a change in the terms of certain of the Company's reinsurance agreements pursuant to which the earned premiums ceded by the Company were reduced. Net Investment Income - --------------------- Net investment income increased $1.6 million or 11.3% to $15.9 million for the year ended December 31, 1996 from $14.3 million in 1995. The increase in net investment income was primarily the result of an increase in cash and invested assets (at amortized cost) of approximately $34.7 million, or 17.7%. The increase in average cash and invested assets was primarily attributable to the net proceeds of $31.0 million from the initial public offering and subscription offering received in July 1996. The return realized on the Company's cash and invested assets was 7.5% in 1996 and 7.6% in 1995. Net Realized Investment Gains (Losses) - --------------------------------------- Net realized investment losses were $0.6 million for the year ended December 31, 1996 compared to a gain of $0.9 million in 1995. Losses and Loss Adjustment Expenses - ----------------------------------- Losses and loss adjustment expenses increased $11.8 million, or 14.2%, to $95.0 million for the year ended December 31, 1996 from $83.2 million in 1995. The increase in losses and loss adjustment expenses was primarily attributable to the overall growth in the Company's business, as well as the frequency of weather related losses in the Northeastern United States during the three months ended March 31, 1996. Loss and loss adjustment expenses were 72.6% of premium revenue in 1996 compared to 71.1% of premium revenue in 1995. Losses believed to be weather related aggregated $10.6 million in 1996 compared to $5.2 million in 1995. Underwriting Expenses - --------------------- Underwriting expenses increased $3.3 million, or 9.3%, to $38.2 million for the year ended December 31, 1996 from $34.9 million for the same period in 1995. For the year ended December 31, 1996, underwriting expenses were 29.2% of premium revenue compared to 29.8% in 1995. The reduction in the Company's underwriting expense ratio was primarily attributable to a smaller relative increase in overhead expenses than in premium revenue for the period. Federal Income Tax Expense - -------------------------- Federal income tax expense decreased $1.3 million to $3.7 million in 1996 from $5.0 million in 1995. Federal income tax expense was 30.3% of income before federal income taxes in 1996 compared to 34.2% in 1995. The decrease in the Company's effective federal income tax rate was primarily attributable to an increase in tax exempt interest income in 1996. Net Income - ---------- Net income decreased $2.7 million to $6.9 million in 1996 from $9.6 million in 1995 primarily as a result of the foregoing factors and the impact of $1.5 million of expenses related to the Plan of Conversion which the Company has identified as an extraordinary item. In addition, the Company implemented a voluntary early retirement program which resulted in a one time charge to earnings, net of an income tax benefit of $0.4 million, of $0.8 million in the last quarter of 1996. The Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994 Premiums - -------- Premium revenue increased $15.5 million or 15.2%, during the year ended December 31, 1995 to $116.9 million from $101.5 million in 1994. The increase in premium revenue in 1995 resulted from an increase of $14.3 million in earned premiums on additional business directly written by the Company (principally in New York and New Jersey) and an increase of $2.3 million in earned premiums retained by the Company and not ceded to reinsurers, which were partially offset by a decrease of $1.1 million in earned premiums assumed. The $14.3 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $10.8 million, or 11.1%, in earned premiums from the Company's primary products (personal and commercial automobile policies other than assigned risk business, the Special Farm Package, businessowners policies, homeowners policies, and Special Home Package) and to an increase of $1.8 million in earned premiums on assigned risk business. The number of policies in force related to the Company's primary products increased by 8.4% to approximately 105,000 in 1995 from approximately 97,000 in 1994 and the average premium earned for each such policy increased by 2.5% in 1995. The $2.3 million increase in earned premiums retained by the Company was primarily the result of a change in the terms of certain of the Company's reinsurance agreements pursuant to which both the amount of earned premiums ceded by the Company and the ceding commissions received by the Company were reduced. The $1.1 million decrease in earned premiums assumed was attributable to a reduction in premiums assumed from mandatory pools as a result of the depopulation of such pools. Net Investment Income - --------------------- Net investment income increased $1.1 million or 8.6% to $14.3 million for the year ended December 31, 1995 from $13.2 million in 1994. The increase in net investment income was primarily the result of an increase in cash and invested assets (at amortized cost) of approximately $17.2 million, or 9.6%. The return realized on the Company's cash and invested assets was 7.6% in 1995 and 1994. Net Realized Investment Gains - ----------------------------- Net realized investment gains were $0.9 million for the year ended December 31, 1995 compared to $1.3 million in 1994. Losses and Loss Adjustment Expenses - ----------------------------------- Losses and loss adjustment expenses increased $0.5 million, or 0.6%, to $83.2 million for the year ended December 31, 1995 from $82.7 million in 1994. The increase in losses and loss adjustment expenses was primarily attributable to the overall growth in the Company's business and was significantly offset by a reduction in the loss and loss adjustment expense ratio. Loss and loss adjustment expenses were 71.1% of premium revenue in 1995 compared to 81.5% of premium revenue in 1994. The decrease in the loss and loss adjustment expense ratio was primarily attributable to improved loss ratios on the Company's personal and commercial automobile lines and to a decline in the frequency and severity of weather related property losses in 1995 as compared with 1994. Losses believed to be weather related aggregated $5.2 million in 1995 compared to $7.9 million in 1994. To a much lesser extent, the decrease in the loss and loss adjustment expense ratio on assumed reinsurance also contributed to the decrease in the Company's overall loss and loss adjustment expense ratio during 1995. Underwriting Expenses - --------------------- Underwriting expenses increased $6.1 million, or 21%, to $34.9 million for the year ended December 31, 1995 from $28.8 million for the same period in 1994. For the year ended December 31, 1995, underwriting expenses were 29.8% of premium revenue compared to 28.4% in 1994. A reduction in 1994 of $2.2 million in amounts accrued for the Company's share of the deficit of the New Jersey Market Transition Facility had a favorable impact on the Company's underwriting expense ratio in that year. Without taking into account the effect of this reduction, underwriting expenses in 1994 would have been 30.5% of premium revenue Federal Income Tax Expense - -------------------------- Federal income tax expense increased $3.6 million to $5.0 million in 1995 from $ 1.4 million in 1994. Federal income tax expense was 34.2% of income before federal income tax expense in 1995 compared to 29.1% in 1994. The increase in the Company's effective federal income tax rate was primarily attributable to the increase in income before federal income tax expense, certain expenses related