UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2000 Commission File No. 1-11941 FARM FAMILY HOLDINGS, INC. A Delaware Corporation IRS No. 14-1789227 344 Route 9W, Glenmont, New York 12077-2910 Registrant's telephone number: (518) 431-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the issuer's common stock as of November 10, 2000 is 6,003,983. FARM FAMILY HOLDINGS, INC. INDEX Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2000 (unaudited) and December 31, 1999 3 Consolidated Statements of Income and Comprehensive Income - Three and Nine Months Ended September 30, 2000 and 1999 (unaudited) 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Review Report of Independent Accountants 11 Item 2. Management's Discussion and Analysis of Financial Condition 12 and Results of Operations Item 3. Quantitative and Qualitative Disclosures of Market Risk 17 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 18 2 FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets ($ in thousands) (Unaudited) September 30, 2000 December 31, 1999 - - - -------------------------------------------------------------------------------------------------------------------- ASSETS Investments: Fixed maturities Available for sale, at fair value (Amortized cost: $1,021,761 in 2000 and $1,002,850 in 1999) $987,722 $960,054 Held to maturity, at amortized cost (Fair value: $6,545 in 2000 and $7,820 in 1999) 6,433 7,971 Equity securities - available for sale, at fair value (Cost: $41,005 in 2000 and $42,819 in 1999) 42,163 45,809 Mortgage loans 29,686 26,832 Policy loans 31,930 30,839 Other invested assets 173 176 - - - -------------------------------------------------------------------------------------------------------------------- Total investments 1,098,107 1,071,681 - - - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 20,747 19,190 Insurance receivables: Reinsurance receivables 31,599 23,129 Premiums receivable, net 55,384 32,094 Deferred acquisition costs 24,117 17,630 Present value of future profits 27,440 28,571 Accrued investment income 17,738 18,875 Property and equipment, net 14,501 14,520 Deferred income tax asset, net 26,977 29,605 Other assets 6,648 4,884 - - - -------------------------------------------------------------------------------------------------------------------- Total Assets $1,323,258 $1,260,179 ==================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses for property/casualty insurance $203,614 $186,130 Reserves for life policies and contract benefits 248,978 238,272 Funds on deposit from policyholders 409,614 416,971 Unearned premium reserve 101,336 74,364 Accrued dividends to policyholders 5,334 5,263 Reinsurance premiums payable 5,942 4,168 Accrued expenses and other liabilities 18,545 19,471 Participating policyholders' interest 117,834 128,516 - - - -------------------------------------------------------------------------------------------------------------------- Total liabilities 1,111,197 1,073,155 - - - -------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Mandatory redeemable preferred stock, redemption value - $5,830; 163,214 Series A shares outstanding 5,830 5,830 Stockholders' equity: Preferred stock, $.01 par value, 836,786 shares authorized, no shares issued and outstanding ---- ---- Common stock, $.01 par value, 10,000,000 shares authorized, 6,113,983 and 6,110,683 shares issued, 6,003,983 and 6,110,683 shares outstanding 61 61 Additional paid-in capital 123,590 123,504 Retained earnings 86,823 60,172 Accumulated other comprehensive loss (1,224) (2,543) Treasury stock, at cost, 110,000 and 0 shares (3,019) ---- - - - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 206,231 181,194 - - - -------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $1,323,258 $1,260,179 ==================================================================================================================== See accompanying notes to Consolidated Financial Statements. 3 FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income ($ in thousands, except per share amounts) (Unaudited) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 - - - --------------------------------------------------------------------------------------------------------------------------------- Revenues: Premiums from property/casualty insurance $51,425 $49,398 $147,391 $142,455 Premiums from life and health operations and contract charges 9,338 9,055 28,321 18,351 Net investment income 19,084 18,343 56,429 40,619 Realized investment losses, net (587) (1,216) (1,743) (1,004) Other income 486 287 1,402 1,023 - - - --------------------------------------------------------------------------------------------------------------------------------- Total revenues 79,746 75,867 231,800 201,444 - - - --------------------------------------------------------------------------------------------------------------------------------- Losses, benefits and expenses: Losses and loss adjustment expenses on property/casualty insurance 40,481 37,378 115,969 106,787 Policyholder contract benefits 12,039 12,874 39,938 26,411 Amortization expense 10,065 9,607 28,604 27,772 Other operating costs and expenses 6,685 5,863 18,410 14,781 Participating policyholders' interest 3,287 3,101 (9,880) 5,674 - - - --------------------------------------------------------------------------------------------------------------------------------- Total losses, benefits and expenses 72,557 68,823 193,041 181,425 - - - --------------------------------------------------------------------------------------------------------------------------------- Income before federal income tax expense and preferred stock dividends 7,189 7,044 38,759 20,019 Federal income tax expense 1,886 1,872 11,840 5,865 - - - --------------------------------------------------------------------------------------------------------------------------------- Income before preferred stock dividends 5,303 5,172 26,919 14,154 Preferred stock dividends 89 104 268 189 - - - --------------------------------------------------------------------------------------------------------------------------------- Net income attributable to common stockholders 5,214 5,068 26,651 13,965 - - - --------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during the period (net of deferred tax (expense) benefit of $(1,533), $754, $(565) and $5,007, respectively) 2,847 (1,401) 1,050 (9,300) Reclassification adjustment for losses (gains) included in net income (net of tax (benefit) expense of $(277), $79, $(145) and $134, respectively) 515 (146) 269 (249) - - - --------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 3,362 (1,547) 1,319 (9,549) - - - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income $8,576 $3,521 $27,970 $4,416 ================================================================================================================================= Per Share Data: Net income - basic $0.87 $0.83 $4.40 $2.41 ================================================================================================================================= Net income - diluted $0.86 $0.82 $4.37 $2.38 ================================================================================================================================= Basic weighted average shares outstanding 6,003,983 6,110,683 6,060,804 5,806,227 ================================================================================================================================= Diluted weighted average shares outstanding 6,049,310 6,192,763 6,103,580 5,863,362 ================================================================================================================================= See accompanying notes to Consolidated Financial Statements. 