-----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, QM+U48Xr8fbeGYsisZDKE97j2PURWRmAC74E4uJf0le2fyEKsO/qZO6v3c2wtGe7 Oso/uMuTQ/BIALeB1lJPAQ== 0001013564-01-000004.txt : 20010409 0001013564-01-000004.hdr.sgml : 20010409 ACCESSION NUMBER: 0001013564-01-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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 SEC ACT: SEC FILE NUMBER: 001-11941 FILM NUMBER: 1589796 BUSINESS ADDRESS: STREET 1: 344 RT 9W CITY: GLENMONT STATE: NY ZIP: 12077 BUSINESS PHONE: (518)431-5000 MAIL ADDRESS: STREET 1: PO BOX 656 CITY: ALBANY STATE: NY ZIP: 12201 10-K 1 0001.txt FARM FAMILY HOLDINGS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 Commission File No. 1-11941 FARM FAMILY HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware IRS No. 14-1789227 344 Route 9W, Glenmont, New York 12077 Registrant's telephone number: (518) 431-5000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, par value $0.01 New York Stock Exchange per share (the "Common Stock") Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] On March 12, 2001, Registrant had 6,008,983 shares of Common Stock outstanding. Of these, 5,996,823 shares, having an aggregate market value (based on the closing price of these shares as reported in a summary of composite transactions in the Wall Street Journal for stocks listed on the New York Stock Exchange March 12, 2001) of approximately $262,421,500 were owned by stockholders other than directors and executive officers of the Registrant. Documents Incorporated By Reference: None
FARM FAMILY HOLDINGS, INC. FORM 10-K YEAR ENDED DECEMBER 31, 2000 TABLE OF CONTENTS PART I Page Item 1. Business 1 Item 2. Properties 17 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28 Item 8. Financial Statements and Supplementary Data 29 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 56 Part III Item 10. Directors and Executive Officers of the Registrant 56 Item 11. Executive Compensation 59 Item 12. Security Ownership of Certain Beneficial Owners and Management 67 Item 13. Certain Relationships and Related Transactions 71 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 72 Signatures 73 Index to Financial Statements and Financial Statement Schedules S-1 Exhibit Index E-1
PART I ITEM 1. BUSINESS Overview of Operations and Marketing Strategy The following discussion includes the operations of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiaries (collectively referred to as the "Company" or "we"). The primary subsidiaries of Farm Family Holdings are Farm Family Casualty Insurance Company ("Farm Family Casualty") and Farm Family Life Insurance Company ("Farm Family Life"). United Farm Family Insurance Company ("United Farm Family") is a wholly owned subsidiary of Farm Family Life. On October 31, 2000, Farm Family Holdings announced that it entered into an Agreement and Plan of Merger, dated as of October 31, 2000, among Farm Family Holdings, American National Insurance Company ("American National"), a Texas insurance company, and American National Acquisition Company, a newly formed Delaware corporation and subsidiary of American National. Under the terms of the merger agreement, American National will acquire Farm Family Holdings at a price of $44 per share for Farm Family Holdings' common stock and $35.72 per share for Farm Family Holdings' Series A Preferred Stock in cash. The consideration to be paid to the holders of the Series A Preferred Stock will also include any accrued and unpaid dividends thereon to the closing date. As a result of the merger, Farm Family Holdings will become a wholly owned subsidiary of American National. At a special meeting of its stockholders held on February 27, 2001, Farm Family Holdings' stockholders voted to adopt the merger agreement with American National. The proposal to adopt the merger agreement was approved by the holders of a majority of Farm Family's outstanding voting stock. The merger, valued at approximately $280 million, is subject to certain other closing conditions, including the approval of the New York State Insurance Department. On March 28, 2001, American National and Farm Family Holdings announced that the termination date of their merger agreement was automatically extended for up to an additional 90 days from March 31, 2001 in order to allow American National further time to obtain the approval of the New York State Insurance Department for the merger. The automatic extension was in accordance with the terms of the merger agreement. American National expects to receive the New York State Insurance Department's approval by the end of the first week of April. The companies expect to close the merger promptly after the receipt of the New York State Insurance Department's approval. Farm Family Casualty and United Farm Family are specialized insurance companies that provide property and casualty insurance coverages to farms, agribusiness, and other generally related businesses and residents of rural and suburban communities. Farm Family Casualty provides insurance to members of the state Farm Bureau(R) organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states (collectively the "Farm Bureaus"). Membership in a state Farm Bureau organization is a prerequisite for voluntary insurance coverage with Farm Family Casualty, except for our employees. United Farm Family provides similar property and casualty insurance products in Pennsylvania and Maryland. Membership in a state Farm Bureau organization is not a prerequisite for purchasing insurance coverage from United Farm Family. United Farm Family began operations in these states during 1998. Farm Family Life provides life insurance, annuity, and accident and health insurance coverages principally to members of the state Farm Bureau organizations in the same states as Farm Family Casualty and United Farm Family. Membership in a state Farm Bureau organization is not a prerequisite for purchasing insurance coverage from Farm Family Life. Farm Family Casualty, Farm Family Life and United Farm Family share the same agency force, certain employees and office facilities. Most administrative and operating expenses are allocated between the companies pursuant to expense sharing and service agreements. We market our insurance products through 327 agents who are primarily located in the rural and suburban communities we serve. We believe that our distinctive focus on meeting the specialized insurance needs of rural and suburban communities has provided us with the knowledge and experience to adapt to changes in the demographics of our markets and in the nature of agricultural related businesses. 1 In addition to insuring those engaged in agricultural pursuits such as dairy, vegetable and fruit farming, we insure a wide range of other businesses related to agriculture, such as distributors of agricultural products, horse breeding and training facilities, landscapers, nurseries, florists, wineries and growers of specialty products. We also offer businessowners products for certain retail and contractor businesses and for owners of apartment and office buildings, as well as a homeowners product. Our principal strategy is to focus on meeting the specialized insurance needs of the rural and suburban communities in which we currently operate. We offer personal and commercial automobile products, and also property and liability products. Our flagship product, the Special Farm Package, is a flexible policy that can be adapted to meet the needs of a variety of agricultural and agricultural related businesses. We also emphasize cross-selling opportunities within our distribution system. In addition to the property and casualty products, the acquisition of Farm Family Life added life insurance, annuities, and accident and health products to our product portfolio. Also, through Farm Family Financial Services, Inc. and its affiliation with a national broker-dealer, our agents and policyholders have access to mutual funds, variable annuity policies and other related products. We seek to leverage our local reputation, agency force, knowledge and experience to expand our product offerings to a wider variety of customers in the rural and suburban communities in which we currently operate. In addition, we continue to seek to facilitate and expedite sales, underwriting and policy administration functions through the use of computer networking communications with the home office. Relationship with Farm Bureaus Farm Family Casualty and Farm Family Life were established through the efforts of certain Farm Bureaus to provide property and casualty and life insurance for Farm Bureau members in the Northeast. These Farm Bureaus are affiliated with the American Farm Bureau Federation, the nation's largest general farm organization with over 5 million families, which has traditionally sought to advance the interests of the agricultural community. The majority of our directors are directors or executive officers of Farm Bureau organizations in the Northeast. Farm Family Casualty and Farm Family Life are parties to Membership List Purchase Agreements with each of the state Farm Bureaus in ten of the twelve states in which we operate. Pursuant to the Membership List Purchase Agreements, the Farm Bureaus provide us with the right to utilize their membership lists in connection with the marketing of our insurance products and the financial services and products of financial institutions and authorize us to use the Farm Bureau names and service marks in connection with the marketing of our insurance products. In exchange for these rights, we pay to each of the Farm Bureaus an annual fee of $15.00 per Farm Bureau member. The Membership List Purchase Agreements are for six years and expire on December 31, 2001. For the years ended December 31, 2000, 1999 and 1998, we incurred expense of $1.4 million, $1.2 million and $0.7 million, respectively, pursuant to the Membership List Purchase Agreements. Industry Segments Our operations consist of two operating segments: property and casualty insurance, which is sold through Farm Family Casualty and United Farm Family, and life insurance which is sold through Farm Family Life. The property and casualty segment accounted for 84% of the 2000 consolidated premium revenue and 81% of the 2000 consolidated operating income. Prior to the acquisition of Farm Family Life on April 6, 1999, we did not market life insurance products. Information regarding the last three years' revenues, operating profits, and identifiable assets for each of the operating segments is contained in Note 18 of the accompanying Notes to Consolidated Financial Statements. 2 Property and Casualty Insurance Business Products Our property and casualty insurance segment includes activities related to the Special Farm Package, a flexible multi-line package of insurance coverages, and other insurance products covering personal and commercial automobiles, businessowners and homeowners. We offer a variety of property and casualty insurance products primarily designed to meet the unique insurance needs of our agricultural clients and the general insurance needs of the rural and suburban communities in which we write business. Many policyholders have more than one policy with us. The following table sets forth, by product, the direct written premiums for property and casualty insurance business, including assigned risk business, for the following years:
Year Ended December 31, ---------------------------------------------------------------------- % of % of % of ($ in millions) 2000 Total 1999 Total 1998 Total - ----------------------------------------------------------------------------------------------------------------- Personal Automobile* $83.9 36.9% $68.0 35.2% $68.3 36.9% Special Farm Package 42.8 18.8% 41.5 21.5% 40.6 21.9% Commercial Automobile* 40.9 18.0% 31.0 16.1% 28.9 15.6% Workers' Compensation 14.5 6.4% 13.1 6.8% 12.6 6.8% Businessowners 13.9 6.1% 11.5 6.0% 10.1 5.5% Homeowners 11.4 5.0% 10.3 5.3% 9.2 5.0% Umbrella 6.1 2.7% 5.9 3.0% 5.0 2.7% Commercial General Liability 5.5 2.4% 5.1 2.6% 4.5 2.4% Special Home Package 3.6 1.6% 3.4 1.8% 3.3 1.8% Fire, Allied, Inland Marine 2.5 1.1% 1.9 1.0% 1.8 1.0% Country Estate 1.5 0.7% 0.7 0.4% 0.2 0.1% Products Liability 0.5 0.2% 0.4 0.2% 0.4 0.2% Pollution 0.2 0.1% 0.2 0.1% 0.2 0.1% - ----------------------------------------------------------------------------------------------------------------- Total $227.3 100.0% $193.0 100.0% $185.1 100.0% =================================================================================================================
*Includes $3.8, $4.8, and $3.9 million of assigned risk automobile premiums for personal automobile business and $0.2, $0.3, and $0.3 million of premiums for assigned risk commercial automobile business for each of the years ended December 31, 2000, 1999, and 1998, respectively. In addition, 2000 amounts include the conversion of our personal and commercial automobile policies in certain states from six-month to twelve-month policies. Excluding the impact of converting personal and commercial automobile policies from six-month to twelve-month policies in certain states, we estimate that direct written premiums would have been $73.2 million for personal automobile, $32.4 million for commercial automobile, and approximately $208.1 million for total direct written premiums. Personal Automobile - Our personal automobile policy provides us with more premium than any of our other products. Our industry standard personal automobile policy is generally marketed in conjunction with our other products, such as the Special Farm Package, the businessowners policy or the homeowners policy. Special Farm Package - The Special Farm Package, is a flexible, multi-line package of insurance coverages we regard as our "flagship" product. As a result of its flexible features, this product can be adapted to meet the needs of a variety of agricultural and related businesses. The Special Farm Package policy combines personal, farm and business property and liability insurance for agribusiness, as well as owners of other agricultural related businesses, such as horse breeding and training facilities, nurseries, wineries and greenhouses. Commercial Automobile - Commercial automobile is primarily used for commercial automobiles utilized in conjunction with agricultural and related businesses. Workers' Compensation - We generally do not seek to market or write our workers' compensation policy apart from a Special Farm Package or a businessowners policy. 3 Businessowners - Our businessowners product (based on the industry standard policy form) is designed to meet the needs of small businesses within our rural and suburban markets. This product is marketed to two distinct groups: (i) "mercantile businessowners" with property based risks, including apartment and office building owners and small to medium-sized retail businesses, such as florists and farm markets and (ii) small, established artisan contractors principally serving the agricultural community. Special Home Package and Homeowners - Our homeowners policy is a standard multi-peril policy for the rural and suburban homeowner. Increasingly, the homeowners policy is being sold to provide coverage for the insured's principal residence, while the Special Home Package is used to insure rural-based, tenant occupied residences. Like the Special Farm Package, the Special Home Package combines personal and commercial property and liability coverages, and contains flexible features, which also allow it to be adapted to meet the needs of a variety of customers. Umbrella Liability - We write commercial and personal excess liability policies covering business, farm and personal liabilities of our policyholders in excess of amounts covered under Special Farm Package, homeowners, businessowners and automobile policies. Such policies are available with limits of $1.0 million to $5.0 million. We do not generally seek to market our excess liability policies unless we also write an underlying liability policy. Commercial General Liability - We write a standard commercial general liability policy that is generally marketed in connection with the Special Farm Package, or other property insurance coverage. The commercial general liability policy is generally not written apart from these other policies. We typically write the policy for unique business situations, such as horse breeding and training facilities and certain landscaper risks, which do not meet the criteria for liability coverage under a businessowners or Special Farm Package policy. The policy insures businesses against third party liability from accidents occurring on their premises or arising out of their operations or products. Most of our products liability line is written as part of the commercial general liability product. Country Estate - The Country Estate program is a specialized version of the Special Farm Package. The program covers rural residents where agricultural exposures are present, but agribusiness is not the main source of income for the household. Pollution - We write a small number of pollution liability policies covering specified farm risks on a "claims-made" basis. The policy insures against losses incurred from third party liability, including bodily injury and property damages, and from pollution incidents, such as those caused from pesticides, fertilizers, herbicides and manure piles. An "extended reporting period" option is available under certain circumstances which allows for claim reporting after the policy expiration. The following table sets forth our direct written premiums by state for property and casualty insurance:
Year Ended December 31, -------------------------------------------------------------------------- % of % of % of ($ in millions) 2000 Total 1999 Total 1998 Total - ---------------------------------------------------------------------------------------------------------------------- New York $81.1 35.7% $67.9 35.2% $64.3 34.8% New Jersey 53.7 23.6% 51.2 26.6% 52.4 28.3% Massachusetts 17.5 7.7% 16.0 8.3% 14.6 7.9% Connecticut 14.5 6.4% 12.4 6.4% 12.1 6.5% West Virginia 13.5 5.9% 10.8 5.6% 10.1 5.4% New Hampshire 9.0 3.9% 7.4 3.8% 6.9 3.8% Vermont 8.2 3.6% 6.9 3.6% 6.3 3.4% Delaware 7.4 3.3% 6.6 3.4% 6.5 3.5% Maine 7.2 3.2% 6.5 3.4% 6.5 3.5% Rhode Island 6.5 2.9% 5.5 2.8% 5.4 2.9% Pennsylvania 7.0 3.1% 1.4 0.7% ---- ---- Maryland 1.7 0.7% 0.4 0.2% ---- ---- - ---------------------------------------------------------------------------------------------------------------------- Total $227.3 100.0% $193.0 100.0% $185.1 100.0% ======================================================================================================================
4 Underwriting We seek to underwrite our commercial and personal insurance risks by evaluating loss experience and underwriting profitability with consistently applied standards. We maintain information on many aspects of our business, which is routinely reviewed by our staff of underwriters in relationship to product line profitability. Our underwriters generally specialize by agency territory, or line of business. Specific information is monitored with regard to individual insureds, which is used to assist us in making decisions about policy renewals or modifications. We concentrate on our established major product lines (personal and commercial auto, Special Farm Package, businessowners and homeowners policies). We generally do not pursue the development of products with risk profiles with which we are not familiar, nor do we, typically, actively market our automobile, workers' compensation or general liability policies except to policyholders who may also purchase our Special Farm Package, businessowners or homeowners products. We typically seek to sell multiple products to a household to enhance persistency and profitability. We believe our extensive knowledge of local markets within our service territory is a key element in our underwriting process. Claims Claims on insurance policies written by us are usually investigated and settled by one of our claim adjusters or claim managers. Our claim adjusters are strategically located in our service territory in eight offices. Our claim philosophy emphasizes timely investigation, evaluation and settlement of claims, while maintaining adequate reserves and controlling claim adjustment expenses. Our claim philosophy is designed to support our marketing efforts by providing agents and policyholders with prompt service. Claim settlement authority levels are established for each adjuster and claim manager based upon the employee's ability and level of experience. Claims are reported directly to our central claim processing unit located in the home office or to a field claim office. Specialized units exist at the home office for no-fault automobile, subrogation and large, litigated and certain other claims. We also have a special investigative unit to investigate suspected insurance fraud, including arson. The claims department is responsible for reviewing all claims, obtaining necessary documentation, estimating the loss reserves and resolving the claims. Claims for New York private passenger assigned risk business were handled internally in 2000. In 1999, these claims were handled by an outside claim adjusting firm. An outside adjusting firm that specializes in workers compensation claims handles claims on our workers compensation policies issued on or after January 1, 1999. Reinsurance Reinsurance Ceded: Effective January 1, 1998, the largest net per risk exposure retained by us on any one individual property or casualty risk is $300,000. Per risk property losses in excess of $300,000 up to $4 million are reinsured on an excess of loss basis. Casualty losses, including losses under umbrella policies, in excess of $300,000 up to $1 million (which is generally the maximum limit of liability written on our casualty insurance policies, other than workers' compensation and umbrella liability policies) are covered on an excess of loss basis up to $15 million. In addition, workers' compensation claims, on a per occurrence basis with a $600,000 per person limit, in excess of $3 million up to $20 million are separately reinsured on an excess of loss basis by unaffiliated reinsurers. In addition, we reinsure 100% of our umbrella liability losses in excess of $2 million up to $5 million per loss. Facultative reinsurance coverage is obtained for property policies written for limits in excess of $4 million per risk, casualty policies written for limits in excess of $1 million, and umbrella policies written for limits in excess of $5 million. Our property catastrophe reinsurance provides for recovery of 95% of the losses over $3 million up to a maximum of $51 million per occurrence. We retain the first $3 million of losses per occurrence under our property catastrophe reinsurance program. We also have aggregate stop loss reinsurance covering: net property losses incurred in excess of 65% of our net earned property premiums, up to a maximum of $5.0 million per accident year, for accident year 2000; and net losses incurred in excess of 66% of our net earned premiums, up to a maximum of $12.5 million per accident year, for accident years 1998 and 1999. Aggregate stop loss reinsurance covers our direct written and assumed reinsurance business, net of inuring reinsurance ceded. This coverage covers each accident year separately. 5 The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of operations or financial condition. As of December 31, 2000, more than 95% of our reinsurance program was provided by reinsurers which were rated "A-" (Excellent) or above by A.M. Best Company, Inc. ("A.M. Best"). Reinsurance Assumed: We assume voluntary reinsurance primarily covering property, property catastrophe and casualty risks generally located outside of the Northeast. We believe that, among other benefits, our assumed reinsurance arrangements enhance our geographic spread of risk. For the years ended December 31, 2000 and 1999, we earned premiums of $11.1 million and $10.6 million, respectively, under various voluntary proportional and non-proportional reinsurance agreements. In addition, we have a retrocessional reinsurance program covering our assumed business, which is placed with unaffiliated reinsurers and provides for recovery of 90% of losses over $1 million up to a maximum of $6 million per occurrence. Loss and Loss Adjustment Expense ("LAE") Reserves Our reserves for losses are an estimate of the unpaid amount, as of December 31, of the losses incurred in both the current year and all prior years. The LAE reserve is an estimate of the unpaid expenses required to settle losses incurred in both the current year and all prior years. We are required to maintain reserves for payment of estimated losses and LAE for both reported claims and claims which have been incurred but not yet reported. We regularly update our reserve estimates as new facts become known and further events occur which may impact the resolution of unsettled claims. Therefore, the ultimate liability incurred may differ materially from current reserve estimates. Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made. Although reserves for losses and loss adjustment expenses may not be paid for many years, such reserves are not discounted except for certain lifetime workers' compensation indemnity reserves, assumed from mandatory pools, where the reserves are discounted at 3.5%. The following table provides a reconciliation of beginning and ending loss and LAE reserve balances for each of the years in the three-year period ended December 31, 2000.
Reconciliation of Liability for Losses and Loss Adjustment Expenses Year ended December 31, ------------------------------------- ($ in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Reserves for losses and loss adjustment expenses at beginning of year $186,130 $174,435 $156,622 Less reinsurance recoverables and receivables (20,852) (30,908) (29,054) - ------------------------------------------------------------------------------------------------------------------------------ Net reserves for losses and loss adjustment expenses at beginning of year 165,278 143,527 127,568 Net reserves for losses and loss adjustment expenses from the acquisition of United Farm Family ---- 12,335 ---- - ------------------------------------------------------------------------------------------------------------------------------ 165,278 155,862 127,568 - ------------------------------------------------------------------------------------------------------------------------------ Incurred losses and loss adjustment expenses: Provision for insured events of current year 159,908 146,829 138,201 Decrease in provision for insured events of prior years (2,070) (5,320) (3,899) - ------------------------------------------------------------------------------------------------------------------------------ Total incurred losses and loss adjustment expenses 157,838 141,509 134,302 - ------------------------------------------------------------------------------------------------------------------------------ Loss and loss adjustment expenses payments for claims occurring in: Current year 74,260 70,463 70,098 Prior years 68,203 61,630 48,245 - ------------------------------------------------------------------------------------------------------------------------------ Total payments 142,463 132,093 118,343 - ------------------------------------------------------------------------------------------------------------------------------ Net reserves for losses and loss adjustment expenses at end of year 180,653 165,278 143,527 Plus reinsurance recoverables and receivables 33,022 20,852 30,908 - ------------------------------------------------------------------------------------------------------------------------------ Reserves for losses and loss adjustment expenses at end of year $213,675 $186,130 $174,435 ==============================================================================================================================
6 Analysis of Loss and Loss Adjustment Expense Development The following table reflects the development of losses and loss adjustment expenses for the periods indicated at the end of that year and each subsequent year. Each calendar year-end reserve includes the estimated unpaid liabilities for losses and loss adjustment expenses for that accident year and for all prior accident years. The data presented under the caption "Cumulative Amount of Reserves Paid Through" shows the cumulative amounts paid related to the reserve as of the end of each subsequent year. The data presented under the caption "Reserves, Net, Reestimated as of" shows the original recorded reserve as adjusted as of the end of each subsequent year to reflect the cumulative amounts paid and all other facts and circumstances discovered during each such year. The line "Cumulative Redundancy (Deficiency)" reflects the difference between the latest reestimated reserve amount and the reserve amount as originally established. The amounts in the following table include the effects of all changes in amounts of prior periods. For example, if a loss determined in 1998 to be $150,000 was first reserved in 1995 at $100,000, the $50,000 deficiency (actual loss minus original estimate) would be included in the cumulative deficiency in each of the years 1995 through 1998 shown below. This table presents development data by calendar year and does not relate the data to the year in which the accident actually occurred. Conditions and trends that have affected the development of these reserves in the past may not necessarily recur in the future. The following table sets forth the development of loss and loss adjustment expenses reserves for the ten-year period ended December 31, 2000:
Analysis of Losses and Loss Adjustment Expense Development - --------------------------------------------------------------------------------------------------------------------------- ($ in thousands) Year Ended December 31 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 - --------------------------------------------------------------------------------------------------------------------------- Reserves for Losses and Loss Adjustment Expenses $94,135 $110,135 $117,497 $123,477 $127,954 $137,978 $141,220 $156,622 $174,435 $186,130 $213,675 Reinsurance Recoverable on Unpaid Losses (22,123) (25,048) (24,463) (28,761) (28,230) (28,655) (26,837) (29,054) (30,908) (20,852) (33,022) - --------------------------------------------------------------------------------------------------------------------------- Reserves for Losses and Loss Adjustment Expenses, Net $72,012 $85,087 $93,034 $94,716 $99,724 $109,323 $114,383 $127,568 $143,527 $165,278 $180,653 =========================================================================================================================== Reserves, Net, Reestimated as of: One year later 76,786 84,514 91,561 88,296 94,542 104,649 110,411 123,654 136,305 163,208 Two years later 76,442 84,305 89,666 82,876 87,592 101,561 107,610 117,283 134,949 Three years later 76,832 83,960 86,876 81,556 84,840 100,295 103,055 116,462 Four years later 77,879 82,750 85,204 79,139 84,167 96,798 101,905 Five years later 77,375 81,690 83,875 78,948 81,565 95,702 Six years later 76,811 80,487 83,964 77,110 80,816 Seven years later 76,080 80,385 82,776 76,789 Eight years later 76,179 79,575 82,764 Nine years later 75,556 79,953 Ten years later 76,007 Cumulative Redundancy (Deficiency) (3,995) 5,134 10,270 17,927 18,908 13,621 12,478 11,106 8,578 2,070 - --------------------------------------------------------------------------------------------------------------------------- Cumulative Amount of Reserves Paid Through: One year later 29,446 32,708 36,692 34,439 33,069 39,796 40,258 48,232 57,931 68,203 Two years later 47,392 53,455 57,236 49,867 53,121 59,671 62,486 72,748 87,806 Three years later 60,737 65,951 66,127 62,138 64,023 72,234 75,631 86,061 Four years later 67,401 70,176 73,409 67,865 70,114 78,999 82,964 Five years later 68,634 74,752 76,434 71,160 73,918 83,190 Six years later 71,697 76,266 78,502 73,252 76,814 Seven years later 72,820 77,550 79,842 75,142 Eight years later 73,790 78,387 81,480 Nine years later 74,417 79,557 Ten years later 75,445
Prior to 1991, we had a history of cumulative deficiencies in reserving for losses and LAE. These deficiencies were primarily caused by the underestimation of reserves for workers' compensation, automobile and other liability claims. In 1991, we reviewed and revised our process for estimating reserves for losses and LAE, and in recent years we have generally experienced overall redundancies. The redundancies at December 31, 2000 of $11.1 million, $8.6 million, and $2.1 million for the December 31, 1997, 1998 and 1999 reserves, respectively, were primarily attributable to favorable development of IBNR and case reserves for commercial multiple peril, commercial automobile, automobile physical damage, and workers' compensation claims. 7
Year Ended December 31, ------------------------------------------------ ($ in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Reserve for unpaid losses and loss adjustment expenses: Gross liability $213,675 $186,130 $174,435 Reinsurance recoverable (33,022) (20,852) (30,908) ------------------------------------------------ Net liability $180,653 $165,278 $143,527 ================================================ One year later: Gross reestimated liability $205,458 $159,166 Reestimated reinsurance recoverable (42,250) (22,861) -------------------------------- Net reestimated liability $163,208 $136,305 ================================ Two years later: Gross reestimated liability $179,900 Reestimated reinsurance recoverable (44,951) ---------------- Net reestimated liability $134,949 ================
Our statutory reserves for unpaid losses and LAE are equal to the liability amounts in the table, net of reinsurance recoverable. We believe that our reserves at December 31, 2000 are adequate. Conditions and trends that have historically affected our claims may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future deficiencies or redundancies based on the results set forth above. Future adjustments to loss reserves and LAE that are unanticipated by us could have a material adverse impact on our financial condition and results of operations. Life Insurance Business Our life insurance operations are conducted through Farm Family Life, which was acquired on April 6, 1999. Our results of operations for periods prior to April 6, 1999 do not include the results of Farm Family Life. However, comparative information for 2000, 1999 and 1998 for premium and other operational information have been provided for Farm Family Life for informational purposes only. Products The life insurance segment includes the sale of individual whole life, term and universal life products, single and flexible premium deferred annuity products, single premium immediate annuity products and disability income insurance products through Farm Family Life. Individual life insurance, annuities and disability income products accounted for 93% of the life insurance segment's statutory direct collected premiums during 2000. Group sales of life insurance, annuities and accident and health insurance comprise the remaining 7% of statutory direct collected premiums. Life Insurance Products: The first year statutory direct collected premiums for life insurance products for 2000, 1999 and 1998 are summarized in the following table:
Year Ended December 31, --------------------------------------------------------------- ($ in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ Universal $2,567 48.2% $2,037 45.1% $4,741 67.7% Term 832 15.6% 719 15.9% 583 8.3% Whole life 1,930 36.2% 1,765 39.0% 1,677 24.0% ------------------------------------------------------------------------------------------------------------------------ Total first year statutory direct collected premiums $5,329 100.0% $4,521 100.0% $7,001 100.0% ========================================================================================================================
8 Whole Life Insurance Products - Whole life insurance is designed to provide benefits for the life of the insured. It is generally designed to provide level premiums and a level death benefit and requires payments in excess of mortality charges in early years to offset increasing mortality costs in later years. Under the terms of the contract, policyholders have a right to participate in the surplus of Farm Family Life to the extent determined by the Board of Directors, through annual participating policyholder dividends. Term Life Products - Our term insurance provides life insurance protection for a specified time period. Term insurance is mortality-based and generally has no accumulation values. We can change the premium scales at certain times, however, the scales cannot exceed the guaranteed rates. Universal Life Products - Universal life provides benefits for the life of the insured. Interest is credited to the cash value of the policy at rates set by us periodically. We also market a last survivor universal life product designed especially for the estate planning market. There is no set premium scale for our flexible universal life policies except premium contributions cannot exceed Internal Revenue Code limitations. Our Single Premium Life policy requires a one-time premium payable at issue. Annuity Products: We offer single premium fixed annuities and flexible premium annuities. Single premium fixed annuities feature a single premium paid when the contract is issued. Flexible premium annuities allow for flexibility, within certain parameters, in the payment of periodic annuity premiums. During June 1999, we marketed a single premium deferred annuity at a special rate ("special annuity"). We received $55.1 million in premiums from sales of the special annuity. The total amount received included $50.4 million of money from other annuity policies held with us that did not have surrender protection which were exchanged for special annuity policies that have seven-year surrender protection. Disability Income Insurance Products: Our disability income policies provide payment of benefits in the event of a disabling accident or illness. Disability benefits reimburse the insured for a specified dollar amount payable over a specific time period or for the duration of the disability. Disability is generally defined as the inability of the policyholder to perform one's occupation for the first two years after disability, and inability to pursue any occupation thereafter. One of our products provides extended-care benefits beyond age 65. Since the majority of the policies are issued on a "guaranteed renewable" basis, we may change the premium scale at any time based on claim costs incurred, subject to regulatory approval. The following table sets forth information regarding life insurance and annuities for each of the periods presented. Statutory-basis premiums are used in lieu of GAAP-basis premiums because they provide a consistent measure across varying product types, in contrast to GAAP which provides different revenue recognition rules for different classes of long-duration contracts as defined by the requirements of FASB No. 60, "Accounting and Reporting by Insurance Enterprises", FASB No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments", and SOP 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises".
