UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
Commission File No. 2-57299
FARM FAMILY CASUALTY INSURANCE COMPANY
A New York Corporation IRS No. 14-1415410
344 Route 9W, Glenmont, New York 12077-2910
Registrant's telephone number: (518) 431-5000
Farm Family Mutual Insurance Company
- ---------------------------------------------------------
(Former Name)
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
The number of shares outstanding of the issuer's common stock as
of August 13, 1996 is 2,253,878.
FARM FAMILY CASUALTY INSURANCE COMPANY
INDEX
Part I. Financial Information
Item 1. Financial Statements of Farm Family Mutual Insurance
Company (unaudited)
Consolidated Balance Sheets
December 31, 1995 and June 30, 1996
Consolidated Statements of Income -
Three months and six months ended June 30, 1995 and 1996
Consolidated Statements of Cash Flow -
Six months ended June 30, 1995 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
ITEM 1. FARM FAMILY MUTUAL INSURANCE COMPANY & SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands)
(Unaudited)
December 31, June 30,
1995 1996
ASSETS
Investments
Fixed Maturities
Available for sale, at fair value
(Amortized cost: $171,694 in 1995
and $177,101 in 1996 ) $181,189 $178,067
Held to maturity, at amortized cost
(Fair value: $13,100 in 1995 and
$10,094 in 1996) 12,386 10,072
Equity securities
Available for sale, at fair value
(Cost: $334 in 1995 and 1996) 4,746 5,354
Mortgage loans 1,822 1,784
Other invested assets 1,246 873
Short-term investments 6,532 5,746
-------- --------
Total investments 207,921 201,896
Cash 2,410 3,341
Insurance receivables:
Reinsurance receivables 13,773 11,046
Premiums receivable 21,791 25,701
Deferred acquisition costs 10,527 11,061
Accrued investment income 4,260 4,383
Federal income taxes recoverable 448 -
Deferred income tax asset, net - 3,087
Prepaid reinsurance premiums 1,864 2,129
Receivable from affiliates, net 13,860 15,936
Other assets 1,434 2,700
-------- --------
Total Assets $278,288 $281,280
======== ========
LIABILITIES AND POLICYHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment
expenses 137,978 138,322
Unearned premium reserve 52,799 58,098
Reinsurance premiums payable 2,635 1,121
Accrued expenses and other liabilities 7,788 10,057
Debt 2,707 2,686
Deferred income tax liability, net 217 -
-------- --------
Total liabilities 204,124 210,284
Commitments and contingencies
Policyholders' equity:
Retained earnings 65,284 67,223
Net unrealized investment gains 8,998 3,891
Minimum pension liability adjustment (118) (118)
-------- --------
Total policyholder's equity 74,164 70,996
-------- --------
Total Liabilities and
Policyholders' Equity $278,288 $281,280
======== ========
See accompanying notes to Consolidated Financial Statements.
FARM FAMILY MUTUAL INSURANCE COMPANY & SUBSIDIARIES
Consolidated Statements of Income
($ in thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1996 1995 1996
-------- -------- -------- --------
Revenues:
Premiums $29,211 $32,190 $57,063 $63,866
Net investment income 3,505 3,645 7,009 7,503
Realized investment gains
(losses), net (169) 14 (108) 77
Other income 223 257 391 470
-------- -------- -------- --------
Total revenues 32,770 36,106 64,355 71,916
Losses and Expenses:
Losses and loss adjustment
expenses 21,508 23,031 40,665 48,753
Underwriting expenses 8,198 9,180 16,410 17,967
Interest expense 54 54 108 108
Dividends to policyholders 44 86 91 113
-------- -------- -------- --------
Total losses and expenses 29,804 32,351 57,274 66,941
-------- -------- -------- --------
Income before federal income tax
expense and extraordinary item 2,966 3,755 7,081 4,975
Federal income tax expense 860 1,222 2,053 1,619
-------- -------- -------- --------
Income before extraordinary item 2,106 2,533 5,028 3,356
Extraordinary item -
demutualization expenses - 896 - 1,417
-------- -------- -------- --------
Net income $2,106 $1,637 $5,028 $1,939
======== ======== ======== ========
See accompanying notes to Consolidated Financial Statements.