4 FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows ($ in thousands) (Unaudited) Nine Months Ended September 30, 2000 1999 - - - ------------------------------------------------------------------------------------------------------------------------ Operating Activities Net income $26,651 $13,965 - - - ------------------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities: Realized investment losses, net 1,743 1,004 Amortization of bond discount 3,289 2,257 Amortization and depreciation 30,389 29,093 Interest credited to policyholders 16,975 11,592 Deferred income taxes 3,969 (986) Participating policyholders' interest (9,880) 5,674 Dividends to policyholders (7,715) (4,780) Capitalization of deferred acquisition costs (33,960) (30,929) Changes in: Reinsurance receivables (8,470) (2,853) Premiums receivable, net (23,290) (6,055) Accrued investment income 1,137 637 Receivable from affiliates, net ---- 1,471 Other assets (1,764) (295) Reserves for property/casualty insurance losses and loss adjustment expenses 17,484 10,817 Reserves for life policies and contract benefits 10,706 6,908 Unearned premium reserve 26,972 5,519 Reinsurance premiums payable 1,774 1,760 Accrued expenses and other liabilities (855) (338) - - - ------------------------------------------------------------------------------------------------------------------------ Total adjustments 28,504 30,496 - - - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 55,155 44,461 - - - ------------------------------------------------------------------------------------------------------------------------ Investing Activities Proceeds from sales: Fixed maturities 45,265 29,104 Equity securities 2,802 2,796 Investment collections: Fixed maturities 18,977 43,377 Other investments 625 1,295 Investment purchases: Fixed maturities (87,526) (96,134) Other investments (3,607) (3,730) Policy loans issued, net (1,091) (156) Purchases of property and equipment (1,766) (1,613) Net cash of subsidiary at date of acquisition ---- 3,295 Acquisition expenses ---- (1,895) - - - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (26,321) (23,661) - - - ------------------------------------------------------------------------------------------------------------------------ Financing Activities Contractholder fund deposits 19,177 69,135 Contractholder fund withdrawals (43,509) (80,594) Payments for purchase of treasury stock (3,019) ---- Exercise of stock options 74 ---- - - - ------------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (27,277) (11,459) - - - ------------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 1,557 9,341 Cash and cash equivalents, beginning of period 19,190 10,677 - - - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $20,747 $20,018 ======================================================================================================================== See accompanying notes to Consolidated Financial Statements. 5 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include the accounts of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly-owned subsidiaries (collectively referred to as the "Company"). The primary subsidiaries of Farm Family Holdings are Farm Family Casualty Insurance Company ("Farm Family Casualty") and Farm Family Life Insurance Company ("Farm Family Life"). United Farm Family Insurance Company ("United Farm Family") is a wholly-owned subsidiary of Farm Family Life. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these statements contain all adjustments, including normal recurring accruals, which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for a full fiscal year. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the related notes included in Farm Family Holdings' December 31, 1999 Form 10-K. Treasury Shares The Company records treasury shares purchased at cost (the market value at the time of the transaction) and as a reduction of stockholders' equity. 2. Merger Agreement On October 31, 2000, Farm Family Holdings and American National Insurance Company ("American National") announced a definitive merger agreement under which American National will acquire Farm Family Holdings at a price of $44 per share for Farm Family Holdings' common stock and $35.72 per share for Farm Family Holdings' Series A Preferred Stock in cash. The consideration to be paid to the holders of the Series A Preferred Stock will also include any accrued and unpaid dividends to the closing date. The merger, valued at approximately $280 million, is subject to certain closing conditions, including the approval of the holders of a majority of Farm Family Holdings' outstanding voting stock and the approval of the New York Insurance Department. The companies expect to close the merger late in the first quarter of 2001. 3. Participating Policyholders' Interest A significant portion of the Company's life insurance segment's products is written on a "participating" basis, as defined in the New York State Insurance Law. Profits earned on participating business are reserved for the payment of dividends to participating policyholders, except for the stockholders' share of profits on participating policies, which is limited annually to the greater of 10% of the profit on participating business, or 50 cents per thousand dollars of the face amount of participating life insurance in force. In November 1999, the Company requested an opinion of the Insurance Department of the State of New York (the "Department") as to whether interest credited in excess of the interest guaranteed under certain participating insurance policies, annuities and dividend accumulations ("Excess Interest") and the difference between the guaranteed cost of insurance or premium and the cost of insurance or premium actually charged ("Spreads"), as well as dividends to participating policyholders, could be included in its calculation of the estimate of statutory profits on participating life insurance business allocable to stockholders. In April 2000, the Department approved the Company's request to include Excess Interest and Spreads, as well as dividends to participating policyholders, in its calculation of the estimate of statutory 6 3. Participating Policyholders' Interest - Continued profits on participating life insurance business allocable to stockholders on both a prospective and retrospective basis. Accordingly, the Company's calculation of the estimate of profits on participating life insurance business allocable to stockholders has been revised to include Excess Interest and Spreads on a retrospective and prospective basis. The impact of including Excess Interest and Spreads in the Company's estimate of the profits on participating life insurance business allocable to stockholders increased the profits allocable to stockholders and is included in participating policyholders' interest on the accompanying Consolidated Statements of Income and Comprehensive Income. The effect of retroactively including Excess Interest and Spreads in the Company's calculation of its estimate of profits on participating life insurance business allocable to stockholders for periods through December 31, 1999 increased net income for the three months ended March 31, 2000 by $12.7 million (after tax expense of $6.3 million) or $2.07 per common share on a fully diluted basis. 4. Earnings Per Share The following table presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations. Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 - - - --------------------------------------------------------------------------------------------------------------------------------- Net income attributable to common stockholders $5,214,000 $5,068,000 $26,651,000 $13,965,000 ================================================================================================================================= Weighted-average number of shares in basic earnings per share 6,003,983 6,110,683 6,060,804 5,806,227 Effect of stock options 45,327 82,080 42,776 57,135 - - - --------------------------------------------------------------------------------------------------------------------------------- Weighted-average number of shares in diluted earnings per share 6,049,310 6,192,763 6,103,580 5,863,362 ================================================================================================================================= Basic net income per share $0.87 $0.83 $4.40 $2.41 ================================================================================================================================= Diluted net income per share $0.86 $0.82 $4.37 $2.38 ================================================================================================================================= 5. Future Application of Accounting Standards In September 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133") and subsequently issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FAS 133" ("Statement 138"). These statements, which are effective for the Company for the year beginning January 1, 2001, establish accounting and reporting standards for derivative instruments and for hedging activities. Management believes that Statements 133 and 138 will not have a material impact on the Company's Consolidated Financial Statements. In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which will replace the current Accounting Practices and Procedures Manual as the NAIC's primary guidance on statutory accounting. Statutory accounting is a comprehensive basis of accounting based on prescribed accounting practices, which include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. The Codification provides guidance for the areas where statutory accounting has been silent and changes current statutory accounting in some areas. The NAIC has established January 1, 2001 as the effective date of the Codification. The New York Insurance Department has advised that it intends to proceed with implementation of the Codification, subject to any provisions in New York statutes which conflict with particular points in the Codification rules. The Company has not estimated the potential effect of adopting the Codification. 