As of and for the Year Ended December 31, ------------------------------------------------------------- ($ in thousands, except face amounts in millions) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Life insurance: Universal Number of policies 8,535 8,652 8,895 Statutory direct premiums $8,888 $8,571 $11,627 GAAP policyholder account balances $125,406 $118,673 $112,864 Direct face amounts $1,035 $1,041 $1,060 Whole life and term Number of policies 64,494 66,777 66,999 Statutory direct premiums $31,803 $30,939 $30,301 GAAP policyholder account balances $238,741 $226,704 $212,618 Direct face amounts $3,069 $2,892 $2,740
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As of and for the Year Ended December 31, ------------------------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Total life Number of policies 75,029 75,429 75,894 Statutory direct premiums $40,691 $39,510 $41,928 Direct face amounts $4,104 $3,933 $3,800 Annuities: Number of policies 9,519 10,377 11,141 Statutory direct premiums(1) $12,044 $68,065 $13,797 GAAP policyholder account balances $216,019 $226,746 $238,395
(1) The 1999 amount includes $55.1 million from the special annuity program during June, as previously discussed. For 2000 and 1999, approximately 44.8% and 45.8%, respectively, of the life insurance segment's statutory direct life insurance premiums were in New York and 13.0% and 13.3%, respectively, were written in New Jersey. Interest Crediting Interest crediting rates for universal life type contracts and investment contracts are determined by the Board of Directors and are based on each product's target interest rate spread and competitive market conditions. For annuity products, the interest crediting rate is determined by the Board of Directors and generally varies monthly based on an established market rate or our investment portfolio rate, subject to a contractual minimum rate. Interest rates credited on universal life contracts for 2000, 1999 and 1998 range from 5.8% to 7.0%. Interest rates credited on annuity contracts range from 4.0% to 8.3% for the same period. Underwriting We have adopted and follow detailed, uniform underwriting practices and procedures designed to assess risks before issuing coverage to qualified applicants. Our underwriters review each applicant's written application, which is prepared under the supervision of the selling agent, and any required medical records. We employ blood and urine testing to provide additional information on applications over $100,000 face amount. Based on the results of these tests, we may adjust the mortality charge or decline coverage completely. Any nicotine use by a life insurance applicant within the preceding year results in a higher mortality charge. Reinsurance We purchase reinsurance for our life insurance and accident and health lines of business to mitigate the impact of potential large or unusual risks on our liquidity and operating results. Our life insurance reinsurance program provides for coverage for individual life insurance risks greater than $400,000 and risks over $250,000 on our last survivor universal life product. Coverage currently written for disability income payments in excess of $1,500 per month is also reinsured. In addition, 50% of our term life insurance business currently written is ceded to an unaffiliated reinsurer. Participating Business A significant portion of our life insurance policies are written on a "participating" basis, as defined in the New York State Insurance Law. A participating policy is a policy under which there is a right to participate in the divisible surplus of an insurance company. Typically, there is an expectation that a participating policy will pay a dividend to the policyholder based on the actual experience of the insurer. Favorable operating results are more likely to result in the payment of such dividends. Annual policyholder dividends are often paid in a manner that identifies divisible surplus and distributes that surplus in approximately the same proportion as the contracts are considered to have contributed to divisible surplus. Participating insurance represented 83% of the total life insurance in force at December 31, 2000 and 78% of the total statutory premiums collected for the year ended December 31, 2000. Profits earned on participating business are reserved for the payment of dividends to policyholders except for the stockholders' share of profits on participating policies, which is limited each year to the greater of 10% of the statutory profits on participating business, or fifty cents per year per thousand dollars of the face amount of participating life insurance in force other than group term insurance. In addition to the greater of 10% of the statutory profit on participating business or fifty cents per year per thousand dollars of the face amount of participating life insurance in force, earnings 10 available to stockholders consist of earnings on non-participating business and a pro rata share of net investment income and realized investment gains (losses). The accumulated profit held by us for the benefit of participating policyholders is shown as a liability on the Consolidated Balance Sheets, under the caption, "Participating Policyholders' Interest". Policyholder dividends are paid to participating policyholders, principally holders of whole life products, based on the profitability of the products. Policyholder dividends are declared annually by the Board of Directors, and are effective on the anniversary date of the policy. At the option of the policyholder, policyholder dividends can be paid in cash, credited to renewal premiums due, left to accumulate at interest with Farm Family Life, or used to purchase additional life insurance. Policyholder dividend expense is charged against Participating Policyholders' Interest. Policyholder dividends incurred for the year ended December 31, 2000 were $10.5 million and for the period April 6, 1999 through December 31, 1999 were $7.2 million. Marketing As of December 31, 2000, we marketed our products in twelve states through approximately 200 primarily career agents, 111 independent agents and 16 general agents. Many of our agents are established residents of the rural and suburban communities in which they operate and often have specific prior experience in agricultural related businesses. The majority of our agency force markets property and casualty and life insurance products. We have designed our commission program in a manner to encourage agents to produce profitable business for us. In 2000, agent compensation for the property and casualty insurance segment was comprised entirely of commissions earned by our agents for premiums written by the agents during 2000. The commissions earned by our agents on property and casualty business are determined by applying a commission rate to the amount of the premiums written by the agent. We apply a fixed commission rate to determine commissions earned on workers' compensation and umbrella business produced by our agents. For automobile business and property liability business, the commission rate varies monthly based upon the loss ratio of such business written by the agent during the previous twelve-month period. In 2000, agent compensation for the life insurance segment was comprised entirely of commissions, office expense allowance and an annual persistency bonus. In addition, in order to assist in the development of a book of business, most new agents receive a salary during their first two years of licensing provided they meet certain minimum production requirements. We emphasize personal contact between our agents and policyholders. We believe that recognition of our name, policyholder loyalty and policyholder satisfaction with agent and claims relationships are the principal sources of new customer referrals, cross-selling of additional insurance products and policyholder retention. Investments An important component of our operating results has been the return on invested assets. Our investment objective is to maximize current yield while maintaining safety of capital together with adequate liquidity for our insurance operations. At December 31, 2000, we had cash and invested assets with an aggregate carrying value of $1.2 billion. We primarily invest in high quality fixed maturity securities and to a lesser extent, equity securities. At December 31, 2000, 88.0% of our total cash and invested assets consisted of fixed maturities, 3.5% consisted of equity securities, 2.8% consisted of policy loans, 2.7% consisted of mortgage loans, and 3.0% consisted of cash and short-term investments. Since September 1, 1997, we have retained the services of a professional asset management firm, specializing in the management of investments for insurance companies, to supplement our internal capabilities and improve upon the management of our investments in fixed maturities. We manage our equity securities, cash and short-term investments, and mortgage loans internally. Our investment activities are subject to oversight by management as well as the Investment Committee of the Board of Directors. We actively manage and monitor our exposure to credit risk. Invested assets are reviewed regularly for credit quality. Investments which have experienced payment delinquencies, adverse changes in credit ratings or deterioration in the financial condition of the borrower, or which have otherwise been identified as having potential adverse credit implications are placed on a credit watch report. On a regular basis, management and the Investment Committee of our Board of Directors review securities placed on the credit watch list. At December 31, 2000, we had identified 18 securities, with an aggregate carrying value of $17.1 million on the credit watch report. Only three of these securities were considered non-performing or in default. During 2000, these three securities were in default of $0.5 million in interest. In addition, our holdings of NAIC Class 3 through 6 bonds, generally considered non-investment grade, were $15.5 million or 1.5% of our fixed maturity portfolio at carrying value, at December 31, 2000. Due to uncertainties in the economic environment, it is possible that the quality of investments currently held in our investment portfolio may change. 11 The following table sets forth the carrying and market values of our investments as of December 31, 2000:
($ in thousands) Carrying Value(1) --------------------------------------------------- % of Property Total Amortized and Carrying Type of Investment Cost Casualty Life Total Value - ------------------------------------------------------------------------------------------------------------------------- Available For Sale Portfolio: Fixed Maturities(1) United States government and government agencies and authorities $15,270 $8,062 $7,688 $15,750 1.4% States, municipalities and political subdivisions 184,060 111,348 74,310 185,658 16.6% Corporate bonds 594,382 156,624 420,671 577,295 51.6% Mortgage-backed securities 215,066 66,507 149,693 216,200 19.3% Redeemable preferred stock 14,061 8,296 5,241 13,537 1.2% - ------------------------------------------------------------------------------------------------------------------------- Total Fixed Maturities 1,022,839 350,837 657,603 1,008,440 90.1% Equity securities 37,392 4,297 36,627 40,924 3.7% - ------------------------------------------------------------------------------------------------------------------------- Total Available for Sale 1,060,231 355,134 694,230 1,049,364 93.8% - ------------------------------------------------------------------------------------------------------------------------- Held to Maturity Portfolio: Fixed Maturities(2) States, municipalities and political subdivisions 2,630 2,630 ---- 2,630 0.2% All other corporate bonds 3,799 3,799 ---- 3,799 0.4% - ------------------------------------------------------------------------------------------------------------------------- Total Held to Maturity 6,429 6,429 ---- 6,429 0.6% - ------------------------------------------------------------------------------------------------------------------------- Mortgage loans(1) 30,928 526 30,402 30,928 2.8% Policy loans(1) 31,816 ---- 31,816 31,816 2.8% Other invested assets(1) 339 169 170 339 ---- - ------------------------------------------------------------------------------------------------------------------------- Total Investments $1,129,743 $362,258 $756,618 $1,118,876 100.0% =========================================================================================================================
(1) Fixed maturities (bonds, redeemable preferred stocks and mortgage-backed securities) and equity securities in the Available for Sale Portfolio are carried at market value in our Consolidated Financial Statements. Mortgage loans, policy loans and other invested assets are carried at cost, which approximates market value. We primarily obtain market value information through our professional asset management firm. (2) Fixed maturities in the Held to Maturity Portfolio are carried at amortized cost. Our investments in fixed maturity securities are comprised primarily of intermediate-term, investment grade securities. The following table contains additional information concerning the investment ratings of our fixed maturity investments at December 31, 2000.
NAIC Rating Carrying Rating(1) Value Percentage(4) - ---------------------------------------------------------------------------------------------------------------------- ($ in thousands) Available for Sale Portfolio(2) 1 AAA, AA, A $733,705 72.8% 2 BBB 257,716 25.5% - ---------------------------------------------------------------------------------------------------------------------- Total investment grade 991,421 98.3% - ---------------------------------------------------------------------------------------------------------------------- 3 BB 4,416 0.4% 4 B 3,447 0.3% 5 CCC, CC, C 5,535 0.6% 6 In or near default 2,083 0.2% - ---------------------------------------------------------------------------------------------------------------------- Total below investment grade 15,481 1.5% - ---------------------------------------------------------------------------------------------------------------------- NR Not Rated 1,538 0.2% - ---------------------------------------------------------------------------------------------------------------------- Total Available for Sale $1,008,440 100.0%
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NAIC Carrying Rating Rating(1) Value Percentage(4) - ---------------------------------------------------------------------------------------------------------------------- ($ in thousands) Held to Maturity Portfolio:(3) 1 AAA, AA, A $5,392 83.9% 2 BBB 1,037 16.1% - ---------------------------------------------------------------------------------------------------------------------- Total investment grade 6,429 100.0% - ---------------------------------------------------------------------------------------------------------------------- 3 BB ---- ---- 4 B ---- ---- 5 CCC, CC, C ---- ---- 6 In or near default ---- ---- - ---------------------------------------------------------------------------------------------------------------------- Total below investment grade ---- ---- - ---------------------------------------------------------------------------------------------------------------------- Total Held to Maturity $6,429 100.0% ======================================================================================================================
(1) The Company's investment advisor obtains ratings from Moody's, Standard & Poor's, Duff & Phelps and Fitch. Investments are assigned the lowest rating from all of the rating agencies that cover the investment security. If the investment security is not covered by one the rating agencies, then the NAIC rating is utilized. Any remaining securities are classified as not rated. (2) Fixed maturities in the Available for Sale portfolio are carried at market value in our Consolidated Financial Statements. (3) Fixed maturities in the Held to Maturity portfolio are carried at amortized cost in our Consolidated Financial Statements. (4) Represents percent of market value for classification as a percent of total for each portfolio. The average effective duration of our fixed maturity investments as of December 31, 2000 was approximately 4.8 years and their average life was 7.7 years. As a result, the market value of our investments may fluctuate significantly in response to changes in interest rates. In addition, we may also experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments. The maturity profile of our Available for Sale and Held to Maturity investments is included in Note 5 of the accompanying Notes to the Consolidated Financial Statements. For a discussion of the yields on our investment portfolios by operating segment, see "Management's Discussion and Analysis of Financial Condition and Results of Operations". Information Services Our automated information processing capabilities are supported by centralized computer systems and a network of personal computers linking agents, claims offices and service centers with our home office data center and information services division. This network enables field employees and agents to work directly with clients in response to service questions and policy transactions. Our agents have access to a specialized client information system containing policy and claim information for each customer's portfolio to monitor policy activity. Also, personalized summaries of material events affecting each agent's policies are updated daily on the network and forwarded to agents. During 2000, we began making certain of our systems web-enabled to improve our service delivery to our agents and customers. This initiative is aimed at increasing the accessibility and usability of our primary product systems for our agents as well as improve the efficiency with which we administer certain of our property and casualty policies. During 2000, we completed the web-enabling process for systems relating to one of our primary products. This process will continue into 2001, making additional systems relating to our primary products web-enabled. A.M. Best Rating A.M. Best Company, which rates insurance companies based on factors of concern to policyholders, currently assigns a Best's Rating of "A" (Excellent), its third highest rating category, to Farm Family Casualty, Farm Family Life and United Farm Family. A.M. Best assigns "A" or "A-" ratings to companies, which, in its opinion, have demonstrated excellent overall performance when compared to the standards established by A.M. Best. Companies rated "A" or "A-" have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity, as well as the company's book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competency of its management and its market presence. No assurance can be given that A.M. Best will not downgrade any of the companies' current ratings in the future. 13 Competition We compete in the property and casualty, life insurance and financial services markets that are highly competitive. We compete with stock insurance companies, mutual insurance companies, local cooperatives, other underwriting organizations and other financial services providers. The Gramm-Leach-Bliley Act of 1999 was passed which permits mergers that combine commercial banks, insurers and securities firms under one holding company. Prior to this Act, limitations were imposed on banks to engage in securities-related business and from being affiliated with insurance companies. The passage of the Gramm-Leach-Bliley Act of 1999 may increase competition within the insurance, financial services and banking industries. In addition, we believe advances in technology and the use and acceptance of the internet have also intensified the competition we face in the markets we serve. Certain competitors have substantially greater financial, technical and operating resources than we do. Our ability to compete successfully in our principal markets is dependent upon a number of factors, many of which (including market and competitive conditions) are outside our control. The lines and types of insurance we write are subject to significant price competition. Some companies may offer insurance at lower premium rates through the use of salaried personnel or through the use of the internet to quote, process or distribute policies. In addition to price, competition in our operating segments are based on the quality of the products, quality and speed of service (including claims service), financial strength, ratings, distribution systems and technical expertise. We also compete with other companies for qualified agents to distribute our products. Strong competition exists among insurance companies for agents with demonstrated ability to sell insurance products. We maintain strong relationships with our agents through a competitive commission structure, support services, a range of competitive products and continuing communication with management. Seasonality Although premiums from insurance business generally are not seasonal, losses and loss adjustment expenses associated with our direct property and casualty insurance tend to be higher for periods of severe or inclement weather, which for us has historically been the first and fourth quarters of the year. Employees As of December 31, 2000, we had 478 employees, of which 310 were employed in the home office. None of these employees are covered by a collective bargaining agreement, and we believe that our employee relations are good. Effect of Regulation General We are regulated by government agencies in the states in which we do business. This regulation has a substantial effect on our business. For example, such regulation usually includes regulating premium rates and policy forms; setting minimum capital and surplus requirements; regulating guaranty fund assessments and residual markets; licensing companies, adjusters and agents; approving accounting methods and methods of setting statutory loss and expense reserves; setting requirements for and limiting the types and amounts of investments; establishing requirements for the filing of annual statements and other financial reports; conducting periodic statutory examinations of the affairs of insurance companies; approving proposed changes in control and limiting the amount of dividends that may be paid without prior regulatory approval. Insurance companies are also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. These include redefining risk exposures in areas such as products liability, environmental damage and workers' compensation. Certain state insurance departments and legislatures may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Several states place restrictions on the ability of insurers to discontinue or withdraw from certain lines of insurance. Such developments may adversely affect the profitability of various lines of insurance. 14 Risk-Based Capital State insurance departments have adopted a methodology developed by the NAIC for assessing the adequacy of statutory surplus of insurance companies. The methodology includes a risk-based capital formula that attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potential inadequately capitalized companies. Under the formula, a company determines its "risk-based capital"("RBC") by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). The risk-based capital rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" of RBC. At December 31, 2000, the RBC for each of our insurance subsidiaries exceeded a level that would trigger regulatory attention. NAIC-IRIS Ratios The NAIC's Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 11 ratios for property and casualty companies and 12 for life insurance companies and specifies a range of "usual values" for each ratio. A ratio falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Departure from the "usual value" range on four or more ratios may lead to increased regulatory oversight from individual state insurance commissioners. None of our insurance subsidiaries, except United Farm Family, had four or more ratios that varied from the "usual value" range in 2000. United Farm Family had four ratios with unusual values primarily as a result of its growth, underwriting results, and having completed only its second full year as a direct writer in Pennsylvania and Maryland during 2000. Prior to 1998, United Farm Family's business was primarily derived from reinsurance agreements with its affiliate, Farm Family Casualy. Risk Factors In addition to the normal risks of business, we are subject to significant risk factors, including but not limited to: o the inherent uncertainty in the process of establishing property-casualty loss reserves, including reserves for the cost of pollution claims, and the fact that ultimate losses could materially exceed established loss reserves and have a material adverse effect on our results of operations and financial condition; o the potential material adverse impact on our financial condition, results of operations and cash flows of losses arising out of catastrophes; o the inability of any reinsurer to meet its obligations to us which may have a material adverse effect on our financial condition, results of operations and cash flows; o the need for our insurance company subsidiaries to maintain appropriate levels of statutory capital and surplus, particularly in light of continuing scrutiny by rating organizations and state insurance regulatory authorities, and to maintain acceptable financial strength and claims-paying ability ratings; o changes in interest rates which may cause a reduction of investment income or operating cash flow, an increase in policyholder lapses for our life insurance segment and an adverse impact on the attractiveness of certain life insurance segment products; o the inherent uncertainty in the economic environment which may cause the quality of the investments currently held in our investment portfolio to change; o significant variations of actual experience from assumptions regarding future morbidity, persistency, lapse rates, expenses, mortality, and interest rates used in calculating reserve and liability amounts for our life insurance segment and in developing pricing and other terms of life insurance products; o the ability of our insurance company subsidiaries to maintain their current A.M. Best ratings and the fact that our business and results of operations could be materially adversely affected by a rating downgrade; o the highly competitive insurance environment including certain competitors that may have substantially greater financial, technical and operating resources than we have; o the extensive regulation and supervision to which we are subject, various regulatory initiatives that may affect us and regulatory and other legal actions involving us; o Farm Family Holdings' primary reliance, as a holding company, on dividends and other payments from its subsidiaries for funds to meet its obligations, and regulatory restrictions on its subsidiaries to pay such dividends; o the impact on our revenues and profitability from prevailing economic, regulatory, demographic and other conditions in New York, New Jersey and the other states in which we operate; o storm and weather related losses may have a material adverse impact on our results of operations, financial condition and cash flow; o the need to adjust the duration of assets in order to meet anticipated cash flow requirements of our policyholder obligations; o satisfaction of the closing conditions set forth in the merger agreement with American National, including the approval of the New York State Insurance Department; and o the risk of a significant delay in the expected completion of, or failure to close, the merger with American National. 15 Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 With exception of historical information, the matters discussed or incorporated by reference in this Report on Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current knowledge, expectations, estimates, beliefs and assumptions. The forward-looking statements in this Form 10-K include, but are not limited to, statements concerning our exposure to interest rate and market risk, statements regarding the adequacy of the Company's capital resources, liquidity, and other financial items, statements of the plans and objectives of the Company or its management, and statements of future economic performance and assumptions underlying statements regarding the Company or its business. Readers are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those estimated, projected or predicted. The forward-looking statements in this Form 10-K are not guarantees of future performance and are subject to a number of important risks and uncertainties, many of which are outside the Company's control, that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, exposure to catastrophic loss, the frequency and severity of weather related losses, geographic concentration of loss exposure in New York, New Jersey and the Northeastern United States generally, the effect of regulatory changes governing personal automobile insurance in New Jersey and the impact thereof on the Company's direct written premium, losses and loss adjustment expenses, the risks associated with the legislative, regulatory and competitive environments in the states in which the Company currently operates, heightened competition, including specifically the intensification of competition, failure to obtain new customers or to retain existing customers, the Company's primary reliance, as a holding company, on dividends from its subsidiaries and the applicable regulatory restrictions on the ability of the Company's subsidiaries to pay such dividends, and conditions specific to the insurance industry, including its cyclical nature, regulatory changes and conditions, rating agency policies and practices, competitive factors, claims development and the impact thereof on loss reserves and the Company's reserving policy, the adequacy of the Company's reinsurance programs, developments in the securities markets and the impact thereof on the Company's investment portfolio, tax law changes, an increase in policyholder lapses for our life insurance segment and an adverse impact on the attractiveness of certain life insurance segment products, significant variations of actual experience from assumptions regarding future morbidity, persistency, lapse rates, expenses, mortality, and interest rates used in calculating reserve and liability amounts for our life insurance segment and in developing pricing and other terms of life insurance products, satisfaction of the closing conditions set forth in the merger agreement with American National (which conditions include, but are not limited to, the approval of the New York State Insurance Department), the risk of a significant delay in the expected completion of, or failure to close, the merger, the risks and uncertainties with respect to the expectations of the parties to the merger agreement regarding growth opportunities, synergies and integration of their businesses and other benefits of the merger, and other risk factors listed from time to time in the Company's Securities and Exchange Commission filings. Accordingly, there can be no assurance that actual results will conform to the forward-looking statements in this Form 10-K. 16 ITEM 2. PROPERTIES We own our home office buildings located in Glenmont, New York, consisting of three buildings containing a total of approximately 140,000 square feet of space. We believe our property and facilities are adequate and suitable for our current and anticipated future needs. ITEM 3. LEGAL PROCEEDINGS The Company is a party to litigation as a result of a $2 million investment in notes issued by FoxMeyer Corporation ("FoxMeyer"). We received full payment of these notes in 1996. FoxMeyer subsequently declared bankruptcy and other creditors are seeking recovery of amounts paid to the noteholders. We are unable to estimate the amount of loss, if any, which may arise as a result of these proceedings. We are subject to other litigation in the normal course of business. Based upon information presently available, management believes that resolution of these other legal actions will not have a material adverse effect on our consolidated financial condition and results of operations. However, given the uncertainties attendant to litigation, there can be no assurance that our consolidated results of operations and financial condition will not be materially adversely affected by any threatened or pending litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the New York Stock Exchange. There were approximately 26,100 registered holders of our common stock on March 12, 2001. We have never paid cash dividends on shares of our common stock. We currently intend to retain any earnings in order to develop our business and support our operations, and, as such, do not anticipate that we will pay any dividends to stockholders in the foreseeable future. The declaration of dividends in the future is at the discretion of our Board of Directors, subject to certain regulatory constraints and will depend upon, among other things, our results of operations, financial condition, cash requirements, dividends from our insurance subsidiaries, future prospects and other factors. The merger agreement with American National prohibits Farm Family Holdings, without the prior consent of American National, from paying any dividends on the common stock. See Note 3 to the accompanying Consolidated Financial Statements. Discussion regarding the distribution of dividends from our insurance subsidiaries is included in Note 15 to the accompanying Consolidated Financial Statements. The high and low New York Stock Exchange closing market prices for our common stock were as follows:
2000 1999 -------------------------------------------------------------------- For the Quarter Ended High Low High Low -------------------------------------------------------------------------------------------------------- First quarter $41.00 $29.38 $34.38 $31.75 Second quarter 30.94 26.25 36.94 31.56 Third quarter 35.25 29.25 40.00 34.13 Fourth quarter $42.88 $29.75 $43.00 $38.63
17 ITEM 6. SELECTED FINANCIAL DATA ($ in thousands, except per share amounts) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Consolidated Statement of Income Data: Premiums from property/casualty insurance $201,147 $188,921 $181,756 $149,220 $130,780 Premiums from life and health insurance and contract charges(5) 38,094 27,799 ---- ---- ---- Net investment income 75,698 58,558 19,119 18,077 15,952 Total revenues 312,927 274,863 202,359 173,723 146,997 Total losses, benefits, expenses and other(1) 269,256 248,527 175,434 147,005 136,159 Net income attributable to common stockholders - before extraordinary item(2) 30,114 18,618 18,671 17,500 7,557 Net income attributable to common stockholders 30,114 18,618 18,671 17,500 6,014 Operating income(3) $19,421 $19,131 $14,271 $14,990 $9,648 - ------------------------------------------------------------------------------------------------------------------------ Income before extraordinary item per share-basic(2) $4.98 $3.16 $3.55 $3.33 $1.90 Income before extraordinary item per share-diluted(2) 4.93 3.13 3.52 3.32 1.90 - ------------------------------------------------------------------------------------------------------------------------ Net income per share-basic $4.98 $3.16 $3.55 $3.33 $1.51 Net income per share-diluted 4.93 3.13 3.52 3.32 1.51 - ------------------------------------------------------------------------------------------------------------------------ Operating income per share-basic(3) $3.21 $3.25 $2.72 $2.85 $2.42 Operating income per share-diluted(3) 3.18 3.22 2.69 2.84 2.42 - ------------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding-diluted(4)(5) 6,102,468 5,948,213 5,303,965 5,270,947 3,979,115 - ------------------------------------------------------------------------------------------------------------------------ Consolidated Balance Sheet Data: Total investments $1,118,876 $1,071,681 $307,524 $274,788 $240,594 Total assets 1,350,545 1,259,224 406,415 371,231 321,836 Debt ---- ---- ---- 1,268 1,304 Total liabilities 1,130,510 1,072,200 262,265 247,997 216,784 Mandatory redeemable preferred stock(5) 5,830 5,830 ---- ---- ---- Total stockholders' equity $214,205 $181,194 $144,238 $123,234 $105,052 Book value per outstanding share(4)(5) $35.68 $29.65 $27.45 $23.46 $20.00 Property and Casualty GAAP Ratios: Loss and loss adjustment expense ratio(6) 78.5% 74.9% 73.9% 69.2% 72.6% Underwriting expense ratio(6) 23.8% 24.6% 25.2% 28.2% 29.7% Combined ratio(6) 102.3% 99.5% 99.1% 97.4% 102.3% Property and Casualty Statutory Ratios(7): Statutory combined ratio(6) 102.1% 100.0% 98.4% 95.6% 101.8% Statutory capital and surplus $136,030 $131,617 $105,165 $94,592 $83,194 Life Insurance Statutory Data(7): Statutory capital and surplus $115,048 $110,374 ---- ---- ---- Life insurance in force $4,104,026 $3,933,117 ---- ---- ---- ========================================================================================================================