FARM FAMILY MUTUAL INSURANCE COMPANY & SUBSIDIARIES
Consolidated Statements of Policyholders' Equity
($ in thousands)
(Unaudited)
For the Six Month Period
Ended June 30,
1995 1996
Retained earnings
Balance, beginning of period $55,678 $65,284
Net income 5,028 1,939
------- -------
Balance, end of period 60,706 67,223
Net unrealized appreciation (depreciation) of investments
Balance, beginning of period (2,701) 8,998
Change in unrealized appreciation
(depreciation), net 8,612 (5,107)
------- -------
Balance, end of period 5,911 3,891
Minimum pension liability adjustment
Balance, beginning of period - (118)
------- -------
Balance, end of period - (118)
------- -------
Total Policyholders' Equity $66,617 $70,996
======= =======
See accompanying notes to Consolidated Financial Statements.
FARM FAMILY MUTUAL INSURANCE COMPANY & SUBSIDIARIES
Statements of Consolidated Cash Flows
($ in thousands)
For the Six Month Period
Ended June 30,
1995 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,028 $1,939
- ------------------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized investment (gains) losses 108 (77)
Amortization of bond discount 22 67
Depreciation - -
Deferred income taxes (191) (554)
Extraordinary item - demutualization expense - 1,417
Changes in:
Reinsurance receivables 2,148 2,727
Premiums receivable (5,023) (3,910)
Deferred acquisition costs (2,181) (534)
Accrued investment income 46 (123)
Federal income taxes recoverable 635 448
Prepaid reinsurance premiums (259) (265)
Receivable from affiliates (1,035) (2,076)
Reserves for losses and loss
adjustment expenses 3,733 344
Unearned premium reserve 6,678 5,299
Reinsurance premiums payable (1,838) (1,514)
Accrued expenses and other liabilities 647 2,270
-------- --------
Total adjustments 4,010 2,254
Net cash provided by operating activities
before extraordinary item $9,038 $4,193
Extraordinary item -
demutualization expenses - (1,417)
-------- --------
Net cash provided by operating activities $9,038 $2,776
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Fixed maturities available for sale 17,339 5,450
Equity securities - 143
Investment collections:
Fixed maturities available for sale 5,318 6,505
Fixed maturities held to maturity 279 2,277
Mortgage loans 33 37
Investment purchases:
Fixed maturities available for sale (24,795) (17,241)
Change in short-term investments, net (7,926) 786
Change in other invested assets 377 219
-------- --------
Net cash used in investing activities ($9,375) ($1,824)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (32) (21)
-------- --------
Net cash used in financing activities ($32) ($21)
-------- --------
Net increase (decrease) in cash (369) 931
Cash, beginning of period 4,507 2,410
-------- --------
Cash, end of period $4,138 $3,341
======== ========
See accompanying notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the
accounts of Farm Family Mutual Insurance Company ("Farm Family
Mutual") and its wholly owned subsidiaries, Rural Agency &
Brokerage, Inc. ("RAB") and Farm Family Holdings, Inc. (the
"Holding Company") (collectively referred to as the "Company").
The Holding Company was incorporated under Delaware law on
February 12, 1996 for the purpose of becoming the parent holding
company of Farm Family Mutual under a Plan of Reorganization and
Conversion (the "Plan"). On July 26, 1996, Farm Family Mutual
converted from a mutual property and casualty insurance company
to a stockholder owned property and casualty insurance company
and became a wholly owned subsidiary of the Holding Company
pursuant to the Plan. In addition, Farm Family Mutual was
renamed Farm Family Casualty Insurance Company.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form
10-Q. In the opinion of management, these statements contain
all adjustments including normal recurring accruals, which are
necessary for a fair presentation of the consolidated financial
position at June 30, 1996, and the consolidated results of
operations for the periods ended June 30, 1995 and 1996. The
results of the Company's operations for any interim period are
not necessarily indicative of the results of the Company's
operations for a full fiscal year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Farm Family Mutual Insurance Company (the "Company") is a
specialized property and casualty insurer of farms, other
generally related businesses and residents of rural and suburban
communities principally in the Northeastern United States. The
Company provides property and casualty insurance coverages to
members of the state Farm Bureau organizations in New York, New
Jersey, Delaware, West Virginia and all of the New England
states. In addition, the Company's wholly owned subsidiary,
Rural Agency and Brokerage, Inc., places insurance coverages not
underwritten by the Company for the Company's policyholders.
The operations of the Company are also closely related with
those of its affiliates, Farm Family Life Insurance Company and
its wholly owned subsidiary, United Farm Family Insurance
Company.
The Company's premium revenue is a function of changes in
average premium per policy and the growth in the number of
policies. Premium rates are regulated by the state insurance
departments in the states in which the Company operates.
Membership in the Farm Bureau organizations is a prerequisite
for voluntary insurance coverage (except for employees of the
Company and its affiliates). Associate Farm Bureau memberships
are generally available for an annual fee to persons not engaged
in agricultural businesses.