6. Contingencies The Company is party to numerous legal actions arising in the normal course of business. Management believes that resolution of these legal actions will not have a material adverse effect on the Company's consolidated financial condition. 7 6. Contingencies - Continued Catastrophes are an inherent risk in the property and casualty insurance industry and could produce significant adverse fluctuations in the Company's results of operations and financial condition. The Company is subject to a concentration of risk within the Northeastern United States. For each of the nine month periods ended September 30, 2000 and 1999, approximately 59% and 62%, respectively, of the Company's property and casualty direct premiums were written in the states of New York and New Jersey. As a result of the concentration of the Company's business in the states of New York and New Jersey, and more generally, in the Northeastern United States, the Company's results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States, despite the Company's property and casualty reinsurance program designed to mitigate the impact of adverse weather and catastrophic events on the Company's operating results. As a condition of its license to do business in various states, the Company is required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. The amount of future losses or assessments from residual market mechanisms can not be predicted with certainty and could have a material adverse effect on the Company's future results of operations. During the third quarter of 1998, the Company modified the agreements with its agents to include revised conditions under which eligible agents may receive extended earnings payments. In addition to length of service, confidentiality, and non-competition conditions, extended earnings will be paid only if a successor agent(s) assumes the right to service the book of business of the eligible former agent and agrees to become primarily responsible for making the extended earnings payments. In the event that no successor agent(s) assumes the right to service the book of business of an eligible former agent, the Company has no obligation to make the extended earnings payments. The Company has no intention to waive this provision of its agreements with its agents. As a result, the successor agent(s), not the Company, is the primary obligor responsible for extended earnings payments. Since the inception of the Program in 1986, the Company has always been able to identify successor agents willing to assume the rights to service such books of business. The Company acts as guarantor of the amounts payable to eligible former agents who have terminated their association with the Company by successor agents who agree to make the extended earnings payments. At September 30, 2000, the Company was guarantor of $1.5 million for such payments. The Company expects to enforce the terms of the guarantee in the event of default by a successor agent. The Company's liability for funds on deposit from policyholders includes amounts subject to discretionary withdrawal. Withdrawal characteristics as of September 30, 2000 are as follows: ($ in thousands) Amount % of Total - - - ------------------------------------------------------------------------------------------------------ Surrender charge rate: Greater than or equal to 5% $88,629 21.6% Less than 5%, but still subject to surrender charge 62,993 15.4% Not subject to surrender charge 249,783 61.0% Not subject to discretionary withdrawal 8,209 2.0% - - - ------------------------------------------------------------------------------------------------------ Total funds on deposit from policyholders $409,614 100.0% ====================================================================================================== 8 7. Segment Information The Company has two reportable segments: property and casualty insurance and life insurance, which offer different products and services. The property and casualty insurance segment includes activities related to the sale of the Special Farm Package, a flexible multi-line package of insurance coverages, and other insurance products covering personal and commercial automobiles, businessowners and homeowners. The life insurance segment includes the sale of individual whole life, term and universal life products, single and flexible premium deferred annuity products, single premium immediate annuity products and disability income insurance products. The Company uses operating income (net income excluding realized investment gains (losses) and nonrecurring charges, net of taxes) to measure the financial results of its segments. "Corporate and other" includes holding company activities and operations not directly related to the reportable segments. Summarized segment financial information is as follows: Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands) 2000 1999 2000 1999 - - - ------------------------------------------------------------------------------------------------------------------------------------ Premium revenues Property and casualty insurance $51,425 $49,398 $147,391 $142,455 Life insurance 9,338 9,055 28,321 18,351 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total premium revenues $60,763 $58,453 $175,712 $160,806 ==================================================================================================================================== Net investment income Property and casualty insurance $5,843 $5,220 $17,114 $15,069 Life insurance 13,195 13,004 39,099 25,209 Corporate and other 37 94 186 304 Intersegment eliminations 9 25 30 37 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total net investment income $19,084 $18,343 $56,429 $40,619 ==================================================================================================================================== Amortization expense Property and casualty insurance Amortization of deferred acquisition costs $9,488 $9,398 $26,947 $26,909 Life insurance Amortization of deferred acquisition costs 38 334 526 591 Amortization of present value of future profits 539 (125) 1,131 272 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total amortization expense $10,065 $9,607 $28,604 $27,772 ==================================================================================================================================== Other operating costs and expenses Property and casualty insurance Underwriting expenses $2,443 $2,546 $7,700 $7,671 Dividends to policyholders 56 51 144 159 Life insurance 4,043 3,115 9,998 6,493 Corporate and other 373 376 1,258 908 Intersegment eliminations (230) (225) (690) (450) - - - ------------------------------------------------------------------------------------------------------------------------------------ Total other operating costs and expenses $6,685 $5,863 $18,410 $14,781 ==================================================================================================================================== 9 7. Segment Information - Continued Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands) 2000 1999 2000 1999 - - - ------------------------------------------------------------------------------------------------------------------------------------ Net income Operating income Property and casualty insurance $4,566 $4,439 $11,666 $12,855 Life insurance 1,024 963 3,497 1,598 Corporate and other (291) (159) (907) (504) - - - ------------------------------------------------------------------------------------------------------------------------------------ Total consolidated operating income 5,299 5,243 14,256 13,949 Effect of retroactively including Excess Interest and Spreads, net of tax ---- ---- 12,746 ---- Realized investment gains, net of tax (85) (175) (351) 16 - - - ------------------------------------------------------------------------------------------------------------------------------------ Net income $5,214 $5,068 $26,651 $13,965 ==================================================================================================================================== Federal income tax expense (benefit) Property and casualty insurance $1,425 $1,274 $4,001 $4,741 Life insurance 566 808 8,183 1,357 Corporate and other (105) (210) (344) (233) - - - ------------------------------------------------------------------------------------------------------------------------------------ Total federal income tax expense $1,886 $1,872 $11,840 $5,865 ==================================================================================================================================== September 30, December 31, 2000 1999 - - - ------------------------------------------------------------------------------------------------------------------------------------ Assets Property and casualty $501,409 $446,721 Life insurance 818,834 810,487 Corporate and other 68,387 71,014 Intersegment eliminations (65,372) (68,043) - - - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $1,323,258 $1,260,179 ==================================================================================================================================== 10 Report of Independent Accountants To the Shareholders and Board of Directors Farm Family Holdings, Inc. We have reviewed the accompanying consolidated balance sheet of Farm Family Holdings, Inc. and its subsidiaries as of September 30, 2000, and the related consolidated statements of income and comprehensive income for each of the three-month and nine-month periods ended September 30, 2000 and 1999 and the consolidated statement of cash flows for the nine-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 1999, and the related consolidated statements of income and comprehensive income, of stockholders' equity and of cash flows for the year then ended (not presented herein), and in our report dated February 11, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP October 31, 2000 11 Management's Discussion and Analysis of Financial Condition and Results of Operations General 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") and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere within this document. On April 6, 1999, Farm Family Holdings acquired all of the outstanding capital stock of Farm Family Life Insurance Company ("Farm Family Life"). As a result of the acquisition, Farm Family Life became a wholly-owned subsidiary of Farm Family Holdings. The acquisition was accounted for under the purchase method of accounting. 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"), have been included in the Consolidated Financial Statements of Farm Family Holdings subsequent to April 6, 1999. Our operating results are subject to significant fluctuations from period to period depending upon, among other factors, the frequency and severity of losses from weather related and other catastrophic events, the effect of competition and regulation on the pricing of products, changes in interest rates, the impact on reserves and reserving policy caused by property and casualty claims development and variations of actual experience from that assumed for life insurance business as to expected morbidity, lapse rates and other factors used in the development of product pricing, general economic conditions, tax laws and the regulatory environment. As a condition of our license to do business in various states, we are required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. In all such states, residual market premium rates are subject to the approval of the state insurance department and have generally been inadequate. The amount of future losses or assessments from residual market mechanisms cannot be predicted with certainty and could have a material adverse effect on our results of operations. For the nine-month periods ended September 30, 2000 and 1999, 36% and 35%, respectively, of our property and casualty direct written premiums were derived from policies written in New York and, for the same periods, 23% and 27%, respectively, were derived from policies written in New Jersey. For these same periods, no other state accounted for more than 10% of our property and casualty direct written premiums. As a result, our results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States generally. Safe Harbor Statement under The Private Securities Litigation Reform Act of 1995: With the exception of historical information, the matters discussed or incorporated by reference in this Report on Form 10-Q 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-Q 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-Q are not guarantees of future performance and are subject to a number of important risks and uncertainties, many of which are outside the Company's control, that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, exposure to catastrophic loss, the frequency and severity of weather related losses, geographic concentration of loss exposure in New York, New Jersey and the Northeastern United States generally, the effect of regulatory changes governing personal automobile insurance in New Jersey and the impact thereof on the Company's direct written premium, losses and loss adjustment expenses, the risks associated with the legislative, regulatory and competitive environments in the states in which the Company currently operates, heightened competition, including specifically the intensification of competition, failure to obtain new customers or to retain existing customers, the Company's primary reliance, as a holding company, on dividends from its subsidiaries and the applicable regulatory restrictions on the ability of the Company's subsidiaries to pay such dividends, and conditions specific to the insurance industry, including its cyclical nature, regulatory changes and conditions, rating agency policies and practices, competitive factors, claims development and the impact thereof on loss reserves and the Company's reserving policy, the adequacy of the Company's reinsurance programs, developments in the securities markets and the impact thereof on the Company's investment portfolio, tax law changes, the satisfaction of the closing conditions set forth in the merger agreement (which conditions include but are not limited to the approval of the holders of the majority of the outstanding shares of voting stock of Farm Family, approval of the New York Insurance Department and other governmental approvals) and other risk factors listed from time to time in the Company's Securities and Exchange Commission filings including the Company's Form 10-K filed for the fiscal year ended December 31, 1999 and Form 10-Q's filed for the quarters ended March 31, 2000 and June 30, 2000. Accordingly, there can be no assurance that actual results will conform to the forward-looking statements in this Form 10-Q. 12 Results of Operations The Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999 Insurance Premiums and Contract Charges Premium revenue increased to $60.8 million for the three months ended September 30, 2000 from $58.5 million for the same period in 1999. Premium revenue for property and casualty insurance increased $2.0 million during the three months ended September 30, 2000 to $51.4 million from $49.4 million for the same period in 1999. The increase was primarily attributable to an increase of $3.6 million in premium revenue from our direct writings and an increase of $0.6 million in voluntary assumed reinsurance premiums. These increases in premium revenue were partially offset by a $1.9 million increase in premiums ceded to our reinsurers. The $3.6 million increase in premium revenue from our direct writings was primarily attributable to an increase of $3.2 million, or 7.9%, in earned premiums from our primary products (personal and commercial automobile products other than assigned risk automobile business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package) and an increase of $0.4 million, or 5.3%, in earned premiums from other products. The number of policies in force related to our primary products increased by 7.8% to approximately 154,100 as of September 30, 2000 from approximately 143,000 as of September 30, 1999. Total policies in force increased by approximately 14,000, or 8.1%, to 187,600 as of September 30, 2000 compared to 173,600 as of September 30, 1999. The increase in policies in force was primarily attributable to increases in