(1) Includes a gain of $6.3 million on the partial reduction of the Company's extended earnings liability during the year ended December 31, 1998, which was the result of modifications made to the agreements with the Company's agents and agency managers that relieved the Company of the primary obligation to make extended earnings payments. Includes the effect of retroactively including Excess Interest and Spreads in the Company's calculation of its estimate of profits on participating life insurance business allocable to stockholders, which resulted in a decrease in total losses, benefits, expenses and other during 2000. (2) Extraordinary item for $1.5 million was recorded during 1996 for demutualization expenses related to Farm Family Casualty's conversion from a mutual company to a stockholder owned company. (3) Operating income excludes realized investment gains (losses), nonrecurring items, and the related taxes thereon. (4) Includes the allocation of 3,000,000 shares to eligible policyholders on July 26, 1996 pursuant to Farm Family Casualty's conversion from a mutual company to a stockholder owned company. (5) Includes the operations of Farm Family Life since its acquisition on April 6, 1999. Farm Family Holdings issued 856,871 shares of common stock and 163,214 shares of voting preferred stock in connection with the acquisition. (6) In 1999, these ratios include nine months of operations of United Farm Family. United Farm Family is in start-up mode as a direct writer in Pennsylvania and Maryland. Excluding United Farm Family, the 2000 and 1999 ratios would have been as follows: GAAP loss and loss adjustment expense ratio - 76.9% and 73.8%, GAAP underwriting expense ratio - 23.2% and 24.3%, GAAP combined ratio - 100.1% and 98.1% and statutory combined ratio - 100.1% and 98.5%, respectively. (7) Statutory data is derived from the annual statements of the Company's insurance subsidiaries, prepared in accordance with statutory accounting practices. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Corporate Profile The following discussion and analysis of financial condition and results of operations includes the operations of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiaries (collectively referred to as the "Company" or "we"). The primary subsidiaries of Farm Family Holdings are Farm Family Casualty Insurance Company ("Farm Family Casualty") and Farm Family Life Insurance Company ("Farm Family Life"). On April 6, 1999, Farm Family Holdings acquired Farm Family Life and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family"). The following should be read in conjunction with the Consolidated Financial Statements and related Notes. Under the terms of a definitive merger agreement announced on October 31, 2000, American National Insurance Company ("American National") will acquire Farm Family Holdings at a price of $44 per share for Farm Family Holdings' common stock and $35.72 per share for Farm Family's Series A Preferred Stock in cash. The consideration to be paid to the holders of the Series A Preferred Stock will also include any accrued and unpaid dividends thereon to the closing date. On February 27, 2001, Farm Family Holdings' stockholders voted to adopt the merger agreement with American National. The proposal to adopt the merger agreement was approved by the holders of a majority of Farm Family Holdings' outstanding voting stock. The proposed merger remains subject to the satisfaction of certain closing conditions, including the approval of the New York State Insurance Department. On March 28, 2001, American National and Farm Family Holdings announced that the termination date of their merger agreement was automatically extended for up to an additional 90 days from March 31, 2001 in order to allow American National further time to obtain the approval of the New York State Insurance Department for the merger. The automatic extension was in accordance with the terms of the merger agreement. American National expects to receive the New York State Insurance Department's approval by the end of the first week of April. The companies expect to close the merger promptly after the receipt of the New York State Insurance Department's approval. See Notes 3 and 20 to the accompanying Consolidated Financial Statements for further details regarding the merger agreement and Notes 12 and 16 regarding commitments and contingencies relating to the merger agreement. 2000 Highlights 2000 was another year of growth for Farm Family Holdings. For the year ended December 31, 2000, property and casualty net written premiums were $223,183,000 compared to $191,702,000 for the same period in 1999, which includes the operations of United Farm Family since April 6, 1999. The increase in property and casualty net written premiums for the year ended December 31, 2000 was primarily attributable to an increase of $35,407,000 in direct written premiums (excluding assigned risk automobile business premiums) largely as a result of the conversion of our personal and commercial automobile policies in certain states from six-month to twelve-month policies. Excluding the impact of converting personal and commercial automobile policies from six-month to twelve-month policies in certain states, we estimate that property and casualty direct written premiums (excluding assigned risk automobile business premiums) would have increased approximately $16,227,000 or 8.6% to $204,131,000 for the year ended December 31, 2000. For the year ended December 31, 2000, life insurance premium revenue was $38,094,000 compared to $27,799,000 for the same period in 1999. The 1999 revenue includes amounts subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. Consolidated operating income for the year ended December 31, 2000 was $19.4 million compared to $19.1 million for the same period in 1999. On a diluted per share basis, consolidated operating income for the year ended December 31, 2000 was $3.18 compared to $3.22 for the same period in 1999. Operating Environment Our operating results are subject to significant fluctuations from period to period depending upon, among other factors, the frequency and severity of property and casualty losses from weather related and other catastrophic events, the effect of competition and regulation on the pricing of products, changes in interest rates which may cause a reduction of investment income or operating cash flow, or an increase in policy lapses for our life insurance segment, significant variations of actual experience from assumptions regarding future morbidity, persistency, lapse rates, expenses, mortality, and interest rates used in calculating reserve and liability amounts for our life insurance segment and in developing pricing and other terms of life insurance products, the ability of our insurance subsidiaries to maintain their current ratings from A.M. Best, and changes in general economic conditions, tax laws and the regulatory environment. 19 As a condition of our license to do business in various states, we are required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. In all such states, residual market premium rates are subject to the approval of the state insurance departments. Residual market premium rates for automobile insurance have generally been inadequate. The amount of future losses or assessments from residual market mechanisms cannot be predicted with certainty and could have a material adverse effect on our results of operations. For the years ended December 31, 2000, 1999, and 1998, 36%, 35%, and 35%, respectively, of the property and casualty insurance segment's direct written premiums were derived from policies written in New York and 24%, 27%, and 28%, respectively, were derived from policies written in New Jersey. For these periods, no other state accounted for more than 10.0% of direct written premiums. In addition, for the years ended December 31, 2000 and 1999, 45% and 46%, respectively, of the life insurance segement's collected life insurance premiums were derived from policies written in New York and 13% for each year were derived from policies written in New Jersey. As a result of the concentration of our business in the states of New York and New Jersey, and more generally, in the Northeastern United States, the Company's results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States, generally. Market-Sensitive Instruments and Risk Management Our investment objective is to maximize after tax yield while maintaining safety of capital and providing adequate liquidity for our insurance operations. We seek to meet these objectives and simultaneously manage interest rate risk and market risk by investing in primarily investment-grade fixed maturity securities that have similar cash flows to the liabilities they support, and are diversified by industry, issuer, type and geography. We utilize the services of a professional asset management firm specializing in the management of assets for insurance companies to assist in meeting these objectives. Our invested assets are managed to maximize long term risk adjusted returns consistent with and in support of our product liabilities and capital position. Based on the current interest rate environment, we anticipate that reinvestment of our money at investment maturity dates during 2001 will result in decreasing yields compared to yields upon reinvestment during 2000. The fair value of our fixed maturity portfolio is sensitive to changes in interest rates. We estimate that if interest rates were to increase by 100 basis points from their December 31, 2000 levels, our fixed maturity portfolio would decline in fair value by approximately $51.3 million. The calculation of interest rate sensitivity uses numerous assumptions, requires significant estimates and assumes an immediate change in interest rates without any management of the investment portfolio in reaction to such a change. Consequently, the estimated change in the fair value of our fixed maturity portfolio will likely be different from the actual change experienced under the given interest rate scenario, and the difference may be material. We currently do not have any investments in derivative financial instruments such as futures, forward, swap, or option contracts, or other financial instruments with similar characteristics. Future Application of Accounting Standards In June 1999, the Financial Accounting Standards Board ("FASB") delayed the effective date of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 replaces existing pronouncements and practices with a single, integrated accounting framework for derivatives and hedging activities. This statement requires that all derivatives be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Additionally, the change in fair value of a derivative which is not effective as a hedge will be immediately recognized in earnings. 20 The delay in implementation was effected through the issuance of SFAS No. 137, which extends the SFAS No. 133 requirements to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amends the accounting and reporting standards of Statement 133 for certain derivative instruments and certain hedging activities. Therefore, we adopted the provisions of SFAS No. 133 and SFAS No. 138 as of January 1, 2001. Since we do not have any investments in derivative financial instruments, the adoption of these statements did not have an impact on the Company's financial statements. In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which will replace the current Accounting Practices and Procedures Manual as the NAIC's primary guidance on statutory accounting. Statutory accounting is a comprehensive basis of accounting based on prescribed accounting practices, which include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. The Codification provides guidance for certain areas where statutory accounting has been silent and changes current statutory accounting in some areas. The NAIC has established January 1, 2001 as the effective date of the Codification. However, individual states retain the right to adopt Codification in whole or in part. In our state of domicile, the New York State Insurance Department has adopted the Codification, with modifications to conform to provisions in New York statute which conflict with particular points in the Codification rules. The impact of adopting Codification will be reported as an adjustment to the statutory surplus of our insurance subsidiaries on the effective date. We estimate the adoption of the Codification will increase the statutory surplus of our insurance subsidiaries by approximately $5.5 million in the aggregate. We expect that statutory surplus after adoption will continue to be in excess of the regulatory risk-based capital requirements. In 2000, the FASB Emerging Issues Task Force ("EITF") reached a consensus regarding Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"). EITF 99-20 sets forth the rules for (1) recognizing interest income (including amortization of premium or discount) on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities and (2) determining when these securities must be written down to fair value because of impairment. EITF 99-20 adopts the "prospective method" for adjusting the level yield used to recognize interest income when estimates of future cash flows on the security either increase or decrease since the date of the last evaluation. The impairment provisions of EITF 99-20 generally require an other-than-temporary write down for any decrease in the estimated future cash flows from the security when the fair value of the security is less than the carrying amount. EITF 99-20 is effective for us in the second quarter of 2001. The adoption of EITF 99-20 will not have a material impact on the Company's financial statements. RESULTS OF OPERATIONS This section should be read in conjunction with the Consolidated Financial Statements and related Notes which include information for our operating segments. The Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999 Insurance Premiums and Contract Charges Premium revenue increased to $239.2 million in 2000 from $216.7 million in 1999. The increase was attributable to an increase of $12.2 million in property and casualty insurance premium revenue and an increase of $10.3 million in life insurance premium revenue. Premium revenue for property and casualty insurance increased $12.2 million, or 6.5%, to $201.1 million in 2000 from $188.9 million in 1999. The increase was primarily attributable to an increase of $13.3 million in premium revenue from our direct writings. This increase in premium revenue was partially offset by an increase of $1.1 million in revenue ceded to our reinsurers. 21 The $13.3 million increase in premium revenue from our direct writings was primarily attributable to an increase of $11.1 million, or 7.0%, in earned premiums from our primary products (personal and commercial automobile products other than assigned risk automobile business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package) and an increase of $2.2 million, or 7.0%, in earned premiums from other products. Property and casualty net written premiums increased $31.5 million to $223.2 million in 2000 compared to $191.7 million for the same period in 1999. The increase in net written premiums was primarily attributable to an increase of $35.4 million in direct writings (excluding assigned risk automobile business premiums). Premiums from direct writings increased primarily as a result of the conversion of our personal and commercial automobile policies in certain states from six-month to twelve-month policies. Excluding the impact of converting personal and commercial automobile policies from six-month to twelve-month policies in certain states and premiums from assigned risk automobile business, we estimate direct written premiums increased approximately $16.2 million or 8.6% to $204.1 million in 2000 compared to $187.9 million in 1999. This increase was offset by a decrease of $1.1 million in assigned risk automobile premiums, an increase of $1.1 million in premiums ceded to our reinsurers and a decrease of $1.7 in assumed reinsurance premiums. Excluding the effects of converting personal and commercial automobile policies in certain states from six-month to twelve-month policies and premiums from assigned risk automobile business, direct writings increased in each of the twelve states we serve and for each of our primary products in 2000 compared to 1999. Life insurance premium revenue was $38.1 million in 2000, compared to $27.8 million in 1999. Life insurance premium revenue includes premiums and contract charges primarily from the sale of individual whole life, term and universal life products, and disability income insurance products. The 1999 revenue includes amounts subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. Net Investment Income Net investment income increased $17.1 million to $75.7 million in 2000 from $58.6 million in 1999. Net investment income for the property and casualty insurance segment increased $2.8 million, or 13.9% to $23.3 million in 2000 from $20.5 million in 1999. The taxable equivalent yield on the property and casualty insurance segment's investment portfolio was 7.0% and 6.8% for 2000 and 1999, respectively. The increase in net investment income for the property and casualty insurance segment was primarily the result of an increase in the average cash and invested assets (at amortized cost) of $40.8 million, or 12.6%, and to a lesser extent, an increase in the prevailing interest rate environment. Net investment income for the life insurance segment increased $14.5 million to $52.2 million in 2000 compared to $37.7 million in 1999. The increase is primarily attributable to the 1999 net investment income including amounts subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. The yield on the life insurance segment's investment portfolio was 6.6% in 2000 compared to 6.5% in 1999. Net Realized Investment Gains (Losses) Net realized investment losses were $3.9 million in 2000 compared to $2.0 million in 1999. Of the total $3.9 million in net realized investment losses in 2000, $3.4 million were in the life insurance segment and the remaining $0.5 million were in the property and casualty segment. During 2000, we sold several bonds from the life insurance segment investment portfolio at losses. In addition, we also recorded write downs for other-than-temporary impairments on two bonds for approximately $1.3 million in the life insurance segment and $0.3 million in the property and casualty segment. During 1999, we sold several bonds from the life insurance segment investment portfolio at losses and recorded a write down of approximately $0.5 million as an other-than-temporary impairment on a bond held in the life insurance segment investment portfolio, which represents the majority of the realized investment losses for 1999. 22 Losses and Loss Adjustment Expenses Losses and loss adjustment expenses on property and casualty insurance increased $16.3 million, or 11.5%, to $157.8 million in 2000 from $141.5 million in 1999. Losses and loss adjustment expenses were 78.5% of premium revenue in 2000 compared to 74.9% of premium revenue in 1999. The increase in the loss and loss adjustment expense ratio was primarily attributable to an increase in the severity of losses incurred on certain of our businessowners, umbrella, and commercial automobile (bodily injury coverage) policies and property losses on two of our voluntary assumed reinsurance contracts during 2000 compared to the same period in 1999. Other Operating Costs and Expenses Other operating costs and expenses increased $6.3 million to $26.7 million in 2000 from $20.4 million in 1999. The increase was primarily due to the inclusion of other operating costs and expenses for Farm Family Life subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. The 2000 amounts include twelve months of expenses for Farm Family Life. In addition, the 2000 amounts include $1.4 million relating to the pending merger with American National. Property and casualty insurance underwriting expenses (including amortization expenses) were 23.8% of premium revenue in 2000 compared to 24.6% in 1999. Participating Policyholders' Interest Participating policyholders' interest of $(8.5) million reduced losses, benefits and expenses in 2000, compared to participating policyholders' interest of $9.7 million which increased losses, benefits and expenses in 1999. The 2000 amount includes $19.0 million, which reduced losses, benefits and expenses, representing the pre-tax effect of retroactively including Excess Interest and Spreads in our calculation of the estimate of profits on participating life insurance business allocable to stockholders for periods through December 31, 1999, as discussed in Note 2 to the accompanying Consolidated Financial Statements. Federal Income Tax Expense Federal income tax expense increased $5.8 million to $13.2 million in 2000 from $7.4 million in 1999. Federal income tax expense was 30.2% of income before federal income tax expense and preferred stock dividends in 2000 compared to 28.3% in 1999. The Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 Insurance Premiums and Contract Charges Premium revenue increased to $216.7 million in 1999 from $181.7 million in 1998. The increase was attributable to an increase of $7.2 million in property and casualty insurance premium revenue and $27.8 million from the addition of life insurance segment premium revenue. Premium revenue for property and casualty insurance increased $7.2 million, to $188.9 million in 1999 from $181.7 in 1998. The increase in property and casualty premium revenue for the year ended December 31, 1999 was attributable to an increase of $7.2 million in premium revenue derived from Farm Family Casualty's direct writings, an increase of $1.0 million in premium revenue assumed by Farm Family Casualty and premium revenue of $1.0 million from United Farm Family. These increases were partially offset by an increase of $2.0 million in premium revenue ceded to Farm Family Casualty's reinsurers. We ceded $2.0 million in premium revenue in 1999, compared to $3.5 million in 1998, pursuant to our aggregate stop loss reinsurance program. The property and casualty insurance segment's premium revenue has been adversely impacted by the mandated reduction in personal automobile rates in New Jersey of approximately 15% effective March 22, 1999. In addition, certain changes in the New Jersey Farm Bureau's membership requirements have had a favorable impact on reducing the growth of our personal automobile policies written in New Jersey. For the year ended December 31, 1999, the number of personal automobile policies we had in New Jersey decreased by 2.3% compared to an increase of 18.8% during the year ended December 31, 1998. The $7.2 million increase in premium revenue on additional business directly written by Farm Family Casualty was primarily attributable to an increase of $5.5 million, or 3.6%, in earned premiums from Farm Family Casualty's primary products (personal and commercial automobile products other than assigned risk automobile business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package) and an increase of $1.7 million in earned premiums from other products. Farm Family Casualty had approximately 173,300 policies in force at December 31, 1999 compared to approximately 167,100 at December 31, 1998. The number of policies in force related to Farm Family Casualty's primary products increased by 3.4% to approximately 142,500 as of December 31, 1999 from approximately 137,800 as of December 31, 1998 and the average premium earned for each such policy was approximately the same in 1999 compared to 1998. 23 Property and casualty net written premiums increased $2.9 million, or 1.5%, to $191.7 million in 1999 compared to $188.8 million in 1998. The increase in property and casualty net written premiums for the year ended December 31, 1999 was attributable to an increase of $5.4 million, or 3.0%, in direct writings by Farm Family Casualty (excluding assigned risk automobile business premiums), an increase of $0.9 million in Farm Family Casualty's assigned risk automobile business premiums, and the inclusion of United Farm Family's net written premium of $1.4 million. These increases were partially offset by an increase of $4.0 million in premiums ceded to reinsurers and a decrease of $0.8 million in premiums assumed by Farm Family Casualty. Excluding premiums from personal automobile business in the state of New Jersey and premiums from assigned risk automobile business, Farm Family Casualty's direct writings increased $9.4 million or 6.1% in 1999 compared to 1998. The reduction in personal automobile business in New Jersey was primarily attributable to the New Jersey legislation mandating a rate roll back for personal automobile business in New Jersey, effective March 22, 1999. Geographically, the increase in Farm Family Casualty's direct writings came from all ten states in which it writes property and casualty insurance. In addition, direct writings of all of Farm Family Casualty's primary products, except personal automobile, increased during 1999. Excluding personal automobile business premiums written in New Jersey, Farm Family Casualty's direct written premiums from personal automobile policies increased by 5.3% or $2.0 million in 1999 compared to 1998. Life insurance premium revenue was $27.8 million. This amount includes premiums and contract charges primarily from the sale of individual whole life, term and universal life products, and disability income insurance products, subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. Net Investment Income Net investment income increased $39.5 million to $58.6 million in 1999 from $19.1 million in 1998. The increase was attributable to an increase of $1.8 million in property and casualty net investment income and $37.7 million from the addition of the life insurance segment's net investment income. Net investment income for the property and casualty insurance segment increased $1.8 million, or 9.9% to $20.4 million in 1999 from $18.6 million in 1998. The taxable equivalent yield on the property and casualty insurance segment's investment portfolio was 6.8% and 7.0% for 1999 and 1998, respectively. The increase in net investment income for the property and casualty insurance segment was primarily the result of an increase in the average cash and invested assets (at amortized cost) of $30.5 million, or 10.9%, for Farm Family Casualty and the inclusion of United Farm Family, which accounted for $1.2 million of the increase in investment income and an additional $26.9 million in average cash and invested assets (at amortized cost). The overall increase in cash and invested assets was greater than the overall increase in net investment income in 1999 primarily as a result of an increase in the investment in tax-exempt fixed maturity securities. The investment income from the property and casualty insurance segment's tax-exempt securities increased to $4.3 million in 1999 from $2.7 million in 1998. United Farm Family's investment income from tax-exempt securities was not material in 1999. Net investment income for the life insurance segment was $37.7 million in 1999, which represents net investment income for Farm Family Life since its acquisition by Farm Family Holdings on April 6, 1999. The yield on the life insurance segment's investment portfolio was 6.5% for that period. Net Realized Investment Gains (Losses) Net realized investment losses were $2.0 million in 1999 compared to a net realized gain of $0.5 million in 1998. During 1999, we sold several bonds from the life insurance investment portfolio at losses and recorded a write down of approximately $0.5 million as an other-than-temporary impairment on a bond held in the life insurance segment investment portfolio, which represents the majority of the realized investment losses. 24 Losses and Loss Adjustment Expenses Losses and loss adjustment expenses on property and casualty insurance increased $7.2 million, or 5.4%, to $141.5 million in 1999 from $134.3 million in 1998. Losses and loss adjustment expenses were 74.9% of premium revenue in 1999 compared to 73.9% of premium revenue in 1998. Excluding United Farm Family, losses and loss adjustment expenses were 73.8% of premium in 1999 compared to 73.9% in 1998. Losses and loss adjustment expenses incurred were reduced by $2.8 million and $3.2 million in 1999 and 1998, respectively, as a result of coverage provided by our aggregate stop loss reinsurance program. This program, which became effective January 1, 1998, covers net losses incurred on the Company's net earned premium. Losses related to our direct writings believed to be weather related aggregated $11.1 million in 1999 compared to $11.7 million in 1998. Amortization Expense Amortization expense increased $3.2 million, or 9.0%, to $38.2 million in 1999 from $35.0 million in 1998. The increase was attributable to the inclusion of amortization expense of deferred acquisition costs and present value of future profits for the life insurance segment of $1.8 million and an increase in amortization of deferred acquisition costs for the property and casualty segment of $1.4 million. The increase in amortization of deferred acquisition costs for the property and casualty segment is due to the increase in premium volume and the inclusion of United Farm Family's amortization of $0.5 million. Other Operating Costs and Expenses Other operating costs and expenses increased $8.0 million to $20.4 million in 1999 from $12.4 million in 1998. The increase was primarily due to the inclusion of Farm Family Life's other operating costs and expenses of $9.3 million in 1999 partially offset by a decrease in property and casualty underwriting expenses of $0.7 million and the elimination of rental income of $0.7 million paid by Farm Family Casualty to Farm Family Life in 1999. This amount was not eliminated in 1998 since the operations of Farm Family Life were not consolidated with the Company's until its acquisition on April 6, 1999. For 1999, property and casualty insurance underwriting expenses (including amortization expenses) were 24.6% of premium revenue compared to 25.2% in 1998. The decrease in underwriting expenses as a percent of premium revenue was primarily attributable to a greater relative increase in the Company's premium revenue than in the level of overhead expenses, as well as the continuation of a company-wide expense management program, partially offset by the inclusion of the costs and expenses for United Farm Family since its acquisition by Farm Family Holdings. Excluding United Farm Family, property and casualty underwriting expenses (including amortization expenses) were 24.3% of premium revenue in 1999 compared to 25.2% for the same period in 1998. Participating Policyholders' Interest Participating policyholders' interest of $9.7 million in 1999 is attributable to the inclusion of Farm Family Life since its acquisition by Farm Family Holdings. Federal Income Tax Expense Federal income tax expense decreased $0.8 million to $7.4 million in 1999 from $8.2 million in 1998. Federal income tax expense was 28.3% of income before federal income tax expense and preferred stock dividends in 1999 compared to 30.7% in 1998. The reduction is primarily due to an increased proportion of interest income from tax-exempt securities. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of cash flow are premiums, investment income, principal from maturing investments, and proceeds from sales of invested assets. The property and casualty insurance and life insurance segments typically generate positive cash flows from operations as a result of premiums being received in advance of the related claim and benefit payments. In addition to the need for cash flow to meet operating expenses, the liquidity requirements of the property and casualty insurance segment relate primarily to the payment of losses and loss adjustment expenses and the liquidity requirements of the life insurance segment relate primarily to the payment of benefits under life insurance, annuity, and accident and health policies. The liquidity requirements of the property and casualty insurance and life insurance segments can vary because of the uncertainties regarding the settlement dates for liabilities for unpaid claims and the potential for large losses, either individually or in the aggregate. In addition, Farm Family Holdings pays dividends on its Series A Preferred Stock and may repurchase shares of its common stock. 