The Company's operating results are subject to significant
fluctuations from period to period depending upon, among other
factors, the frequency and severity of losses from weather
related and other catastrophic events, the effect of competition
and regulation on the pricing of products, changes in interest
rates, general economic conditions, tax laws and the regulatory
environment. As a condition of its license to do business in
various states, the Company is required to participate in a
variety of mandatory residual market mechanisms (including
mandatary pools) which provide certain insurance (most notably
automobile insurance) to consumers who are otherwise unable to
obtain such coverages from private insurers. In all such
states, residual market premium rates are subject to the
approval of the state insurance department and have generally
been inadequate. The amount of future losses or assessments
from residual market mechanisms cannot be predicted with
certainty and could have a material adverse effect on the
Company's results of operations.
For the six month periods ended June 30, 1996 and 1995, 38.4%
and 39.0%, respectively, of the Company's direct written
premiums were derived from policies written in New York and, for
the same periods, 22.2% and 20.4%, respectively, were derived
from policies written in New Jersey. For these same periods, no
other state accounted for more than 10.0% of the Company's
direct written premiums. As a result, 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.
The Special Farm Package is a flexible, multi-line package of
insurance coverage which the Company regards as its "flagship"
product. For the six month periods ended June 30, 1996 and
1995, 24.4% and 24.8%, respectively, of the Company's direct
written premiums were derived from the Special Farm Package
product. The Company concentrates on the Special Farm Package
and its other established major product lines and, increasingly,
on its businessowners and homeowners products. It generally
does not pursue the development of products with risk profiles
with which it is not familiar, nor does it, typically, actively
market its automobile, workers' compensation or general
liability policies except to policyholders who may also purchase
its Special Farm Package, businessowners or homeowners products.
The following Results of Operations include the operations of
the Company and its wholly owned subsidiaries, Rural Agency and
Brokerage, Inc. and Farm Family Holdings, Inc. (the "Holding
Company"). The Holding Company was incorporated under Delaware
law on February 12, 1996 for the purpose of becoming the parent
holding company of Farm Family Mutual Insurance Company pursuant
to a Plan of Reorganization and Conversion. On July 26, 1996,
Farm Family Mutual Insurance Company converted from a mutual
insurance company to a stockholder owned company and was renamed
Farm Family Casualty Insurance Company and became a wholly owned
subsidiary of the Holding Company. In addition, on July 26, 1996,
pursuant to the Plan of Reorganization and Conversion, Farm Family
Casualty Insurance Company issued 2,253,878 shares of its common
stock, representing all of its issued and outstanding common stock,
to the Holding Company.
Results of Operations
The Three Month Period Ended June 30, 1996 Compared to the Three
Month Period Ended June 30, 1995
Premiums
- --------
Premium revenue increased $3.0 million or 10.2%, during the
three month period ended June 30, 1996 to $32.2 million from
$29.2 million for the same period in 1995. The increase in
premium revenue in 1996 resulted from an increase of $2.7
million in earned premiums on additional business directly
written by the Company and an increase of $0.5 million in
earned premiums retained by the Company and not ceded to
reinsurers, which were partially offset by a decrease of $0.2
million in earned premiums assumed. The $2.7 million increase
in earned premiums on additional business directly written by
the Company was primarily attributable to an increase of $2.4
million, or 9.0%, in earned premiums from the Company's primary
products (personal and commercial automobile products other than
assigned risk business, the Special Farm Package, businessowners
products, homeowners products, and Special Home Package) and to
an increase of $0.2 million in earned premiums from workers
compensation policies. The number of policies in force related
to the Company's primary products increased by 7.2% to
approximately 109,100 as of June 30, 1996 from approximately
101,700 as of June 30, 1995 and the average premium earned for
each such policy increased by 1.6% during the three month period
ended June 30, 1996 compared to the same period in 1995. The
$0.5 million increase in earned premiums retained by the Company
was primarily the result of a change in the terms of certain of
the Company's reinsurance agreements pursuant to which the
amount of earned premiums ceded by the Company were slightly
reduced.
Net Investment Income
- ---------------------
Net investment income increased $0.1 million or 4.0% to $3.6
million for the three month period ended June 30, 1996 from $3.5
million for the same period in 1995. The increase in net
investment income was primarily the result of an increase in
average cash and invested assets (at amortized cost) of
approximately $15.4 million, or 8.3% from June 30, 1996
compared to June 30, 1995. The return realized on the Company's
cash and investments was 7.3% for the three month period ended
June 30, 1996 and 7.6% for the same period in 1995.
Net Realized Investment Gains
- -----------------------------
Net realized investment gains (losses) were $14,000 for the
three month period ended June 30, 1996 and ($169,000) for the
same period in 1995.