to the Plan of Conversion , and reductions in tax exempt interest income in 1995. Net Income - ---------- Net income increased $6.1 million to $9.6 million in 1995 from $3.5 million in 1994 primarily as a result of the foregoing factors. LIQUIDITY AND CAPITAL RESOURCES Historically, the principal sources of the Company's cash flow have been premiums, investment income, maturing investments, and proceeds from sales of invested assets. In addition to the need for cash flow to meet operating expenses, the liquidity requirements of the Company relate primarily to the payment of losses and loss adjustment expenses. The liquidity requirements of the Company vary because of the uncertainties regarding the settlement dates for liabilities for unpaid claims and because of the potential for large losses, either individually or in the aggregate. During 1996, the Company continued to reduce its holdings of non-investment grade fixed maturities to improve the overall quality of its investment portfolio. The aggregate carrying value of fixed maturity securities rated as non-investment grade by the NAIC was reduced to $6.9 million, or 3.2% of its fixed maturity portfolio, at December 31, 1996 from $10.8 million, or 5.6% of its fixed maturity portfolio, at December 31, 1995. High yield corporate bonds constituted most of the non-investment grade securities held by the Company as of December 31, 1996. As a result of the reduction in holdings of certain non-investment grade securities, the Company anticipates that future investment yields may be lower than they otherwise would be. Approximately 4% of the Company's investment portfolio consists of investments in mortgage-backed securities. The mortgage-backed securities held by the Company as of December 31, 1996 were primarily GNMA, FNMA, and Federal Home Loan Mortgage Corp. pass-through securities. The Company currently has no investments in such derivative financial instruments as futures, forward, swap, or option contracts, or other financial instruments with similar characteristics. The market value of the Company's fixed maturity investments is subject to fluctuations directly attributable to prevailing rates of interest as well as other factors. As of December 31, 1996, the aggregate market value of the Company's fixed maturity investments exceeded the aggregate amortized cost of such investments by $5.1 million. As of December 31, 1995, the aggregate market value of the Company's fixed maturity investments exceeded the aggregate amortized cost of such investments by $10.2 million The Company has in place an unsecured line of credit with Key Bank, NA under which it may borrow up to $2.0 million and, effective January 1997, a $7.0 million unsecured line of credit with Fleet National Bank. At December 31, 1996, no amounts were outstanding on either line of credit, each of which has an annual interest rate equal to such bank's prime rate. In addition, the Company had notes payable outstanding consisting of $0.3 million of debentures and $1.0 million of subordinated surplus certificates (collectively "the Surplus Notes"). The Surplus Notes bear interest at the rate of 8% per annum, have no maturity date, and principal and interest are repayable only with the approval of the Insurance Department of the State of New York. Net cash provided by operating activities was $11.8 million, $16.4 million, and $8.6 million during the years ended December 31, 1996, 1995, and 1994, respectively. The decrease in cash provided by operating activities in 1996 was primarily attributable to the decrease in net income which included the impact of $1.5 million of expenses related to the Plan of Conversion which the Company has identified as an extraordinary item during 1996 compared to 1995. The increase in net cash provided by operating activities in 1995 was primarily attributable to the increase in net income and a decrease in payments for losses and loss adjustment expenses during 1995 compared to 1994. Net cash used in investing activities was $41.1 million, $18.5 million, and $7.7 million during the years ended December 31, 1996, 1995, and 1994, respectively. The increase in net cash used in investing activities in 1996 resulted primarily from a reduction in proceeds on the maturities and sales of fixed maturities and the investment of the net proceeds from the Company's initial public offering. The increase in net cash used in investing activities in 1995 resulted from the net increase in cash available from the Company's operations during 1995 and a corresponding increase in investments in short-term investments and fixed maturities. Net cash provided by financing activities for the year ended December 31, 1996 of $30.9 million was the result of the Company's initial public offering of its common stock on July 23, 1996. The Company received net proceeds of $41.5 million for 2,786,000 shares sold in the initial public offering as well as $3.4 million for 214,000 shares sold in a subscription offering to policyholders. The Company made payments of $11.7 million to policyholders in exchange for their membership interest in Farm Family Mutual and $1.1 million to holders of Farm Family Mutual debt pursuant to the Plan of Conversion. In addition, the net proceeds were utilized to pay certain expenses associated with the initial public offering of $1.1 million. Subsequent to the initial public offering, Farm Family Holdings made an $18.0 million capital contribution to Farm Family Casualty. The Company purchases reinsurance in part to mitigate the impact of large or unusual losses and loss expenses on its liquidity. As a condition of writing business in certain states, the Company participates in a number of mandatory pools and the Company may be required to pay assessments to the extent such pools require the funding of deficits in the future. The principal source of liquidity for Farm Family Holdings will be derived from dividend payments received from the Farm Family Casualty. The New York Insurance Law regulates the distribution of dividends and other payments to Farm Family Holdings by Farm Family Casualty. Such restrictions or any subsequently imposed restrictions may in the future affect Farm Family Holdings' liquidity. FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Income ($ in thousands)
- -------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- Revenues: Premiums $130,780 $116,936 $101,466 Net investment income 15,952 14,326 13,190 Realized investment gains (losses), net (640) 912 1,340 Other income 905 840 696 ------------------------------------------ Total revenues 146,997 133,014 116,692 ------------------------------------------ Losses and Expenses: Losses and loss adjustment expenses 94,977 83,184 82,680 Underwriting expenses 38,160 34,902 28,768 Early retirement program expense 1,177 - - Interest expense 167 216 220 Dividends to policyholders 373 122 51 ------------------------------------------ Total losses and expenses 134,854 118,424 111,719 ------------------------------------------ Income before federal income tax expense and extraordinary item 12,143 14,590 4,973 Federal income tax expense 3,676 4,984 1,447 ------------------------------------------ Income before extraordinary item 8,467 9,606 3,526 Extraordinary item - demutualization expenses 1,543 - - ------------------------------------------ Net income $6,924 $9,606 $3,526 ------------------------------------------ Per Common Share: Income before extraordinary item $2.13 $3.20 $1.18 ------------------------------------------ Net income $1.74 $3.20 $1.18 ------------------------------------------ ------------------------------------------ See accompanying notes to Consolidated Financial Statements.