25 Farm Family Holdings may receive dividends from subsidiaries, if declared and paid. The New York State Insurance Law regulates the distribution of dividends and other payments to Farm Family Holdings by Farm Family Casualty and Farm Family Life. As of December 31, 2000, the maximum amount of shareholder dividends that could be paid by Farm Family Casualty without the prior approval of the New York State Insurance Department (the "Department") was approximately $4.6 million. During 2000, Farm Family Casualty declared and paid dividends of $0.5 million to Farm Family Holdings. Effective September 20, 2000, New York State Insurance Law was amended to permit domestic stock life insurers to distribute shareholder dividends up to a certain threshold amount without the prior approval of the Department. Previously, the payment of shareholder dividends by Farm Family Life was subject to prior approval of the Department. The maximum amount of shareholder dividends that could be paid by Farm Family Life without the prior approval of the Department during 2001 is approximately $6.1 million. During 2000, Farm Family Life declared and paid dividends of $1.0 million to Farm Family Holdings with the prior approval of the Department. Our asset/liability management process is designed to mitigate the risks associated with interest-sensitive assets and liabilities. We price our annuity and universal life products based on assumptions considering prevailing and expected interest rates and other factors to achieve a positive difference, or spread, between the expected return on investments and the crediting rate. We attempt to achieve this spread by active portfolio management focusing on matching the duration of invested assets and related liabilities to minimize the exposure to fluctuations in interest rates and by the adjustment of the crediting rate on annuity products. In addition, we perform cash flow analysis under multiple interest rate scenarios to further analyze the assets and liabilities of our life insurance segment. We believe that we will continue to achieve a positive spread and that the amount of lapses and surrender rates generally will remain consistent with those assumed in the pricing of the products. To assist in the management of our assets and liabilities, we utilize the services of a professional investment management firm specializing in managing insurance company assets. We believe this supplements our internal capabilities and will further improve the management of the invested assets. At December 31, 2000, our cash and invested assets, at amortized cost, were $1.1 billion, a $18.3 million increase from 1999. During 2000, we continued to invest primarily in investment grade fixed maturities to maintain the overall quality of our investment portfolio. We also increased investments in commercial mortgage loans in the life insurance segment to further diversify and increase the yield of the investment portfolio in this segment. The market value of fixed maturity investments is subject to fluctuations directly attributable to prevailing rates of interest as well as other factors. Fixed maturity securities, at amortized cost, rated as investment grade by the National Association of Insurance Commissioners were $997.9 million, or 98% of the fixed maturity portfolio, at December 31, 2000 compared to $968.2 million, or 96% of the fixed maturity portfolio, at December 31, 1999. We currently do not have any investments in financial instruments such as futures, forward, swap, or option contracts, or other financial instruments with similar characteristics. In January 2000, we replaced our existing lines of credit with a revolving credit agreement with three banks. The credit agreement, which expires during January 2003, provides for uncollateralized borrowings of up to $30.0 million at the lending banks' prime rate or LIBOR plus 0.8%. On each anniversary date, the committed amount may decrease by $10.0 million, unless otherwise extended by mutual agreement. Effective January 2001, the committed amount decreased to $20.0 million. The terms of the credit agreement contain, among other provisions, requirements for maintaining minimum levels of surplus, net worth and debt service coverage. We have not utilized our credit facilities in 2000, 1999 or 1998. Pursuant to the merger agreement with American National, Farm Family Holdings may not borrow against the line of credit prior to the closing of the merger with American National, without the prior consent of American National. Upon the closing of the merger, the revolving credit agreement will be terminated. See Notes 3 and 20 to the Consolidated Financial Statements for further details regarding the merger. 26 On April 25, 2000, Farm Family Holdings' Board of Directors adopted a stock repurchase plan that authorized Farm Family Holdings to repurchase shares of its common stock in an aggregate amount of up to $7.5 million. During 2000, we repurchased 110,000 shares of our common stock for $3.0 million at an average cost of $27.45 per share. The repurchases were financed through cash generated from operations. As of December 31, 2000, $4.5 million remained authorized under the stock repurchase plan for future share repurchases. Pursuant to the merger agreement with American National, Farm Family Holdings may not repurchase any additional shares prior to the closing of the merger with American National, without the prior consent of American National. See Notes 3 and 20 to the Consolidated Financial Statements for further details regarding the merger. Net cash provided by operating activities was $73.9 million, $64.5 million, and $29.5 million during the years ended December 31, 2000, 1999, and 1998, respectively. The $9.4 million increase in net cash provided by operating activities in 2000 was primarily in the life insurance segment which included a full year of Farm Family Life's operations compared to 1999 which included Farm Family Life's operations subsequent to the effective date of the acquisition on April 6, 1999. The $35.0 million increase in net cash provided by operating activities in 1999 compared to 1998 resulted primarily from additional cash provided by operating activities of the life insurance segment subsequent to the acquisition of Farm Family Life on April 6, 1999. Net cash used in investing activities was $28.1 million, $36.1 million, and $29.0 million during the years ended December 31, 2000, 1999, and 1998, respectively. The $8.0 million decrease in net cash used in investing activities in 2000 compared to 1999 was primarily due to a decrease in investment purchases partially offset by a decrease in investment collections. The $7.1 million increase in net cash used in investing activities in 1999 compared to 1998 was primarily due to $10.4 million in cash used in investing activities of the life insurance segment. Pursuant to the merger agreement with American National, Farm Family Holdings may not make any capital expenditure involving a payment in excess of $0.5 million, with an aggregate limit of $3.0 million, without the prior consent of American National. See Notes 3 and 20 to the accompanying Consolidated Financial Statements for further details regarding the merger. Net cash used in financing activities was $30.2 million, $19.9 million, and $1.3 million for the years ended December 31, 2000, 1999, and 1998, respectively. Net cash used in 2000 and 1999 was primarily the result of policyholder fund withdrawals on interest sensitive products exceeding the related deposits for these products. The 2000 amounts include a full year of policyholder activity and the 1999 policyholder amounts include activity since the acquisition of Farm Family Life on April 6, 1999. Also, during June 1999, we marketed a single premium deferred annuity at a special rate ("special annuity"). We received $55.1 million in premiums from sales of the special annuity. The total amount received included $50.4 million of money from other policies held with the Company that did not have surrender protection which were exchanged for special annuity policies that have seven-year surrender protection. The 1998 net cash used was due to principal payments on surplus notes. The Company's liability for funds on deposit from policyholders includes amounts subject to discretionary withdrawal. Withdrawal characteristics as of December 31, 2000 are as follows:
($ in thousands) Amount % of Total ------------------------------------------------------------------------------------------------------ Surrender charge rate: Greater than or equal to 5% $89,759 21.7% Less than 5%, but still subject to surrender charge 62,541 15.2% Not subject to surrender charge 252,753 61.2% Not subject to discretionary withdrawal 7,680 1.9% -------------------------------- Total funds on deposit from policyholders $412,733 100.0% ================================
The Company's property catastrophe reinsurance provides $48 million of protection per event in excess of $3 million retention. In addition, the Company has aggregate stop loss reinsurance covering: net property losses incurred in excess of 65% of net earned property premiums, up to a maximum of $5.0 million, for accident year 2000; and net losses incurred in excess of 66% of net earned premiums, up to a maximum of $12.5 million per accident year, for accident years 1998 and 1999. Aggregate stop loss reinsurance covers our direct written and assumed reinsurance business, net of reinsurance ceded. The Company's reinsurance program is structured to partially mitigate the impact of large or unusual losses as well as the aggregation of smaller, more frequent losses on liquidity and operating results. 27 We also purchase reinsurance for our life insurance and accident and health lines of business to mitigate the impact of potential large or unusual claims on our liquidity and operating results. Our life insurance reinsurance program provides for coverage for individual life insurance claims greater than $400,000. We believe that the Company's liquidity and capital resources are adequate for the coming year. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our investment objective is to maximize after tax yield while maintaining safety of capital and providing adequate liquidity for our insurance operations. We seek to meet these objectives and simultaneously manage interest rate risk and market risk by investing in primarily investment-grade fixed maturity securities that have similar cash flows to the liabilities they support, and are diversified by industry, issuer, type and geography. We utilize the services of a professional asset management firm specializing in the management of assets for insurance companies to assist in meeting these objectives. Our invested assets are managed to maximize long term risk adjusted returns consistent with and in support of our product liabilities and capital position. The fair value of our fixed maturity portfolio is sensitive to changes in interest rates. We estimate that if interest rates were to increase by 100 basis points from their December 31, 2000 levels, our fixed maturity portfolio would decline in fair value by approximately $51.3 million. The calculation of interest rate sensitivity uses numerous assumptions, requires significant estimates and assumes an immediate change in interest rates without any management of the investment portfolio in reaction to such a change. Consequently, the estimated change in the fair value of our fixed maturity portfolio will likely be different from the actual change experienced under the given interest rate scenario, and the difference may be material. We currently do not have any investments in financial instruments such as futures, forward, swap, or option contracts, or other financial instruments with similar characteristics. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Farm Family Holdings, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income ($ in thousands, except per share amounts) Years Ended December 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Revenues: Premiums from property/casualty insurance $201,147 $188,921 $181,756 Premiums from life and health insurance and contract charges 38,094 27,799 ---- Net investment income 75,698 58,558 19,119 Realized investment gains (losses), net (3,908) (1,984) 451 Other income 1,896 1,569 1,033 - --------------------------------------------------------------------------------------------------------------------- Total revenues 312,927 274,863 202,359 - --------------------------------------------------------------------------------------------------------------------- Losses, benefits, expenses and other: Losses and loss adjustment expenses on property/casualty insurance 157,838 141,509 134,302 Policyholder contract benefits 53,605 38,710 ---- Amortization expense 39,561 38,182 35,019 Other operating costs and expenses 26,716 20,434 12,431 Participating policyholders' interest (8,464) 9,692 ---- - --------------------------------------------------------------------------------------------------------------------- Total losses, benefits and expenses 269,256 248,527 181,752 Gain on partial reduction of extended earnings liability ---- ---- (6,318) - --------------------------------------------------------------------------------------------------------------------- Total losses, benefits, expenses and other 269,256 248,527 175,434 - --------------------------------------------------------------------------------------------------------------------- Income before federal income tax expense and preferred stock dividends 43,671 26,336 26,925 Federal income tax expense 13,200 7,440 8,254 - --------------------------------------------------------------------------------------------------------------------- Income before preferred stock dividends 30,471 18,896 18,671 Preferred stock dividends 357 278 ---- - --------------------------------------------------------------------------------------------------------------------- Net income attributable to common stockholders $30,114 $18,618 $18,671 - --------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during the year (net of tax expense (benefit) of $3,064, $(6,308), and $1,046, respectively) 5,692 (11,718) 1,943 Reclassification adjustment for losses (gains) included in net income (net of tax expense (benefit) of $(170), $296, and $(211), respectively) 315 (550) 390 Minimum pension liability adjustment (net of tax benefit of $96) (177) ---- ---- - --------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 5,830 (12,268) 2,333 - --------------------------------------------------------------------------------------------------------------------- Comprehensive income $35,944 $6,350 $21,004 ===================================================================================================================== Per Share Data: Net Income - basic $4.98 $3.16 $3.55 ===================================================================================================================== Net Income - diluted $4.93 $3.13 $3.52 ===================================================================================================================== Basic weighted average shares outstanding 6,046,521 5,882,968 5,253,813 ===================================================================================================================== Diluted weighted average shares outstanding 6,102,468 5,948,213 5,303,965 ===================================================================================================================== See accompanying notes to Consolidated Financial Statements.
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Farm Family Holdings, Inc. and Subsidiaries Consolidated Balance Sheets ($ in thousands) As of December 31, 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Assets Investments: Fixed Maturities Available for sale, at fair value (Amortized cost: $1,022,839 in 2000 and $1,002,850 in 1999) $1,008,440 $960,054 Held to maturity, at amortized cost (Fair value: $6,634 in 2000 and $7,820 in 1999) 6,429 7,971 Equity securities - available for sale, at fair value (Cost: $37,392 in 2000 and $42,819 in 1999) 40,924 45,809 Mortgage loans 30,928 26,832 Policy loans 31,816 30,839 Other invested assets 339 176 - -------------------------------------------------------------------------------------------------------------------- Total investments 1,118,876 1,071,681 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 34,746 19,190 Insurance receivables: Reinsurance receivables 36,366 23,129 Premiums receivable, net 52,071 32,094 Deferred acquisition costs 24,435 17,630 Present value of future profits 26,588 28,571 Accrued investment income 18,719 18,875 Property and equipment, net 14,167 14,520 Deferred income tax asset, net 21,441 29,605 Other assets 3,136 3,929 - -------------------------------------------------------------------------------------------------------------------- Total assets $1,350,545 $1,259,224 ==================================================================================================================== Liabilities Reserves for losses and loss adjustment expenses for property/casualty insurance $213,675 $186,130 Reserves for life policies and contract benefits 252,356 238,272 Funds on deposit from policyholders 412,733 416,971 Unearned premium reserve 96,557 74,364 Accrued dividends to policyholders 5,515 5,263 Reinsurance premiums payable 5,925 4,168 Accrued expenses and other liabilities 17,483 18,516 Participating policyholders' interest 126,266 128,516 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 1,130,510 1,072,200 - -------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Mandatory redeemable preferred stock 5,830 5,830 Stockholders' equity Preferred stock, $.01 par value, 836,786 shares authorized and no shares issued and outstanding ---- ---- Common stock, $.01 par value, 10,000,000 shares authorized, 6,113,983 and 6,110,683 shares issued, 6,003,983 and 6,110,683 shares outstanding 61 61 Additional paid-in capital 123,590 123,504 Retained earnings 90,286 60,172 Accumulated other comprehensive income (loss) 3,287 (2,543) Treasury stock, at cost, 110,000 and 0 shares, respectively (3,019) ---- - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 214,205 181,194 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,350,545 $1,259,224 ==================================================================================================================== See accompanying notes to Consolidated Financial Statements.
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Farm Family Holdings, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity ($ in thousands) Years Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Shares of common stock outstanding Balance, beginning of year 6,110,683 5,253,813 5,253,813 Issuance of shares for acquisition ---- 856,870 ---- Repurchase of shares of treasury shares (110,000) ---- ---- Exercise of stock options 3,300 ---- ---- - -------------------------------------------------------------------------------------------------------------------- Balance, end of year 6,003,983 6,110,683 5,253,813 ==================================================================================================================== Common stock issued Balance, beginning of year $61 $53 $53 Issuance of shares for acquisition ---- 8 ---- - -------------------------------------------------------------------------------------------------------------------- Balance, end of year 61 61 53 - -------------------------------------------------------------------------------------------------------------------- Additional paid-in capital Balance, beginning of year 123,504 92,906 92,906 Issuance of shares for acquisition ---- 30,598 ---- Exercise of stock options 86 ---- ---- - -------------------------------------------------------------------------------------------------------------------- Balance, end of year 123,590 123,504 92,906 - -------------------------------------------------------------------------------------------------------------------- Retained earnings Balance, beginning of year 60,172 41,554 22,883 Net income 30,114 18,618 18,671 - -------------------------------------------------------------------------------------------------------------------- Balance, end of year 90,286 60,172 41,554 - -------------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss), net of tax Balance, beginning of year (2,543) 9,725 7,392 Unrealized holding gains (losses) arising during the year 5,692 (11,718) 1,943 Reclassification adjustment for (gains) losses included in net income 315 (550) 390 Minimum pension liability adjustment (177) ---- ---- - -------------------------------------------------------------------------------------------------------------------- Balance, end of year 3,287 (2,543) 9,725 - -------------------------------------------------------------------------------------------------------------------- Treasury stock Balance, beginning of year ---- ---- ---- Repurchase of 110,000 shares of common stock (3,019) ---- ---- - -------------------------------------------------------------------------------------------------------------------- Balance, end of year (3,019) ---- ---- - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $214,205 $181,194 $144,238 ==================================================================================================================== See accompanying notes to Consolidated Financial Statements.
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Farm Family Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows ($ in thousands) Years Ended December 31, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $30,114 $18,618 $18,671 - ---------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Realized investment (gains) losses, net 3,908 1,984 (451) Amortization of bond discount 3,777 3,752 328 Amortization and depreciation 41,963 40,154 35,019 Interest credited to policyholders 23,041 17,636 ---- Deferred income taxes 2,101 (719) 1,472 Gain on partial reduction of extended earnings liability ---- ---- (6,318) Participating policyholders' interest (8,464) 9,692 ---- Dividends to policyholders (10,462) (7,205) ---- Capitalization of deferred acquisition costs (44,383) (41,039) (36,074) Changes in assets and liabilities, net of the Farm Family Life acquisition in 1999: Reinsurance receivables (13,237) (2,452) (5,457) Premiums receivable, net (19,977) (2,428) (1,525) Accrued investment income 156 (780) (119) Receivable from affiliates, net ---- 1,471 1,126 Other assets 793 1,430 959 Reserves for property/casualty insurance losses and loss adjustment expenses 27,545 11,695 17,813 Reserves for life policies and contract benefits 14,084 7,967 ---- Unearned premium reserve 22,193 3,155 5,140 Reinsurance premiums payable 1,757 3,113 (1,509) Accrued expenses and other liabilities (1,054) (1,547) 410 - ---------------------------------------------------------------------------------------------------------------------- Total adjustments 43,741 45,879 10,814 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 73,855 64,497 29,485 - ---------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Proceeds from sales: Fixed maturities - available for sale 56,163 57,178 3,684 Equity securities 5,614 3,459 ---- Investment collections: Fixed maturities - available for sale 34,568 45,879 38,957 Fixed maturities - held to maturity 1,501 392 440 Other investments 879 1,221 977 Investment purchases: Fixed maturities - available for sale (118,471) (133,900) (73,484) Other investments (5,137) (9,118) ---- Policy loans issued, net (977) (396) ---- Change in other invested assets (163) 102 402 Purchases of property and equipment (2,060) (2,337) ---- Proceeds from sale of property and equipment 8 36 ---- Net cash of subsidiary at date of acquisition, net of acquisition costs ---- 1,400 ---- - ---------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (28,075) (36,084) (29,024) - ---------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Policyholder fund deposits 27,249 76,728 ---- Policyholder fund withdrawals (54,528) (96,628) ---- Purchase of treasury stock (3,019) ---- ---- Exercise of stock options 74 ---- ---- Principal payments on debt ---- ---- (1,268) - ---------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (30,224) (19,900) (1,268) - ---------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 15,556 8,513 (807) Cash and cash equivalents, beginning of year 19,190 10,677 11,484 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $34,746 $19,190 $10,677 ====================================================================================================================== See accompanying notes to Consolidated Financial Statements.
32 Notes to Consolidated Financial Statements 1. General Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include the accounts of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiaries (collectively referred to as the "Company"). The primary subsidiaries of Farm Family Holdings are Farm Family Casualty Insurance Company ("Farm Family Casualty") and Farm Family Life Insurance Company ("Farm Family Life"). On April 6, 1999, Farm Family Holdings acquired Farm Family Life and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family"). Farm Family Holdings acquired all of the outstanding capital stock of Farm Family Life for an aggregate purchase price of approximately $38.3 million, including direct acquisition costs. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior periods' financial statements to conform to the current period's presentation. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Nature of Operations: Farm Family Casualty and United Farm Family are specialized insurance companies that provide property and casualty insurance coverages to farms, agribusiness, other generally related businesses and residents of rural and suburban communities. Farm Family Casualty provides insurance to members of the state Farm Bureau(R) organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states. Membership in a state Farm Bureau organization is a prerequisite for voluntary insurance coverage with Farm Family Casualty, except for employees of the Company and its affiliates. United Farm Family provides similar property and casualty insurance products in Pennsylvania and Maryland. United Farm Family began operations in these states during 1998. Membership in a state Farm Bureau organization is not a prerequisite for purchasing insurance coverage from United Farm Family. Farm Family Life provides life insurance, annuity, and accident and health insurance coverages principally to members of the state Farm Bureau organizations in the same states as Farm Family Casualty and United Farm Family. Membership in a state Farm Bureau organization is not a prerequisite for purchasing insurance coverage from Farm Family Life. Farm Family Casualty, Farm Family Life and United Farm Family have substantially identical directors and officers, share substantially the same agency force and certain employees and utilize common office facilities. Most administrative and operating expenses are allocated between the companies pursuant to expense sharing and service agreements (see Note 13). 2. Summary of Significant Accounting Policies Cash and cash equivalents: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Investments: Fixed maturities include primarily bonds, redeemable preferred stocks, asset-backed securities and mortgage-backed securities. Investments in fixed maturities which the Company has both the ability and positive intent to hold to maturity are classified as held to maturity and carried at amortized cost. Investments classified as held to maturity on the Company's consolidated balance sheets consist primarily of private placements. Fixed maturities which may be sold prior to their contractual maturity are classified as available for sale and are carried at fair value on the Company's consolidated balance sheets. The difference between amortized cost and fair value of fixed maturities classified as available for sale, net of deferred income taxes, is reflected as a component of stockholders' equity. 33 Equity securities include common stocks which are carried at fair value. The difference between cost and fair value of equity securities, less deferred income taxes, is reflected as a component of stockholders' equity. Mortgage loans are carried at their outstanding principal balance. At December 31, 2000, no mortgage loans were considered uncollectible. Other invested assets, which consist primarily of investments in real estate, are carried at cost, which approximates fair value. Policy loans are carried at their unpaid principal balance. The carrying values of all investments are reviewed on an ongoing basis. If this review indicates a decline in fair value below cost is other than temporary, the Company's carrying value in the investment is reduced to its estimated realizable value and a specific write-down is taken. Such write-downs are included in realized investment gains (losses), net. Investment income consists primarily of interest and dividends. Interest is recognized on an accrual basis and dividends are recorded on the ex-dividend date. Interest income on mortgage-backed and asset-backed securities is determined by the effective yield method based on estimated principal repayments. Realized investment gains and losses are determined on a specific identification basis. Income Taxes: The income tax provision is calculated under the liability method. Deferred income tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities and the enacted tax rates. The principal assets and liabilities giving rise to such differences are reserves for losses and loss adjustment expenses, unearned premiums, reserves for life policies and contract benefits, funds on deposit from policyholders, present value of future profits, participating policyholders' interest and deferred acquisition costs. Deferred income taxes also arise from unrealized investment gains or losses on equity securities and fixed maturities classified as available for sale. Stock Compensation Plan: The Company has elected to account for its stock compensation plan using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, no compensation cost is recognized in the financial statements for employee stock options that are issued with an exercise price equal to the fair market value of the stock. Recognition of Premium Revenues and Costs: Premiums on property and casualty business are deferred and earned on a pro rata basis over the terms of the respective policies. Amounts paid for ceded reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to premium. Traditional life insurance products include those products with fixed and guaranteed premiums and benefits, and consist principally of whole life and term insurance policies. Life insurance premiums are recognized as premium revenue when due. Group insurance premiums are recognized as premium revenue over the time period to which the premiums relate. Benefits and expenses are associated with earned premiums to result in the recognition of profits over the life of the contracts. This association is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred acquisition costs. 34 Universal life-type policies are insurance contracts with terms that are not fixed and guaranteed. The terms that may be changed could include one or more of the amounts assessed to the policyholder, premiums paid by the policyholder or interest credited to policyholder balances. Revenues for universal life-type policies consist of charges assessed against policy account values for the cost of insurance and policy administration. Other amounts received as payments for such contracts are not reported as premium revenues. Payments received are considered deposits and are classified as funds on deposit from policyholders. Account balances are increased by interest credited and reduced by withdrawals, mortality charges and administrative expenses charged to policyholders. Contracts that do not subject the Company to risks arising from policyholder mortality or morbidity are referred to as investment contracts. Certain annuity contracts are considered investment contracts. Revenues for investment contracts consist of investment income and policy administration charges. Other amounts received as payments for such contracts are not reported as premium revenues. Payments received are considered deposits and are classified as funds on deposit from policyholders. Account balances are increased by interest credited and reduced by withdrawals. Policy benefits and claims that are charged to expense for universal life-type contracts and investment contracts include interest credited to contracts and benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for universal life type contracts and investment contracts are based on current market conditions and are determined by the Board of Directors. All insurance related revenues, losses, benefits and expenses are reported net of reinsurance. Deferred Acquisition Costs: Policy acquisition costs that vary with and are primarily related to the production of property and casualty insurance business have been deferred. These amounts primarily consist of agents' compensation, premium taxes, and certain other underwriting expenses. Such deferred acquisition costs are amortized as premium revenue is recognized. Deferred acquisition costs are limited to their estimated realizable value, which gives effect to the premium to be earned, related investment income, and losses and loss adjustment expenses expected to be incurred as the premium is earned. Certain costs of writing life insurance and annuity business, which vary with and are primarily related to the production of new business, have been deferred to the extent that such costs are deemed recoverable from future premiums, and have been reported as deferred acquisition costs. Such costs include commissions, certain costs of policy issuance and underwriting, and certain variable agency expenses. Future investment income is considered in determining the recoverability of deferred acquisition costs. For traditional life insurance products, these costs are amortized, with interest, in proportion to the ratio of estimated annual revenues to the estimated total revenues over the contract period. For most life insurance, a 15-year to 40-year amortization period is used, and a 25-year period is used for annuities. Deferred acquisition costs for universal life contracts and certain annuity contracts are amortized at a constant rate based upon the present value of estimated gross profits expected to be realized over the life of the contracts. The Company reviews the carrying amount of deferred acquisition costs on a periodic basis. Amortization of deferred acquisition costs includes amounts relating to property and casualty and life insurance business and has been reported as amortization expense in the accompanying consolidated statements of income and comprehensive income. 35 Reserves for Losses and Loss Adjustment Expenses: Reserves for losses and loss adjustment expenses represent estimates of the ultimate amounts necessary to settle reported losses and a provision for incurred but not reported claims of insured losses for property and casualty insurance business. The reserve estimates are based on known facts and circumstances, including the Company's experience with similar cases and historical trends involving reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions and public attitudes. The reserves for losses and loss adjustment expenses include case basis estimates of reported losses, estimates of incurred but not reported losses based upon prior experience adjusted for current trends, and estimates of losses to be paid under assumed reinsurance contracts. Estimated amounts of recoverable salvage and subrogation are deducted from the reserves for losses and loss adjustment expenses. The establishment of appropriate reserves, as well as related amounts recoverable under reinsurance contracts is an inherently uncertain process. Reserve estimates are regularly reviewed and updated, using the most current information available. Any resulting adjustments, which may be material, are reflected in current operations (see Note 10). Reserves for Life Policies and Contract Benefits: Liabilities for future policy benefits for term life contracts are calculated using the net level premium method and assumptions as to investment yields, mortality and withdrawals. These assumptions are based on projections and past experience and include provisions for possible unfavorable deviation. These assumptions are made at the time the contract is issued. Liabilities for future policy benefits for traditional whole life contracts are calculated using the net level premium method and assumptions as to interest and mortality. Reserve interest assumptions are level and range from 2.5% to 4.5%. The average rate of assumed investment yields used in estimating gross margins was 7.5% in 2000 and 1999. Traditional whole life is written on a participating basis with a provision for dividends to policyholders (see Participating Policyholders' Interest). Liabilities for future policy and contract benefits on universal life-type and investment-type contracts are based on the policy account balance. The liabilities for future policy and contract benefits for long-term disability income contracts are based upon interest rate assumptions and morbidity and termination rates from published tables.