Losses and Loss Adjustment Expenses
- -----------------------------------
Losses and loss adjustment expenses increased $1.5 million, or
7.1%, to $23.0 million for the three month period ended June 30,
1996 from $21.5 million for the same period in 1995. Loss and
loss adjustment expenses were 71.6% of premium revenue for the
three month period ended June 30, 1996 compared to 73.6% of
premium revenue for the same period in 1995. The decrease in
the loss and loss adjustment expense ratio was primarily
attributable to improvements in the loss and loss adjustment
expense ratio for the Company's direct business derived from its
Special Farm Package, businessowners and workers compensation
products during the three month period ended June 30, 1996
compared to the same period in 1995. These factors were
partially offset by losses believed to be storm and weather
related which aggregated $1.8 million in the three month period ended
June 30, 1996 compared to $1.3 million for the same period in
1995.
Underwriting Expenses
- ---------------------
Underwriting expenses increased $1.0 million, or 12.0%, to $9.2
million for the three month period ended June 30, 1996 from $8.2
million for the same period in 1995. For the three month period
ended June 30, 1996, underwriting expenses were 28.5% of premium
revenue compared to 28.1% in 1995.
Federal Income Tax Expense
- --------------------------
Federal income tax expense increased $0.3 million to $1.2
million in 1996 from $0.9 million in 1995. Federal income tax
expense was 32.5% of income before federal income tax expense
for the three month period ended June 30, 1996 compared to 29.0%
for the same period in 1995. The increase in the Company's
effective federal income tax rate was primarily attributable to
reductions in tax exempt interest income and dividend income
during the three month period ended June 30, 1996 compared to
the same period in 1995.
Income Before Extraordinary Item
- --------------------------------
Income before extraordinary item increased $0.4 million or 20.3%
to $2.5 million for the three month period ended June 30, 1996
compared to $2.1 million for the same period in 1995 primarily
as a result of the foregoing factors.
Net Income
- ----------
Net income decreased $0.5 million to $1.6 million for the three
month period ended June 30, 1996 from $2.1 million for the same
period in 1995 primarily as a result of the impact of $0.9
million of expenses related to the demutualization of the
Company identified as an extraordinary item which more than
offset the increase in income before extraordinary item of $0.4
million.
The Six Month Period Ended June 30, 1996 Compared to the Six
Month Period Ended June 30, 1995
Premiums
- --------
Premium revenue increased $6.8 million or 11.9%, during the six
month period ended June 30, 1996 to $63.9 million from $57.1
million for the same period in 1995. The increase in premium
revenue in 1996 resulted from an increase of $5.8 million in
earned premiums on additional business directly written by the
Company and an increase of $1.3 million in earned premiums
retained by the Company and not ceded to reinsurers, which were
partially offset by a decrease of $0.3 million in earned
premiums assumed. The $5.8 million increase in earned premiums
on additional business directly written by the Company was
primarily attributable to an increase of $4.6 million, or 8.9%,
in earned premiums from the Company's primary products (personal
and commercial automobile products other than assigned risk
business, the Special Farm Package, businessowners products,
homeowners products, and Special Home Package) and to an
increase of $0.5 million and $0.4 million in earned premiums on
the Company's workers compensation and assigned risk business,
respectively. The number of policies in force related to the
Company's primary products increased by 7.2% to approximately
109,100 as of June 30, 1996 from approximately 101,700 as of
June 30, 1995 and the average premium earned for each such
policy increased by 1.5% during the six month period ended June
30, 1996 compared to the same period in 1995. The $1.3 million
increase in earned premiums retained by the Company was
primarily the result of a change in the terms of certain of the
Company's reinsurance agreements pursuant to which the amount of
earned premiums ceded by the Company were slightly reduced.
Net Investment Income
- ---------------------
Net investment income increased $0.5 million or 7.1% to $7.5
million for the six month period ended June 30, 1996 from $7.0
million for the same period in 1995. The increase in net
investment income was primarily the result of an increase in
average cash and investments (at amortized cost) of
approximately $16.0 million, or 8.7%. The return realized on the
Company's cash and invested assets was 7.5% for the six month
period ended June 30, 1996 and 7.7% for the same period in 1995.
Net Realized Investment Gains
- -----------------------------
Net realized investment gains (losses) were $77,000 for the six
month period ended June 30, 1996 and ($108,000) for the same
period in 1995.
