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, 1999
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 1, 2000, Registrant had 6,110,684 shares of Common Stock outstanding.
Of these, 6,098,717 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 1, 1999) of approximately $219,553,812 were owned by stockholders other
than directors and executive officers of the Registrant.
Documents Incorporated By Reference
Portions of the following documents are incorporated by reference as follows:
Documents Incorporated Part of Form 10K
Farm Family Holdings, Inc. I and II
Annual Report to Stockholders
for the fiscal year ended
December 31, 1999
(the "Annual Report")
Farm Family Holdings, Inc. III
Proxy Statement for the
2000 Annual Meeting of
Stockholders
(the "Proxy Statement")
FARM FAMILY HOLDINGS, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 20
Part III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 21
Signatures 22
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").
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family
Mutual") converted from a mutual property and casualty insurance company to a
stockholder-owned property and casualty insurance company and became a
wholly-owned subsidiary of Farm Family Holdings pursuant to a plan of
Reorganization and Conversion (the "Plan"). In addition, Farm Family Mutual was
renamed Farm Family Casualty Insurance Company. As part of the Plan, Farm Family
Mutual policyholders received approximately 2,237,000 shares of Farm Family
Holding's common stock and $11,735,000 in cash in exchange for their membership
interest in Farm Family Mutual.
On July 23, 1996, Farm Family Holdings made an initial public offering of
its common stock at a price of $16.00 per share. Farm Family Holdings received
net proceeds of $41,453,000 for approximately 2,786,000 shares sold in the
initial public offering. In addition, Farm Family Holdings received $3,427,000
for approximately 214,000 shares purchased by policyholders of Farm Family
Mutual in a subscription offering. In addition, pursuant to the Plan, holders of
Farm Family Mutual debt could elect to exchange their debt instruments for
shares of common stock or cash. As a result, there were 17,000 common shares and
$1,107,000 in cash exchanged for debt with an outstanding principal amount of
$1,371,000.
On April 6, 1999, Farm Family Holdings acquired all of the outstanding
capital stock of Farm Family Life. Farm Family Holdings' aggregate purchase
price was approximately $38.3 million, including direct acquisition costs. The
purchase price consisted of approximately $30.6 million of Farm Family Holdings'
common stock ($31.5 million less certain expenses paid by Farm Family Life),
approximately $5.8 million stated value of 6-1/8% voting preferred stock ($6
million less certain expenses paid by Farm Family Life) and approximately $1.9
million in direct acquisition costs. Under the terms of the Option Purchase
Agreement, the price used to determine the number of shares of common and voting
preferred stock issued in the acquisition was fixed at $35.72 per share. Farm
Family Holdings issued 856,871 shares of common stock and 163,214 shares of
voting preferred stock to the Selling Stockholders. After the acquisition, Farm
Family Holdings' total number of common shares outstanding increased to
6,110,684. As a result of the acquisition, Farm Family Life became a
wholly-owned subsidiary of Farm Family Holdings. Accordingly, the financial
results of Farm Family Life and Farm Family Life's wholly-owned property and
casualty subsidiary, United Farm Family Insurance Company ("United Farm
Family"), are included in our consolidated financial statements effective April
6, 1999.
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.
1
We market our insurance products through more than 290 agents and field
managers 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.
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 4.9 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, 1999, 1998 and 1997, we incurred expense of $1,227,000,
$660,000, and $600,000, respectively, pursuant to the Membership List Purchase
Agreements. The 1999 amount includes Farm Family Life's expense of $526,000 for
the Membership List Purchase Agreements, since its acquisition effective April
6, 1999.
Industry Segments
Our operations consist of two operating segments: property and casualty
insurance, which is sold through Farm Family Casualty and United Farm Family,
and life insurance which is sold through Farm Family Life. The property and
casualty segment accounted for 87% of the 1999 consolidated premium revenue and
90% of the 1999 consolidated operating income. Prior to the acquisition of Farm
Family Life, we did not market life insurance products. Information regarding
the last three years' revenues, operating profits, and identifiable assets for
each of the operating segments is contained in Note 18 of the Notes to
Consolidated Financial Statements appearing on pages 26 to 46 of our Annual
Report, incorporated herein by reference and included as part of Exhibit 13 to
this Form 10-K.
2
Property and Casualty Insurance Business
Products
Our property and casualty insurance segment includes activities related to
the Special Farm Package, a flexible multi-line package of insurance coverages,
and other insurance products covering, personal and commercial automobiles,
businessowners and homeowners.
We offer a variety of property and casualty insurance products primarily
designed to meet the unique insurance needs of our agricultural clients and the
general insurance needs of the rural and suburban communities in which we write
business. Many policyholders have more than one policy with us.
The following table sets forth, by product, the direct written premiums for
property and casualty insurance business, including assigned risk business, for
the following years:
Year Ended December 31,
----------------------------------------------------------------------
% of % of % of
($ in millions) 1999 Total 1998 Total 1997 Total
- -----------------------------------------------------------------------------------------------------------------
Personal Automobile* $68.0 35.2% $68.3 36.9% $62.3 36.9%
Special Farm Package 41.5 21.5% 40.6 21.9% 38.4 22.8%
Commercial Automobile* 31.0 16.1% 28.9 15.6% 26.1 15.5%
Workers' Compensation 13.1 6.8% 12.6 6.8% 11.3 6.7%
Businessowners 11.5 6.0% 10.1 5.5% 9.0 5.3%
Homeowners 10.3 5.3% 9.2 5.0% 7.7 4.6%
Umbrella 5.9 3.0% 5.0 2.7% 4.8 2.9%
Commercial General Liability 5.1 2.6% 4.5 2.4% 4.1 2.4%
Special Home Package 3.4 1.8% 3.3 1.8% 3.1 1.8%
Fire, Allied, Inland Marine 1.9 1.0% 1.8 1.0% 1.3 0.8%
Country Estate 0.7 0.4% 0.2 0.1% ---- ----
Products Liability 0.4 0.2% 0.4 0.2% 0.4 0.2%
Pollution 0.2 0.1% 0.2 0.1% 0.2 0.1%
- -----------------------------------------------------------------------------------------------------------------
Total $193.0 100.0% $185.1 100.0% $168.7 100.0%
=================================================================================================================
*Includes $4.8, $3.9, and $6.3 million of assigned risk automobile premiums
for personal automobile business and $0.3, $0.3, and $0.7 million of premiums
for assigned risk commercial automobile business for each of the years ended
December 31, 1999, 1998, and 1997, respectively.
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.
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.