Present Value of Future Profits ("PVFP"): ($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------- Balance, beginning of year $28,571 $---- Additions arising from acquisitions ---- 29,676 Amortization during the year (1,983) (1,105) - ------------------------------------------------------------------------------------------------------- Balance, end of year $26,588 $28,571 ======================================================================================================= Interest accrued on unamortized balance during the year $1,755 $1,250 ======================================================================================================= Interest accrual rate 5.1%-7.3% 4.6%-6.3% =======================================================================================================
The actuarially determined present value of anticipated net cash flows to be realized from insurance, annuity and investment contracts in force at the date of an acquisition is recorded as PVFP. This balance is amortized and evaluated for recoverability in the same manner as the deferred acquisition costs described above. PVFP amortization is projected to range from 8.3% to 12.1% of the December 31, 2000 unamortized balance for each of the next five years. Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation. The Company uses the straight-line method of depreciation. The estimated useful lives of the Company's depreciable assets range from 10 to 20 years for property and 3 to 7 years for equipment and software. The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 36 Participating Policyholders' Interest: A significant portion of the life insurance segment's products is written on a "participating" basis, as defined in the New York State insurance law. Participating insurance represented 83% of the total life insurance in force at December 31, 2000 and 78% of the total statutory premiums collected for the year ended December 31, 2000. Profits earned on participating business are reserved for the payment of dividends to policyholders except for the stockholders' share of profits on participating policies, which is limited to the greater of 10% of the profit on participating business, or 50 cents per thousand dollars of the face amount of participating life insurance in force. Participating policyholders' interest includes the accumulated net income from participating policies reserved for payment to such policyholders in the form of dividends (less net income allocated to stockholders as indicated above) as well as a pro rata portion of unrealized investment gains (losses), net of tax. The Board of Directors approves dividends to policyholders. In addition to the greater of 10% of the profit on participating business or 50 cents per thousand dollars of the face amount of participating life insurance in force, earnings available to common stockholders consists of earnings on non-participating business and a pro rata share of net investment income and realized investment gains (losses). In November 1999, the Company requested an opinion of the Insurance Department of the State of New York (the "Department") as to whether interest credited in excess of the interest guaranteed under certain participating insurance policies, annuities and dividend accumulations ("Excess Interest") and the difference between the guaranteed cost of insurance or premium and the cost of insurance or premium actually charged ("Spreads"), as well as dividends to participating policyholders, could be included in its calculation of the estimate of statutory profits on participating life insurance business allocable to stockholders. In April 2000, the Department approved the Company's request to include Excess Interest and Spreads, as well as dividends to participating policyholders, in its calculation of the estimate of statutory profits on participating life insurance business allocable to stockholders on both a prospective and retrospective basis. Accordingly, the Company's calculation of the estimate of profits on participating life insurance business allocable to stockholders has been revised to include Excess Interest and Spreads on a retrospective and prospective basis. The impact of including Excess Interest and Spreads in the Company's estimate of the profits on participating life insurance business allocable to stockholders increased the profits allocable to stockholders and is included in participating policyholders' interest on the accompanying Consolidated Statements of Income and Comprehensive Income. The effect of retroactively including Excess Interest and Spreads in the Company's calculation of its estimate of profits on participating life insurance business allocable to stockholders for periods through December 31, 1999 increased net income for the year ended December 31, 2000 by $12.7 million (after tax expense of $6.3 million) or $2.07 per common share on a fully diluted basis. For the years ended December 31, 2000 and December 31, 1999, participating policyholder dividends were $10.5 million and $7.2 million, respectively, and (loss) income attributable to participating policyholders was $(8.5) million and $9.7 million, respectively. Guaranty Fund Assessments: The Company accrues assessments levied by guaranty associations, and potential assessments for events that have occurred, in certain states. Dividend Policy: The Company has never paid cash dividends on shares of common stock. The Company currently intends to retain any earnings in order to develop its business and support its operations, and, as such, does not anticipate that it will pay dividends to stockholders in the foreseeable future. The declaration and payment of dividends in the future are at the discretion of the Board of Directors of the Company, are subject to certain regulatory constraints and will depend upon, among other things, the Company's results of operations, financial condition, cash requirements, future prospects and other factors. 37 Future Application of Accounting Standards: In June 1999, the Financial Accounting Standards Board ("FASB") delayed the effective date of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 replaces existing pronouncements and practices with a single, integrated accounting framework for derivatives and hedging activities. This statement requires that all derivatives be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Additionally, the change in fair value of a derivative which is not effective as a hedge will be immediately recognized in earnings. The delay in implementation was effected through the issuance of SFAS No. 137, which extends the SFAS No. 133 requirements to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amends the accounting and reporting standards of Statement 133 for certain derivative instruments and certain hedging activities. Therefore, the Company adopted the provisions of SFAS No. 133 and SFAS No. 138 as of January 1, 2001. Since the Company does not have any investments in derivative financial instruments, the adoption of these statements did not have an impact on the Company's financial statements. In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which will replace the current Accounting Practices and Procedures Manual as the NAIC's primary guidance on statutory accounting. Statutory accounting is a comprehensive basis of accounting based on prescribed accounting practices, which include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. The Codification provides guidance for the areas where statutory accounting has been silent and changes current statutory accounting in some areas. The NAIC has established January 1, 2001 as the effective date of the Codification. However, individual states retain the right to adopt Codification in whole or in part. The New York Insurance Department has adopted the Codification, with modifications to conform to provisions in New York statute which conflict with particular points in the Codification rules. The impact of adopting Codification will be reported as an adjustment to the statutory surplus of our insurance subsidiaries on the effective date. The Company estimates the adoption of the Codification will increase the statutory surplus of its insurance subsidiaries by approximately $5.5 million in the aggregate. The Company expects that statutory surplus after adoption will continue to be in excess of the regulatory risk-based capital requirements. In 2000, the FASB Emerging Issues Task Force ("EITF") reached a consensus regarding Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"). EITF 99-20 sets forth the rules for (1) recognizing interest income (including amortization of premium or discount) on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities and (2) determining when these securities must be written down to fair value because of impairment. EITF 99-20 adopts the "prospective method" for adjusting the level yield used to recognize interest income when estimates of future cash flows on the security either increase or decrease since the date of the last evaluation. The impairment provisions of EITF 99-20 generally require an other-than-temporary write down for any decrease in the estimated future cash flows from the security when the fair value of the security is less than the carrying amount. EITF 99-20 if effective for the Company in the second quarter of 2001. The adoption of EITF 99-20 will not have a material impact on the Company's financial statements. 3. Merger Agreement with American National Insurance Company On October 31, 2000, Farm Family Holdings announced that it entered into an Agreement and Plan of Merger, dated as of October 31, 2000, among Farm Family Holdings, American National Insurance Company ("American National"), a Texas insurance company, and American National Acquisition Company, a newly formed Delaware corporation and subsidiary of American National. 38 Under the terms of the merger agreement, American National will acquire Farm Family Holdings at a price of $44 per share for Farm Family Holdings' common stock and $35.72 per share for Farm Family Holdings' Series A Preferred Stock in cash. The consideration to be paid to the holders of the Series A Preferred Stock will also include any accrued and unpaid dividends thereon to the closing date. As a result of the merger, Farm Family Holdings will become a wholly owned subsidiary of American National. See Note 12 to the Consolidated Financial Statements for information regarding effects of the adoption of the merger agreement by Farm Family Holdings' stockholders on the Company's stock compensation plan and merger-related retention payments, Note 16 to the Consolidated Financial Statements for information regarding merger termination fees and Note 20 to the Consolidated Financial Statements for subsequent events relating to the merger. 4. Net Income Per Share The following table for the years ended December 31, 2000, 1999 and 1998 presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
2000 1999 1998 Net income available to common stockholders $30,114,000 $18,618,000 $18,671,000 ================================================================================================================== Weighted average number of shares in basic earnings per share 6,046,521 5,882,968 5,253,813 Effect of stock options 55,947 65,245 50,152 - ------------------------------------------------------------------------------------------------------------------ Weighted average number of shares in diluted earnings per share 6,102,468 5,948,213 5,303,965 ================================================================================================================== Basic net income per share $4.98 $3.16 $3.55 ================================================================================================================== Diluted net income per share $4.93 $3.13 $3.52 ==================================================================================================================
5. Investments The amortized cost, fair value and gross unrealized gains and losses of available for sale securities and held to maturity securities at December 31, 2000 and 1999 are as follows:
Amortized Gross Unrealized Fair ($ in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- 2000 Available for Sale Fixed maturities: U.S. Government & Agencies $15,270 $512 $32 $15,750 States, Municipalities & Political Subdivisions 184,060 3,165 1,567 185,658 Corporate 594,382 5,498 22,585 577,295 Mortgage-backed Securities 215,066 2,859 1,725 216,200 Redeemable Preferred Stock 14,061 190 714 13,537 - ------------------------------------------------------------------------------------------------------------------- Total fixed maturities 1,022,839 12,224 26,623 1,008,440 Equity securities 37,392 7,566 4,034 40,924 - ------------------------------------------------------------------------------------------------------------------- Total Available for Sale $1,060,231 $19,790 $30,657 $1,049,364 =================================================================================================================== Held to Maturity Fixed maturities: States, Municipalities & Political Subdivisions $2,630 $12 $---- $2,642 Corporate 3,799 217 24 3,992 - ------------------------------------------------------------------------------------------------------------------- Total Held to Maturity $6,429 $229 $24 $6,634 ===================================================================================================================
39
Amortized Gross Unrealized Fair ($ in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- 1999 Available for Sale Fixed maturities: U.S. Government & Agencies $30,741 $274 $969 $30,046 States, Municipalities & Political Subdivisions 196,311 1,020 8,207 189,124 Corporate 558,252 1,781 30,350 529,683 Mortgage-backed Securities 202,091 432 6,088 196,435 Redeemable Preferred Stock 15,455 111 800 14,766 - ------------------------------------------------------------------------------------------------------------------- Total fixed maturities 1,002,850 3,618 46,414 960,054 Equity securities 42,819 7,596 4,606 45,809 - ------------------------------------------------------------------------------------------------------------------- Total Available for Sale $1,045,669 $11,214 $51,020 $1,005,863 =================================================================================================================== Held to Maturity Fixed maturities: States, Municipalities & Political Subdivisions $4,009 $21 $99 $3,931 Corporate 3,962 17 90 3,889 - ------------------------------------------------------------------------------------------------------------------- Total Held to Maturity $7,971 $38 $189 $7,820 ===================================================================================================================
The table below presents the amortized cost and fair value of fixed maturities at December 31, 2000, by contractual maturity. Actual maturities may differ from contractual maturities as a result of prepayments.
Available for Sale Held to Maturity Amortized Fair Amortized Fair ($ in thousands) Cost Value Cost Value - ---------------------------------------------------------------------------------------------------------------- Due in one year or less $67,902 $67,255 $1,040 $1,052 Due after one year through five years 394,479 395,244 2,762 2,894 Due after five years through ten years 293,431 293,585 2,627 2,688 Due after ten years 267,027 252,356 ---- ---- - ---------------------------------------------------------------------------------------------------------------- Total $1,022,839 $1,008,440 $6,429 $6,634 ================================================================================================================
Unrealized investment gains and losses on fixed maturities classified as available for sale and equity securities included in stockholders' equity as accumulated other comprehensive income and in participating policyholders' interest at December 31, 2000 are as follows: Cost/ Net Amortized Fair Gross Unrealized Unrealized ($ in thousands) Cost Value Gains Losses Gains(Losses) - ------------------------------------------------------------------------------------------------------------------- Fixed maturities available for sale $1,022,839 $1,008,440 $12,224 $26,623 $(14,399) Equity securities 37,392 40,924 7,566 4,034 3,532 - ------------------------------------------------------------------------------------------------------------------- Total $1,060,231 $1,049,364 $19,790 $30,657 (10,867) ===================================================== Deferred income taxes 3,803 ---------------- Total net unrealized loss (7,064) Net unrealized losses attributable to participating policyholders' interest 10,528 ---------------- Total $3,464 ================
40 The change in unrealized appreciation (depreciation) of investments included in stockholders' equity as accumulated other comprehensive income and participating policyholders' interest is as follows:
($ in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Fixed maturities available for sale $28,149 $(55,782) $2,781 Equity securities 542 1,012 809 - ------------------------------------------------------------------------------------------------------------------- 28,691 (54,770) 3,590 Deferred income taxes 10,129 19,170 (1,257) - ------------------------------------------------------------------------------------------------------------------- Total change in unrealized appreciation (depreciation) 18,562 (35,600) 2,333 Change in unrealized appreciation (depreciation) of investments attributable to participating policyholders' interest (12,555) 23,332 ---- - ------------------------------------------------------------------------------------------------------------------- Total $6,007 $(12,268) $2,333 ===================================================================================================================
The components of net investment income for the years 2000, 1999 and 1998 are as follows: ($ in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Interest on fixed maturities $70,833 $55,959 $19,031 Dividends from equity securities 1,234 699 179 Interest on mortgage loans 2,213 1,319 90 Interest on short-term investments 2,411 976 458 Interest on policy loans 1,868 1,347 ---- Other, net 82 66 43 - ------------------------------------------------------------------------------------------------------------------- Gross investment income 78,641 60,366 19,801 Investment expense (2,943) (1,808) (682) - ------------------------------------------------------------------------------------------------------------------- Net investment income $75,698 $58,558 $19,119 ===================================================================================================================
The amount of net investment income attributable to participating policyholders for 2000 and 1999 was approximately $36.3 million and $29.0 million, respectively. There were no participating policyholders prior to the acquisition of Farm Family Life effective April 6, 1999. A summary of realized investment gains (losses), net for the years 2000, 1999 and 1998 is as follows:
($ in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Fixed maturity securities Gross gains $376 174 629 Gross losses (4,291) (2,926) (31) - --------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities (3,915) $(2,752) $598 - --------------------------------------------------------------------------------------------------------------------- Equity securities Gross gains 1,398 541 1 Gross losses (1,391) (48) ---- - --------------------------------------------------------------------------------------------------------------------- Total equity securities 7 493 1 - --------------------------------------------------------------------------------------------------------------------- Other invested assets ---- 275 (148) - --------------------------------------------------------------------------------------------------------------------- Total $(3,908) $(1,984) $451 =====================================================================================================================
The amount of net realized investment losses attributable to participating policyholders for 2000 and 1999 was approximately $2.4 million and $1.6 million, respectively. There were no participating policyholders prior to the acquisition of Farm Family Life effective April 6, 1999. 41 6. Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at December 31, 2000 and 1999. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The table excludes cash and cash equivalents, insurance receivables, receivables from affiliates, accrued investment income and other assets, and accrued expenses and other liabilities, all of which had fair values approximating carrying values. As a number of the Company's significant assets (including deferred acquisition costs, and deferred income taxes) and liabilities (including reserves for property/casualty insurance losses and loss adjustment expenses and reserves for life policies and contract benefits) are not considered financial instruments, the disclosures that follow do not reflect the fair value of the Company as a whole.
2000 1999 - ------------------------------------------------------------------------------------------------------------------- ($ in thousands) Carrying Fair Carrying Fair Value Value Value Value - ------------------------------------------------------------------------------------------------------------------- Assets: Fixed maturities $1,014,869 $1,015,074 $968,025 $967,874 Equity securities 40,924 40,924 45,809 45,809 Mortgage loans 30,928 31,703 26,832 26,832 Policy loans 31,816 31,816 30,839 30,839 Other invested assets 339 339 176 176 Liabilities: Funds on deposit from policyholders 412,733 414,433 416,971 415,223
The following methods and assumptions were used in estimating the fair value disclosures for the financial instruments: Fixed maturities, equity securities and other invested assets - The fair value is based upon quoted market prices where available or from independent pricing services. Mortgage loans - The fair value is based on discounted cash flows using interest rates at which similar loans would be made to borrowers with similar characteristics. Policy loans - Future cash flows of policy loans are uncertain and difficult to predict. Therefore management believes that the fair value of policy loans approximates the unpaid principal balance. Funds on deposit from policyholders - Deposit funds include investment contracts that earn interest at either fixed or variable rates. Interest rates are adjusted monthly to market rates for those investment contracts with a variable rate. The carrying value is the fair value for these liabilities. Other investment contracts earn interest at a fixed rate for one, three or five-year terms. Fair value for these liabilities is set by discounting future cash flows to present value at current market rates. Fair values for the Company's off-balance-sheet instruments (letters of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties' credit standing. The fair value of the Company's off-balance-sheet instruments at December 31, 2000 is not considered to be material. 7. Property and Equipment The carrying value of the Company's property and equipment at December 31 is as follows:
($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------ Home office building and grounds $9,039 $8,898 Furniture and equipment 6,083 5,223 Software 2,515 1,828 Automobiles 540 506 - ------------------------------------------------------------------------------------------ 18,177 16,455 Accumulated amortization and depreciation (4,010) (1,935) - ------------------------------------------------------------------------------------------ Property and equipment, net $14,167 $14,520 ==========================================================================================
Amortization and depreciation expense was $2.4 million for 2000 and $2.0 million for 1999. Included in these totals are amortization expense relating to software of $0.2 million for 2000 and $0.1 million for 1999. 42 8. Reinsurance The Company purchases property and casualty reinsurance to limit its exposure to losses from catastrophic events, such as hurricanes, tornadoes or earthquakes, and to limit losses from any single large risk. Reinsurance contracts do not relieve the Company from its obligations to policyholders as the primary insurer. The Company evaluates the financial condition of its reinsurers and monitors concentrations of risk arising from similar geographic regions, activities and economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company regularly evaluates amounts recoverable and an allowance for uncollectible reinsurance is provided when collection is in doubt. At December 31, 2000 and 1999, the Company determined it was not necessary to provide an allowance for uncollectible reinsurance. Reinsurance receivables at December 31, 2000 include $34.7 million related to the property and casualty insurance segment and $1.7 million related to the life insurance segment. Approximately 92% of the property and casualty reinsurance receivable balances at December 31, 2000 were due from eight reinsurers. Effective December 31, 1997, the Company revised its property and casualty reinsurance program. Certain reinsurance agreements with its affiliate, United Farm Family, were terminated effective December 31, 1997. As a result, United Farm Family discontinued reinsuring losses incurred by Farm Family Casualty which exceeded $100,000 up to $300,000 and, accordingly, Farm Family Casualty's retention increased from $100,000 to $300,000 effective January 1, 1998. The Company's property catastrophe reinsurance provides $48 million of protection per event in excess of a $3 million retention. In addition, the Company has aggregate stop loss reinsurance covering: net property losses incurred in excess of 65% of net earned property premiums, up to a maximum of $5.0 million per accident year, for accident year 2000; and net losses incurred in excess of 66% of net earned premiums, up to a maximum of $12.5 million per accident year, for accident years 1998 and 1999. Aggregate stop loss reinsurance covers our direct written and assumed reinsurance business, net of reinsurance ceded. The Company's reinsurance program is structured to partially mitigate the impact of large or unusual losses as well as the aggregation of smaller, more frequent losses on liquidity and operating results. The Company also purchases reinsurance for its life insurance and accident and health lines of business in part to mitigate the impact of large or unusual claims on its liquidity and operating results. The Company's life insurance reinsurance program provides for coverage for individual life insurance claims greater than $400,000. The effects of reinsurance on premiums written and earned, and losses and loss adjustment expenses incurred, for the years ended December 31, were as follows:
($ in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Premiums From Property/Casualty Insurance Written Direct 227,308 $192,995 $185,139 Assumed 10,678 14,144 15,034 Ceded to non-affiliates (14,803) (15,437) (11,349) - ----------------------------------------------------------------------------------------------------------------------- Premiums written, net of reinsurance $223,183 $191,702 $188,824 ======================================================================================================================= Premiums From Property/Casualty Insurance Earned Direct $202,650 $189,337 $180,996 Assumed 13,104 14,969 14,037 Ceded to non-affiliates (14,607) (15,385) (13,277) - ----------------------------------------------------------------------------------------------------------------------- Premiums earned, net of reinsurance $201,147 $188,921 $181,756 ======================================================================================================================= Losses and Loss Adjustment Expenses Incurred Direct $166,175 $142,883 $137,003 Assumed 8,999 8,023 8,835 Ceded to United Farm Family ---- 288 (1,050) Ceded to non-affiliates (17,336) (9,685) (10,486) - ----------------------------------------------------------------------------------------------------------------------- Losses and loss adjustment expenses incurred, net of reinsurance $157,838 $141,509 $134,302 ======================================================================================================================= Premiums From Life and Health Insurance and Contract Charges Direct $40,023 $28,917 $---- Reinsurance ceded (1,929) (1,118) ---- - ----------------------------------------------------------------------------------------------------------------------- Premiums from life and health insurance and contract charges, net of reinsurance $38,094 $27,799 $---- =======================================================================================================================
43 9. Income Taxes The components of the deferred income tax assets and liabilities at December 31, 2000 and 1999 are:
($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------- Deferred Income Tax Assets Reserves for losses and loss adjustment expenses $6,729 $6,633 Participating policyholders' interest 19,683 22,775 Reserves for life policies and contract benefits and funds on deposit from policyholders 13,883 13,160 Net operating loss carryforward(1) 1,583 482 Unrealized investment losses, net 3,803 13,932 Unearned premium reserve 6,735 5,187 Accrued expenses 4,021 4,697 Other 194 336 - ------------------------------------------------------------------------------------------------------------- Total deferred income tax assets 56,631 67,202 - ------------------------------------------------------------------------------------------------------------- Deferred Income Tax Liabilities Deferred acquisition costs 5,399 3,251 Investments 16,320 19,453 Present value of future profits 9,305 10,000 Property and equipment 1,880 1,474 Limited partnership investment 817 850 Premium and agent balances 81 829 Other 1,388 1,740 - ------------------------------------------------------------------------------------------------------------- Total deferred income tax liabilities 35,190 37,597 - ------------------------------------------------------------------------------------------------------------- Net deferred income tax asset $21,441 $29,605 =============================================================================================================
(1) The Company's net operating loss carryforward amount is available to offset future taxable income through 2020. There was no valuation allowance for deferred income tax assets as of December 31, 2000 or 1999. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. Management believes the benefits of the deductible differences recognized as of December 31, 2000 and 1999 will ultimately be realized. The components of income tax expense (benefit) for the years ended December 31, are as follows:
($ in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------- Current $11,111 $8,724 $6,782 Deferred 2,089 (1,284) 1,472 - ------------------------------------------------------------------------------------------------------- Total income tax expense $ 13,200 $7,440 $8,254 =======================================================================================================
The Company paid income taxes of $ 9.7 million, $9.8 million, and $6.7 million in 2000, 1999 and 1998 respectively. A reconciliation of the differences between the Company's effective tax rates and the United States federal income tax rates for the years ended December 31, 2000, 1999 and 1998 is as follows:
% of Pretax Income 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Income tax provision at prevailing rates 35.00% 35.00% 35.00% Tax effect of: Tax exempt interest income (3.59) (5.60) (3.45) Dividends received deduction (0.59) (0.83) (0.63) Other, net (0.59) (0.32) (0.26) - -------------------------------------------------------------------------------------------------------------- Federal income tax expense 30.23% 28.25% 30.66% ==============================================================================================================
44 10. Reserves for Losses and Loss Adjustment Expenses As described in Note 2, the Company establishes reserves for losses and loss adjustment expenses on reported and incurred but not reported claims. The establishment of appropriate reserves for losses and loss adjustment expenses is an inherently uncertain process and the ultimate cost may vary materially from the recorded amounts. Reserve estimates are regularly reviewed and updated, using the most current information. Any resulting adjustments, which may be material, are reflected in current operations. The following table provides a reconciliation of beginning and ending liability balances for reserves for losses and loss adjustment expenses for the years ended December 31, 2000, 1999 and 1998.