policies issued in Pennsylvania, New York, West Virginia and New Jersey. Property and casualty net written premiums increased $3.1 million to $53.3 million for the three months ended September 30, 2000 compared to $50.2 million for the same period in 1999. The increase in net written premiums was primarily attributable to an increase of $4.8 million in direct writings (excluding assigned risk automobile business premiums) and an increase of $0.6 million in voluntary assumed reinsurance premiums. This increase was partially offset by a $1.9 million increase in premiums ceded to our reinsurers. Direct property and casualty writings (excluding assigned risk automobile business premiums) increased in ten of the twelve states we serve and for each of our primary products during the third quarter of 2000 compared to the same period in 1999. Life insurance premium revenue increased $0.3 million to $9.3 million for the three months ended September 30, 2000, compared to $9.0 million for the same period in 1999. Life insurance premium revenue includes premiums and contract charges primarily from the sale of individual whole life, term and universal life products, and disability income insurance products. Total collected premium from life insurance policies increased 6.0% to $9.8 million for the third quarter of 2000 compared to $9.2 million for the same period in 1999. Net Investment Income Net investment income increased $0.7 million to $19.1 million for the three months ended September 30, 2000 from $18.4 million for the same period in 1999. 13 Net investment income for the property and casualty insurance segment increased $0.6 million, or 11.9%, to $5.8 million for the three months ended September 30, 2000 from $5.2 million for the same period in 1999. The taxable equivalent yield on the property and casualty insurance segment's investment portfolio for the three months ended September 30, 2000 and 1999 was 7.0% and 6.9%, respectively. The increase in net investment income for the property and casualty insurance segment was primarily the result of an increase in the average cash and invested assets (at amortized cost) of $26.1 million, or 7.7%, and to a lesser extent, an increase in the prevailing interest rate environment. Net investment income for the life insurance segment increased $0.2 million to $13.2 million for the three months ended September 30, 2000, compared to $13.0 million for the same period in 1999. The yield on fixed maturity investments (at amortized cost) was 7.0% for each of the three months ended September 30, 2000 and 1999. Realized Investment Losses, Net Net realized investment losses decreased to $0.6 million for the three months ended September 30, 2000 compared to a net loss of $1.2 million for the same period in 1999. Fluctuations in realized capital gains are largely the result of timing of sales decisions reflecting decisions on the positioning of the investment portfolio, as well as assessments of individual securities and overall market conditions. Losses and Loss Adjustment Expenses Losses and loss adjustment expenses on property and casualty insurance increased $3.1 million, or 8.3%, to $40.5 million for the three months ended September 30, 2000 from $37.4 million for the same period in 1999. Losses and loss adjustment expenses were 78.7% of premium revenue for the three months ended September 30, 2000 compared to 75.6% of premium revenue for the same period in 1999. The increase in our loss and loss adjustment expense ratio is largely due to an increase in severity of personal automobile claims of United Farm Family. Excluding United Farm Family, our losses and loss adjustment expenses were 75.0% of premium revenue for the three months ended September 30, 2000 compared to 74.1% for the same period in 1999. Other Operating Costs and Expenses Other operating costs and expenses increased $0.8 million to $6.7 million for the three months ended September 30, 2000 from $5.9 million for the same period in 1999. For the three months ended September 30, 2000, property and casualty insurance underwriting expenses (including amortization expenses) were 23.2% of premium revenue compared to 24.2% for the same period in 1999. The decrease in the underwriting expense ratio is largely due to a greater relative increase in our premium revenue than in the level of overhead expenses, as well as the continuation of our expense management program. Federal Income Tax Expense Federal income tax expense was $1.9 million for each of the three months ended September 30, 2000 and 1999. Federal income tax expense was 26.2% of income before federal income tax expense and preferred stock dividends for the three months ended September 30, 2000 compared to 26.6% for the same period in 1999. The Nine months Ended September 30, 2000 Compared to the Nine months Ended September 30, 1999 Insurance Premiums and Contract Charges Premium revenue increased to $175.7 million for the nine months ended September 30, 2000 from $160.8 million for the same period in 1999. Premium revenue for property and casualty insurance increased $4.9 million during the nine months ended September 30, 2000 to $147.4 million from $142.5 million for the same period in 1999. The increase was primarily attributable to an increase of $8.0 million in premium revenue from our direct writings, due in part to the inclusion of premium revenue of United Farm Family since April 6, 1999. This increase in premium revenue was partially offset by an increase of $1.7 million in revenue ceded to our reinsurers and a decrease of $1.4 million in assumed reinsurance premiums. The $8.0 million increase in premium revenue from our direct writings was primarily attributable to an increase of $6.9 million, or 5.8%, in earned premiums from our primary products (personal and commercial automobile products other than assigned risk automobile business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package) and an increase of $1.1 million, or 5.0%, in earned premiums from other products. 14 Property and casualty net written premiums increased $26.6 million to $173.9 million for the nine months ended September 30, 2000 compared to $147.3 million for the same period in 1999. The increase in net written premiums was primarily attributable to an increase of $30.8 million in direct writings (excluding assigned risk automobile business premiums). Premiums from direct writings increased primarily as a result of the conversion of our personal and commercial automobile policies in certain states from six-month to twelve-month policies. Excluding the impact of converting personal and commercial automobile policies from six-month to twelve-month policies in certain states and premiums from assigned risk automobile business, direct written premiums increased approximately $11.7 million or 8.2% to $154.4 million for the first nine months of 2000 compared to $142.7 million for the same period in 1999. This increase was partially offset by a decrease of $1.7 million in assigned risk automobile premiums, an increase of $1.8 million in premiums ceded to our reinsurers and a decrease of $0.7 in assumed reinsurance premiums. Excluding the effects of converting personal and commercial automobile policies in certain states from six-month to twelve-month policies and premiums from assigned risk automobile business, direct writings increased in eleven of the twelve states we serve and for each of our primary products during the first nine months of 2000 compared to the same period in 1999. Life insurance premium revenue was $28.3 million for the nine months ended September 30, 2000, compared to $18.4 million for the same period in 1999. Life insurance premium revenue includes premiums and contract charges primarily from the sale of individual whole life, term and universal life products, and disability income insurance products. The 1999 revenue includes amounts subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. Net Investment Income Net investment income increased $15.8 million to $56.4 million for the nine months ended September 30, 2000 from $40.6 million for the same period in 1999. The increase is primarily attributable to the inclusion of Farm Family Life since April 6, 1999. Net investment income for the property and casualty insurance segment increased $2.0 million, or 13.6%, to $17.1 million for the nine months ended September 30, 2000 from $15.1 million for the same period in 1999. The taxable equivalent yield on the property and casualty insurance segment's investment portfolio was 7.0% and 6.9% for the nine