3
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 $5.0 million. We do not generally seek to market our excess
liability policies unless we also write an underlying liability policy.
Commercial General Liability - We write a standard commercial general
liability policy which is generally marketed in connection with the Special Farm
Package, or other property insurance coverage. The commercial general liability
policy is generally not written apart from these other policies. We typically
write the policy for unique business situations, such as horse breeding and
training facilities and certain landscaper risks, which do not meet the criteria
for liability coverage under a businessowners or Special Farm Package policy.
The policy insures businesses against third party liability from accidents
occurring on their premises or arising out of their operations or products. Most
of our products liability line is written as part of the commercial general
liability product.
Country Estate - In October 1997, we began marketing the Country Estate
program, a specialized version of the Special Farm Package. The program covers
rural residents where agricultural exposures are present, but agribusiness is
not the main source of income for the household.
Pollution - We write a small number of pollution liability policies
covering specified farm risks on a "claims-made" basis. The policy insures
against losses incurred from third party liability, including bodily injury and
property damages, and from pollution incidents, such as those caused from
pesticides, fertilizers, herbicides and manure piles. An "extended reporting
period" option is available under certain circumstances which allows for claim
reporting after the policy expiration.
The following table sets forth our direct written premiums by state for property
and casualty insurance:
Year Ended December 31,
--------------------------------------------------------------------------
% of % of % of
($ in millions) 1999 Total 1998 Total 1997 Total
- ----------------------------------------------------------------------------------------------------------------------
New York $67.9 35.2% $64.3 34.8% $61.5 36.5%
New Jersey 51.2 26.6% 52.4 28.3% 44.5 26.4%
Massachusetts 16.0 8.3% 14.6 7.9% 12.9 7.6%
Connecticut 12.4 6.4% 12.1 6.5% 11.0 6.5%
West Virginia 10.8 5.6% 10.1 5.4% 9.1 5.4%
New Hampshire 7.4 3.8% 6.9 3.8% 6.5 3.9%
Vermont 6.9 3.6% 6.3 3.4% 5.8 3.4%
Delaware 6.6 3.4% 6.5 3.5% 5.8 3.4%
Maine 6.5 3.4% 6.5 3.5% 6.7 4.0%
Rhode Island 5.5 2.8% 5.4 2.9% 4.9 2.9%
Pennsylvania 1.4 0.7% ---- ---- ---- ----
Maryland 0.4 0.2% ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------
Total $193.0 100.0% $185.1 100.0% $168.7 100.0%
======================================================================================================================
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 are handled by
an outside claim adjusting firm that specializes in this line of business. 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:
Prior to January 1, 1998, the largest net per risk exposure retained by us
on any one individual property or casualty risk was $100,000 and United Farm
Family covered property and casualty risks in excess of $100,000 on an excess of
loss basis up to $300,000 per risk. 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 by unaffiliated reinsurers. Casualty losses
per risk 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 by unaffiliated reinsurers. Clash coverage, which provides
coverage for a single event that results in multiple casualty losses to our
insureds, is provided by unaffiliated reinsurers and covers casualty losses,
including workers' compensation, in excess of $1 million 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.
Prior to January 1, 1998, we reinsured 95% of our umbrella liability losses
(including a 5% quota share participation by United Farm Family) under $1
million per loss on a quota share basis and 100% of our umbrella liability
losses in excess of $1 million up to $5 million per loss with unaffiliated
reinsurers. Effective January 1, 1998, umbrella losses per occurrence in excess
of $300,000 up to $2 million are covered on an excess of loss basis with
unaffiliated reinsurers. In addition, we reinsure 100% of our umbrella liability
losses in excess of $2 million up to $5 million per loss with unaffiliated
reinsurers. Facultative reinsurance coverage is obtained for property policies
written for limits in excess of $4 million per risk, casualty risks in excess of
$1 million, and umbrella policies written for limits in excess of $5 million.
5
We terminated certain reinsurance agreements with United Farm Family
effective December 31, 1997. However, United Farm Family retains liability for
covered losses arising from occurrences prior to the termination date.
Our property catastrophe reinsurance is placed with unaffiliated reinsurers
and 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 program.
We also have aggregate stop loss reinsurance covering 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 is provided by unaffiliated reinsurers
and covers each accident year separately.
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, 1999, 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. We also assumed an insignificant amount of
property and casualty reinsurance covering substandard automobile policies from
United Farm Family through December 31, 1997. For the years ended December 31,
1999 and 1998, we earned premiums of $12.6 million and $11.2 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 95% of losses over $1 million up to a
maximum of $6 million per occurrence.
Loss and Loss Adjustment Expense ("LAE") Reserves
Our reserves for losses are an estimate of the unpaid amount, as of
December 31, of the losses incurred in both the current year and all prior
years. The LAE reserve is an estimate of the unpaid expenses required to settle
losses incurred in both the current year and all prior years. We are required to
maintain reserves for payment of estimated losses and LAE for both reported
claims and claims which have been incurred but not yet reported. We regularly
update our reserve estimates as new facts become known and further events occur
which may impact the resolution of unsettled claims. Therefore, the ultimate
liability incurred may differ materially from current reserve estimates.
Adjustments in aggregate reserves, if any, are reflected in the operating
results of the period during which such adjustments are made. Although reserves
for losses and loss adjustment expenses may not be paid for many years, such
reserves are not discounted except for certain lifetime workers' compensation
indemnity reserves where the reserves are discounted at 3.5%.
6
The following table provides a reconciliation of beginning and ending loss and
LAE reserve balances for each of the years in the three-year period ended
December 31, 1999.
Reconciliation of Liability for Losses and Loss Adjustment Expenses
Year ended December 31,
-------------------------------------
($ in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Reserves for losses and loss adjustment expenses at beginning of year $174,435 $156,622 $141,220
Less reinsurance recoverables and receivables (30,908) (29,054) (26,837)
- ------------------------------------------------------------------------------------------------------------------------------
Net reserves for losses and loss adjustment expenses at beginning of year 143,527 127,568 114,383
Net reserves for losses and loss adjustment expenses from the acquisition of
United Farm Family 12,335 ---- ----
- ------------------------------------------------------------------------------------------------------------------------------
155,862 127,568 114,383
- ------------------------------------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year 146,829 138,201 107,273
Decrease in provision for insured events of prior years (5,320) (3,899) (3,972)
- ------------------------------------------------------------------------------------------------------------------------------
Total incurred losses and loss adjustment expenses 141,509 134,302 103,301
- ------------------------------------------------------------------------------------------------------------------------------
Loss and loss adjustment expenses payments for claims occurring in:
Current year 70,463 70,098 49,858
Prior years 61,630 48,245 40,258
- ------------------------------------------------------------------------------------------------------------------------------
Total payments 132,093 118,343 90,116
- ------------------------------------------------------------------------------------------------------------------------------
Net reserves for losses and loss adjustment expenses at end of year 165,278 143,527 127,568
Plus reinsurance recoverables and receivables 20,852 30,908 29,054
- ------------------------------------------------------------------------------------------------------------------------------
Reserves for losses and loss adjustment expenses at end of year $186,130 $174,435 $156,622
==============================================================================================================================
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 $50,000 deficiency (actual
loss minus original estimate) would be included in the cumulative deficiency in
each of the years 1995 through 1998 shown below. This table presents development
data by calendar year and does not relate the data to the year in which the
accident actually occurred. Conditions and trends that have affected the
development of these reserves in the past may not necessarily recur in the
future.