($ in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Reserves for losses and loss adjustment expenses at beginning of year $186,130 $174,435 $156,622 Less reinsurance recoverables and receivables (20,852) (30,908) (29,054) - ------------------------------------------------------------------------------------------------------------------- Net reserves for losses and loss adjustment expenses at beginning of year 165,278 143,527 127,568 Net reserves for losses and loss adjustment expenses from the acquisition of United Farm Family ---- 12,335 ---- - ------------------------------------------------------------------------------------------------------------------- 165,278 155,862 127,568 - ------------------------------------------------------------------------------------------------------------------- Incurred losses and loss adjustment expenses: Provision for insured events of current year 159,908 146,829 138,201 Decrease in provision for insured events of prior years (2,070) (5,320) (3,899) - ------------------------------------------------------------------------------------------------------------------- Total incurred losses and loss adjustment expenses 157,838 141,509 134,302 - ------------------------------------------------------------------------------------------------------------------- Payments: Losses and loss adjustment expenses attributable to insured events of current year 74,260 70,463 70,098 Losses and loss adjustment expenses attributable to insured events of prior years 68,203 61,630 48,245 - ------------------------------------------------------------------------------------------------------------------- Total payments 142,463 132,093 118,343 - ------------------------------------------------------------------------------------------------------------------- Net reserves for losses and loss adjustment expenses at end of year 180,653 165,278 143,527 Plus reinsurance recoverables and receivables 33,022 20,852 30,908 - ------------------------------------------------------------------------------------------------------------------- Reserves for losses and loss adjustment expenses at end of year $213,675 $186,130 $174,435 ===================================================================================================================
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 $1.7 million (net of a discount of $1.1 million), $2.4 million (net of a discount of $1.2 million), and $3.3 million (net of a discount of $1.2 million) for December 31, 2000, 1999 and 1998, respectively. 11. Debt At December 31, 2000, the Company had no outstanding debt. On April 1, 1998 the Company redeemed all of its outstanding debt, consisting of $293,000 of debentures and $975,000 of subordinated surplus certificates, plus accrued interest of $127,000. The debentures and subordinated surplus certificates paid interest at the rate of 8% per annum, had no maturity date, and principal and interest were repayable only with the approval of the Insurance Department of the State of New York. No single holder held more than 5% of the outstanding debentures or subordinated surplus certificates at the time of redemption. The Company paid interest of $127,000 for the year ended December 31, 1998. At December 31, 2000, the Company had a revolving credit agreement with three banks, providing for uncollateralized borrowings of up to $30.0 million with no amounts outstanding. Effective January 2001, the committed amount decreased to $20.0 million. Pursuant to the merger agreement with American National, Farm Family Holdings may not borrow against the line of credit prior to the closing of the merger with American National, without the prior consent of American National. Upon the closing of the merger, the revolving credit agreement will be terminated. 45 12. Benefits Plans Pension and Other Postretirement Benefit Plans: The Company sponsors a qualified noncontributory defined benefit pension plan covering substantially all of the Company's full time employees hired prior to January 1, 1997. Effective January 1, 1997, Farm Family Casualty and Farm Family Life froze benefits available through the defined benefit plan. The Company also provides life insurance benefits through a postretirement benefit plan for retired employees meeting certain age and length of service requirements. These benefits are shown as "Other Benefits" in the tables below. Benefits under the postretirement benefit plan are provided by a group term life insurance policy issued by Farm Family Life. The change in benefit obligation for the plans for the years ended December 31, 2000, 1999 and 1998 are as follows:
Pension Benefits Other Benefits ------------------------ --------------------------- ($ in thousands) 2000 1999 1998 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Benefit obligation at beginning of year $21,259 $22,324 $20,785 $989 $1,131 $989 Service cost ---- ---- ---- 29 34 26 Interest cost 1,491 1,461 1,416 71 66 62 Actuarial (gain) / loss 677 3 50 49 (6) (88) Benefits paid (1,407) (1,274) (1,328) (66) (58) (28) Changes in assumptions ---- (650) 1,401 ---- (178) 170 Curtailment gain ---- (605) ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------ Benefit obligation at end of year $ 22,020 $21,259 $22,324 $1,072 $989 $1,131 ==================================================================================================================
The change in plan assets for the years ended December 31, 2000, 1999 and 1998 are as follows:
Pension Benefits Other Benefits -------------------------- ---------------------------- ($ in thousands) 2000 1999 1998 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $22,442 $20,770 $19,026 $---- $---- $---- Actual return on plan assets 241 2,754 2,944 ---- ---- ---- Service cost (48) (58) (72) ---- ---- ---- Employer contribution 250 250 200 66 58 28 Benefits paid (1,407) (1,274) (1,328) (66) (58) (28) - ------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 21,478 $22,442 $20,770 $---- $---- $---- ===================================================================================================================
Pension plan assets include an unallocated group annuity contract issued by Farm Family Life. The fair value of the contract was $2,839,000, $852,000, and $870,000 at December 31, 2000, 1999, and 1998, respectively. The components of the plans' accrued benefit cost as of December 31, 2000, 1999 and 1998 are as follows: Pension Benefits Other Benefits -------------------------- --------------------------- ($ in thousands) 2000 1999 1998 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Funded status $(541) $1,183 $(1,554) $(1,072) $(989) $(1,131) Unrecognized net actuarial (gain) loss 273 (1,909) (121) ---- ---- ---- Unrecognized net gain ---- ---- ---- (147) (199) (15) Unrecognized transition obligation ---- ---- ---- 617 664 712 Adjustment required to recognize minimum liability (273) ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------- Accrued benefit cost $(541) $(726) $(1,675) $(602) $(524) $(434) ===================================================================================================================
46 Weighted-average assumptions as of December 31, 2000, 1999 and 1998 are as follows:
Pension Benefits Other Benefits --------------------------- --------------------------- 2000 1999 1998 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Discount rate 7.0% 7.0% 6.5% 7.0% 7.0% 6.0% Expected return on plan assets 8.0% 8.0% 8.0% 0.0% 0.0% 0.0% Rate of compensation increase 0.0% 0.0% 0.0% 4.0% 4.0% 4.0%
The rate of compensation increase assumptions for pension benefits are zero, because benefits under the pension plan were frozen as of January 1, 1997. The components of net periodic pension expense (benefit) and the net periodic other benefit expense for the plans for the years ended December 31, 2000, 1999 and 1998 are as follows:
Pension Benefits Other Benefits ---------------------------- ------------------------- ($ in thousands) 2000 1999 1998 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Service cost $48 $58 $72 $29 $34 $26 Interest cost 1,491 1,461 1,416 71 66 62 Expected return on plan assets (1,746) (1,613) (1,473) ---- ---- ---- Amortization of unrecognized net gain ---- ---- (34) (3) ---- (7) Amortization of unrecognized transition obligation ---- ---- ---- 47 47 47 Curtailment gain ---- (605) ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------- Net periodic expense (benefit) $(207) $(699) $(19) $144 $147 $128 ===================================================================================================================
The Company's portion of net periodic pension benefit for the years ended December 31, 2000, 1999 and 1998 was $(207,000), $(505,000), and $(12,000), respectively. The Company's portion of net periodic other benefits for the years ended December 31, 2000, 1999 and 1998 was $144,000, $137,000, and $85,000, respectively. Incentive Savings Plans: The Company sponsors incentive savings plans for the benefit of its employees. A portion of the contributions made by the Company are discretionary, based on the profits earned by the Company. The Company's expense associated with the plans was $1.5 million, $1.2 million, and $0.9 million in 2000, 1999 and 1998, respectively. Stock Compensation Plan: The Company sponsors the Omnibus Securities Plan (the "Securities Plan"), under which up to 1,000,000 shares of common stock are available for award to key employees. Stock options granted under the Securities Plan may be either incentive stock options ("ISO's") or non-qualified stock options ("NQSO's"). For ISO's, the option price may be no less than the fair market value on the date of the grant. For NQSO's, the option price may be no less than 85% of the fair market value on the date of grant. All granted options have been at exercise prices equal to the fair value of the Company's common stock on the applicable grant date. The options granted vest annually in approximately equal amounts over a three-year period. The options granted may be exercised when vested and will expire ten years after the date of grant. 47 The following table summarizes the changes in stock options for years ended December 31, as follows:
Number of Shares Option Price Range Weighted Average Subject to Option Per Share Exercise Price - --------------------------------------------------------------------------------------------------------------------- Outstanding at January 1, 1998 210,000 $22.56 $22.56 Granted ---- ---- ---- Exercised ---- ---- ---- Forfeited ---- ---- ---- - --------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1998 210,000 22.56 22.56 Granted 258,000 32.31-32.63 32.61 Exercised ---- ---- ---- Forfeited (21,700) 22.56-32.63 31.84 - --------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1999 446,300 22.56-32.63 27.92 Granted 126,000 30.09 30.09 Exercised (3,300) 22.56 22.56 Forfeited (6,350) 30.09-32.63 31.43 - --------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2000 562,650 $22.56-32.63 $28.40 ===================================================================================================================== Exercisable at December 31, 1999 208,300 $22.56 $22.56 ===================================================================================================================== Exercisable at December 31, 2000 283,435 $22.56-32.63 $25.33 =====================================================================================================================
No stock options were exercisable at December 31, 1998. The Company has elected to follow APB 25 and related interpretations in accounting for the Securities Plan. Under APB 25, because the exercise price of the Company's stock options equals the fair market price of the underlying stock on the date of grant, no compensation expense is recognized. If the Company had determined the compensation expense of the Securities Plan as prescribed by Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts as follows:
2000 1999 1998 -------------------------- ---------------------- ---------------------- As As As ($ in thousands, except per share amounts) reported Pro forma reported Pro forma reported Pro forma - ----------------------------------------------------------------------- ---------------------- ---------------------- Net income $30,114 $29,280 $18,618 $17,676 $18,671 $18,271 Basic earnings per share $4.98 $4.84 $3.16 $3.00 $3.55 $3.48 Diluted earnings per share $4.93 $4.80 $3.13 $2.97 $3.52 $3.44
The per share weighted-average fair value of the options granted in 2000 and 1999 was $12.23 and $12.24, respectively, estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted-average assumptions: 1998 - no options were granted. 1999 - dividend yield of 0.0%, expected volatility of 25.64%, risk-free interest rate of 5.32%, and an expected life of six years. 2000 - dividend yield of 0.0%, expected volatility of 27.25%, risk-free interest rate of 6.15%, and an expected life of six years. At December 31, 2000 the weighted-average contractual life of the outstanding options is 7.6 years. Upon adoption of the merger agreement with American National by Farm Family Holdings' stockholders (see Notes 3 and 20 to the Consolidated Financial Statements), all outstanding stock options that have been granted to Farm Family Holdings' directors and officers under the Omnibus Securities Plan will vest and become exercisable. Immediately before the effective time of the merger, all outstanding stock options, whether or not vested or exercisable, will terminate and each holder of a terminated stock option will receive at the effective time of the merger a cash payment equal to the number of shares subject to his or her stock option multiplied by the excess, if any, of (1) the higher of the fair market value per share of Farm Family Holdings' common stock immediately prior to the adoption of the merger agreement, or the merger consideration per share of our common stock, which is $44.00 per share, over (2) the exercise price of the option. Based on the number of stock options outstanding as of December 31, 2000 and the exercise prices of those stock options, and assuming the merger consideration is higher than the fair market value of our common stock immediately prior to the adoption of the merger agreement by our stockholders, holders of outstanding stock options will receive approximately $8.7 million, in the aggregate, in exchange for termination of their stock options. 48 Merger-Related Retention Payments: In connection with the execution of the merger agreement with American National, Farm Family Holdings entered into employment agreements providing that certain executive officers of the Company will be entitled to receive retention payments on the effective date of the merger and at the end of each of the three successive six-month periods following the effective date of the merger. The total aggregate amount of these payments is $3.9 million, with $2.6 million of this amount due at the effective time of the merger. See Notes 3 and 20 to the Consolidated Financial Statements. 13. Related Party Transactions Prior to Farm Family Holdings' acquisition of Farm Family Life effective April 6, 1999, the operations of Farm Family Holdings (including Farm Family Casualty) were closely related with those of Farm Family Life and Farm Family Life's wholly owned subsidiary, United Farm Family. The affiliated companies operate under similar Boards of Directors, with similar senior management and shared home office premises, branch office facilities, data processing equipment, certain personnel and other operational expenses. Expenses are shared based on each company's estimated level of usage. The operations of Farm Family Life, which were not previously consolidated with Farm Family Holdings, have been consolidated subsequent to the acquisition by Farm Family Holdings. For each of the periods January 1, 1999 through April 6, 1999 and the year ended December 31, 1998, 68% of aggregate expenses totaling $7.7 million and $29.3 million, respectively, were allocated to the Company under an expense sharing agreement. 14. Preferred Stock Farm Family Holdings' Certificate of Incorporation authorizes the issuance of 1,000,000 shares of preferred stock with a par value of $.01, issuable in classes or series. Of the 1,000,000 shares authorized, 163,214 shares of mandatory redeemable preferred stock have been issued and are outstanding and are reported in the accompanying consolidated balance sheets as mandatory redeemable preferred stock. The remaining 836,786 shares are reported in preferred stock in the stockholders' equity section. None of the remaining 836,786 shares have been issued as of December 31, 2000. In connection with the acquisition of Farm Family Life, Farm Family Holdings issued 163,214 shares of 6 1/8% Series A preferred stock with a redemption value of $5,830,000, or $35.72 per share. Dividends on the preferred stock are payable on each January 15, April 15, July 15 and October 15 and must be fully paid or declared with funds set aside for payment before any dividend can be declared or paid on any other class of Farm Family Holdings' stock. The preferred stock must be redeemed by Farm Family Holdings on April 7, 2019 (or the next business day) and may be redeemed, at Farm Family Holdings' option, in whole or in part, on and after April 6, 2009. Farm Family Holdings has the option to pay the redemption amount in cash or by delivery of Farm Family Holdings' common stock. See Notes 3 and 20 to the Consolidated Financial Statements for information regarding the merger agreement with American National. 15. Dividends and Statutory Financial Information Farm Family Holdings may receive dividends from subsidiaries, if declared and paid. The New York State Insurance Law regulates the distribution of dividends and other payments to Farm Family Holdings by Farm Family Casualty and Farm Family Life. As of December 31, 2000, the maximum amount of shareholder dividends that could be paid by Farm Family Casualty without the prior approval of the New York State Insurance Department (the "Department") was approximately $4.6 million. During 2000, Farm Family Casualty declared and paid dividends of $0.5 million to Farm Family Holdings. Effective September 20, 2000, New York State Insurance Law was amended to permit domestic stock life insurers to distribute shareholder dividends up to a certain threshold amount without the prior approval of the Department. Previously, the payment of shareholder dividends by Farm Family Life was subject to prior approval of the Department. The maximum amount of shareholder dividends that could be paid by Farm Family Life without the prior approval of the Department during 2001 is approximately $6.1 million. During 2000, Farm Family Life declared and paid dividends of $1.0 million to Farm Family Holdings with the prior approval of the Department. Net income and capital and surplus of the Company, as determined in accordance with statutory accounting practices are as follows: 49
($ in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------- Net income Property and casualty insurance(1) $7,610 $14,350 $13,346 Life insurance(2) 6,677 7,843 ---- ---------------------------------------------- Total $14,287 $22,193 $13,346 ============================================== Capital and Surplus Property and casualty insurance $136,030 $131,617 $105,165 Life insurance 115,048 110,374 ---- ---------------------------------------------- Total $251,078 $241,991 $105,165 ==============================================
(1) Net income under statutory accounting principles for 1999 includes the operations of United Farm Family for the entire year. The Company's net income under generally accepted accounting principles only includes the operations of United Farm Family since April 6, 1999 - the date it was acquired by Farm Family Holdings. (2) Net income under statutory accounting principles for 1999 includes the operations for Farm Family Life for the entire year. The Company's net income under generally accepted accounting principles only includes the operations of Farm Family Life since April 6, 1999 - the date it was acquired by Farm Family Holdings. The National Association of Insurance Commissioners ("NAIC") requires insurance companies to calculate and report risk based capital information under a set of formulas which measure statutory capital and surplus needs based on a regulatory definition of the risks in a company's mix of products and its balance sheet. As of December 31, 2000, Farm Family Casualty's, Farm Family Life's and United Farm Family's total capital exceeds the threshold level of regulatory action, as defined by the NAIC. 16. Commitments, Contingencies and Uncertainties The Company is a party to litigation as a result of a $2 million investment in notes issued by FoxMeyer Corporation ("FoxMeyer"). The Company received full payment of these notes in 1996. FoxMeyer subsequently declared bankruptcy and other creditors are seeking recovery of amounts paid to the noteholders. Management is unable to estimate the amount of loss, if any, which may arise as a result of these proceedings. The Company is party to numerous other legal actions arising in the normal course of business. Management believes that resolution of these other legal actions will not have a material adverse effect on the Company's consolidated financial condition and results of operations. Catastrophes are an inherent risk in the property and casualty insurance industry and could produce significant adverse fluctuations in the Company's results of operations and financial condition. The Company is subject to a concentration of risk within the Northeastern United States. For the years ended December 31, 2000, 1999 and 1998, approximately 59%, 62%, and 63%, respectively, of the Company's property and casualty direct premiums were written in the states of New York and New Jersey. In addition, for the years ended December 31, 2000 and 1999, approximately 58% and 59%, respectively, of the life insurance segement's collected life insurance premiums were derived from policies written in the states of New York and New Jersey. As a result of the concentration of the Company's business in the states of New York and New Jersey, and more generally, in the Northeastern United States, the Company's results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States, despite the Company's reinsurance program designed to mitigate the impact of adverse weather and catastrophic events on the Company's operating results. 50 As a condition of its license to do business in various states, the Company is required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. The amount of future losses or assessments from residual market mechanisms cannot be predicted with certainty and could have a material adverse effect on the Company's future results of operations. During the third quarter of 1998, the Company modified the agreements with its agents to include revised conditions under which eligible agents may receive extended earnings payments. In addition to the conditions described previously, extended earnings will be paid only if a successor agent(s) assumes the right to service the book of business of the eligible former agent and agrees to become primarily responsible for making the extended earnings payments. In the event that no successor agent(s) assumes the right to service the book of business of an eligible former agent, the Company has no obligation to make the extended earnings payments. The Company has no intention to waive this provision of its agreements with its agents. As a result, the successor agent(s), not the Company, will be the primary obligor responsible for extended earnings payments. Since the inception of the Program in 1986, the Company has always been able to identify successor agents willing to assume the rights to service such books of business. The Company will act as guarantor of the amounts payable to eligible former agents who have terminated their association with the Company by successor agents who agree to make the extended earnings payments. At December 31, 2000, the Company was guarantor of $1.7 million for such payments. The Company expects to enforce the terms of the guarantee in the event of default by a successor agent. Farm Family Casualty and Farm Family Life are each parties to Membership List Purchase Agreements with the state Farm Bureaus in Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and West Virginia. The Membership List Purchase Agreements are for six years commencing on January 1, 1996. For the years ended December 31, 2000, 1999, and 1998, the Company incurred expense of $1.4 million, $1.2 million, and $0.7 million, respectively, to the Farm Bureaus pursuant to the Membership List Purchase Agreements. At December 31, 2000 and 1999, the gross amount of property and equipment and related depreciation recorded under capital leases was $348,000 and $365,000, respectively. The future minimum capital lease payments as of December 31, 2000 are approximately $132,000 per year for 2001 and 2002. The Company's liability for funds on deposit from policyholders includes amounts subject to discretionary withdrawal. Withdrawal characteristics as of December 31, 2000 are as follows:
($ in thousands) Amount % of Total ------------------------------------------------------------------------------------------------------ Surrender charge rate: Greater than or equal to 5% $89,759 21.7% Less than 5%, but still subject to surrender charge 62,541 15.2% Not subject to surrender charge 252,753 61.2% Not subject to discretionary withdrawal 7,680 1.9% -------------------------------- Total funds on deposit from policyholders $412,733 100.0% ================================
At December 31, 2000, the Company had $4.4 million of outstanding letters of credit. These letters of credit are issued to insurance companies reinsured by Farm Family Casualty and domiciled in states where Farm Family Casualty is not licensed or authorized as a reinsurer. In accordance with the merger agreement with American National (see Notes 3 and 20 to the Consolidated Financial Statements), Farm Family Holdings will be obligated to pay a $7.5 million "break-up" fee to American National if Farm Family Holdings enters into an agreement to consummate an alternative transaction or the merger agreement is terminated under certain circumstances by Farm Family Holdings or American National. 51 17. Unaudited Interim Financial Information The following table sets forth the unaudited quarterly financial information for the periods indicated.
Quarter ------------------------------------------------------------------ ($ in thousands except per share data) 1st 2nd 3rd 4th - ------------------------------------------------------------------------------------------------------------------- 2000 Revenues $75,991 $76,063 $79,746 $81,127 Net income $16,409 $5,028 $5,214 $3,463 Per share: Net income - Basic $2.69 $0.83 $0.87 $0.58 Net income - Diluted $2.66 $0.82 $0.86 $0.57 1999 Revenues $53,724 $71,853 $75,867 $73,419 Net income $3,743 $5,154 $5,068 $4,653 Per share: Net income - Basic $0.71 $0.85 $0.83 $0.76 Net income - Diluted $0.71 $0.84 $0.82 $0.75
18. Segment Information The Company has two reportable segments: property and casualty insurance and life insurance, which offer different products and services. The property and casualty insurance segment includes activities related to the Special Farm Package product, a flexible multi-line package of insurance coverages, and other insurance products covering personal and commercial automobiles, businessowners and homeowners. The life insurance segment includes activities related to individual whole life, term and universal life products, single and flexible premium deferred annuity products, single premium immediate annuity products and disability income insurance products. The Company uses operating income (net income excluding realized investment gains (losses) and nonrecurring items, net of taxes) to measure the financial results of its segments. "Corporate and other" includes holding company activities and operations not directly related to the reportable segments. Summarized segment financial information is as follows:
($ in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Premium Revenues Property and casualty insurance $201,147 $188,921 $181,756 Life insurance 38,094 27,799 ---- - ------------------------------------------------------------------------------------------------------------------------- Total premium revenues $239,241 $216,720 $181,756 ========================================================================================================================= Net Investment Income Property and casualty insurance $23,289 $20,449 $18,601 Life insurance 52,164 37,673 ---- Corporate and other 203 388 518 Intersegment eliminations 42 48 ---- - ------------------------------------------------------------------------------------------------------------------------- Total investment income $75,698 $58,558 $19,119 ========================================================================================================================= Amortization Expense Property and casualty insurance Amortization of deferred acquisition costs $36,930 $36,378 $35,019 Life insurance Amortization of deferred acquisition costs 648 699 ---- Amortization of present value of future profits 1,983 1,105 ---- - ------------------------------------------------------------------------------------------------------------------------- Total amortization expense $39,561 $38,182 $35,019 =========================================================================================================================
52
($ in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Other Operating Costs and Expenses Property and casualty insurance Underwriting expenses $10,897 $10,093 $10,759 Dividends to policyholders 319 159 192 Life insurance 13,376 9,293 ---- Corporate and other 3,044 1,564 1,480 Intersegment eliminations (920) (675) ---- - ------------------------------------------------------------------------------------------------------------------------- Total other operating costs and expenses $26,716 $20,434 $12,431 ========================================================================================================================= Net Income Operating Income Property and casualty insurance $15,827 $17,140 $14,884 Life insurance 4,811 2,879 ---- Corporate and other (1,217) (888) (613) - ------------------------------------------------------------------------------------------------------------------------- Total consolidated operating income 19,421 19,131 14,271 Effect of retroactively including Excess Interest and Spreads, net of tax 12,746 ---- ---- Realized investment (gains) losses, net of tax (956) (266) 293 Other non-recurring charges, net of tax (1,097) (247) ---- Adjustments relating to extended earnings liability, net of tax ---- ---- 4,107 - ------------------------------------------------------------------------------------------------------------------------- Total net income $30,114 $18,618 $18,671 ========================================================================================================================= Federal Income Tax Expense (Benefit) Property and casualty insurance $5,329 $6,107 $8,572 Life insurance 8,632 1,636 ---- Corporate and other (761) (303) (318) - ------------------------------------------------------------------------------------------------------------------------- Total federal income tax expense $13,200 $7,440 $8,254 =========================================================================================================================
December 31, --------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Assets Property and casualty $514,320 $445,223 $397,038 Life insurance 839,003 811,030 ---- Corporate and other 67,330 71,014 35,329 Intersegment eliminations (70,108) (68,043) (25,952) - ------------------------------------------------------------------------------------------------------------------------- Total assets $1,350,545 $1,259,224 $406,415 =========================================================================================================================
53 19. Reconciliation to Statutory Accounting The Company's insurance subsidiaries are required to file statutory financial statements with state insurance regulatory authorities. Accounting principles used to prepare these statutory financial statements differ from those used to prepare financial statements under Generally Accepted Accounting Principles. Significant differences for our insurance subsidiaries in aggregate, as of and for the years ended December 31, are as follows:
Net Income Stockholders' Equity ---------------------------------- ------------------------- ($ in thousands) 2000 1999 1998 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Balance per statutory accounting principles $14,287 $22,193 $13,346 $251,078 $241,991 To adjust statutory results for the first quarter of 1999 for Farm Family Life and United Farm Family which were purchased effective April 6, 1999 ---- (3,427) ---- ---- ---- Parent company and non-insurance companies (2,301) (1,055) (611) 60,111 63,815 Deferred acquisition costs 6,805 3,962 1,055 24,435 17,630 Present value of future profits (1,983) (1,105) ---- 26,588 28,571 Policyholder funds 10,176 9,365 ---- (3,713) (6,048) Deferred income taxes (1,755) 1,940 (1,482) 21,441 29,605 Premiums deferred and other receivables (11) 219 (135) (4,728) (4,788) Statutory reserves 352 327 ---- 24,938 30,581 Investment valuation differences (8,070) (6,269) ---- 15,592 (13,231) Participating policyholders' interest 8,464 (9,692) ---- (126,266) (128,516) Gain on reduction of extended earnings liability ---- ---- 6,318 ---- ---- Other adjustments, net 1,050 561 180 (1,048) (1,952) Consolidating eliminations and adjustments 3,100 1,599 ---- (74,223) (76,464) - ------------------------------------------------------------------------------------------------------------------------------- Balance per generally accepted accounting principles $30,114 $18,618 $18,671 $214,205 181,194 ===============================================================================================================================
20. Subsequent Events On February 27, 2001, Farm Family Holdings held a special meeting of its stockholders at which they considered and voted upon a proposal to adopt the merger agreement with American National pursuant to which Farm Family Holdings would be sold to American National. The merger, valued at approximately $280 million, is subject to certain other closing conditions, including the approval of the New York State Insurance Department. On March 28, 2001, American National and Farm Family Holdings announced that the termination date of their merger agreement was automatically extended for up to an additional 90 days from March 31, 2001 in order to allow American National further time to obtain the approval of the New York State Insurance Department for the merger. The automatic extension was in accordance with the terms of the merger agreement. American National expects to receive the New York State Insurance Department's approval by the end of the first week of April. The companies expect to close the merger promptly after the receipt of the New York State Insurance Department's approval. 54 Report of Independent Accountants To the Stockholders and Board of Directors of Farm Family Holdings, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Farm Family Holdings, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Albany, New York February 16, 2001, except for Note 20 as to which the dates are February 27, 2001 and March 28, 2001 55 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with our independent auditors. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors Robert L. Baker, 51, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2003. Mr. Baker has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1988. Mr. Baker is President and a Director of Delaware State Farm Bureau, Inc. Mr. Baker has been a farmer and Treasurer of Baker Farms, Inc. since 1972. Wayne R. Bissonette, 62, has been a Director of Farm Family Holdings since April 1998. His term as a Director will expire in 2001. Mr. Bissonette has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since April 1998. Mr. Bissonette is First Vice President and a Director of Vermont Farm Bureau, Inc. Mr. Bissonette has been a self-employed dairy farmer since 1970. Randolph C. Blackmer, Jr., 59, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2002. Mr. Blackmer has also served as a Director of Farm Family Casualty and Farm Family Life since 1984 and of United Farm Family since 1988. Mr. Blackmer is President and a Director of Connecticut Farm Bureau Association, Inc. Mr. Blackmer has been a self-employed farmer since 1966 and has been the owner of Blackmer Farm and President of Ag Service, Inc since 1975. Joseph E. Calhoun, 66, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2001. Mr. Calhoun has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1990. Mr. Calhoun has owned and operated Joseph E. Calhoun Farms since 1953. James V. Crane, 39, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2003. Mr. Crane has also served as a Director of Farm Family Casualty since 1994 and of Farm Family Life and United Farm Family since April 1999. Mr. Crane previously served as a Director of Farm Family Life and United Farm Family from 1994 to 1998. Mr. Crane is a Director of Maine Farm Bureau Association. Mr. Crane has been a farmer and manager of Crane Bros., Inc. since 1983. Sandra A. George, 56, has been a Director of Farm Family Holdings since April 1999. Her term as a Director will expire in 2002. Ms. George has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1997. Ms. George is President and a Director of Maine Farm Bureau Association. Ms. George has been a self-employed farmer since 1967. Stephen J. George, 61, has been a Director of Farm Family Holdings since February 1996 and Vice Chairman of the Board of Farm Family Holdings since April 1999. His term as a Director will expire in 2002. Mr. George has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1989 and Vice Chairman of the Board of Farm Family Casualty, Farm Family Life and United Farm Family since April 1999. Mr. George had been a self-employed farmer in the greenhouse and nursery business from 1965 to 1998 and was a Managing Director of Gladstone-NYC Partners LLC from 1999 to May 2000 and since November 2000, has been a Managing Director of Friendship Business Ventures, LLC. Gordon H. Gowen, 74, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2001. Mr. Gowen has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1991. Mr. Gowen previously served as a Director of Farm Family Casualty and Farm Family Life from 1978 to 1980. Mr. Gowen has been a self-employed farmer since 1957. 56 Jon R. Greenwood, 47, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2001. Mr. Greenwood has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1995. Mr. Greenwood has been a self-employed farmer since 1978. Clark W. Hinsdale III, 45, has been a Director of Farm Family Holdings since February 1996 and Chairman of the Board of Farm Family Holdings since April 1999. His term as a Director will expire in 2003. Mr. Hinsdale has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1993 and Chairman of the Board of Farm Family Casualty, Farm Family Life and United Farm Family since April 1999. Mr. Hinsdale is President and a Director of Vermont Farm Bureau, Inc. Mr. Hinsdale has been a self-employed farmer, land planner and real estate broker since 1983. Denzil D. Huff, 68, has been a Director of Farm Family Holdings since July 2000. His term as a Director will expire in 2002. Mr. Huff has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since July 2000. Mr. Huff is Vice President and a Director of West Virginia Farm Bureau, Inc. Mr. Huff is a retired teacher and a part-time beef cattle farmer. Arthur D. Keown, Jr., 55, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2002. Mr. Keown has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family 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. W. Bruce Krenning, 57, has been a Director of Farm Family Holdings since April 1999. His term as a Director will expire in 2002. Mr. Krenning has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since April 1999. Mr. Krenning is Vice President and a Director of New York Farm Bureau, Inc. Mr. Krenning has been a self-employed farmer since 1977. John W. Lincoln, 62, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2003. Mr. Lincoln previously served as Vice Chairman of the Board of Farm Family Holdings from February 1996 to April 1999. Mr. Lincoln has also served as Vice Chairman of the Board of Farm Family Casualty, Farm Family Life and United Farm Family from July 1996 to April 1999, as First Vice President of Farm Family Casualty, Farm Family Life and United Farm Family from March 1996 to July 1996 and as a Director of Farm Family Casualty and Farm Family Life since 1984 and of United Farm Family since 1988. Mr. Lincoln is President and a Director of New York Farm Bureau, Inc. Mr. Lincoln has owned and operated Linholm dairy farm since 1961. Wayne A. Mann, 67, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2003. Mr. Mann has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1994. Mr. Mann is President and a Director of New Hampshire Farm Bureau Federation. Mr. Mann is a retired Air Force Lieutenant Colonel and pilot and has been a self-employed farmer since 1980. Frank W. Matheson, 75, has been a Director of Farm Family Holdings since April 1998. His term as a Director will expire in 2001. Mr. Matheson has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1996. Mr. Matheson is Vice President and a Director of Massachusetts Farm Bureau Federation, Inc. Mr. Matheson has been a self-employed farmer since 1951. John P. Moskos, 49, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2001. Mr. Moskos has also served as a Director of Farm Family Casualty since 1997 and of Farm Family Life and United Farm Family since 1999. Mr. Moskos has been Senior Vice President, Private Clients Group of Fleet Boston Financial Corporation since September 1998. Previously, Mr. Moskos had been Senior Vice President, Corporate Banking of Fleet Bank from January 1996 to September 1998 and 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, 67, has been a Director of Farm Family Holdings since February 1996. Her term as a Director will expire in 2001. Ms. O'Leary has also served as a Director of Farm Family Casualty and Farm Family Life since 1983 and of United Farm Family since 1988. Ms. O'Leary, now retired, had been a self-employed farmer since 1952. 57 John I. Rigolizzo, Jr., 47, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2001. Mr. Rigolizzo has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1995. Mr. Rigolizzo is President and a Director of New Jersey Farm Bureau. Mr. Rigolizzo has been the sole proprietor of Five-R-Farms since 1998. Mr. Rigolizzo was previously a farm employee of Johnny Boy Farms, Inc. from 1975 to 1998. William M. Stamp, Jr., 61, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2002. Mr. Stamp previously served as Chairman of the Board of Farm Family Holdings from February 1996 to April 1999. Mr. Stamp has also served as Chairman of the Board of Farm Family Casualty, Farm Family Life and United Farm Family from July 1996 to April 1999, as President of Farm Family Casualty, Farm Family Life and United Farm Family from 1987 to July 1996 and as a Director of Farm Family Casualty and Farm Family Life since 1975 and of United Farm Family since 1988. 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. Charles A. Wilfong, 43, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2003. Mr. Wilfong has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family since 1991. Mr. Wilfong is President and a Director of West Virginia Farm Bureau, Inc. Mr. Wilfong has been a farmer and a Partner of Wilfong Farms since 1976. Mr. Wilfong is a Director of Southern States Cooperative, Incorporated. Tyler P. Young, 40, has been a Director of Farm Family Holdings since February 1996. His term as a Director will expire in 2003. Mr. Young has also served as a Director of Farm Family Casualty, Farm Family Life and United Farm Family 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 and owner of Young Family Farms, LLC since 1998.
Executive Officers Date First Elected Officer of Registrant or Name Age Position Presently Held with Registrant Subsidiary - ------------------------------------------------------------------------------------------------------------------------------------ Philip P. Weber 52 President & Chief Executive Officer 1987 James J. Bettini 46 Executive Vice President - Operations 1990 Victoria M. Stanton 41 Executive Vice President, General Counsel 1991 & Secretary Timothy A. Walsh 39 Executive Vice President, Chief Financial 1996 Officer & Treasurer William T. Conine 52 Senior Vice President - Casualty Operations 1985 Farm Family Casualty Dale E. Wyman 58 Senior Vice President - Field Administration 1989 Farm Family Casualty, Farm Family Life Richard E. Long 38 Senior Vice President - Casualty Claims 1993 Farm Family Casualty Sharon T. DiLorenzo 44 Senior Vice President - Life Operations 1996 Farm Family Life Patrick A. Wejrowski 52 Senior Vice President - Information Services 1996 Farm Family Casualty, Farm Family Life
58 There are no family relationships among any of the executive officers nor are there any arrangements or understandings between any person pursuant to which he/she was elected as an officer. All officers serve at the pleasure of the Board of Directors, but subject to the foregoing, are elected for terms of approximately one year until our next Annual Meeting. Mr. Bettini currently serves as a Director of Ambanc Holding Co., Inc. Mr. Walsh currently serves as a Director of MPW Industrial Services Group, Inc. ITEM 11. EXECUTIVE COMPENSATION Executive Compensation The following table sets forth information regarding the compensation of the Chief Executive Officer and the other four most highly compensated executive officers of Farm Family Holdings. The figures below represent the aggregate compensation paid to such executive officers by Farm Family Holdings, Farm Family Casualty, Farm Family Life and United Farm Family (collectively, the "Companies").