months ended September 30, 2000 and 1999, respectively. The increase in net investment income for the property and casualty insurance segment was primarily the result of an increase in the average cash and invested assets (at amortized cost) of $40.2 million, or 12.5%, and to a lesser extent, an increase in the prevailing interest rate environment. Net investment income for the life insurance segment was $39.1 million for the nine months ended September 30, 2000, compared to $25.2 million for the same period in 1999. The yield on fixed maturity investments (at amortized cost) was 7.1% for the nine months ended September 30, 2000 compared to 6.8% for the same period in 1999. The 1999 net investment income includes amounts subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. Realized Investment Losses, Net Net realized investment losses increased to $1.7 million for the nine months ended September 30, 2000 compared to a net loss of $1.0 million for the same period in 1999. During the second quarter of 2000, we recorded a $1.8 million writedown of a fixed maturity security as a result of an other than temporary decline in fair value of the security. Losses and Loss Adjustment Expenses Losses and loss adjustment expenses on property and casualty insurance increased $9.2 million, or 8.6%, to $116.0 million for the nine months ended September 30, 2000 from $106.8 million for the same period in 1999. Losses and loss adjustment expenses were 78.7% of premium revenue for the nine months ended September 30, 2000 compared to 74.9% of premium revenue for the same period in 1999. The increase in the loss and loss adjustment expense ratio was primarily attributable to an increase in the severity of losses incurred on certain of our businessowners, umbrella, and personal automobile (bodily injury coverage) policies during the first quarter of 2000, property losses on two of our voluntary assumed reinsurance contracts during the first quarter of 2000 and an increase in weather-related losses incurred during the second quarter of 2000 compared to the same period in 1999. 15 Other Operating Costs and Expenses Other operating costs and expenses increased $3.6 million to $18.4 million for the nine months ended September 30, 2000 from $14.8 million for the same period in 1999. The increase was primarily due to the inclusion of other operating costs and expenses for Farm Family Life subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. The 2000 amounts include nine months of expenses for Farm Family Life. For the nine months ended September 30, 2000, property and casualty insurance underwriting expenses (including amortization expenses) were 23.5% of premium revenue compared to 24.3% for the same period in 1999. Participating Policyholders' Interest Participating policyholders' interest of $(9.9) million reduced losses, benefits and expenses for the nine months ended September 30, 2000, compared to participating policyholders' interest of $5.7 million which increased losses, benefits and expenses for the same period in 1999. The 2000 amount includes $19.0 million, which reduced losses, benefits and expenses, representing the pre-tax effect of retroactively including Excess Interest and Spreads in our calculation of the estimate of profits on participating life insurance business allocable to stockholders for periods through December 31, 1999, as discussed in Note 3 to the accompanying Consolidated Financial Statements. Federal Income Tax Expense Federal income tax expense increased $6.0 million to $11.8 million for the nine months ended September 30, 2000 from $5.8 million for the same period in 1999. Federal income tax expense was 30.5% of income before federal income tax expense and preferred stock dividends for the nine months ended September 30, 2000 compared to 29.3% for the same period in 1999. Liquidity and Capital Resources Farm Family Holdings may receive dividends from subsidiaries, if declared and paid. The New York Insurance Law regulates the distribution of dividends and other payments to Farm Family Holdings by Farm Family Casualty and Farm Family Life. As of December 31, 1999, the maximum amount of shareholder dividends that could be paid by Farm Family Casualty without the prior approval of the New York State Insurance Department (the "Department") was approximately $4.3 million. During the first nine months of 2000, Farm Family Casualty declared and paid dividends of $0.5 million to Farm Family Holdings. Effective September 20, 2000, New York Insurance Law was amended to permit domestic stock life insurers to distribute shareholder dividends up to a certain threshold amount without the prior approval of the Department. Previously, the payment of shareholder dividends by Farm Family Life was subject to prior approval of the Department. The maximum amount of shareholder dividends that could be paid by Farm Family Life without the prior approval of the Department during 2000 is approximately $6.6 million. During the first nine months of 2000, Farm Family Life declared and paid dividends of $1.0 million to Farm Family Holdings with the prior approval of the Department. We have a revolving credit agreement with three banks, which provides for uncollateralized borrowings of up to $30.0 million. At September 30, 2000, no amounts were outstanding. On April 25, 2000, the Company's Board of Directors adopted a stock repurchase plan that authorizes the Company to repurchase shares of its common stock in an aggregate amount of up to $7.5 million. During 2000, we repurchased 110,000 shares of our common stock for $3.0 million at an average cost of $27.45 per share. The repurchases were financed through cash generated from operations. As of September 30, 2000, $4.5 million remained authorized under the stock repurchase plan for future share repurchases. Pursuant to the Agreement and Plan of Merger among American National Insurance Company, American National Acquisition Company and Farm Family Holdings, Farm Family Holdings may not repurchase any additional shares prior to the closing of the merger with American National Insurance Company, without the prior consent of American National Insurance Company. See Note 2 to the Consolidated Financial Statements for further details regarding the merger. Net cash provided by operating activities was $55.2 million and $44.5 million during the nine-month periods ended September 30, 2000 and 1999, respectively. The increase in net cash provided by operating activities was primarily attributable to the additional operating cash flow from Farm Family Life since the 1999 results include amounts subsequent to April 6, 1999. The 2000 amounts include nine months of operating activities for Farm Family Life. 16 Net cash used in investing activities was $26.3 million during the nine months ending September 30, 2000 compared to $23.7 million for the same period in 1999. The increase in cash used in investing activities resulted primarily from a decrease in investment collections partially offset by an increase in proceeds from investment sales and a decrease in investment purchases. Net cash used in financing activities was $27.3 million for the nine months ending September 30, 2000 compared to $11.5 million for the same period in 1999. The increase is the result of contractholder fund withdrawals on interest sensitive products exceeding the related deposits for these products to a greater degree than in the prior year. We believe the excess of contractholder fund withdrawals over deposits is primarily related to the strength of the stock market, the prevailing interest rate environment and increased competition from other fixed and variable annuity products. In addition, contractholder fund withdrawals and deposits for Farm Family Life in 1999 include amounts subsequent to April 6, 1999. The 2000 amounts include nine months of financing activities for Farm Family Life. Also, we repurchased 110,000 shares of our common stock for $3.0 million in 2000 with no repurchases made in 1999. Future Application of Accounting Standards In September 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133") and subsequently issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FAS 133" ("Statement 138"). These statements, which are effective for the Company for the year beginning January 1, 2001, establish accounting and reporting standards for derivative instruments and for hedging activities. Management believes that Statements 133 and 138 will not have a material impact on the Company's Consolidated Financial Statements. In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which will replace the current Accounting Practices and Procedures Manual as the NAIC's primary guidance on statutory accounting. Statutory accounting is a comprehensive basis of accounting based on prescribed accounting practices, which include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. The Codification provides guidance for the areas where statutory accounting has been silent and changes current statutory accounting in some areas. The NAIC has established January 1, 2001 as the effective date of the Codification. The New York Insurance Department has advised that it intends to proceed with implementation of the Codification, subject to any provisions in New York statute which conflict with particular points in the Codification rules. We have not estimated the potential effect of adopting the Codification. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK Our market risks of financial instruments and investment objectives have not materially changed since December 31, 1999. 17 PART II. OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K EXHIBIT INDEX FARM FAMILY HOLDINGS, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 Exhibit Number Document Description - - - -------------------------------------------------------------------------------- 2.1 Plan of Reorganization and Conversion dated February 14, 1996 as amended by Amendment No. 1, dated April 23, 1996 (Incorporated by reference to Registration Statement No. 333-4446) 3.1 Certificate of Incorporation of Farm Family Holdings, Inc. (Incorporated by reference to Registration Statement No. 333-4446) 3.2 Bylaws of Farm Family Holdings, Inc. (Incorporated by reference to Registration Statement No. 333-4446) 4.1 Certificate of Designations of Junior Participating Cumulative Preferred Stock of Farm Family Holdings, Inc. (incorporated by reference to Exhibit 4.3 to Form S-8, Registration No. 333-80723 filed with the Securities and Exchange Commission on June 15, 1999) 4.2 Certificate of Corrections to Certificate of Designations of Junior Participating Cumulative Preferred Stock of Farm Family Holdings, Inc. (incorporated by reference to Exhibit 4.4 to Form S-8, Registration No. 333-80723 filed with the Securities and Exchange Commission on June 15, 1999) 4.3 Certificate of Designations of Farm Family Holdings, Inc. Preferred Stock, Series A (incorporated by reference to Exhibit 4.5 to Form S-8, Registration No. 333-80723 filed with the Securities and Exchange Commission on June 15, 1999) 4.4 Rights Agreement, dated as of July 29, 1997, between the Company and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K/A filed with the Securities and Exchange Commission on June 14, 1999) as amended by Amendment of Rights Agreement entered into as of October 31, 2000 (incorporated by reference to Exhibit 4.1 Farm Family Holdings, Inc. Form 8-A/A filed with the Securities and Exchange Commission on November 3, 2000) 4.5 Registration Rights Agreement, dated as of April 6, 1999 by and among Farm Family Holdings, Inc. and the Shareholders of the Farm Family Life Insurance Company (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended June 30, 1999) 10.1 Amended and Restated 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. (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996) 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) 10.4 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) 18 Exhibit Number Document Description - - - --------------- ---------------------------------------------------------------- 10.5 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) 10.6 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) and Farm Family Life Insurance Company Annual Incentive Plan Termination, effective as of April 25, 2000 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended June 30, 2000) 10.7 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) 10.8 Service Agreement, made effective as of July 25, 1988 by and between Farm Family Mutual Insurance Company and United Farm Family Insurance Company (Incorporated by reference to Registration Statement No. 333-4446) 10.9 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, Farm Family Holdings, Inc. Officer Severance Pay Plan effective August 1, 1994, as amended July 29, 1997, July 28, 1998, October 27, 1998, July 28, 1999 and October 31, 2000 (filed herewith) 10.10 Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted as of January 1, 1994 (Incorporated by reference to Registration Statement No. 333-4446) 10.11 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) 10.12 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) 10.13 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) and Amendment No. 2 to Farm Family Holdings, Inc. Annual Incentive Plan effective October 31, 2000 (filed herewith) 10.14 Tax Payment Allocation Agreement effective January 1, 1996 by and between Farm Family Holdings, Inc. and Farm Family Casualty Insurance Company (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996) 10.15 Farm Family Holdings, Inc. Amended and Restated Omnibus Securities Plan, effective as of February 29, 2000 (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended June 30, 2000) 10.16 Indenture of Lease made the 1st day of January 1999, between Farm Family Life Insurance Company and New York Farm Bureau, Inc. 2000 (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended June 30, 2000) 27 Financial Data Schedule (for electronic filing purposes only) 19 Reports on Form 8-K A report on Form 8-K was filed on July 28, 2000 reporting a press release issued announcing operating results for the second quarter ended June 30, 2000. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FARM FAMILY HOLDINGS, INC. (Registrant) November 13, 2000 By: /s/ Philip P. Weber - - - ------------------------------------ --------------------------------------- (Date) Philip P. Weber, President & Chief Executive Officer (Principal Executive Officer) November 13, 2000 By: /s/ Timothy A. Walsh - - - ------------------------------------ --------------------------------------- (Date) Timothy A. Walsh, Executive VP, Chief Financial Officer & Treasurer (Principal Financial & Accounting Officer) Exhibit 10.9 FARM FAMILY LIFE INSURANCE COMPANY FARM FAMILY CASUALTY INSURANCE COMPANY FARM FAMILY HOLDINGS, INC. OFFICER SEVERANCE PAY PLAN Effective October 31, 2000 Purpose Farm Family Life Insurance Company (hereinafter referred to as "Life"), Farm Family Casualty Insurance Company (hereinafter referred to as "Casualty") and Farm Family Holdings, Inc. (hereinafter referred to as "Holdings") have adopted a severance pay plan effective August 1, 1994, as amended July 29, 1997, July 28, 1998, October 27, 1998, July 28, 1999, and as further amended October 31, 2000, the purpose of which is to provide financial benefits to officers of Life, Casualty or Holdings who lose their positions under Severance Qualifying Conditions. Eligible Officers All officers of Life, Casualty and Holdings (each of such companies a "Company" and collectively, the "Companies"), who are employed and an officer on October 31, 2000 are eligible for severance benefits under this plan. As of the Merger Closing Date, Designated Officers shall not be eligible to participate in this plan. Definitions 1. Cause: An officer's: ----- (a) felony conviction or the failure of an officer to contest prosecution for a felony; (b) willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of Life, Casualty or Holdings; (c) theft, participation in any material fraudulent conduct, or other acts involving material misappropriation of property; or (d) willful and continued failure by the officer to substantially perform the officer's duties properly assigned to the officer (other than any such failure resulting from the officer's incapacity due to physical or mental illness) after demand for substantial performance is delivered by the Company specifically identifying the manner in which the Company believes the officer has not substantially performed his/her duties. For purposes of determining Cause, no act, or failure to act, on the officer's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interests of the Company. Furthermore, the officer shall not be deemed to have been terminated for Cause without (i) reasonable notice to the officer setting forth the reasons for the Company's intention to terminate for Cause, (ii) an opportunity for the officer, together with the officer's counsel, to be heard before the Board, and (iii) delivery to the officer of a notice of termination from the Board finding that in the good faith opinion of a majority of the Board, the officer was guilty of conduct set forth in this Section. 