7
The following table sets forth the development of loss and loss adjustment
expenses reserves for the ten-year period ended December 31, 1999:
Analysis of Losses and Loss Adjustment Expense Development
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Year Ended December 31 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
Reserves for Losses
and Loss Adjustment
Expenses $78,339 $94,135 $110,135 $117,497 $123,477 $127,954 $137,978 $141,220 $156,622 $174,435 $186,130
Reinsurance Recoverable
on Unpaid Losses (11,784) (22,123) (25,048) (24,463) (28,761) (28,230) (28,655) (26,837) (29,054) (30,908) (20,852)
- -----------------------------------------------------------------------------------------------------------------------------
Reserves for Losses and
Loss Adjustment
Expenses, Net $66,555 $72,012 $85,087 $93,034 $94,716 $99,724 $109,323 $114,383 $127,568 $143,527 $165,278
=============================================================================================================================
Reserves, Net,
Reestimated as of:
One year later 69,036 76,786 84,514 91,561 88,296 94,542 104,649 110,411 123,654 136,305
Two years later 72,478 76,442 84,305 89,666 82,876 87,592 101,561 107,610 117,283
Three years later 72,926 76,832 83,960 86,876 81,556 84,840 100,295 103,055
Four years later 73,130 77,879 82,750 85,204 79,139 84,167 96,798
Five years later 74,599 77,375 81,690 83,875 78,948 81,565
Six years later 74,391 76,811 80,487 83,964 77,110
Seven years later 74,578 76,080 80,385 82,776
Eight years later 73,993 76,179 79,575
Nine years later 74,364 75,556
Ten years later 73,956
Cumulative Redundancy
(Deficiency) (7,401) (3,544) 5,512 10,258 17,606 18,159 12,525 11,328 10,285 7,222
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Amount of
Reserves Paid
Through:
One year later 29,587 29,446 32,708 36,692 34,439 33,069 39,796 40,258 48,232 57,931
Two years later 46,469 47,392 53,455 57,236 49,867 53,121 59,671 62,486 72,748
Three years later 57,838 60,737 65,951 66,127 62,138 64,023 72,234 75,631
Four years later 65,803 67,401 70,176 73,409 67,865 70,114 78,999
Five years later 68,950 68,634 74,752 76,434 71,160 73,918
Six years later 68,652 71,697 76,266 78,502 73,252
Seven years later 71,075 72,820 77,550 79,842
Eight years later 72,038 73,790 78,387
Nine years later 72,736 74,417
Ten years later 73,328
Prior to 1990, 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, 1999 of $11.3 million, $10.3 million and $7.2
million for the December 31, 1996, 1997 and 1998 reserves, respectively, were
primarily attributable to favorable development of IBNR and case reserves for
commercial multiple peril, commercial automobile, automobile physical damage,
and workers' compensation claims.
8
Year Ended December 31,
------------------------------------------------
($ in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Reserve for unpaid losses and loss adjustment expenses:
Gross liability $186,130 $174,435 $156,622
Reinsurance recoverable (20,852) (30,908) (29,054)
------------------------------------------------
Net liability $165,278 $143,527 $127,568
================================================
One year later:
Gross reestimated liability $159,166 $156,928
Reestimated reinsurance recoverable (22,861) (33,274)
--------------------------------
Net reestimated liability $136,305 $123,654
================================
Two years later:
Gross reestimated liability $144,069
Reestimated reinsurance recoverable (26,786)
----------------
Net reestimated liability $117,283
================
Our statutory reserves for unpaid losses and LAE are equal to the liability
amounts in the table, net of reinsurance recoverable.
We believe that our reserves at December 31, 1999 are adequate. Conditions
and trends that have historically affected our claims may not necessarily occur
in the future. Accordingly, it would not be appropriate to extrapolate future
deficiencies or redundancies based on the results set forth above. Future
adjustments to loss reserves and LAE that are unanticipated by us could have a
material adverse impact on our financial condition and results of operations.
Life Insurance Business
Our life insurance operations are conducted through Farm Family Life, which
was acquired on April 6, 1999. Our results of operations for periods prior to
April 6, 1999 do not include the results of Farm Family Life. However,
comparative information for 1999, 1998 and 1997 for premium and other
operational information have been provided for Farm Family Life for
informational purposes only.
Products
The life insurance segment includes the sale of individual whole life, term
and universal life products, single and flexible premium deferred annuity
products, single premium immediate annuity products and disability income
insurance products through Farm Family Life.
Individual life insurance, annuities and disability income products
accounted for 98% of the life insurance segment's statutory direct collected
premiums for the period April 6, 1999 through December 31, 1999. Group sales of
life insurance, annuities and accident and health insurance comprise the
remaining 2% of statutory direct collected premiums.
Life Insurance Products:
The first year statutory direct premiums for life insurance products for
1999, 1998 and 1997 are summarized in the following table:
Year Ended December 31,
---------------------------------------------------------------
($ in thousands) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
Universal $2,037 45.1% $4,741 67.7% $3,552 57.5%
Term 719 15.9% 583 8.3% 595 9.6%
Whole life 1,765 39.0% 1,677 24.0% 2,032 32.9%
======================================================================================================================
Total first year statutory direct premiums $4,521 100.0% $7,001 100.0% $6,179 100.0%
======================================================================================================================
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.
9
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 choose to change the premium scales at any time;
however, the scales can not 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
periodically set by us. 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 $50.4 million
of money from other annuity policies held with us that did not have surrender
protection which were exchanged for special annuity policies that have
seven-year surrender protection.