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES THE COMPANY MUTUAL INSURANCE COMPANY Consolidated Balance Sheets ($ in thousands)
As of December 31, 1995 1996 ASSETS Investments: Fixed Maturities Available for sale, at fair value (Amortized cost: $214,226 in 1996 and $171,694 in 1995 ) $219,188 $181,189 Held to maturity, at amortized cost (Fair value: $9,973 in 1996 and $13,100 in 1995) 9,782 12,386 Equity securities Available for sale, at fair value (Cost: $2,546 in 1996 and $334 in 1995) 7,908 4,746 Mortgage loans 1,745 1,822 Other invested assets 748 1,246 Short-term investments 5,333 6,532 ------------------------------ Total investments 244,704 207,921 ------------------------------ Cash 4,110 2,410 Insurance receivables: Reinsurance receivables 10,743 13,773 Premiums receivable 22,663 21,791 Deferred acquisition costs 10,682 10,527 Accrued investment income 4,861 4,260 Deferred income tax asset, net 1,520 - Prepaid reinsurance premiums 1,944 1,864 Receivable from affiliates, net 16,133 13,860 Other assets 2,052 1,882 ------------------------------ Total Assets $319,412 $278,288 ------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses $141,220 $137,978 Unearned premium reserve 55,945 52,799 Reinsurance premiums payable 641 2,635 Accrued expenses and other liabilities 9,561 7,788 Debt 1,304 2,707 Deferred income tax liability, net - 217 ------------------------------ Total liabilities 208,671 204,124 ------------------------------ Commitments and contingencies - ----------------------------- Stockholders' 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 5,253,813 shares issued and outstanding 53 - Additional Paid in Capital 98,140 - Retained earnings 5,838 65,284 Net unrealized investment gains 6,710 8,998 Minimum pension liability adjustment - (118) ------------------------------ Total stockholders' equity 110,741 74,164 ------------------------------ Total Liabilities and Stockholders' Equity $319,412 $278,288 ------------------------------ See accompanying notes to Consolidated Financial Statements.
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity ($ in thousands)
- ------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Common stock Balance, beginning of year $ - $ - $ - Common stock issued 53 - - ------------------------------------ Balance, end of year 53 - - ------------------------------------ Additional Paid in Capital Balance, beginning of year - - - Initial public offering and subscription offering, net 43,715 - - Payments to policyholders (12,210) - - Conversion of debt to common stock 265 - - Demutualization of Farm Family Mutual 66,370 - - ------------------------------------ Balance, end of year 98,140 - - ------------------------------------ Retained earnings Balance, beginning of year 65,284 55,678 52,152 Net income 6,924 9,606 3,526 Demutualization of Farm Family Mutual (66,370) - - ------------------------------------ Balance, end of year 5,838 65,284 55,678 ------------------------------------ Net unrealized appreciation (depreciation) of investments Balance, beginning of year 8,998 (2,701) 8,360 Change in unrealized appreciation (depreciation), net (2,288) 11,699 (11,061) ------------------------------------ Balance, end of year 6,710 8,998 (2,701) ------------------------------------ Minimum pension liability adjustment Balance, beginning of year (118) - - Minimum pension liability adjustment 118 (118) - ------------------------------------ Balance, end of year - (118) - ------------------------------------ Total Stockholders' Equity $110,741 $74,164 $52,977 ------------------------------------ ------------------------------------ See accompanying notes to Consolidated Financial Statements.
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Statements of Consolidated Cash Flows ($ in thousands)
- ----------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $6,924 $9,606 $3,526 -------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Realized investment (gains) losses 640 (912) (1,340) Amortization of bond discount 130 62 77 Deferred income taxes (505) 581 596 Extraordinary item - demutualization expense 1,543 - - Changes in: Reinsurance receivables 3,030 1,254 1,910 Premiums receivable, net (872) (3,062) (2,732) Deferred acquisition costs (155) (1,856) (39) Accrued investment income (601) (213) (426) Prepaid reinsurance premiums (80) (58) (367) Receivable from affiliates, net (2,273) (3,293) 1,699 Other assets (283) 742 (803) Reserves for losses and loss adjustment expenses 3,242 10,024 4,477 Unearned premium reserve 3,146 3,956 4,541 Reinsurance premiums payable (1,994) (1,394) 4 Accrued expenses and other liabilities 1,497 1,001 (2,030) Income taxes payable - - (459) -------------------------------------- Total adjustments 6,465 6,832 5,108 -------------------------------------- Net cash provided by operating activities before extraordinary item 13,389 16,438 8,634 Extraordinary item - demutualization expenses (1,543) - - -------------------------------------- Net cash provided by operating activities 11,846 16,438 8,634 -------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales: Fixed maturities available for sale 5,670 28,466 26,102 Other invested assets 144 - 732 Investment collections: Fixed maturities available for sale 9,405 15,435 16,025 Fixed maturities held to maturity 2,561 514 418 Mortgage loans 77 68 58 Investment purchases: Fixed maturities available for sale (58,430) (58,339) (54,010) Fixed maturities held to maturity - (1,598) (1,040) Equity securities (2,042) - - Change in short-term investments, net 1,199 (3,519) 90 Change in other invested assets 344 480 3,186 Proceeds from sale of property and equipment - - 711 -------------------------------------- Net cash used in investing activities (41,072) (18,493) (7,728) -------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from IPO and Subscription Offerings 44,880 - - subscription Demutualization payments to Policyholders and Noteholders (12,842) - - IPO Expenses paid (1,080) - - Principal payments on debt (32) (42) (34) -------------------------------------- Net cash provided by (used in) financing activities 30,926 (42) (34) -------------------------------------- Net increase (decrease) in cash 1,700 (2,097) 872 Cash, beginning of year 2,410 4,507 3,635 -------------------------------------- Cash, end of year $4,110 $2,410 $4,507 -------------------------------------- -------------------------------------- See accompanying 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 Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiary, Farm Family Casualty Insurance Company ("Farm Family Casualty") and its wholly owned subsidiary, Rural Agency and Brokerage, Inc., ("RAB") (collectively referred to as the "Company"). All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company provides property