Losses and Loss Adjustment Expenses
- -----------------------------------
Losses and loss adjustment expenses increased $8.1 million, or
20.0%, to $48.8 million for the six month period ended June 30,
1996 from $40.7 million for the same period in 1995. Loss and
loss adjustment expenses were 76.3% of premium revenue for the
six month period ended June 30, 1996 compared to 71.3% of
premium revenue for the same period in 1995. The increase in
the loss and loss adjustment expense ratio was primarily
attributable to the frequency of weather related losses in the
Northeastern United States during the three months ended March
31, 1996. Losses believed to be storm and weather related
which aggregated $8.7 million in six month period ended June 30, 1996
compared to $2.2 million for the same period in 1995.
Underwriting Expenses
- ---------------------
Underwriting expenses increased $1.6 million, or 9.5%, to $18.0
million for the six month period ended June 30, 1996 from $16.4
million for the same period in 1995. For the six month period
ended June 30, 1996, underwriting expenses were 28.1% of premium
revenue compared to 28.8% in 1995. The reduction in the
Company's underwriting expense ratio was primarily attributable
to a smaller relative increase in overhead expenses than in
premium revenue for the period.
Federal Income Tax Expense
- --------------------------
Federal income tax expense decreased $0.5 million to $1.6
million in 1996 from $2.1 million in 1995. Federal income tax
expense was 32.5% of income before federal income tax expense
for the six month period ended June 30, 1996 compared to 29.0%
for the same period in 1995. The increase in the Company's
effective federal income tax rate was primarily attributable to
reductions in tax exempt interest income and dividend income
during the three month period ended June 30, 1996 compared to
the same period in 1995.
Income Before Extraordinary Item
- --------------------------------
Income before extraordinary item decreased $1.6 million to $3.4
million for the six month period ended June 30, 1996 compared to
$5.0 million for the same period in 1995 primarily as a result
of the foregoing factors.
Net Income
- ----------
Net income decreased $3.1 million to $1.9 million for the three
month period ended June 30, 1996 from $5.0 million for the same
period in 1995 primarily as a result of the foregoing factors
and the impact of $1.4 million of expenses related to the
demutualization of the Company which the Company has identified
as an extraordinary item.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $4.2 million and
$9.0 million during the six month periods ended June 30, 1996
and 1995, respectively. The decrease in net cash provided by
operating activities during the six month period ended June 30,
1996 was primarily attributable to the decrease in net income
and an increase in payments for losses and loss adjustment
expenses.
Net cash used in investing activities was $1.8 million and $9.4
million during the six month periods ended June 30, 1996 and
1995, respectively. The decrease in net cash used in investing
activities in 1996 primarily resulted from the net increase in
the Company's short-term investments during the six month period
ended June 30, 1996.
The Company has in place an unsecured line of credit with Key
Bank of New York under which it may borrow up to $2.0 million.
At August 3, 1996, no amounts were outstanding on this line of
credit, which has an annual interest rate equal to the bank's
prime rate. In addition, at June 30, 1996, the Company had $2.7
million principal amount of surplus notes outstanding. The
surplus notes bear interest at the rate of eight percent per
annum and have no maturity date. The principal and interest on
the surplus notes are repayable only with the approval of the
Superintendent of Insurance of New York State.
On July 26, 1996, the Holding Company completed its initial
public offering and closed the subscription offering pursuant to
its Plan of Reorganization and Conversion. The gross proceeds
from the initial public offering, the exercise of the
underwriters' over-allotment option, and the subscription
offering aggregated approximately $48.0 million. Approximately
$12.2 million was used to make cash payments to certain
policyholders and approximately $1.2 million was used to make
cash payments to certain surplus note holders pursuant to the
Plan of Reorganization and Conversion. In addition,
approximately $6.8 million will be used to pay expenses,
including the underwriters' discount, incurred in connection
with the initial public offering and conversion and
reorganization. The Holding Company also made a capital
contribution of $18.0 million to Farm Family Casualty Insurance
Company
Item 6. Exhibits and Reports on Form 8-K
A report on Form 8-K was filed on May 2, 1996 reporting a
press release issued stating that the Superintendent of
Insurance of the State of New York approved the Company's Plan
of Reorganization and Conversion.
A report on Form 8-K was filed on June 17, 1996 reporting a
press release issued stating that the policyholders approved the
Company's Plan of Reorganization and Conversion.
No financial statements were filed with either Form 8-K.
Pursuant to the requirements 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 MUTUAL INSURANCE COMPANY
(Registrant)
August 14, 1996 /s/ Philip P. Weber
(Date) Philip P. Weber, Executive Vice-President & C.E.O.
(Principal Administrative Officer)
August 14, 1996 /s/ Timothy A. Walsh
(Date) Timothy A. Walsh, Senior Vice President - Finance
(Principal Financial Officer)