Disability Income Insurance Products:
Our disability income policies provide payment of benefits in the event of
a disabling accident or illness. Disability benefits reimburse the insured for a
specified dollar amount payable over a specific time period or for the duration
of the disability. Disability is generally defined as the inability of the
policyholder to perform one's occupation for the first two years after
disability, and inability to pursue any occupation thereafter. One of our
products provides extended-care benefits beyond age 65. Since the majority of
the policies are issued on a "guaranteed renewable" basis, we may change the
premium scale at any time based on claim costs incurred, subject to regulatory
approval.
The following table sets forth information regarding life insurance and
annuities for each of the periods presented. Statutory-basis premiums are used
in lieu of GAAP-basis premiums because they provide a consistent measure across
varying product types, in contrast to GAAP which provides different revenue
recognition rules for different classes of long-duration contacts as defined by
the requirements of FASB No. 60, "Accounting and Reporting by Insurance
Enterprises", FASB No. 97, "Accounting and Reporting by Insurance Enterprises
for Certain Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments", and SOP 95-1, "Accounting for Certain Insurance Activities
of Mutual Life Insurance Enterprises".
As of and for the Year Ended
December 31,
-------------------------------------------------------------
($ in thousands, except face amounts in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Life insurance:
Universal
Number of policies 8,652 8,895 9,053
Statutory direct premiums $8,571 $11,627 $10,078
GAAP policyholder account balances $118,673 $112,864 $103,970
Direct face amounts $1,041 $1,060 $1,067
Whole life and term
Number of policies 66,777 66,999 67,262
Statutory direct premiums $30,939 $30,301 $28,799
GAAP policyholder account balances $226,704 $212,618 $200,526
Direct face amounts $2,892 $2,740 $2,629
Total life
Number of policies 75,429 75,894 76,315
Statutory direct premiums $39,510 $41,928 $38,877
Direct face amounts $3,933 $3,800 $3,696
Annuities:
Number of policies 10,377 11,141 11,490
Statutory direct premiums(1) $68,065 $13,797 $15,292
GAAP policyholder account balances $226,746 $238,395 $279,130
(1) The 1999 amount includes $55.1 million from the special annuity program
during June, as previously discussed.
For 1999 and 1998, approximately 45.8% and 43.1%, respectively, of the life
insurance segment's statutory direct life insurance premiums were in New York
and 13.3% and 12.6%, respectively, were written in New Jersey.
10
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 1999, 1998 and 1997 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 claims on
our liquidity and operating results. Our life insurance reinsurance program
provides for coverage for individual life insurance claims greater than $400,000
and $250,000 on our last survivor universal life product. In addition, 50% of
term insurance business 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 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 89% of the
total life insurance in force at December 31, 1999 and 38% of the total
statutory premiums collected for the year ended December 31, 1999. 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 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 period April 6, 1999 through
December 31, 1999 were $7.2 million.
IMSA Certification
During 1999, Farm Family Life earned the Insurance Marketplace Standards
Association ("IMSA") certification and has been accepted as an IMSA member. IMSA
is an independent, voluntary association created by the life insurance industry
to promote high standards of ethical conduct in advertising, sales and service
for individual life insurance and annuity products. These standards are
specified in a set of principles and code of conduct. IMSA companies must
demonstrate that they have met these standards by undergoing a self-assessment
and a second assessment by an independent examiner to determine compliance with
IMSA's Principles and Code. Farm Family Life is a member for three years, after
which it must repeat the self and independent assessment processes to retain its
membership.
11
Marketing
As of December 31, 1999, we marketed our products in twelve states through
approximately 218 primarily career agents, 74 independent agents and 12 field
managers. 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 1999, 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 1999. 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 1999, 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, 1999, we had cash and invested assets with an aggregate
carrying value of $1.1 billion. We primarily invest in high quality fixed
maturity securities and to a lesser extent, equity securities. At December 31,
1999, 88.7% of our total cash and invested assets consisted of fixed maturities,
4.2% consisted of equity securities, 2.8% consisted of policy loans, 2.5%
consisted of mortgage loans, and 1.8% 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. Prior to September 1,
1997, we exclusively managed our invested assets internally. We continue to
internally manage our equity securities, cash and short-term investments, and
mortgage loans. Our investment activities are subject to oversight by management
as well as an 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,
1999, we had identified 13 securities, with an aggregate carrying value of $15.9
million on the credit watch report. Only two of these securities were considered
non-performing or in default. During 1999, these two securities were in default
of $0.1 million in interest. In addition, our holdings of NAIC Class 3 through 6
bonds, generally considered non-investment grade, were $15.9 million or 1.6% of
our fixed maturity portfolio at carrying value, at December 31, 1999. Due to
uncertainties in the economic environment, it is possible that the quality of
investments currently held in our investment portfolio may change.
For the year ended December 31, 1999, compared with the prior year, the
amortized cost of our cash and invested assets increased $827.4 million to $1.1
billion, primarily as a result of the additional investments acquired with the
acquisition of Farm Family Life.
12
The following table sets forth the carrying and market values of our investments
as of December 31, 1999:
Carrying Value(1)
----------------------------------------------------
($ in thousands) Percentage
of Total
Type of Investment Amortized Property Corporate Carrying
Cost and Casualty Life and Other Total Value
- ------------------------------------------------------------------------------------------------------------------------------------
Available For Sale Portfolio:
Fixed Maturities(1)
United States government and
government agencies and authorities $30,741 $13,283 $12,300 $4,463 $30,046 2.8%
States, municipalities and political
subdivisions 196,311 112,777 76,347 ---- 189,124 17.7%
Corporate bonds 558,252 137,459 392,224 ---- 529,683 49.4%
Mortgage-backed securities 202,091 47,229 149,206 ---- 196,435 18.3%
Redeemable preferred stock 15,455 9,051 5,715 ---- 14,766 1.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 1,002,850 319,799 635,792 4,463 960,054 89.6%
Equity securities 42,819 6,075 39,734 ---- 45,809 4.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale 1,045,669 325,874 675,526 4,463 1,005,863 93.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
Fixed Maturities(2)
States, municipalities and political
subdivisions 4,009 4,009 ---- ---- 4,009 0.4%
All other corporate bonds 3,962 3,962 ---- ---- 3,962 0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 7,971 7,971 ---- ---- 7,971 0.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans(1) 26,832 ---- 26,832 ---- 26,832 2.5%
Policy loans(1) 30,839 ---- 30,839 ---- 30,839 2.9%
Other invested assets(1) 176 ---- 176 ---- 176 ----
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments $1,111,487 $333,845 $733,373 $4,463 $1,071,681 100.0%
====================================================================================================================================
(1) Fixed maturities (bonds, redeemable preferred stocks and mortgage-backed
securities) and equity securities in the Available for Sale Portfolio are
carried at market value in our Consolidated Financial Statements. Mortgage
loans, policy loans and other invested assets are carried at cost, which
approximates market value. We primarily obtain market value information
through our professional asset management firm.