and casualty insurance coverages to members of the state Farm Bureau organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states. Membership in the state Farm Bureau organizations is a prerequisite for voluntary insurance coverage, except for employees of the Company and its affiliates. The operations of the Company are closely related with those of its affiliates, Farm Family Life Insurance Company ("Farm Family Life") and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family"). (see Note 10.) Farm Family Life is a stock life insurance company owned by the state Farm Bureau organizations of the ten states in which the Company operates. The Company and Farm Family Life are affiliated by common management, shared agents and employees and similar Boards of Directors. Investments: Fixed maturities include bonds, redeemable preferred stocks and mortgage-backed securities. Investments in fixed maturities which the Company has both the ability and positive intent to hold to maturity are classified as held to maturity and carried at amortized cost. Fixed maturities which may be sold prior to their contractual maturity are classified as available for sale and are carried at fair value. The difference between amortized cost and fair value of fixed maturities classified as available for sale, net of deferred income taxes, is reflected as a component of stockholders' equity. Equity securities include common and non-redeemable preferred stocks which are carried at fair value. The difference between cost and fair value of equity securities, less deferred income taxes, is reflected as a component of stockholders' equity. Mortgage loans are carried at their outstanding principal balance. The carrying values of all investments are reviewed on an ongoing basis. If this review indicates a decline in fair value below cost is other than temporary, the Company's carrying value in the investment is reduced to its estimated realizable value and a specific write-down is taken. Such write-downs are included in realized investment gains and losses. Short-term investments are carried at cost which approximates fair value. Investment income consists primarily of interest and dividends. Interest is recognized on an accrual basis and dividends are recorded on the ex-dividend date. Interest income on mortgage-backed securities is determined 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 acquisition costs. Deferred income taxes also arise from unrealized investment gains or losses on equity securities and fixed maturities classified as available for sale. Property-Liability Insurance Accounting: Premiums are deferred and earned on a pro rata basis over the terms of the respective policies. Amounts paid for ceded reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to premium. Premiums receivable are recorded at cost less an allowance for doubtful accounts. Policy acquisition costs that vary with and are primarily related to the production of business have been deferred. Deferred acquisition costs primarily consist of agents' compensation, premium taxes, and certain other underwriting expenses. Such deferred acquisition costs are amortized as premium revenue is recognized. Deferred acquisition costs are limited to their estimated realizable value, which gives effect to the premium to be earned, related investment income, and losses and loss adjustment expenses expected to be incurred as the premium is earned. Reserves for losses and loss adjustment expenses represent estimates of the ultimate amounts necessary to settle reported losses and a provision for incurred but not reported claims of insured losses. The reserve estimates are based on known facts and circumstances, including the Company's experience with similar cases and historical trends involving reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions and public attitudes. The reserves for losses and loss adjustment expenses include case basis estimates of reported losses, estimates of incurred but not reported losses based upon prior experience adjusted for current trends, and estimates of losses to be paid under assumed reinsurance contracts. Estimated amounts of recoverable salvage and subrogation are deducted from the reserves for losses and loss adjustment expenses. The establishment of appropriate reserves, as well as related amounts recoverable under reinsurance contracts is an inherently uncertain process. Reserve estimates are regularly reviewed and updated, using the most current information available. Any resulting adjustments, which may be material, are reflected in current operations (see Note 7). Net Income Per Share: The weighted average shares of common stock used in the computation of net income per share and income per share before extraordinary item were 3,979,115 in 1996 and 3,000,000 in 1995 and 1994. The weighted average shares of common stock in all periods give effect to the allocation of 3,000,000 shares of common stock to eligible policyholders on July 26, 1996 pursuant to Farm Family Casualty's conversion from a mutual company to a stockholder owned company. 2. Plan of Reorganization and Conversion On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family Mutual") converted from a mutual property and casualty insurance company to a stockholder owned property and casualty insurance company and changed its name to Farm Family Casualty Insurance Company. The conversion was made pursuant to a Plan of Reorganization and Conversion ("the Plan"). As part of the Plan, Farm Family Holdings was formed and the policyholders received 2,237,000 shares of Farm Family Holdings common stock and $11,735,000 in cash in exchange for their membership interest in Farm Family Mutual. On July 23, 1996 Farm Family Holdings made an initial public offering of its common stock at a price of $16 per share. Farm Family Holdings received net proceeds of $41,453,000 for 2,786,000 shares sold in the initial public offering. In addition, Farm Family Holdings received $3,427,000 for 214,000 shares purchased by policyholders of Farm Family Mutual in a subscription offering. As part of the Plan, holders of Farm Family Mutual debt (see Note 8) could elect to exchange their debt instruments for shares of stock or cash. As a result, there were 17,000 shares and $1,107,000 in cash exchanged for debt with an outstanding principal amount of $1,371,000 plus accrued interest thereon. Farm Family Holdings has entered into an Option Purchase Agreement, dated February 14, 1996 (the "Option Purchase Agreement"), with the shareholders of Farm Family Life pursuant to which Farm Family Holdings has, for a two year period commencing on July 26, 1996, the option to acquire Farm Family Life subject to certain conditions, which include the approval of Farm Family Holdings' shareholders and applicable regulatory authorities. Although Farm Family Holdings believes that the acquisition of Farm Family Life would be desirable under appropriate circumstances, Farm Family Holdings is not in a position at this time to predict with any certainty whether the option to acquire Farm Family Life will in fact be exercised. Farm Family Holdings' decision to exercise the option will depend, among other things, on the exercise price for the shares of Farm Family Life, an evaluation of the financial statements prepared in accordance with generally accepted accounting principles and prospects of Farm Family Life, the outcome of a vote by the Farm Family Holdings' shareholders, and the receipt of applicable regulatory approvals. Farm Family Life's financial statements are prepared on the basis of statutory accounting practices prescribed or permitted by insurance regulatory authorities. Financial statements for Farm Family Life prepared in accordance with generally accepted accounting principles do not currently exist. 