SUMMARY COMPENSATION TABLE Long Term Compensation ------------ Annual Compensation Awards --------------------------------- ---------- Securities Underlying All Other Name and Salary Bonus Options Compensation Principal Position Year ($) ($) (#) ($) ------------------ ---- --- --- --- --- Philip P. Weber ............................................ 2000 375,000 228,750(1) 30,000 55,536 (2) President & Chief Executive Officer 1999 375,000 193,094(1) 75,000 55,228 1998 325,000 193,701(1) ---- 51,747 Victoria M. Stanton ................................... 2000 240,000 108,000(1) 12,000 37,673 (3) Executive Vice President, 1999 240,000 84,374(1) 31,000 34,451 General Counsel & Secretary 1998 213,000 84,690(1) ---- 31,965 Timothy A. Walsh............................................ 2000 240,000 108,000(1) 12,000 31,369 (4) Executive Vice President, Chief Financial Officer 1999 215,000 77,494(1) 31,000 28,354 & Treasurer 1998 175,000 73,011(1) ---- 24,829 James J. Bettini............................................ 2000 210,000 94,500(1) 12,000 27,939 (5) Executive Vice President-Operations 1999 200,000 69,752(1) 31,000 26,847 1998 168,000 68,443(1) ---- 25,111 William T. Conine........................................... 2000 126,000 42,840(1) 5,000 16,409 (6) Senior Vice President-Casualty Operations 1999 126,000 32,061(1) 10,000 16,713 Farm Family Casualty 1998 121,000 36,795(1) ---- 16,802
(1) Represents bonuses earned in the year reported by the named executive officer pursuant to Farm Family Holdings' Annual Incentive Plan. At the time we entered into the merger agreement with American National, the Farm Family Holdings Annual Incentive Plan was amended to, among other things, provide minimum bonus amounts for 2000. (2) Represents a contribution of $15,300 earned under the Farm Family Profit Sharing Plan and the Farm Family Money Purchase Plan (collectively, the "Profit Sharing and Money Purchase Plan"), a credit of $37,518 earned under the Farm Family Supplemental Money Purchase and Profit Sharing Plan (the "Supplemental Plan') and a group term life insurance premium of $2,718 paid by the Companies for the benefit of Mr. Weber, which resulted in $2,265 of taxable income. Contributions under the Profit Sharing and Money Purchase Plan and credits under the Supplemental Plan are made during the year subsequent to the year in which they are earned. 59 (3) Represents a contribution of $15,300 earned under the Profit Sharing and Money Purchase Plan, a credit of $14,992 earned under the Supplemental Plan, a credit of $6,012 representing the difference between market interest rates determined pursuant to SEC rules and the "Prime Rate" as published in the "Money Rates" section of The Wall Street Journal credited by Farm Family Holdings on salary deferred pursuant to the Officers' Deferred Compensation Plan and a group term life insurance premium of $1,369 paid by the Companies for the benefit of Ms. Stanton, of which $604 was taxable income. Contributions under the Profit Sharing and Money Purchase Plan and credits under the Supplemental Plan are made during the year subsequent to the year in which they are earned. (4) Represents a contribution of $15,300 earned under the Profit Sharing and Money Purchase Plan, a credit of $14,589 earned under the Supplemental Plan and a group term life insurance premium of $1,480 paid by the Companies for the benefit of Mr. Walsh, of which $690 was taxable income. Contributions under the Profit Sharing and Money Purchase Plan and credits under the Supplemental Plan are made during the year subsequent to the year in which they are earned. (5) Represents a contribution of $15,300 earned under the Profit Sharing and Money Purchase Plan, a credit of $11,234 earned under the Supplemental Plan and a group term life insurance premium of $1,405 paid by the Companies for the benefit of Mr. Bettini, of which $760 was taxable income. Contributions under the Profit Sharing and Money Purchase Plan and credits under the Supplemental Plan are made during the year subsequent to the year in which they are earned. (6) Represents a contribution of $15,300 earned under the Profit Sharing and Money Purchase Plan, a credit of $44 earned under the Supplemental Plan, and a group term life insurance premium of $1,065 paid by the Companies for the benefit of Mr. Conine, of which $613 was taxable income. Contributions under the Profit Sharing and Money Purchase Plan and credits under the Supplemental Plan are made during the year subsequent to the year in which they are earned. Compensation of Directors The directors of Farm Family Holdings are also directors of Farm Family Casualty, Farm Family Life and United Farm Family. The director fees and retainers listed below represent the aggregate fees and retainers paid to the director by the Companies. In 2000, 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) received an annual retainer of $20,000 and $10,000, respectively. All other directors received an annual retainer of $5,000. Directors also received a daily fee of $1,000 for meetings of the boards of directors of the Companies, $500 per meeting of a board committee and $500 per day for attendance at other company functions and in lieu of the fees set forth above, received a fee of $250 for participation in each meeting or company function conducted by teleconference. Directors may defer their compensation pursuant to a non-qualified deferred compensation plan and may be granted awards pursuant to our Omnibus Securities Plan. In 2000, the Board of Directors granted 1,000 nonqualified stock options under the Omnibus Securities Plan to each individual who served as a director of Farm Family Holdings on April 25, 2000. See "Omnibus Securities Plan" below. Directors are reimbursed for reasonable travel and other expenses of attending meetings of the boards of directors and board committees and other functions. Fees and expenses paid to directors are allocated among Farm Family Holdings, Farm Family Casualty, Farm Family Life and United Farm Family pursuant to expense sharing arrangements. 60
OPTION/SAR GRANTS IN LAST FISCAL YEAR Individual Grants -------------------------------------------------------------------------------------------------- Number of Securities % of Total Underlying Options/SARs Options/SARs Granted to Exercise Granted Employees Price Expiration Grant Date Name (#) in Fiscal Year ($/Sh) Date Present Value $(2) - ---- --- -------------- ------ ---- ------------------ Philip P. Weber 30,000(1) 28.85% $30.094 4/24/10 $367,020 James J. Bettini 12,000(1) 11.54% $30.094 4/24/10 $146,808 Victoria M. Stanton 12,000(1) 11.54% $30.094 4/24/10 $146,808 Timothy A. Walsh 12,000(1) 11.54% $30.094 4/24/10 $146,808 William T. Conine 5,000(1) 4.81% $30.094 4/24/10 $61,170
(1) All options vest in approximately equal amounts over a three (3) year period and immediately vest and become exercisable or satisfiable, as applicable, in the event of a change of control (as defined in our Omnibus Securities Plan). All options vest upon termination of the holder's employment with the Company on account of death, Permanent and Total Disability (as defined in our Omnibus Securities Plan), or retirement upon or after attaining age fifty-five (55). Adoption of the merger agreement with American National by Farm Family Holdings' stockholders on February 27, 2001 constituted a change of control under the Omnibus Securities Plan. Upon adoption of the merger agreement with American National by Farm Family Holdings' stockholders on February 27, 2001, all outstanding stock options that we have granted to our directors and executive officers under our Omnibus Securities Plan vested and became exercisable. (2) The Black-Scholes method is used with these assumptions: expected volatility of 27.25%, dividend yield of 0%, expected life of 6 years, initial annual forfeiture rate of 5% and risk-free interest rate of 6.15%.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES Number of Securites Underlying Unexercised Value of Unexercised Options/SARs at In-the-Money Options/SARs Shares FY-End(#)(1) at FY-End ($) Acquired -------------------------------------- ----------------------------------- Upon Value Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- (#) ($) (#) (#) ($) ($) Philip P. Weber 0 0 99,750 80,250 1,764,844 888,461 James J. Bettini 0 0 50,230 32,770 911,179 362,168 Victoria M. Stanton 0 0 50,230 32,770 911,179 362,168 Timothy A. Walsh 0 0 50,230 32,770 911,179 362,168 William T. Conine 0 0 8,300 11,700 134,363 131,118
(1) All options immediately vest and become exercisable or satisfiable, as applicable, in the event of a change of control (as defined in our Omnibus Securities Plan). All options vest upon termination of the holder's employment with the Company on account of death, Permanent and Total Disability (as defined in our Omnibus Securities Plan), or retirement upon or after attaining age fifty-five (55). Adoption of the merger agreement with American National by Farm Family Holdings' stockholders on February 27, 2001 constituted a change of control under the Omnibus Securities Plan. Upon adoption of the merger agreement with American National by Farm Family Holdings' stockholders on February 27, 2001, all outstanding stock options that we have granted to our directors and executive officers under our Omnibus Securities Plan vested and became exercisable. 61 Pension Benefits Farm Family Holdings and its subsidiaries are participating employers under the Farm Family Employee Retirement Plan (the "Retirement Plan"). Substantially all salaried employees of Farm Family who were participants in the Plan on December 31, 1996, including executive officers, are eligible to receive pension benefits under the Retirement Plan. Effective January 1, 1997, benefits available through the Retirement Plan were frozen and new benefit accruals under the Retirement Plan were discontinued as of December 31, 1996. The Retirement Plan is a tax-qualified defined benefit retirement plan which is subject to the Employee Retirement Income Security Act of 1974, as amended. Federal law limits the amount of pension benefits that can be accrued and compensation that can be recognized under a tax-qualified retirement plan such as the Retirement Plan. Farm Family Casualty and Farm Family Life have adopted a non-qualified unfunded retirement plan, the Farm Family Supplemental Employee Retirement Plan (the "SERP"), for the payment of those benefits at retirement that cannot be accrued under the Retirement Plan on account of the Federal law limits on the amount of pension benefits that can be accrued and compensation that can be recognized under the Retirement Plan. The practical effect of the SERP is to provide for the calculation of retirement benefits on a uniform basis for all employees. The net expense for the Retirement Plan and the SERP are allocated among Farm Family Holdings, Farm Family Casualty, Farm Family Life and United Farm Family pursuant to expense sharing arrangements. 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.
Pension Plan Table Years of Service -------------------------------------------------------------------- Remuneration 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
The annual pension benefit under the Retirement Plan and, when applicable, the SERP equals 2.0% of Average Annual Compensation multiplied by years of service (not to exceed 30 years). The credited years of service under the Retirement Plan and, when applicable, the SERP for Mr. Weber, Mr. Bettini, Ms. Stanton, Mr. Walsh and Mr. Conine are 17, 18, 6, 2 and 22, respectively. The credited Average Annual Compensation under the Retirement Plan and, when applicable, the SERP for Mr. Weber, Mr. Bettini, Ms. Stanton, Mr. Walsh and Mr. Conine is $254,785, $124,674, $121,121, $130,059, and $112,376, respectively. Benefits under the Retirement Plan and the SERP are not subject to Social Security or other offset amounts. 62 Employment Contracts and Termination of Employment and Change in Control Arrangements Employment Agreements. At American National's request in connection with the merger contemplated by the merger agreement with American National, Farm Family Holdings entered into employment agreements with four of our executive officers: Philip P. Weber; James J. Bettini; Timothy A. Walsh; and Victoria M. Stanton. These employment agreements will become effective at the effective time of the merger. They provide for the annual base salaries, terms of employment and other benefits described below. Salary and Term. The employment agreements provide for the following annual base salaries and terms of employment: o Philip P. Weber, $375,000 (three year term); o James J. Bettini, $210,000 (18 month term); o Timothy A. Walsh, $240,000 (18 month term); and o Victoria M. Stanton, $240,000 (18 month term). Each executive's annual base salary will be increased by no less than four percent within one year of the effective time of the merger. Retention Payments. If the executive is employed by us at the effective time of the merger and at the end of each of the three successive six-month periods following the effective time of the merger, the executive will be entitled to receive retention payments. The total amount of these payments is: o Philip P. Weber, $1,862,250; o James J. Bettini, $639,000; o Timothy A. Walsh, $722,000; and o Victoria M. Stanton, $722,000. If we terminate the executive's employment for any reason other than for "cause", if the executive terminates his or her employment for "good reason" or upon the executive's death or termination due to disability, each executive (or his or her estate) will be entitled to receive all retention payments not previously paid to him or her. The terms "cause" and "good reason" are defined below. Bonus. Each executive will be entitled to receive the following bonuses: o for 2000 and for the period of 2001 prior to the merger, cash bonuses as calculated under our Annual Incentive Plan, described below under "Annual Incentive Plan"; o for the periods after the effective time of the merger, the executive will receive an annual performance-based cash bonus on a basis that is comparable to the basis under our Annual Incentive Plan (without giving effect to an amendment of that plan made in connection with the execution of the merger agreement with American National) with respect to potential payments and performance criteria. Each employment agreement specifies a bonus range as a percentage of the executive's annual base salary, as follows: Mr. Weber, 30.5% to 91.5%; Messrs. Bettini and Walsh and Ms. Stanton, 22.5% to 67.5%. If we terminate the executive's employment for any reason other than for cause, if the executive terminates his or her employment for good reason or upon the executive's death or termination due to disability, each executive (or his or her estate) will be entitled to receive: o the 2000 and prorated 2001 bonuses and any unpaid bonus for a fiscal year ending prior to the termination of employment; and o a bonus for the fiscal year in which the executive's employment termination occurs based on a minimum target bonus of 61% of annual base salary for Mr. Weber and 45% of annual base salary for Messrs. Bettini and Walsh and Ms. Stanton, prorated for the number of days elapsed in the year as of the date of termination. 63 If we terminate the executive's employment for cause or if the executive terminates his or her employment without good reason, the executive will be entitled to any unpaid bonus for a fiscal year ending prior to the termination of employment. Other Benefits. Each executive will be entitled to: o participate in employee benefit plans, option plans, fringe benefit programs, and vacation and paid leave time programs at a level and cost, if any, that is no less favorable in the aggregate than the level and cost of the benefits to which the executive was entitled immediately prior to October 31, 2000; and o receive various perquisites, such as an automobile allowance and reimbursement for spousal travel on business trips. Other Payments and Benefits. Each employment agreement provides that if we terminate the executive's employment for any reason other than for cause or if the executive terminates his or her employment for good reason, the executive will be entitled to the following payments and benefits, in addition to the payments described above: o with respect to Mr. Weber, a lump sum payment equal to two years of his annual base salary conditioned upon his compliance with non-compete and non-solicitation and related provisions described below; o continued eligibility for health, dental, life and disability insurance benefits for a period of up to two years for Messrs. Bettini and Walsh and Ms. Stanton, and for a period of up to three years for Mr. Weber; and o provision of outplacement services for a period of up to two years from the executive's date of termination. "Good reason" is generally defined in the employment agreements to include, among other things, a reduction in the executive's base salary, a material change in the executive's duties or responsibilities, a material breach by us of certain provisions of the employment agreements, or a change of the executive's place of employment to one that is more than 50 miles from where the executive is currently working. "Cause" is generally defined to include, among other things, the executive's felony conviction, willful misconduct, theft, fraud or willful failure to substantially perform the executive's duties. Generally, if the executive's employment terminates for any reason, the executive will be entitled to receive annual base salary and other benefits earned and accrued prior to the termination of employment but not yet paid. Excise Tax. The employment agreements also provide for an additional payment, if required, to make the executives whole for any excise tax imposed by Section 4999 of the Internal Revenue Code. Non-Compete. Mr. Weber's employment agreement provides that during the term of his employment and following termination of his employment: (1) for a period of one year, he will not compete with us; (2) for a period of three years, he will not solicit our employees, independent contractors or agents to leave their employment or service with us or hire our employees, independent contractors or agents within one year of their termination of employment or service with us; (3) for a period of two years, he will not intentionally interfere with our relationships with any customer, client, agent representative or other agent; and (4) he will not disclose confidential information. These provisions will be null and void if Mr. Weber's employment terminates after the third anniversary of the closing date of the merger. Participation in Other Plans. If the merger occurs, Messrs. Weber, Bettini and Walsh and Ms. Stanton will cease to be eligible to participate in our Officer Severance Pay Plan and Annual Incentive Plan, discussed below. Under the employment agreements, the executives expressly waive their rights under the Officer Severance Pay Plan as of the effective time of the merger and will not be entitled to receive any severance benefits under this plan. Termination of Employment and Change in Control Arrangements Certain of our compensation plans applicable to the executive officers appearing in the Summary Compensation Table include provisions regarding payments pursuant to such plans in the event of the termination of employment and/or a change in control. Plans containing such provisions are described below. These provisions are generally applicable to all participants in such plans. 64 Officer Severance Pay Plan. Our executive officers participate in our Officer Severance Pay Plan. If the merger occurs, Philip P. Weber, James J. Bettini, Timothy A. Walsh and Victoria M. Stanton will cease to participate in this plan. This plan entitles our officers to severance payments and benefits if we terminate the officer's employment for any reason other than for "cause" (as defined in the plan), due to elimination of the officer's position or due to a change in control, or the officer terminates his or her employment for "good reason" (as defined in the plan) after a change in control or, in the case of our Chief Executive Officer or an Executive Vice President, within 30 days following the first anniversary of a change in control. Adoption of the merger agreement with American National by our stockholders on February 27, 2001 constituted a change in control under this plan. Severance benefits provided under the plan for our executive officers, as amended in connection with the execution of the merger agreement, include the following: o a payment equal to the greater of: (1) one week's salary, including target bonus and fringe benefits, for each year of service; (2) in the case of a termination due to elimination of the officer's position which occurs during the period beginning on October 31, 2000, and ending on the third anniversary of the merger, the greater of (a) two weeks' base salary for each year of service up to a maximum of 12 months base salary, or (b) four weeks' base salary; or (3) between 12 months' and 36 months' salary, depending on the officer's position, including target bonus and fringe benefits; o continued eligibility for a period of between 12 months and 36 months, depending on the officer's position of the officer's medical, dental, group term life and disability insurance coverages; and o provision of outplacement services for a period of up to two years from the officer's effective date of termination. The plan also provides for an additional payment, if required, to make the officers whole for any excise tax imposed by Section 4999 of the Internal Revenue Code. Annual Incentive Plan. Our executive officers participate in our Annual Incentive Plan. At the effective time of the merger, Philip P. Weber, James J. Bettini, Timothy A. Walsh and Victoria M. Stanton will cease to participate in this plan. This plan entitles our officers and certain of our key employees to annual bonuses based upon the participant's attainment of certain performance goals established by us in relation to our strategic plans and budget. Upon a change in control of Farm Family Holdings, the plan provides that participants will be entitled to receive a minimum bonus amount for the year in which the change in control occurs. Adoption of the merger agreement with American National by our stockholders on February 27, 2001 constituted a change in control under this plan. At the time we entered into the merger agreement with American National, we amended our Annual Incentive Plan to provide minimum bonus amounts for 2000 and for the period of 2001 prior to the merger for each executive officer covered by this plan. Officers' Deferred Compensation Plan and Directors' Deferred Compensation Plan. Our executive officers are eligible to participate in our Officers' Deferred Compensation Plan and our directors are eligible to participate in our Directors' Deferred Compensation Plan. These plans permit our executive officers and directors to defer all or a portion of their compensation or fees received until termination of their employment as an officer or service as a director. Upon a change in control, each participant in these plans will receive a distribution of his or her entire accrued benefit, consisting of amounts deferred by the participant into these plans plus earnings, as soon as practicable following the date of the change in control. Adoption of the merger agreement with American National by our stockholders on February 27, 2001 constituted a change in control of Farm Family Holdings under these plans. Omnibus Securities Plan. Upon adoption of the merger agreement with American National by our stockholders on February 27, 2001, all outstanding stock options that we have granted to our directors and officers under our Omnibus Securities Plan vested and became exercisable. Immediately before the effective time of the merger, all outstanding stock options, whether or not vested or exercisable, will terminate and each holder of a terminated stock option will receive at the effective time of the merger a cash payment equal to the number of shares subject to his or her stock option multiplied by the excess, if any, of (1) the higher of the fair market value per share of our common stock immediately prior to the adoption of the merger agreement by our stockholders, or the merger consideration per share of our common stock, which is $44.00 per share, over (2) the exercise price of the option. 65 Compensation Committee Interlocks and Insider Participation In 2000, Farm Family Holdings' Compensation Committee was comprised of Randolph C. Blackmer, James V. Crane, John P. Moskos, Edward J. Muhl and Tyler P. Young. Mr. Blackmer is President and a Director of Connecticut Farm Bureau Association, Inc. For the year ended December 31, 2000 Farm Family Casualty and Farm Family Life collectively paid $69,645 to the Connecticut Farm Bureau Association, Inc. under Membership List Purchase Agreements. Mr. Young is Vice President and a Director of Rhode Island Farm Bureau Federation, Inc. For the year ended December 31, 2000, Farm Family Casualty and Farm Family Life collectively paid $40,950 to the Rhode Island Farm Bureau Federation, Inc. under Membership List Purchase Agreements. See Item 13. "Certain Relationships and Related Transactions - Farm Bureaus Membership List Purchase Agreements." 66 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following tables set forth information regarding the beneficial ownership of our common stock and our preferred stock as of March 12, 2001 by (i) each director, (ii) the Chief Executive Officer and each of the other four most highly compensated executive officers, (iii) all of our executive officers and directors as a group and (iv) each person who is known by us to be the beneficial owner of more than 5% of our common stock or our preferred stock as of such date. Except as noted below, each person listed in the table has sole investment and voting power with respect to the shares held by such person. This information has been furnished by the persons listed in this table.