(2) Fixed maturities in the Held to Maturity Portfolio are carried at amortized
cost.
13
Our investments in fixed maturity securities are comprised primarily of
intermediate-term, investment grade securities. The table below contains
additional information concerning the investment ratings of our fixed maturity
investments at December 31, 1999.
Amortized Market
Type/Ratings of Investment(1) Cost Value Percentage(4)
- ----------------------------------------------------------------------------------------------------------------------
($ in thousands)
Available for Sale Portfolio:(2)
U.S. Government and Agencies $30,741 $30,046 3.1%
AAA 230,211 224,193 23.4%
AA 176,136 167,958 17.4%
A 293,367 280,116 29.2%
BBB 233,001 221,819 23.1%
BB 13,026 11,349 1.2%
B and below 8,943 7,689 0.8%
Not rated(1) 17,425 16,884 1.8%
- ----------------------------------------------------------------------------------------------------------------------
Total Available for Sale $1,002,850 $960,054 100.0%
======================================================================================================================
Held to Maturity Portfolio:(3)
AAA $2,765 $2,787 35.6%
AA ---- ---- ----
A 2,042 1,992 25.5%
BBB ---- ---- ----
BB ---- ---- ----
B and below ---- ---- ----
Not rated(1) 3,164 3,041 38.9%
- ----------------------------------------------------------------------------------------------------------------------
Total Held to Maturity $7,971 $7,820 100.0%
======================================================================================================================
(1) The ratings set forth in this table are based on the ratings assigned by
Standard & Poor's Corporation ("S&P") or Moody's Investors Services, Inc.
("Moody's"). Securities listed as "not rated" above were not assigned a
rating by S&P or Moody's. 93% of the investments included in "not rated" in
the Available for Sale and Held to Maturity portfolios were rated in Class
1 or 2 by the NAIC, which is considered investment grade.
(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.
(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, 1999 was approximately 5.7 years and their average maturity was
15.6 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 at Note 5 of the Notes to the Consolidated Financial
Statements on pages 32 - 34 of our Annual Report, incorporated herein by
reference in response to Item 8 hereof and included as part of Exhibit 13 to
this Form 10-K.
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" on pages 10 - 21 of our 1999 Annual Report, incorporated
herein by reference in response to Item 7 hereof and included as part of Exhibit
13 to this Form 10-K.
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.
14
We are also in the process of developing web-enabled systems to improve our
service delivery to our agents and customers. These system initiatives are aimed
at increasing the accessibility and usability of our primary product systems for
our agents. We plan to roll out these capabilities on a product-by-product basis
over the next 24 months.
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns a Best's Rating of "A" (Excellent), its third
highest rating category, to 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.
Competition
We compete in 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 the insurance business generally is not seasonal, losses and loss
adjustment expenses associated with property and casualty insurance tend to be
higher for periods of severe or inclement weather.
Employees
As of December 31, 1999, we had 469 full time employees, of which 325 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.
15
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.
Effective March 22, 1999, all insurers in New Jersey were required to
reduce personal automobile rates by approximately 15% pursuant to the Automobile
Insurance Cost Reduction Act of 1998 (the "Act"). Our direct premium written for
New Jersey personal automobile business in 1999 was $23.2 million which was
approximately 12.0% of our total direct written premium, for the year ended
December 31, 1999. The Act also made coverage and other changes to the statutory
requirements governing personal automobile insurance in New Jersey, which are
intended to reduce losses, and loss adjustment expenses. The impact on our
losses and loss adjustment expenses, if any, cannot be determined at this time.
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,
1999, 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 12 ratios for the property and casualty and life insurance
industries 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 had four or more ratios that
varied from the "usual value" range in 1999.
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;
16
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; and
o the impact of the Year 2000 related issues on our business.
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 effect of the uncertainties related to the Year 2000
issue, 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 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.
17
Executive Officers of the Registrant
Date First Elected
Officer of
Registrant or
Name Age Position Presently Held with Registrant Subsidiary
- -------------------------------------------------------------------------------------------------------------
Philip P. Weber 51 President & Chief Executive Officer 1987
James J. Bettini 45 Executive Vice President - Operations 1990
Victoria M. Stanton 40 Executive Vice President, 1991
General Counsel and Secretary
Timothy A. Walsh 38 Executive Vice President - Finance and Treasurer 1996
William T. Conine 51 Senior Vice President - Information Services, Farm 1985
Family Casualty Insurance Company and Farm Family
Life Insurance Company
Dale E. Wyman 57 Senior Vice President - New York Sales, Farm 1989
Family Casualty Insurance Company and Farm Family
Life Insurance Company
Richard E. Long 43 Senior Vice President - Casualty Claims, Farm 1999
Family Casualty Insurance Company
Sharon T. DiLorenzo 43 Senior Vice President - Life Operations, Farm 1996
Family Life Insurance Company
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.
The Registrant or its subsidiary has employed all of the Executive Officers
of the Registrant in various executive or administrative capacities for at least
five years, except for the following:
Mr. Walsh has served as Executive Vice President - Finance & Treasurer of
Farm Family Holdings since December 1996 and Executive Vice President - Finance
& Treasurer of Farm Family Casualty and Farm Family Life since April 1997, as
Executive Vice President - Finance of Farm Family Casualty and Farm Family Life
from December 1996 to April 1997, and as Treasurer of Farm Family Holdings from
October 1996 to December 1996. Mr. Walsh was Senior Vice President - Finance of
Farm Family Casualty and Farm Family Life from March 1996 to December 1996, and
was previously Director of Corporate Development for Farm Family Casualty and
Farm Family Life from August 1995 to March 1996. Previously, Mr. Walsh was Vice
President, Finance & Chief Financial Officer with MPW Industrial Services, Inc.,
Columbus, OH, from April 1994 to August 1995, Corporate Controller of NSC
Corporation, Methuen, MA from July 1992 to April 1994 and Senior Manager at KPMG
Peat Marwick from July 1983 to July 1992. Mr. Walsh currently serves as a
Director of MPW Industrial Services Group, Inc.
ITEM 2. PROPERTIES
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
We are subject to litigation in the normal course of business. Based upon
information presently available, management believes that resolution of these
legal actions will not have a material adverse effect on our consolidated
results of operations and financial condition. 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
18
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 26,975 registered holders of our common stock on February 28,
2000. 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.