3. Investments The amortized cost, fair value and gross unrealized gains and losses of available for sale securities and held to maturity securities at December 31, 1996 and 1995 are as follows:
($ in thousands) 1996 Amortized Gross Unrealized Fair Available for Sale Cost Gains Losses Value ------------------ ---- ----- ------ ----- Fixed maturities: U.S. Government & Agencies $18,401 $421 $79 $18,743 States, Municipalities & Political Subdivisions 42,568 1,500 118 43,950 Corporate 135,485 3,918 1,527 137,876 Mortgage-backed Securities 9,676 666 ---- 10,342 Redeemable Preferred Stock 8,096 276 95 8,277 ------------------------------------------------ Total fixed maturities 214,226 6,781 1,819 219,188 Equity securities 2,546 5,431 69 7,908 ------------------------------------------------ Total Available for Sale $216,772 $12,212 $1,888 $227,096 ------------------------------------------------ Held to Maturity ---------------- Fixed maturities: States, Municipalities & Political Subdivisions $5,423 $93 $34 $5,482 Corporate 4,359 186 54 4,491 ------------------------------------------------ Total Held to Maturity $9,782 $279 $88 $9,973 ------------------------------------------------ 1995 Available for Sale ------------------ Fixed maturities: U.S. Government & Agencies $12,797 $596 $ ---- $13,393 States, Municipalities & Political Subdivisions 21,871 1,675 66 23,480 Corporate 119,319 7,040 987 125,372 Mortgage-backed Securities 10,985 995 ---- 11,980 Redeemable Preferred Stock 6,722 322 80 6,964 ------------------------------------------------ Total fixed maturities 171,694 10,628 1,133 181,189 Equity securities 334 4,440 28 4,746 ------------------------------------------------ Total Available for Sale $172,028 $15,068 $1,161 $185,935 ------------------------------------------------ Held to Maturity ---------------- Fixed maturities: States, Municipalities & Political Subdivisions $5,925 $373 $ ---- $6,298 Corporate 6,461 354 13 6,802 ------------------------------------------------ Total Held to Maturity $12,386 $727 $13 $13,100 ------------------------------------------------
The table below presents the amortized cost and fair value of fixed maturities at December 31, 1996, by contractual maturity. Actual maturities may differ from contractual maturities as a result of prepayments.
($ in thousands) Available Held to for Sale Maturity ------------- ------------- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- Due in one year or less $771 $746 $350 $358 Due after one year through five years 28,061 28,756 917 923 Due after five years through ten years 100,668 102,102 3,186 3,173 Due after ten years 75,050 77,242 5,329 5,519 -------------------------- ------------------------- 204,550 208,846 9,782 9,973 Mortgage-backed securities 9,676 10,342 ---- ---- -------------------------- ------------------------- Total $214,226 $219,188 $9,782 $9,973 -------------------------- -------------------------
Unrealized investment gains and losses on fixed maturities classified as available for sale and equity securities included in stockholders' equity at December 31, 1996 are as follows:
($ in thousands) Cost/ Net Amortized Fair Gross Unrealized Unrealized Cost Value Gains Losses Gains Fixed maturities available for sale $214,226 $219,188 $6,781 $1,819 $4,962 Equity securities 2,546 7,908 5,431 69 5,362 ------------------------------------------------------------- Total $216,772 $227,096 $12,212 $1,888 10,324 ------------------------------------------------ Deferred income taxes 3,614 ------------- Total $6,710 -------------
The change in unrealized appreciation (depreciation) of investments included in stockholders' equity for the years ended December 31, 1996, 1995 and 1994 was as follows:
($ in thousands) 1996 1995 1994 ---- ---- ---- Fixed maturities available for sale $(4,532) $17,197 $(17,236) Equity securities 950 802 477 Other invested assets 63 (63) ---- ---------------------------------------- (3,519) 17,936 (16,759) Deferred income taxes 1,231 (6,237) 5,698 ---------------------------------------- Total $(2,288) $11,699 $(11,061) ----------------------------------------
The components of net investment income are as follows:
($ in thousands) 1996 1995 1994 ---- ---- ---- Interest on fixed maturities $15,612 $14,561 $13,546 Dividends from equity securities 53 19 23 Interest on mortgage loans 169 180 182 Interest on short-term investments 585 315 145 Other, net ---- (406) (381) ----------------------------------- Gross investment income 16,419 14,669 13,515 Investment expense (467) (343) (325) ----------------------------------- Net investment income $15,952 $14,326 $13,190 -----------------------------------
A summary of realized investment gains (losses), net, as follows:
($ in thousands) 1996 1995 1994 ---- ---- ---- Fixed maturities $(567) $912 $1,241 Equity securities ---- ---- 99 Other invested assets (73) ---- ---- ----------------------------------- Total $(640) $912 $1,340 -----------------------------------
4. Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined using available market information and appropriate value methodologies. The estimated fair value of financial instruments are not necessarily indicative of the amounts the Company might pay or receive in actual market transactions. Potential taxes and other transaction costs have not been considered in estimating fair value. As a number of the Company's significant assets (including deferred acquisition costs, and deferred income taxes) and liabilities (including reserves for losses and loss adjustment expenses) are not considered financial instruments, the disclosures that follow do not reflect the fair value of the Company as a whole. The following table presents the carrying value and fair value of the Company's financial instruments at December 31, 1996 and 1995.