Stock Ownership of Management as of March 12, 2001 Name of Amount and Nature of % of Beneficial Owner Beneficial Ownership(1) Common Stock Clark W. Hinsdale III........................................................... 1,210 (2) * Stephen J. George............................................................... 1,100 (3) * Philip P. Weber................................................................. 181,537 (4) 2.93% James J. Bettini................................................................ 83,223 (5) 1.37% Victoria M. Stanton............................................................. 83,835 (6) 1.38% Timothy A. Walsh................................................................ 83,500 (7) 1.37% William T. Conine............................................................... 20,270 (8) * Robert L. Baker................................................................. 2,133 (9) * Wayne R. Bissonette............................................................. 1,000(10) * Randolph C. Blackmer, Jr........................................................ 1,800(11) * Joseph E. Calhoun............................................................... 1,073(12) * James V. Crane.................................................................. 1,350(13) * Sandra A. George................................................................ 1,000(14) * Gordon H. Gowen................................................................. 2,017(15) * Jon R. Greenwood................................................................ 2,479(16) * Denzil D. Huff.................................................................. 82(17) * Arthur D. Keown, Jr............................................................. 1,000(18) * W. Bruce Krenning............................................................... 1,030(19) * John W. Lincoln................................................................. 1,167(20) * Wayne A. Mann................................................................... 1,067(21) * Frank W. Matheson............................................................... 1,372(22) * John P. Moskos.................................................................. 1,000(23) * Norma R. O'Leary................................................................ 2,216(24) * John I. Rigolizzo, Jr........................................................... 1,027(25) * William M. Stamp, Jr............................................................ 1,534(26) * Charles A. Wilfong.............................................................. 1,643(27) * Tyler P. Young.................................................................. 1,227(28) * All directors and executive officers as a group (31 persons)......................................................... 535,160(29) 8.19% * less than 1%
67
Holders of Greater Than 5% of our Common Stock Name and Address of Amount and Nature of % of Beneficial Owner Beneficial Ownership Common Stock Parsimony Limited................................... 403,500(30) 6.71% Piermont House 33/35 Pier Road St. Helier, Jersey Channel Island JE 8X3 FMR Corp............................................ 360,000(31) 5.99% 82 Devonshire Street Boston, MA 02109 New York Farm Bureau, Inc........................... 341,599(32) 5.68% Route 9W, Box 992 Glenmont, NY 12077-0992
Holders of Greater Than 5% of our Preferred Stock Name and Address of Amount and Nature of % of Beneficial Owner Beneficial Ownership Preferred Stock New York Farm Bureau, Inc............................ 64,682 39.63% Route 9W, Box 992 Glenmont, NY 12077-0992 New Jersey Farm Bureau............................... 44,100 27.02% 168 West State Street Trenton, NJ 08608 Massachusetts Farm Bureau Federation, Inc............ 19,109 11.71% 466 Chestnut Street Ashland, MA 01721-2299 Connecticut Farm Bureau Association, Inc............. 13,229 8.11% 510 Pigeon Hill Road Windsor, CT 07095-2141
(1) No beneficial owner in this table holds any of our preferred stock except as otherwise indicated in the notes hereto. Upon adoption of the merger agreement with American National by our stockholders on February 27, 2001, all outstanding stock options that we have granted to our directors and officers under our Omnibus Securities Plan vested and became exercisable. (2) Includes options to acquire 1,000 shares that may be exercised within 60 days. Excludes 667 shares of our common stock and 33 shares of our preferred stock owned by Vermont Farm Bureau, Inc. and its affiliates. Mr. Hinsdale is President and a Director of Vermont Farm Bureau, Inc. (3) Includes options to acquire 1,000 shares that may be exercised within 60 days. (4) Represents 1,537 shares as to which voting and investment power are shared with Brenda Lee Weber and options to acquire 180,000 shares that may be exercised within 60 days. 68 (5) Represents 223 shares as to which voting and investment power are shared with Marie C. Bettini and options to acquire 83,000 shares that may be exercised within 60 days. (6) Includes 685 shares as to which voting and investment power are shared with Randy M. Sweeney and options to acquire 83,000 shares that may be exercised within 60 days. (7) Includes options to acquire 83,000 shares that may be exercised within 60 days. (8) Represents 270 shares as to which voting and investment power are shared with Judith Conine and options to acquire 20,000 shares that may be exercised within 60 days. (9) Represents 33 shares as to which voting and investment power are shared with Pamela M. Baker, 86 shares as to which voting and investment power are shared with Delaware Produce Growers, Inc., 744 shares as to which voting and investment power are shared with Baker Farms, Inc., 270 shares held by the Robert L. Baker Revocable Trust and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 38,645 shares of our common stock and 7,349 shares of our preferred stock owned by Delaware State Farm Bureau, Inc. Mr. Baker is President and a Director of Delaware State Farm Bureau, Inc. (10) Represents options to acquire 1,000 shares that may be exercised within 60 days. Excludes 667 shares of our common stock and 33 shares of our preferred stock owned by Vermont Farm Bureau, Inc. and its affiliates. Mr. Bissonette is First Vice President and a Director of Vermont Farm Bureau, Inc. (11) Represents shares as to which voting and investment power are shared with Myrtie I. Blackmer or Ag Services, Inc. and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 69,540 shares of our common stock and 13,229 shares of our preferred stock owned by Connecticut Farm Bureau Association, Inc. Mr. Blackmer is President and a Director of Connecticut Farm Bureau Association, Inc. (12) Represents shares as to which voting and investment power are shared with Bessie J. Calhoun and options to acquire 1,000 shares that may be exercised within 60 days. (13) Represents shares as to which voting and investment power are shared with Crane Bros., Inc. and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 15,846 shares of our common stock and 2,943 shares of our preferred stock owned by Maine Farm Bureau Association and its affiliates. Mr. Crane is a Director of Maine Farm Bureau Association. (14) Represents options to acquire 1,000 shares that may be exercised within 60 days. Excludes 15,846 shares of our common stock and 2,943 shares of our preferred stock owned by Maine Farm Bureau Association and its affiliates. Ms. George is President and a Director of Maine Farm Bureau Association. (15) Includes 929 shares as to which voting and investment power are shared with Elizabeth R. Gowen and options to acquire 1,000 shares that may be exercised within 60 days. (16) Represents shares as to which voting and investment power are shared with Linda R. Greenwood and options to acquire 1,000 shares that may be exercised within 60 days. (17) Represents shares as to which voting and investment price are shared with Rita F. Huff. Excludes 37,935 shares of our common stock and 5,882 shares of our preferred stock owned by West Virginia Farm Bureau, Inc. Mr. Huff is Vice President and a Director of West Virginia Farm Bureau, Inc. (18) Represents options to acquire 1,000 shares that may be exercised within 60 days. Excludes 100,959 shares of our common stock and 19,109 shares of our preferred stock owned by Massachusetts Farm Bureau Federation, Inc. Mr. Keown is President and a Director of Massachusetts Farm Bureau Federation, Inc. (19) Represents shares as to which voting and investment power are shared with Diane Z. Krenning and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 341,599 shares of our common stock and 64,682 shares of our preferred stock owned by New York Farm Bureau, Inc. Mr. Krenning is Vice President and a Director of New York Farm Bureau, Inc. (20) Includes 113 shares as to which voting and investment power are shared with S. Anne Lincoln and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 341,599 shares of our common stock and 64,682 shares of our preferred stock owned by New York Farm Bureau, Inc. Mr. Lincoln is President and a Director of New York Farm Bureau, Inc. 69 (21) Represents shares as to which voting and investment power are shared with Ruth F. Mann and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 233 shares of our common stock and 5 shares of our preferred stock owned by New Hampshire Farm Bureau Federation. Mr. Mann is President and a Director of New Hampshire Farm Bureau Federation. (22) Includes 69 shares as to which voting and investment power are shared with Eunice Matheson and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 100,959 shares of our common stock and 19,109 shares of our preferred stock owned by Massachusetts Farm Bureau Federation, Inc. and 813 shares of our common stock owned by Middlesex County Farm Bureau. Mr. Matheson is Vice President and a Director of Massachusetts Farm Bureau Federation, Inc. and Financial Advisor of Middlesex County Farm Bureau. (23) Includes options to acquire 1,000 shares that may be exercised within 60 days. (24) Includes 71 shares as to which voting and investment power are shared with Ernest J. O'Leary and options to acquire 1,000 shares that may be exercised within 60 days. (25) Represents shares as to which voting and investment power are shared with Marita Rigolizzo and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 232,523 shares of our common stock and 44,100 shares of our preferred stock owned by New Jersey Farm Bureau. Mr. Rigolizzo is President and a Director of New Jersey Farm Bureau. (26) Includes 297 shares as to which voting and investment power are shared with Stamp Farm Enterprises, Inc. or Carol Stamp and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 31,972 shares of our common stock and 5,882 shares of our preferred stock owned by Rhode Island Farm Bureau Federation, Inc. Mr. Stamp is President and a Director of Rhode Island Farm Bureau Federation, Inc. (27) Represents shares as to which voting and investment power are shared with Linda Wilfong and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 37,935 shares of our common stock and 5,882 shares of our preferred stock owned by West Virginia Farm Bureau, Inc. Mr. Wilfong is President and a Director of West Virginia Farm Bureau, Inc. (28) Represents shares as to which voting and investment power are shared with Karla K. Young and options to acquire 1,000 shares that may be exercised within 60 days. Excludes 31,972 shares of our common stock and 5,882 shares of our preferred stock owned by Rhode Island Farm Bureau Federation, Inc. Mr. Young is Vice President and a Director of Rhode Island Farm Bureau Federation, Inc. (29) Includes options to acquire 523,000 shares that may be exercised within 60 days. (30) Based on Schedule 13D dated March 2, 2000 filed with the Securities and Exchange Commission (the "SEC") by Parsimony Limited which has the sole dispositive power and sole voting power over 403,500 shares. (31) Based on Schedule 13G/A dated February 14, 2001 filed with the SEC by FMR Corp. which has the sole dispositive power over 360,000 shares and the voting power over 0 shares. (32) Based on Schedule 13D dated April 16, 1999 filed with the SEC by New York Farm Bureau Service Company, Inc., and New York Farm Bureau, Inc. which have the sole dispositive power and the sole voting power over 341,599 shares. Section 16(a) Beneficial Ownership Reporting Compliance Based solely on a review of the Forms 3, 4 and 5 submitted to Farm Family Holdings during and with respect to calendar year 2000, or written representations from our executive officers and directors that no Forms 5 were required, Farm Family Holdings believes that all such reports were timely filed except that Ms. DiLorenzo, an officer, and Mr. Huff, a director, each underreported the number of shares beneficially owned on a Form 3. Ms. DiLorenzo's Form 3 has subsequently amended. Mr. Huff's Form 3 will be amended. 70 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Farm Bureaus The majority of the directors of the Company are also directors or executive officers of state Farm Bureau(R) organizations in Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and West Virginia (collectively, the "Farm Bureaus"). Membership List Purchase Agreements Farm Family Casualty and Farm Family Life have each entered into a Membership List Purchase Agreement, commencing on January 1, 1996, with each of the Farm Bureaus. Pursuant to each Membership List Purchase Agreement, Farm Bureau membership lists are provided to Farm Family Casualty and to Farm Family Life on an exclusive basis for the purpose of marketing their insurance products. For the year ended December 31, 2000, Farm Family Casualty and Farm Family Life collectively paid approximately $1.4 million to the Farm Bureaus, in the aggregate, under the Membership List Purchase Agreements. New York Farm Bureau, Inc. is the record owner of greater than 5% of each of our common stock and our preferred stock. For the year ended December 31, 2000, Farm Family Casualty and Farm Family Life collectively paid $452,970 to New York Farm Bureau, Inc. under Membership List Purchase Agreements. Connecticut Farm Bureau Association, Inc., Massachusetts Farm Bureau Federation, Inc. and New Jersey Farm Bureau are each the record owners of greater than 5% of our preferred stock. For the year ended December 31, 2000, Farm Family Casualty and Farm Family Life collectively paid $69,645 to Connecticut Farm Bureau Association, Inc., $86,175 to Massachusetts Farm Bureau Federation, Inc. and $270,405 to New Jersey Farm Bureau under Membership List Purchase Agreements. New York Farm Bureau, Inc. Lease Agreement New York Farm Bureau, Inc. and Farm Family Life are parties to a Lease Agreement commencing January 1, 1999 pursuant to which New York Farm Bureau, Inc. leases office space from Farm Family Life. Annual rent under the Lease Agreement for the year ended December 31, 2000 was $116,249. 71 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1&2 An "Index to Financial Statements and Financial Statement Schedules" has been filed as a part of this Report beginning on page S-1 hereof. (a) 3 An "Exhibit Index" has been filed as a part of this report beginning on page E-1 hereof and is incorporated herein by reference . (b) Reports on Form 8-K: On November 1, 2000, a Report on Form 8-K was filed regarding a press release announcing the results of our operations for the third quarter ended September 30, 2000. On November 7, 2000, a Report on Form 8-K was filed regarding a press release announcing that on October 31, 2000, Farm Family Holdings and American National Insurance Company agreed to the terms of a definitive merger agreement under which American National will acquire Farm Family at a price of $44 per share for Farm Family's common stock and $35.72 per share for Farm Family's Series A Preferred Stock in cash. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FARM FAMILY HOLDINGS, INC. By: /s/ Philip P. Weber --------------------------- Philip P. Weber, President April 2, 2001 72
SIGNATURES Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. President and CEO /s/ Philip P. Weber (Principal Executive Officer) /s/ Arthur D. Keown, Jr. Director - ------------------------------------ ----------------------------- Philip P. Weber April 2, 2001 Arthur D. Keown, Jr. March 22, 2001 Executive Vice President, CFO & Treasurer /s/ Timothy A. Walsh (Principal Financial & Accounting Officer) /s/ W. Bruce Krenning Director - ------------------------------------ ----------------------------- Timothy A. Walsh April 2, 2001 W. Bruce Krenning March 22, 2001 /s/ Robert L. Baker Director /s/ John W. Lincoln Director - ------------------------------------ ----------------------------- Robert L. Baker March 22, 2001 John W. Lincoln March 22, 2001 /s/ Wayne R. Bissonette Director /s/ Wayne A. Mann Director - ------------------------------------ ----------------------------- Wayne R. Bissonette March 21, 2001 Wayne A. Mann March 21, 2001 /s/ Randolph C. Blackmer, Jr. Director /s/ Frank W. Matheson Director - ------------------------------------ ----------------------------- Randolph C. Blackmer, Jr. March 21, 2001 Frank W. Matheson March 24, 2001 /s/ Joseph E. Calhoun Director /s/ John P. Moskos Director - ------------------------------------ ----------------------------- Joseph E. Calhoun March 21, 2001 John P. Moskos March 21, 2001 /s/ James V. Crane Director /s/ Norma R. O'Leary Director - ------------------------------------ ----------------------------- James V. Crane March 22, 2001 Norma R. O'Leary March 21, 2001 Director /s/ John I. Rigolizzo, Jr. Director - ------------------------------------ ----------------------------- Sandra A. George John I. Rigolizzo, Jr. March 22, 2001 /s/ Stephen J. George Director /s/ William M. Stamp, Jr. Director - ------------------------------------ ----------------------------- Stephen J. George March 21, 2001 William M. Stamp, Jr March 23, 2001 /s/ Gordon H. Gowen Director /s/ Charles A. Wilfong Director - ------------------------------------ ----------------------------- Gordon H. Gowen March 22, 2001 Charles A. Wilfong March 24, 2001 /s/ Jon R. Greenwood Director /s/ Tyler P. Young - ------------------------------------ ---------------------------- Director Jon R. Greenwood March 22, 2001 Tyler P. Young March 20, 2001 Director /s/ Clark W. Hinsdale III - ------------------------------------ Clark W. Hinsdale III March 23, 2001 /s/ Denzil D. Huff Director - ------------------------------------ Denzil D. Huff March 23, 2001
73
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Year Ended December 31, 2000 Page Consolidated Statements of Income and Comprehensive Income 29 Consolidated Balance Sheets 30 Consolidated Statements of Stockholders' Equity 31 Consolidated Statements of Cash Flows 32 Notes to Consolidated Financial Statements 33 Report of Independent Accountants 55 Schedule I Summary of Investments - Other than Investments in Related Parties S-2 Schedule II Condensed Financial Information of the Registrant S-3 Schedule III Supplementary Insurance Information S-7 Schedule IV Reinsurance S-8 Schedule VI Supplemental Information Concerning Property - Casualty Insurance Operations S-9
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. S-1
Farm Family Holdings, Inc. and Subsidiaries Schedule I Summary of Investments Other Than Investments in Related Parties December 31, 2000 ($ in thousands) Cost/ Amortized Balance Sheet Type of Investment Cost Fair Value Carrying Value - ------------------------------------------------------------------------------------------------------------------------- Available for sale Fixed maturities: United States Government and government agencies and authorities $15,270 $15,750 $15,750 States, municipalities and political subdivisions 184,060 185,658 185,658 Public utilities 92,185 90,109 90,109 All other corporate bonds 502,197 487,186 487,186 Mortgage-backed securities 215,066 216,200 216,200 Redeemable preferred stock 14,061 13,537 13,537 - ------------------------------------------------------------------------------------------------------------------------- Total fixed maturities 1,022,839 1,008,440 1,008,440 - ------------------------------------------------------------------------------------------------------------------------- Equity securities: Common stocks: Public utilities 3,709 5,462 5,462 Banks, trusts and insurance companies 7,979 7,640 7,640 Industrial and miscellaneous 25,704 27,822 27,822 - ------------------------------------------------------------------------------------------------------------------------- Total equity securities 37,392 40,924 40,924 - ------------------------------------------------------------------------------------------------------------------------- Total available for sale 1,060,231 1,049,364 1,049,364 - ------------------------------------------------------------------------------------------------------------------------- Held to Maturity Fixed maturities: States, municipalities and political subdivisions 2,630 2,642 2,630 All other Corporate bonds 3,799 3,992 3,799 - ------------------------------------------------------------------------------------------------------------------------- Total held to maturity 6,429 6,634 6,429 - ------------------------------------------------------------------------------------------------------------------------- Mortgage loans 30,928 31,703 30,928 Policy loans 31,816 31,816 31,816 Other invested assets 339 339 339 - ------------------------------------------------------------------------------------------------------------------------- Total investments $1,129,743 $1,119,856 $1,118,876 =========================================================================================================================
S-2
Farm Family Holdings, Inc. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Company) Statements of Operations ($ in thousands) Years Ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Revenues: Investment income $203 $388 $518 Realized gains 20 15 3 - ----------------------------------------------------------------------------------------------------------------------- Total revenues 223 403 521 Expenses: General and administrative expenses 2,940 1,481 1,403 - ----------------------------------------------------------------------------------------------------------------------- Loss before federal income tax benefit and preferred stock dividends (2,717) (1,078) (882) Federal income tax benefit 764 302 306 - ----------------------------------------------------------------------------------------------------------------------- Loss before preferred stock dividends (1,953) (776) (576) Preferred stock dividends 357 278 ---- - ----------------------------------------------------------------------------------------------------------------------- Net loss from operations (2,310) (1,054) (576) Income from investments in subsidiaries 32,424 19,672 19,247 - ----------------------------------------------------------------------------------------------------------------------- Net income 30,114 18,618 18,671 - ----------------------------------------------------------------------------------------------------------------------- Other comprehensive Income: Unrealized holding gains (losses) arising during the year (net of tax expense (benefit) of $3,064, $(6,308), and $1,046, respectively) 5,692 (11,718) 1,943 Reclassification adjustment for losses (gains) included in net income (net of tax expense (benefit) of $(170), $296, and $(211), respectively) 315 (550) 390 Minimum pension liability adjustment (net of tax benefit of $96) (177) ---- ---- - ----------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 5,830 (12,268) 2,333 - ----------------------------------------------------------------------------------------------------------------------- Comprehensive income $35,944 $6,350 $21,004 =======================================================================================================================
S-3
Farm Family Holdings, Inc. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Company) Balance Sheets ($ in thousands) As of December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------- Assets: Fixed maturities available for sale $---- $4,463 Investment in subsidiaries 217,715 180,989 Cash and cash equivalents 531 400 Investment income due or accrued 3 86 Deferred tax asset ---- 42 Other assets 3,219 2,566 - ------------------------------------------------------------------------------------------------------------- Total assets $221,468 $188,546 ============================================================================================================= Liabilities: Payable to affiliates $48 $118 Deferred tax liability 271 ---- Other liabilities 1,114 1,404 - ------------------------------------------------------------------------------------------------------------- Total liabilities 1,433 1,522 - ------------------------------------------------------------------------------------------------------------- Commitments and Contingencies Mandatory redeemable preferred stock 5,830 5,830 Stockholders' Equity: Common stock, $.01 par value, 10,000,000 shares authorized, 6,113,983 and 6,110,683 shares issued, 6,003,983 and 6,110,683 shares outstanding 61 61 Additional paid-in capital 123,590 123,504 Retained earnings 90,286 60,172 Accumulated other comprehensive income (loss) 3,287 (2,543) Treasury stock, at cost, 110,000 and 0 shares, respectively (3,019) ---- - ------------------------------------------------------------------------------------------------------------- Total stockholders' equity 214,205 181,194 - ------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $221,468 $188,546 =============================================================================================================
S-4
Farm Family Holdings, Inc. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Company) Statements of Cash Flows ($ in thousands) Years Ended December 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $30,114 $18,618 $18,671 Adjustments to reconcile net income to net cash used in operating activities: Realized investment gains (20) (15) (3) Amortization of bond discount (11) (16) (18) Deferred income taxes 327 (8) (8) Changes in assets and liabilities: Equity in net income of subsidiaries (32,424) (19,672) (19,247) Dividends received from subsidiaries 1,539 ---- ---- Accrued investment income 83 59 12 Other assets, net (653) (196) (1,440) Payable to affiliates (70) (11) (63) Other liabilities (290) 660 195 - --------------------------------------------------------------------------------------------------------- Total adjustments (31,519) (19,199) (20,572) - --------------------------------------------------------------------------------------------------------- Net cash used in operating activities (1,405) (581) (1,901) - --------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Proceeds from sales: Fixed maturities available for sale 4,481 2,720 303 Investment purchases: Acquisition costs ---- (1,895) ---- Investment in subsidiary ---- ---- (55) - --------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 4,481 825 248 - --------------------------------------------------------------------------------------------------------- Cash Flows Used in Financing Activities Purchase of treasury stock (3,019) ---- ---- Exercise of stock options 74 ---- ---- - --------------------------------------------------------------------------------------------------------- Net used in financing activities (2,945) ---- ---- - --------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 131 244 (1,653) Cash and cash equivalents, beginning of year 400 156 1,809 - --------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $531 $400 $156 =========================================================================================================
S-5 Farm Family Holdings, Inc. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Company) Notes To Condensed Financial Information 1. Basis of Presentation The financial statements of the registrant should be read in conjunction with the Consolidated Financial Statements and Notes. The accompanying condensed financial information includes the accounts of Farm Family Holdings, Inc. Farm Family Holdings, Inc. was incorporated on February 14, 1996. S-6
Farm Family Holdings, Inc. and Subsidiaries Schedule III Supplementary Insurance Information ($ in Thousands) Amortization Reserves for Losses, of Losses, Premium Loss Deferred Deferred Expenses Revenue Adjustment Policy Other Premiums Policy and and Net Expenses Acquisition Operating Written Acquisition Contract Unearned Policyholder Contract Investment And Contract Costs and Costs and (Excluding Segment Costs Benefits Premiums Funds Charges Income (1) Benefits PVFP Expenses Life) - ------------------------------------------------------------------------------------------------------------------------------------ 2000 Property and casualty insurance $17,118 $213,675 $96,557 $---- $201,147 $23,289 $157,838 $36,930 $11,216 $223,183 Life Insurance 7,317 252,356 ---- 412,733 38,094 52,164 53,605 2,631 13,376 ---- Corporate and other ---- ---- ---- ---- ---- 203 ---- ---- 3,044 ---- Intersegment eliminations ---- ---- ---- ---- ---- 42 ---- ---- (920) ---- - ------------------------------------------------------------------------------------------------------------------------------------ Total $24,435 $466,031 $96,557 $412,733 $239,241 $75,698 $211,443 $39,561 $26,716 $223,183 ==================================================================================================================================== 1999 Property and casualty insurance $13,975 $186,130 $74,364 $---- $188,921 $20,449 $141,509 $36,378 $10,252 $191,702 Life Insurance 3,655 238,272 ---- 416,971 27,799 37,673 38,710 1,804 9,293 ---- Corporate and other ---- ---- ---- ---- ---- 388 ---- ---- 1,564 ---- Intersegment eliminations ---- ---- ---- ---- ---- 48 ---- ---- (675) ---- - ------------------------------------------------------------------------------------------------------------------------------------ Total $17,630 $424,402 $74,364 $416,971 $216,720 $58,558 $180,219 $38,182 $434 $191,702 ==================================================================================================================================== 1998 Property and casualty insurance $13,668 $174,435 $71,209 $---- $181,756 $18,601 $134,302 $35,019 $10,951 $188,824 Life Insurance ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Corporate and other ---- ---- ---- ---- ---- 518 ---- ---- 1,480 ---- Intersegment eliminations ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------------------------ Total $13,668 $174,435 $71,209 $---- $181,756 $19,119 $134,302 $35,019 $12,431 $188,824 ====================================================================================================================================
(1) Each of the Company's subsidiaries maintain separate investment portfolios. Therefore, net investment income attributable to each segment is readily available. S-7
Farm Family Holdings, Inc. and Subsidiaries Schedule IV Reinsurance ($ in Thousands) Percentage Ceded to Assumed from of Amount Gross Other Other Assumed to Amount Companies Companies Net Amount Net - ---------------------------------------------------------------------------------------------------------------------- Year ended December 31, 2000 Life insurance in force $4,104,026 $634,714 ---- $3,469,312 ---- ============================================================ Premiums and contract charges: Property and casualty insurance $202,650 $14,607 $13,104 $201,147 6.5% Life insurance 36,612 1,595 ---- 35,017 ---- Accident and health insurance 3,411 334 ---- 3,077 ---- ------------------------------------------------------------ Total premiums and contract charges $242,673 $16,536 $13,104 $239,241 5.5% ============================================================ Year ended December 31, 1999 Life insurance in force $3,933,117 $510,174 ---- $3,422,943 ---- ============================================================ Premiums and contract charges: Property and casualty insurance $189,337 $15,385 $14,969 $188,921 7.9% Life insurance 26,532 876 ---- 25,656 ---- Accident and health insurance 2,385 242 ---- 2,143 ---- ------------------------------------------------------------ Total premiums and contract charges $218,254 $16,503 $14,969 $216,720 6.9% ============================================================ Year ended December 31, 1998 Property and casualty insurance $180,996 $13,277 $14,037 $181,756 7.7% ============================================================
Note:The Company did not have premiums and contract charges earned on life insurance or accident and health insurance prior to the acquisition of Farm Family Life, effective April 6, 1999. S-8
Farm Family Holdings, Inc. and Subsidiaries Schedule VI Supplemental Information Concerning Consolidated Property-Casualty Insurance Operations ($ in Thousands) Reserve for Deferred Unpaid claims Claims & Claim Adjustment Paid Claims Premium Policy and Claim Net Expenses Incurred Related to Amortization and Claim Written,Net Acquisition Adjustment Unearned Earned Investment---------------------------- of Adjustment of Costs Expenses Premiums Premiums Income Current Year Prior Years DAC Expenses Reinsurance - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2000 Property and casualty insurance $17,118 $213,675 $96,557 $201,147 $23,289 $159,908 $(2,070) $36,930 $142,463 $223,183 Year Ended December 31, 1999 Property and casualty insurance 13,975 186,130 74,364 188,921 20,449 146,829 (5,320) 36,378 132,093 191,702 Year Ended December 31, 1998 Property and casualty insurance 13,668 174,435 71,209 181,756 18,601 138,201 (3,899) 35,019 118,343 188,824
S-9
Exhibit Index Farm Family Holdings, Inc. Form 10-K For The Year Ended December 31, 2000 Exhibit Page Number Document Description Number - ----------------------------------------------------------------------------------------------------------------------------------- 2.1 Plan of Reorganization and Conversion dated February 14, 1996 as amended by Amendment No. 1, dated April 23, 1996 (Incorporated by reference to Registration Statement No. 333-4446) 2.2 Agreement and Plan of Merger among American National Insurance Company, American National Acquisition Company and Farm Family Holdings, Inc. dated as of October 31, 2000 (incorporated by reference to Farm Family Holdings Inc.'s Form 8-K dated November 7, 2000) 3.1 Certificate of Incorporation of Farm Family Holdings, Inc. (Incorporated by reference to Registration Statement No. 333-4446) 3.2 Bylaws of Farm Family Holdings, Inc. (Incorporated by reference to Registration Statement No. 333-4446) 4.1 Certificate of Designations of Junior Participating Cumulative Preferred Stock of Farm Family Holdings, Inc. (incorporated by reference to Exhibit 4.3 to Form S-8, Registration No. 333-80723 filed with the Securities and Exchange Commission on June 15, 1999) 4.2 Certificate of Corrections to Certificate of Designations of Junior Participating Cumulative Preferred Stock of Farm Family Holdings, Inc. (incorporated by reference to Exhibit 4.4 to Form S-8, Registration No. 333-80723 filed with the Securities and Exchange Commission on June 15, 1999) 4.3 Certificate of Designations of Farm Family Holdings, Inc. Preferred Stock, Series A (incorporated by reference to Exhibit 4.5 to Form S-8, Registration No. 333-80723 filed with the Securities and Exchange Commission on June 15, 1999) 4.4 Rights Agreement, dated as of July 29, 1997, between the Company and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K/A filed with the Securities and Exchange Commission on June 14, 1999) as amended by Amendment of Rights Agreement entered into as of October 31, 2000 (incorporated by reference to Exhibit 4.1 Farm Family Holdings, Inc. Form 8-A/A filed with the Securities and Exchange Commission on November 3, 2000) 4.5 Registration Rights Agreement, dated as of April 6, 1999 by and among Farm Family Holdings, Inc. and the Shareholders of the Farm Family Life Insurance Company (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended June 30, 1999) 10.1 Amended and Restated Expense Sharing Agreement, made effective as of February 14, 1996, by and among Farm Family Mutual Insurance Company, Farm Family Life Insurance Company and Farm Family Holdings, Inc. (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996) 10.2 Indenture of Lease, made the 1st day of January 1999, between Farm Family Life Insurance Company and Farm Family Casualty Insurance Company (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31, 1999)
E-1
Exhibit Page Number Document Description Number - --------------- -------------------------------------------------------------------------------------------------------- ----------- 10.3 Form of Membership List Purchase Agreement between Farm Family Mutual Insurance Company and each of the Farm Bureaus (incorporated by reference to Exhibit 10.9 to Form S-1, Registration No. 333-4446 filed with the Securities and Exchange Commission on May 3, 1996) as amended by Amendment No. 1 to Membership List Purchase Agreements, effective July 26, 1996 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended March 31, 1997) and Amendment No. 2 to Membership List Purchase Agreements (Farm Family Casualty Insurance Company), effective January 1, 1998 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended June 30, 1999) 10.4 Form of Membership List Purchase Agreement between Farm Family Life Insurance Company and each of the Farm Bureaus, as amended by Amendment No. 1 to Membership List Purchase Agreements (Farm Family Life Insurance Company), effective January 1, 1998 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended June 30, 1999) 10.5 Farm Family Supplemental Profit Sharing and Money Purchase Plan, effective January 1, 1997 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-K for the year ended December 31, 1996) as amended by Amendment No. 1 to Supplemental Profit Sharing and Money Purchase Plan effective as of April 27, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended June 30, 1999) and Amendment No. 2 to the Farm Family Holdings, Inc. Supplemental Profit Sharing and Money Purchase Plan effective July 28, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended September 30, 1999) 10.6 Service Agreement, made effective as of July 25, 1988 by and between Farm Family Mutual Insurance Company and United Farm Family Insurance Company (Incorporated by reference to Registration Statement No. 333-4446) 10.7 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, Farm Family Holdings, Inc. Officer Severance Pay Plan effective August 1, 1994, as amended July 29, 1997, July 28, 1998, October 27, 1998, July 28, 1999 and October 31, 2000 (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended September 30, 2000) 10.8 Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted as of January 1, 1994 (Incorporated by reference to Registration Statement No. 333-4446) 10.9 Farm Family Holdings, Inc. Directors' Deferred Compensation Plan, effective January 1, 1997 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996) as amended by Amendment No. 1 dated as of October 27, 1998 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-K for the year ended December 31, 1998) and Amendment No. 2 effective July 28, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended September 30, 1999) 10.10 Farm Family Holdings, Inc. Officers' Deferred Compensation Plan, effective January 1, 1997 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996) as amended by Amendment No. 1 dated as of October 27, 1998 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-K for the year ended December 31, 1998) and Amendment No. 2 effective July 28, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended September 30, 1999) 10.11 Farm Family Holdings, Inc. Annual Incentive Plan, as amended and restated as of October 27, 1998 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-K for the year ended December 31, 1998) as amended by Amendment No. 1 effective July 28, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended September 30, 1999) and Amendment No. 2 to Farm Family Holdings, Inc. Annual Incentive Plan effective October 31, 2000 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended September 30, 1999)
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Exhibit Page Number Document Description Number - --------------- -------------------------------------------------------------------------------------------------------- ----------- 10.12 Tax Payment Allocation Agreement effective January 1, 1996 by and between Farm Family Holdings, Inc. and Farm Family Casualty Insurance Company (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996) 10.13 Farm Family Holdings, Inc. Amended and Restated Omnibus Securities Plan, effective as of February 29, 2000 (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended June 30, 2000) 10.14 Indenture of Lease made the 1st day of January 1999, between Farm Family Life Insurance Company and New York Farm Bureau, Inc. 2000 (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended June 30, 2000) 10.15 Employment Agreement dated as of October 31, 2000 by and between Farm Family Holdings, Inc. and Philip P. Weber and, as to Section 6.17, American National Insurance Company (incorporated by reference to Farm Family Holdings, Inc. Form 8-K dated November 7, 2000) 10.16 Employment Agreement dated as of October 31, 2000 by and between Farm Family Holdings, Inc. and James J. Bettini and, as to Section 6.17, American National Insurance Company (incorporated by reference to Farm Family Holdings, Inc. Form 8-K dated November 7, 2000) 10.17 Employment Agreement dated as of October 31, 2000 by and between Farm Family Holdings, Inc. and Victoria M. Stanton and, as to Section 6.17, American National Insurance Company (incorporated by reference to Farm Family Holdings, Inc. Form 8-K dated November 7, 2000) 10.18 Employment Agreement dated as of October 31, 2000 by and between Farm Family Holdings, Inc. and Timothy A. Walsh and, as to Section 6.17, American National Insurance Company (incorporated by reference to Farm Family Holdings, Inc. Form 8-K dated November 7, 2000) 21 Subsidiaries of the Registrant E-4
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FARM FAMILY HOLDINGS, INC. EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Subsidiaries State - -------------------------------------------------------------------------------------------------------------------- Farm Family Life Insurance Company is a wholly owned subsidiary of Farm Family Holdings, Inc. NY Farm Family Financial Services, Inc. is a wholly owned subsidiary of Farm Family Holdings, Inc. NY Farm Family Casualty Insurance Company ("FFCIC") is a wholly owned subsidiary of Farm Family Holdings, Inc. NY Rural Agency and Brokerage, Inc. ("RAB") is a wholly owned subsidiary of FFCIC. NY Rural Insurance Agency and Brokerage of Massachusetts, Inc. is a wholly owned subsidiary of RAB. MA R.A.A.B of W. Va., Inc. is a wholly owned subsidiary of RAB. WV
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