Discussion regarding the distribution of dividends from our insurance
subsidiaries is included at Note 15 of the Notes to the Consolidated Financial
Statements on page 42 of our Annual Report, incorporated herein by reference in
response to Item 8 hereof and included as part of Exhibit 13 to this Form 10-K.
The high and low New York Stock Exchange closing market prices for our
common stock for each quarter during 1999 and 1998 were as follows:
For the Quarter Ended High Low
- ---------------------------------------------------------------------
1998
First quarter 38 3/4 31 5/8
Second quarter 42 5/8 38 9/16
Third quarter 40 5/8 29 1/4
Fourth quarter 38 3/16 28
1999
First quarter 34 3/8 31 3/4
Second quarter 36 15/16 31 9/16
Third quarter 40 34 1/8
Fourth quarter 43 38 5/8
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Financial Data" on page 9 of the Annual Report is
incorporated herein by reference and included as part of Exhibit 13 to this Form
10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 10 - 21 of our 1999 Annual Report is
incorporated herein by reference and included as part of Exhibit 13 to this Form
10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Quantitative and Qualitative Disclosures about Market Risk under the
caption "Market Sensitive Instruments and Risk Management" on page 11 of our
1999 Annual Report is incorporated herein by reference and included as part of
Exhibit 13 to this Form 10-K.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements, including the accompanying Notes to
Consolidated Financial Statements and Report of Independent Accountants, on
pages 22 - 47 of our 1999 Annual Report are incorporated herein by reference and
included as part of Exhibit 13 to this Form 10-K.
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
Certain information regarding our directors is located in the Proxy
Statement under the caption "Item 1 - Election of Directors" and is incorporated
herein by reference.
Information regarding our executive officers in Item 1 of Part 1 of this
Report under the caption "Executive Officers of the Registrant" is incorporated
herein by reference.
Information required by Item 405 of Regulation S-K of the Securities
Exchange Act of 1934 located in the Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation located in the Proxy Statement
under the caption "Item 1 - Election of Directors - Compensation of Directors",
"Executive Compensation - Summary Compensation Table, Option/SAR Grants in Last
Fiscal Year, Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Option/SAR Values, Pension Benefits, Severance Plan, Change of Control
Arrangements and Compensation Committee Interlocks and Insider Participation" is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management located in the Proxy Statement under the caption "Stock Ownership of
Management and Certain Beneficial Owners" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
located in the Proxy Statement under the caption "Certain Relationships and
Related Transactions" is incorporated herein by reference.
20
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 October 28, 1999, a Report on Form 8-K was filed regarding a press
release announcing the results of our operations for the three months
and the nine months ended September 30, 1999.
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
March 29, 2000
21
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.
C>
President and CEO
/s/ Philip P. Weber (Principal Executive Officer) /s/ Arthur D. Keown, Jr. Director
- ------------------------------------ -----------------------------
Philip P. Weber February 29, 2000 Arthur D. Keown, Jr. February 29, 2000
Executive Vice President - Finance &
Treasurer
/s/ Timothy A. Walsh (Principal Financial & Accounting Officer) /s/ W. Bruce Krenning Director
- ------------------------------------ -----------------------------
Timothy A. Walsh February 29, 2000 W. Bruce Krenning February 29, 2000
/s/ Robert L. Baker Director /s/ John W. Lincoln Director
- ------------------------------------ -----------------------------
Robert L. Baker February 29, 2000 John W. Lincoln February 29, 2000
/s/ Wayne R. Bissonette Director /s/ Wayne A. Mann Director
- ------------------------------------ -----------------------------
Wayne R. Bissonette February 29, 2000 Wayne A. Mann February 29, 2000
/s/ Randolph C. Blackmer, Jr. Director /s/ Frank W. Matheson Director
- ------------------------------------ -----------------------------
Randolph C. Blackmer, Jr. February 29, 2000 Frank W. Matheson February 29, 2000
/s/ Fred G. Butler, Sr. Director /s/ John P. Moskos Director
- ------------------------------------ -----------------------------
Fred G. Butler, Sr. February 29, 2000 John P. Moskos February 29, 2000
/s/ Joseph E. Calhoun Director /s/ Norma R. O'Leary Director
- ------------------------------------ -----------------------------
Joseph E. Calhoun February 29, 2000 Norma R.O'Leary February 29, 2000
/s/ James V. Crane Director /s/ John I. Rigolizzo, Jr. Director
- ------------------------------------ -----------------------------
James V. Crane February 29, 2000 John I. Rigolizzo, Jr. February 29, 2000
/s/ Sandra A. George Director /s/ Howard T. Sprow Director
- ------------------------------------ -----------------------------
Sandra A. George February 29, 2000 Howard T. Sprow February 29, 2000
/s/ Stephen J. George Director /s/ William M. Stamp, Jr. Director
- ------------------------------------ -----------------------------
Stephen J. George February 29, 2000 William M. Stamp, Jr. February 29, 2000
/s/ Gordon H. Gowen Director /s/ Charles A. Wilfong Director
- ------------------------------------ -----------------------------
Gordon H. Gowen February 29, 2000 Charles A. Wilfong February 29, 2000
/s/ Jon R. Greenwood Director /s/ Tyler P. Young Director
- ------------------------------------ -----------------------------
Jon R. Greenwood February 29, 2000 Tyler P. Young February 29, 2000
/s/ Clark W. Hinsdale III Director
- ------------------------------------
Clark W. Hinsdale III February 29, 2000
22
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1999
Page
Report of Independent Accountants on Financial Statement Schedules S-2
Schedule I Summary of Investments - Other than Investments in Related Parties S-3
Schedule II Condensed Financial Information of the Registrant S-4
Schedule III Supplementary Insurance Information S-8
Schedule IV Reinsurance S-9
Schedule VI Supplemental Information Concerning
Property - Casualty Insurance Operations S-10
Page in
Page in Exhibit 13
Annual Report to Form 10-K
Consolidated Statements of Income and Comprehensive Income 22 E-26
Consolidated Balance Sheets 23 E-27
Consolidated Statements of Stockholders' Equity 24 E-28
Consolidated Statements of Cash Flows 25 E-29
Notes to Consolidated Financial Statements 26 E-30
Report of Independent Accountants 47 E-50
S-1
Report of Independent Accountants on Financial Statement Schedules
To the Board of Directors
of Farm Family Holdings, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 11, 2000, appearing in the 1999 Annual Report to Shareholders of
Farm Family Holdings, Inc. and Subsidiaries (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Albany, New York
February 11, 2000
S-2
Farm Family Holdings, Inc. and Subsidiaries
Schedule I
Summary of Investments Other Than Investments in Related Parties
December 31, 1999
($ 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 $30,741 $30,046 $30,046
States, municipalities and political subdivisions 196,311 189,124 189,124
Public utilities 119,326 112,310 112,310
All other corporate bonds 438,926 417,373 417,373
Mortgage-backed securities 202,091 196,435 196,435
Redeemable preferred stock 15,455 14,766 14,766
- --------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 1,002,850 960,054 960,054
- --------------------------------------------------------------------------------------------------------------------------
Equity securities:
Common stocks:
Public utilities 3,108 2,908 2,908
Banks, trusts and insurance companies 7,304 6,770 6,770
Industrial and miscellaneous 32,407 36,131 36,131
- --------------------------------------------------------------------------------------------------------------------------
Total equity securities 42,819 45,809 45,809
- --------------------------------------------------------------------------------------------------------------------------