December 31, 1996 December 31, 1995 ----------------- ----------------- Carrying Fair Carrying Fair ($ in thousands) Value Value Value Value ---------------- ----- ----- ----- ----- Assets ------ Fixed maturities $228,970 $229,161 $193,575 $194,289 Equity securities 7,908 7,908 4,746 4,746 Mortgage loans 1,745 1,745 1,822 1,822 Cash and short-term investments 9,443 9,443 8,942 8,942 Premiums receivable, net 22,663 22,663 21,791 21,791 Receivable from affiliates, net 16,133 16,133 13,860 13,860 Accrued investment income and other assets 7,137 7,137 6,940 6,940 Liabilities ----------- Accrued expenses and other liabilities 9,561 9,561 7,788 7,788 Debt 1,304 1,304 2,707 2,707
The following methods and assumptions were used in estimating the fair value disclosures for the financial instruments: Fixed maturities and equity securities -- The fair value is based upon quoted market prices where available or from independent pricing services. Mortgage loans -- The fair value is based on discounted cash flows using discount rates at which similar loans would be made to borrowers with similar characteristics. Cash and Short-term Investments -- Due to their short-term, highly liquid nature, their carrying value approximates fair value. Premiums Receivable, net; Accrued Investment Income and Other Assets; Receivable from Affiliates, net; and Accrued Expenses and Other Liabilities -- Due to their short-term nature, their carrying value approximates fair value. Debt -- The fair value is based on discounted cash flows using current borrowing rates for similar debt arrangements. 5. Reinsurance The Company assumes and cedes insurance to participate in the reinsurance market, limit maximum losses and minimize exposure on large risks. Reinsurance contracts do not relieve the Company from its obligations to policyholders as the primary insurer. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities and economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Amounts recoverable are regularly evaluated by the Company and an allowance for uncollectible reinsurance is provided when collection is in doubt. At December 31, 1996 and 1995, the Company determined it was not necessary to provide an allowance for uncollectible reinsurance. The Company's reinsurance program also includes reinsurance agreements with United Farm Family. (see Note 10.) The effects of reinsurance on premiums written and earned, and losses and loss adjustment expenses incurred, for the years indicated were as follows:
Year Ended December 31, ----------------------- ($ in thousands) 1996 1995 1994 ---- ---- ---- Premiums written Direct $146,408 $135,963 $122,039 Assumed 6,462 6,261 7,577 Ceded to United Farm Family (9,336) (9,237) (9,776) Ceded to non-affiliates (9,690) (12,153) (14,226) --------------------------------------- Premiums written, net of reinsurance $133,844 $120,834 $105,614 --------------------------------------- Premiums earned Direct $142,794 $131,717 $117,384 Assumed 6,931 6,552 7,690 Ceded to United Farm Family (9,334) (9,238) (9,750) Ceded to non-affiliates (9,611) (12,095) (13,858) --------------------------------------- Premiums earned, net of reinsurance $130,780 $116,936 $101,466 --------------------------------------- Losses and loss adjustment expenses incurred Direct $99,954 $91,176 $91,467 Assumed 4,630 4,658 4,513 Ceded to United Farm Family (7,277) (6,604) (7,378) Ceded to non-affiliates (2,330) (6,046) (5,922) --------------------------------------- Losses and loss adjustment expenses incurred, net of reinsurance $94,977 $83,184 $82,680 ---------------------------------------
6. Income Taxes The components of the deferred income tax assets and liabilities at December 31, 1996 and 1995 are as follows:
($ in thousands) Deferred Income Tax Assets 1996 1995 -------------------------- ---- ---- Reserves for losses and loss adjustment expenses $4,423 $4,444 Unearned premium reserve 3,774 3,559 Accrued expenses and other liabilities 797 474 Investments 148 68 --------------------------------- Total deferred income tax assets 9,142 8,545 --------------------------------- Deferred Income Tax Liabilities Deferred acquisition costs 3,739 3,685 Unrealized investment gains, net 3,614 4,846 Other assets 269 231 --------------------------------- Total deferred income tax liabilities 7,622 8,762 --------------------------------- Net deferred income tax asset (liability) $1,520 $(217) ---------------------------------
There was no valuation allowance for deferred income tax assets as of December 31, 1996 or 1995. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. Management primarily considered the existence of taxable income in the carryback period in making this assessment and believes the benefits of the deductible differences recognized as of December 31, 1996 and 1995 will ultimately be realized. The components of income tax expense (benefit) are as follows:
($ in thousands) Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Current $4,181 $4,403 $851 Deferred (505) 581 596 --------------------------------------- Total income tax expense $3,676 $4,984 $1,447 ---------------------------------------
The Company paid income taxes of $4,592,000, $3,952,000 and $2,209,000 in 1996, 1995 and 1994 respectively. A reconciliation of the differences between the Company's effective rates of tax and the United States federal income tax rates follows:
Year Ended December 31, ----------------------- ($ in thousands) % of % of % of Pretax Pretax Pretax 1996 Income 1995 Income 1994 Income ---- ------ ---- ------ ---- ------ Income tax provision at prevailing rates $4,147 34.18% $5,006 34.31% $1,691 34.00% Tax effect of: Tax exempt interest income (107) (.88) (11) (.08) (67) (1.35) Dividends received deduction (156) (1.29) (148) (1.01) (140) (2.81) Other, net (208) (1.71) 137 .94 (37) (.74) ----------------------------------------------------------- Federal income tax expense $3,676 30.30% $4,984 34.16% $1,447 29.10% -----------------------------------------------------------
7. Reserves for Losses and Loss Adjustment Expenses As described in Note 1, the Company establishes reserves for losses and loss adjustment expenses on reported and incurred but not reported claims of insured losses. The establishment of appropriate reserves for losses and loss adjustment expenses is an inherently uncertain process and the ultimate cost may vary materially from the recorded amounts. Reserve estimates are regularly reviewed and updated, using the most current information. Any resulting adjustments, which may be material, are reflected in current operations. The following table provides a reconciliation of beginning and ending liability balances for reserves for losses and loss adjustment expenses for the years ended December 31, 1996, 1995 and 1994.
Year Ended December 31, 1996 1995 1994 ---- ---- ---- ($ in thousands) Reserves for losses and loss adjustment expenses at beginning of year $137,978 $127,954 $123,477 Less reinsurance recoverables and receivables 28,655 28,230 28,761 ------------------------------------- Net reserves for losses and loss adjustment expenses at beginning of year 109,323 99,724 94,716 ------------------------------------- Incurred losses and loss adjustment expenses: Provision for insured events of current year 100,418 88,366 86,370 Decrease in provision for insured events of prior years (5,441) (5,182) (3,690) ------------------------------------- Total incurred losses and loss adjustment expenses 94,977 83,184 82,680 ------------------------------------- Payments: Losses and loss adjustment expenses attributable to insured events of current year 50,122 40,519 43,232 Losses and loss adjustment expenses attributable to insured events of prior years 39,795 33,066 34,440 ------------------------------------- Total Payments: 89,917 73,585 77,672 ------------------------------------- Net reserves for losses and loss adjustment expenses at end of year 114,383 109,323 99,724 Plus reinsurance recoverables and receivables 26,837 28,655 28,230 ------------------------------------- Reserves for losses and loss adjustment expenses at end of year $141,220 $137,978 $127,954 -------------------------------------
The Company does not discount reserves for losses and loss adjustment expenses except for certain lifetime workers' compensation indemnity reserves it assumes from mandatory pools. The amount of such discounted reserves was $4,184,000 (net of a discount of $1,185,000), $4,754,000 (net of a discount of $1,192,000), and $4,876,000 (net of a discount of $1,217,000) for December 31, 1996, 1995 and 1994, respectively. 8. Debt At December 31, 1996, debt consists of $301,000 of debentures and $1,003,000 of subordinated surplus certificates. The debentures and subordinated surplus certificates bear interest at the rate of 8% per annum, have no maturity date, and principal and interest are repayable only with the approval of the Insurance Department of the State of New York. No single holder holds more than 5% of the outstanding debentures or subordinated surplus certificates. The Company paid interest of $279,000, $217,000 and $220,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, the Company had an available line of credit with a bank for $2,000,000. There were no amounts outstanding on this line of credit at December 31, 1996. 9. Benefits Plans Pension Plan: The Company and Farm Family Life sponsor a qualified multi-employer noncontributory defined benefit pension plan covering substantially all of the Company's and Farm Family Life's full-time employees who meet the eligibility requirements. Benefits under the pension plan are primarily based upon the employee's length of service and the employee's average compensation for certain periods during the last years of employment. The Company's funding policy for its defined benefit pension plan is to make annual contributions in accordance with accepted actuarial cost methods subject to regulatory funding limitations. Effective January 1, 1997, the Company and Farm Family Life froze benefits available through the defined benefit plan. In addition, the Company implemented a voluntary early retirement program in the fourth quarter of 1996. (See note 14). The net pension expense for the plan is as follows:
Year Ended December 31, ($ in thousands) 1996 1995 1994 ---- ---- ---- Service cost $869 $708 $777 Interest cost on projected benefit obligation 1,411 1,384 1,225 Actual return on plan assets (854) (1,844) (401) Net amortization (deferral) (447) 632 (756) Voluntary early retirement program 2,069 ---- ---- --------------------------------------- Total pension expense $3,048 $880 $845 ---------------------------------------
The Company's portion of net periodic pension expense, excluding the expense of the voluntary early retirement program, for the years ended December 31, 1996, 1995 and 1994 was $617,000, $537,000 and $516,000, respectively. In addition, the Company's portion of the expense related to the voluntary early retirement program was $1,155,000 for 1996. Assumptions used in the determination of pension obligations and assets were:
Year Ended December 31, 1996 1995 1994 ---- ---- ---- Weighted-average discount rate 7.00% 6.40% 7.90% Rate of increase in compensation levels 4.00% 3.40% 4.90% Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
The following table summarizes the funded status of the pension plan:
Year Ended December 31, 1996 1995 ---- ---- ($ in thousands) Actuarial present value of benefit obligations: Vested $21,075 $17,901 Nonvested --- 338 -------------------------------- Accumulated benefit obligation 21,075 18,239 Effect of projected future salary increases on past service --- 3,204 -------------------------------- Projected benefit obligation 21,075 21,443 Plan assets at fair value 18,881 17,112 -------------------------------- Projected benefit obligation in excess of plan assets $(2,194) $(4,331) --------------------------------
The accrued pension liability of the plan was as follows:
Year Ended December 31, 1996 1995 ---- ---- ($ in thousands) Projected benefit obligation in excess of plan assets $(2,194) $(4,331) Unrecognized prior service asset --- 114 Unrecognized net gain from past experience different from that assumed --- 3,880 Unrecognized net asset at transition --- (558) Minimum liability adjustment --- (232) ------------------------------- Accrued pension liability $(2,194) $(1,127) -------------------------------
Incentive Savings Plan: The Company and Farm Family Life sponsor an employee incentive savings plan which is qualified under Section 401(k) of the Internal Revenue Code. Under the provisions of this plan, employees may contribute 1% to 16% of their eligible compensation, with up to 6% being eligible for matching contributions from the Company. In addition, the Company contributed 1% of eligible compensation up to $240 to the plan for all eligible employees in 1996, 1995, and 1994. Effective January 1, 1997, the Company will contribute to the plan a regular contribution of 3% of eligible compensation and a matching contribution of 25% of the first 6% of eligible compensation deferred by each eligible employee. Also, Company may elect to make additional discretionary contributions to the plan. The Company's expense associated with the plan was $182,000, $138,000 and $155,000 in 1996, 1995 and 1994, respectively. Postretirement Benefits Other Than Pensions: The Company and Farm Family Life provide life insurance benefits for retired employees meeting certain age and length of service requirements. The Company's postretirement benefit plan is currently unfunded and noncontributory. Benefits under the postretirement benefit plan are provided by a group term life insurance policy. Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", which changed the accounting for the Company's postretirement benefit plan from a cash basis by requiring accrual of the expected cost of providing benefits under the plan during the years that the employee renders the necessary service to the Company. Net periodic postretirement benefit expense for the plan included the following:
Year Ended December 31, ($ in thousands) 1996 1995 Service cost $27 $37 Interest cost 63 73 Return on assets --- --- Amortization of transition obligation 47 47 Voluntary early retirement program 41 --- ---------------------------- Total $178 $157 ----------------------------
The Company incurred postretirement benefit expense on a cash basis of $6,000 for the year ended December 31, 1994. The Company's portion of net periodic postretirement benefit expense, excluding the expense related to the voluntary early retirement program, for each of the years ended December 31, 1996 and 1995 was $66,000. In addition, the Company's portion of the expense related to the voluntary early retirement program was $22,000 for 1996. The plan's postretirement benefit obligation reconciled with the plan's funded status and the amount recognized in the Company's consolidated balance sheets was as follows:
Year Ended December 31, ($ in thousands) 1996 1995 ---- ---- Accumulated postretirement benefit obligation: Retirees $(487) $(534) Other fully eligible plan participants (182) (260) Other active plan participants (293) (452) ----------------------------- Obligation at year-end (962) (1,246) Plan assets --- --- ----------------------------- Funded status (962) (1,246) Unrecognized transition obligation 805 893 Unrecognized net loss (95) 238 ----------------------------- Accrued postretirement benefit liability at year-end $(252) $(115) -----------------------------
The discount rate used to determine the accumulated postretirement benefit obligation was 7.0% at December 31, 1996 and 6.4% at December 31, 1995. 10. Related Party Transactions The operations of the Company are closely related with those of Farm Family Life and Farm Family Life's wholly owned subsidiary, United Farm Family. The affiliated Companies operate under similar Boards of Directors and have similar senior management. The affiliated Companies share home office premises, branch office facilities, data processing equipment, certain personnel and other operational expenses. Expenses are shared based on each Company's estimated level of usage. The gross shared expenses and the Company's share of such expenses is summarized below:
($ in thousands) Company's Share --------------- Gross Shared Expenses Amount Percentage -------- ------ ---------- Year Ended December 31, 1996 $30,689 $19,912 65% 1995 26,650 16,182 61 1994 23,833 14,402 60
Farm Family Life held $813,000 of the Company's debentures in 1994 and 1995. In July 1996 the Company repurchased the debentures owned by Farm Family Life for the principal amount of $813,000 plus accrued interest of $37,000. The Company incurred interest expense of $37,000 in 1996 and $65,000 in 1995 and 1994 on the debentures held by Farm Family Life. During 1994, the Company sold its data processing equipment to Farm Family Life at net book value. The Company's reinsurance program includes reinsurance agreements with United Farm Family. In accordance with the provisions of these reinsurance agreements, the Company recognized commission income (expenses) of approximately $191,000, $2,000, and ($39,000) during the years ended December 31, 1996, 1995 and 1994, respectively. A summary of the effect of the reinsurance agreements with United Farm Family on premiums written and earned is described in Note 5. Receivable from affiliates represents amounts due from United Farm Family pursuant to a reinsurance agreement and amounts due from Farm Family Life and United Farm Family for shared expenses. Currently, Farm Family Life and its wholly owned subsidiary, United Farm Family, prepare their financial statements in accordance with statutory accounting practices. Such practices vary significantly from generally accepted accounting practices. The following financial information was derived from the statutory basis financial statements for Farm Family Life and United Farm Family as of and for the year ended December 31, 1996:
($ in thousands) Total Statutory Net Assets Surplus Income ------ ------- ------ Farm Family Life $721,129 $74,081 $8,111 United Farm Family 31,378 13,571 2,134
11. Dividends From Subsidiaries and Statutory Financial Information Farm Family Casualty is restricted by law as to the amount of dividends it can pay without the approval of regulatory authorities. Net income and Surplus of Farm Family Casualty, as determined in accordance with statutory accounting practices are as follows:
($ in thousands) 1996 1995 1994 ---- ---- ---- Net income $7,221 $6,735 $3,196 Surplus 83,194 55,916 42,870
The National Association of Insurance Commissioners ("NAIC") has adopted risk based capital ("RBC") requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company's mix of products and its balance sheet. The implementation of RBC is not expected to affect the operations of Farm Family Casualty since its Total Adjusted Capital exceeds the threshold level of regulatory action, as defined by the NAIC. 12. Commitments, Contingencies and Uncertainties The Company is party to numerous legal actions arising in the normal course of business. Management believes that resolution of these legal actions will not have a material adverse effect on its consolidated financial condition. Catastrophes are an inherent risk in the property and casualty insurance industry and could produce significant adverse fluctuations in the Company's results of operations and financial condition. Since the Company operates primarily within the Northeastern U.S., it is subject to a concentration of risk within this geographic region. For the years ended December 31, 1996, 1995 and 1994, approximately 61%, 60% and 58%, respectively, of the Company's direct written premiums were derived from policies written in the states of New York and New Jersey. The Company uses its reinsurance program to mitigate the impact on net income of large or unusual losses and loss adjustment expense activity. However, the Company is required by law to participate in a number of involuntary reinsurance pools and such pools may from time to time experience deficits which could result in losses to the Company. The Company is a party to Membership List Purchase Agreements with each of the state Farm Bureaus in the ten states in which it conducts business. The Membership List Purchase Agreements are for six years commencing on January 1, 1996. For the year ended December 31, 1996, the Company paid a total of $571,000 to the Farm Bureaus pursuant to the Membership List Purchase Agreements. For the years ended December 31, 1995 and 1994, the Company paid $547,000 and $516,000, respectively, to the Farm Bureaus under substantially similar Membership List Purchase Agreements in effect for such periods. Pursuant to an agreement between the Company and its agents and agency managers, subject to certain conditions including length of service and profitability, certain agents and agency managers are eligible to receive monthly extended earnings payments for a period of up to eight years subsequent to the termination of their association with the Company. Historically, such payments have been funded from commissions earned on the agent's or agency manager's book of business subsequent to the termination of the agent's association with the Company in accordance with the Company's agreement with the successor agents and agency managers. In the event that such commissions are insufficient to fund the extended earnings payments, the Company would be responsible for such payments. The aggregate outstanding amount of the extended earnings payments which former agents and agency managers are entitled to receive for a period of up to eight years subsequent to December 31, 1996 is $3,341,000. 13. Unaudited Interim Financial Information
Quarter Ended ------------- ($ in thousands except per share data) March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 1996 Revenues $35,810 $36,106 $37,264 $37,817 Net income before extraordinary item 823 2,533 3,462 1,649 Net income 302 1,637 3,336 1,649 Per share: Net income before extraordinary item $0.27 $0.84 $0.75 $0.31 Net income 0.55 0.72 0.31 0.10 1995 Revenues $31,585 $32,770 $34,145 $34,514 Net income before extraordinary item 2,922 2,106 3,173 1,405 Net income 2,922 2,106 3,173 1,405 Per share: Net income before extraordinary item $0.97 $0.70 $1.06 $0.47 Net income 0.97 0.70 1.06 0.47
14. Extraordinary Item and Non-Recurring Expenses During 1996, the Company incurred expenses of $1,543,000 related to the demutualization of Farm Family Mutual which the Company has identified as an extraordinary item. These expenses consisted primarily of printing, postage, and legal costs. Pursuant to the Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions", the Company recorded a non-recurring expense, net of an income tax benefit of $412,000, of $765,000, for the Company's share of the costs of a voluntary early retirement program offered to certain eligible employees in 1996. Eligibility for the program was based on age and years of service. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Farm Family Holdings, Inc. We have audited the accompanying consolidated balance sheets of Farm Family Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 present fairly, in all material respects, the financial position of Farm Family Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Albany, New York February 13, 1997 -----END PRIVACY-ENHANCED MESSAGE-----