Total available for sale 1,045,669 1,005,863 1,005,863
- --------------------------------------------------------------------------------------------------------------------------
Held to Maturity
Fixed maturities:
States, municipalities and political subdivisions 4,009 3,931 4,009
All other Corporate bonds 3,962 3,889 3,962
- --------------------------------------------------------------------------------------------------------------------------
Total held to maturity 7,971 7,820 7,971
- --------------------------------------------------------------------------------------------------------------------------
Mortgage loans 26,832 26,832 26,832
Short-term investments 30,839 30,839 30,839
Other invested assets 176 176 176
- --------------------------------------------------------------------------------------------------------------------------
Total investments $1,111,487 $1,071,530 $1,071,681
==========================================================================================================================
S-3
Farm Family Holdings, Inc. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant (Parent Company)
Statements of Operations
($ in thousands)
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
Investment income $388 $518 $608
Realized gains 15 3 ----
- -----------------------------------------------------------------------------------------------------------------------
Total revenues 403 521 608
Expenses:
General and administrative expenses (1,481) (1,403) (1,347)
- -----------------------------------------------------------------------------------------------------------------------
Loss before federal income tax benefit and preferred stock dividends (1,078) (882) (739)
Federal income tax benefit 302 306 125
- -----------------------------------------------------------------------------------------------------------------------
Loss before preferred stock dividends (776) (576) (614)
Preferred stock dividends (278) ---- ----
- -----------------------------------------------------------------------------------------------------------------------
Net loss from operations (1,054) (576) (614)
Income from investments in subsidiaries 19,672 19,247 18,114
- -----------------------------------------------------------------------------------------------------------------------
Net income 18,618 18,671 17,500
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive Income:
Unrealized holding gains (losses) arising during the year (net of tax
expense (benefit) of $(6,902), $1,046 and $(1,255)) (11,718) 1,943 (2,329)
Reclassification adjustment for (gains) losses included in net income
(net of tax expense (benefit) of $(296), $211 and $1,622) (550) 390 3,011
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (12,268) 2,333 682
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income $6,350 $21,004 $18,182
=======================================================================================================================
S-4
Farm Family Holdings, Inc. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant (Parent Company)
Balance Sheets
($ in thousands)
As of December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------
Assets:
Fixed maturities available for sale $4,463 $7,436
Investment in subsidiaries 180,989 135,059
Cash and cash equivalents 400 156
Investment income due or accrued 86 145
Deferred tax asset 42 ----
Other assets 2,566 2,387
- -------------------------------------------------------------------------------------------------------------
Total assets $188,546 $145,183
=============================================================================================================
Liabilities:
Payable to affiliates $118 $129
Deferred tax liability ---- 72
Other liabilities 1,404 744
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,522 945
- -------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Mandatory redeemable preferred stock 5,830 ----
Stockholders' Equity:
Common stock, $.01 par value, 10,000,000 shares authorized
and 6,110,684 and 5,253,813 shares issued and outstanding 61 53
Additional paid-in capital 123,504 92,906
Retained earnings 60,172 41,554
Accumulated other comprehensive income (2,543) 9,725
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 181,194 144,238
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $188,546 $145,183
=============================================================================================================
S-5
Farm Family Holdings, Inc. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant (Parent Company)
Statements of Cash Flows
($ in thousands)
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $18,618 $18,671 $17,500
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment gains (15) (3) ----
Amortization of bond discount (16) (18) (17)
Deferred income taxes (8) (8) (31)
Changes in assets and liabilities:
Equity in net income of subsidiaries (19,672) (19,247) (18,114)
Accrued investment income 59 12 (5)
Other assets, net (196) (1,440) (716)
Payable to affiliates (11) (63) (164)
Other liabilities 660 195 75
- ----------------------------------------------------------------------------------------------------------
Total adjustments (19,199) (20,572) (18,972)
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (581) (1,901) (1,472)
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales:
Fixed maturities available for sale 2,720 303 ----
Investment purchases:
Acquisition costs (1,895) ---- ----
Investment in subsidiary ---- (55) (70)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by(used in) investing activities 825 248 (70)
- ----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 244 (1,653) (1,542)
Cash and cash equivalents, beginning of year 156 1,809 3,351
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $400 $156 $1,809
==========================================================================================================
S-6
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 thereto included in the Farm
Family Holdings, Inc. 1999 Annual Report.
The accompanying condensed financial information includes the accounts of Farm
Family Holdings, Inc. Farm Family Holdings, Inc. was incorporated on February
14, 1996.
2. 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 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, 1999.
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 $35.72 per share. Dividends on the preferred stock are payable
on each January 15, April 15, July 15 and October 15 and must be fully paid or
declared with funds set aside for payment before any dividend can be declared or
paid on any other class of Farm Family Holdings' stock. The preferred stock must
be redeemed by Farm Family Holdings on April 7, 2019 (or the next business day)
and may be redeemed, at Farm Family Holdings' option, in whole or in part, on
and after April 6, 2009. Farm Family Holdings has the option to pay the
redemption amount in cash or by delivery of Farm Family Holdings' common stock.
S-7
Farm Family Holdings, Inc. and Subsidiaries
Schedule III
Supplementary Insurance Information
($ in Thousands)
Reserves Amortization
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)
- ------------------------------------------------------------------------------------------------------------------------------------
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 3,655 239,891 ---- 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 $426,021 $74,364 $416,971 $216,720 $58,558 $180,219 $38,182 $20,434 $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
====================================================================================================================================
1997
Property and casualty
insurance $12,613 $156,622 $66,069 $---- $149,220 $17,468 $103,301 $28,794 $13,533 $159,245
Life Insurance ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Corporate and other ---- ---- ---- ---- ---- 609 ---- ---- 1,377 ----
Intersegment
eliminations ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
Total $12,613 $156,622 $66,069 $---- $149,220 $18,077 $103,301 $28,794 $14,910 $159,245
====================================================================================================================================
(1) Each of the Company's subsidiaries maintain separate investment portfolios.
Therefore, net investment income attributable to each segment is readily
available.
S-8
Farm Family Holdings, Inc. and Subsidiaries
Schedule IV
Reinsurance
($ in Thousands)
Percentage of
Ceded to Other Assumed from Amount
Gross Amount Companies Other Companies Net Amount Assumed to Net
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
Life insurance in force $3,993,117 $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%
============================================================
Year ended December 31, 1997
Property and casualty insurance $160,988 $22,454 $10,686 $149,220 7.2%
============================================================
Note: The Company did not have premiums and contract charges earned on life
insurance or accident and health insurance prior to the acquisition of
Farm Family Life, effective April 6, 1999.
S-9
Farm Family Holdings, Inc. and Subsidiaries
Schedule Vl
Supplemental Information Concerning Consolidated
Property-Casualty Insurance Operations
($ in Thousands)
Reserve for
Deferred Unpaid claims Claims & Claim Adj.Exp. Paid Claims Premium
Policy and Claim Net 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, 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
Year Ended
December 31, 1997
Property and
casualty
insurance 12,613 156,622 66,069 149,220 17,468 107,273 (3,972) 28,794 90,116 159,245
S-10
Exhibit Index
Farm Family Holdings, Inc. Form 10-K
For The Year Ended December 31, 1999
Sequential
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
*3.1 Certificate of Incorporation of Farm Family Holdings, Inc.
*3.2 Bylaws of Farm Family Holdings, Inc.
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 of Form 8-K/A filed with the
Securities and Exchange Commission on June 14, 1999)
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 Option Purchase Agreement, dated February 26, 1998 among Farm Family Holdings,
Inc. and the Shareholders of Farm Family Life Insurance Company, as amended by Amendment No. 1 dated
as of April 28, 1998 and Amendment No. 2 dated as of January 14, 1999 (incorporated by reference to
the Proxy Statement of Farm Family Holdings, Inc. dated February 17, 1999)
**10.2 Amended and Restated Expense Sharing Agreement, made effective as of February 14, 1996, by and among
Farm Family Mutual Insurance Company, Farm Family Life Insurance Company and Farm Family Holdings, Inc.
10.3 Indenture of Lease, made the 1st day of January 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
Sequential
Exhibit Page
Number Document Description Number
- --------------- -------------------------------------------------------------------------------------------------------- -----------
10.4 Underlying Multi-Line Per Risk Reinsurance Contract, effective January 1, 1995, issued to Farm Family
Mutual Insurance Company by The Subscription Reinsurer(s) Executing the Interests and Liabilities
Agreement(s) Attached Thereto, as amended by Addendum No. 1, effective January 1, 1996 (Incorporated
by reference to Registration Statement No. 333-4446), Addendum No. 2, effective January 1, 1996,
Addendum No. 3, effective July 26, 1996 (Incorporated by reference to Farm Family Holdings, Inc. 1997
Form 10-K for the year ended December 31, 1996), Addendum No. 4, effective January 1, 1997
(Incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31,
1997), and Termination Addendum, effective December 31, 1997 (Incorporated by reference to Farm Family
Holdings, Inc. Form 10-K/A for the year ended December 31, 1997)
10.5 Umbrella Quota Share Reinsurance Contract, effective January 1, 1995, issued to Farm Family Mutual
Insurance Company and United Farm Family Insurance Company, as amended by Addendum No. 1, effective
January 1, 1995 (Incorporated by reference to Registration Statement No. 333-4446), and Addendum No. 2
effective July 26, 1996 (Incorporated by reference to Farm Family Holdings, Inc. 1997 Form 10-K for
the year ended December 31, 1996), Addendum No. 3, effective January 1, 1997 (Incorporated by
reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31, 1997), and
Termination Addendum, effective January 1, 1998 (Incorporated by reference to Farm Family Holdings,
Inc. Form 10-K/A for the year ended December 31, 1997)
10.6 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)
10.7 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)
10.8 Farm Family Life Insurance Company Annual Incentive Plan, as amended and restated as of October 27,
1998 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended June
30, 1999) as amended by Amendment No. 1 to the Farm Family Life Insurance Company Annual Incentive
Plan effective July 28, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for
the quarter ended September 30, 1999)
10.9 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)
*10.10 Service Agreement, made effective as of July 25, 1988 by and between Farm Family Mutual Insurance
Company and United Farm Family Insurance Company
E-2
Sequential
Exhibit Page
Number Document Description Number
- --------------- -------------------------------------------------------------------------------------------------------- -----------
10.11 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, Farm Family Holdings, Inc.
Officer Severance Pay Plan Effective July 28, 1999 (incorporated by reference to Farm Family Holdings,
Inc.'s Form 10-Q for the quarter ended September 30, 1999)
*10.12 Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted as of January 1,
1994
10.13 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)
10.14 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)
10.15 Farm Family Holdings, Inc. Annual Incentive Plan effective, 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)
**10.16 Tax Payment Allocation Agreement effective January 1, 1996 by and between Farm Family Holdings, Inc.
and Farm Family Casualty Insurance Company
10.17 Excess Catastrophe Reinsurance Contract issued to Farm Family Casualty Insurance Company effective
January 1, 1997 (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter
ended March 31, 1997)
10.18 Farm Family Holdings, Inc. Omnibus Securities Plan, as amended by Amendment No. 1 dated February 13,
1997 (incorporated by reference to Exhibit 99 to Form S-8, Registration No. 333-8073 filed with the
Securities and Exchange Commission on June 15, 1999) and amended by Amendment No. 2 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. 3 effective July 28, 1999 (incorporated by reference to
Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended September 30, 1999)
10.19 Indenture of Lease made the 1st day of January 1999, between Farm Family Life Insurance Company and
New York Farm Bureau, Inc. (filed herewith)
13 Farm Family Holdings, Inc. 1999 Annual Report (only those portions of such Annual Report that are
incorporated by reference in this Report on Form 10-K)(filed herewith) E-14
21 Subsidiaries of the Registrant E-51
27 Financial Data Schedule (for electronic filing purposes only)
* Incorporated by reference to Registration Statement No. 333-4446
** Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the
year ended December 31, 1996
E-3