2. Change in Control: A change in control of Life, Casualty or Holdings of a nature that would be required to be reported in response to Item 6(e) of schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not Life, Casualty or Holdings is subject to the Exchange Act at such time; provided, however, that without limiting the generality of the foregoing, a Change in Control will in any event be deemed to occur if and when: (a) any person (as such term is used in paragraphs 13(d) and 14(d)(2) of the Exchange Act, hereinafter in this definition, "Person"), other than Life, Casualty or Holdings, or a subsidiary of Life, Casualty or Holdings or employee benefit plan of Life, Casualty or Holdings, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of twenty percent (20%) or more of the common stock of Life, Casualty, or Holdings then outstanding; (b) stockholders approve a merger, consolidation or other business combination (a "Business Combination") other than a Business Combination in which the persons who were the holders of common stock of Life, Casualty or Holdings immediately prior to the Business Combination (i) own, immediately after the Business Combination, more than sixty percent (60%) of the combined voting power of securities issued by the ultimate parent company resulting from such Business Combination and (ii) own such securities in substantially the same proportion as they were owned by such persons immediately prior to the Business Combination; (c) stockholders approve either (i) an agreement for the sale or disposition of all or substantially all of Life's, Casualty's, or Holding's assets to any entity that is not a subsidiary of one of said Companies, or (ii) a plan of complete liquidation; or (d) the persons who were members of the Board of Directors immediately before a tender offer by any Person other than Life, Casualty or Holdings or a subsidiary of Life, Casualty or Holdings, or before a merger, consolidation or contested election, or before any combination of such transactions, cease to constitute a majority of the Board of Directors as a result of such transaction or transactions. Provided, however, that the acquisition of Life by Holdings pursuant to the Amended and Restated Option Purchase Agreement dated as of February 26, 1998 by and among Holdings and the shareholders of Life, as amended by Amendment No. 1 to Amended and Restated Option Purchase Agreement dated as of April 28, 1998, as the same may be further amended from time to time, shall not constitute a Change in Control hereunder. 3. Designated Officers: The term "Designated Officers" shall mean Philip P. Weber, Timothy A. Walsh, Victoria M. Stanton, and James J. Bettini. 4. Good Reason: "Good Reason" for termination of employment by the Eligible Officer shall mean the occurrence (without the Eligible Officer's express written consent) after a Change in Control of any one or more of the following unless such act is remedied by the Companies within ten (10) business days after receipt of written notice thereof given by the Eligible Officer: (i) the assignment of the Eligible Officer to duties materially inconsistent with the Eligible Officer's authorities, duties, responsibilities and status (including offices, titles and reporting requirements) as an executive and/or officer of any Company or a material reduction or alteration in the nature or status of the Eligible Officer's authorities, duties or responsibilities from those in effect as of ninety (90) days prior to the Change in Control; (ii) a reduction of the Eligible Officer's base salary in effect on the Effective Date hereof or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and is either (a) replaced by an incentive opportunity equal in value or is (b) consistent and proportional with an overall reduction in management compensation (i.e., the base salary of the Eligible Officer will not be singled out for reduction in a manner inconsistent to a reduction imposed on other executives of the Companies); (iii)the failure of any Company to continue in effect any of the Company's annual and long-term incentive compensation plans or employee benefit or retirement plans, policies practices or other compensation arrangements (collectively the "Compensation Arrangements") in which the Eligible Officer participates unless such failure to continue the plan, policy, practice or arrangement pertains to all plan participants generally and the lost value is being replaced by a new plan, policy, practice or arrangement of reasonably equivalent value; or the failure by the Company to continue the Eligible Officer's participation in the Compensation Arrangements on substantially the same basis, both in terms of the amount of benefits provided and the level of the Eligible Officer's participation relative to other participants, as existed immediately prior to the Change in Control; (iv) the permanent relocation of the principal place of the Eligible Officer's employment to a location that is more than fifty (50) miles from the location of the principal place of the Eligible Officer's employment on the date immediately prior to the Change in Control; or (v) the failure of a Company to obtain an agreement, in form and substance reasonably satisfactory to the Eligible Officer, from any acquirer of or successor to such Company to expressly assume and agree to discharge the Company's obligations to the Eligible Officer under this Officer Severance Pay Plan. The Eligible Officer's right to terminate employment for Good Reason shall not be affected by the Eligible Officer's incapacity due to physical or mental illness. The Eligible Officer's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein; provided, however, that the Eligible Officer must provide notice of termination of employment within ninety (90) days following the Eligible Officer's knowledge of an event constituting Good Reason or such event shall not constitute Good Reason hereunder. 5. Merger Agreement: The "Merger Agreement" shall mean the Agreement and Plan of Merger dated as of October 31, 2000 among American National Insurance Company, American National Acquisition Company, and Farm Family Holdings, Inc. 6. Merger Closing Date: The "Merger Closing Date" means the date of the closing of the merger contemplated by the Merger Agreement. 7. Salary: The sum of (i) the highest rate of wages, salaries and fees for professional services, and other amounts received by the officer for personal services actually rendered in the course of employment with the Companies within the last two years, on an annualized basis and (ii) the highest Target Award Opportunity established for the officer under each of the Company's Annual Incentive Plan within the last two years. Salary does include taxable reimbursements or other expense allowances, fringe benefits (cash and non cash), and moving expenses. Salary does not include: (a) any distribution from a plan of deferred compensation; (b) amounts realized from the exercise of a non qualified stock option, or when restricted stock (or property) held by an officer either becomes freely transferable or is no longer subject to substantial risk of forfeiture; and (c) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option. 8. Year of Service: A period of 12 months during which the individual is an officer and/or employee of Life, Casualty or Holdings, excluding any service as: (a) A leased employee; (b) An independent contractor; or (c) An employee or agent of the Company compensated pursuant to an agent's training allowance program, agent's, independent agent's, regional manager's contract or other contract of the same general character Severance Qualifying Conditions An Eligible Officer whose employment with Life, Casualty or Holdings is terminated, is eligible for severance benefits, if his or her employment is terminated under the following conditions ("Severance Qualifying Conditions"): 1. The officer's employment with Life, Casualty or Holdings is (a) involuntarily terminated other than for cause; (b) terminated (i) due to the elimination of the officer's position or the replacement of the officer with another individual or individuals and (ii) the officer is not offered another position of comparable responsibility and compensation with Life, Casualty or Holdings ("Elimination of Position Termination"); (c) terminated due to a Change in Control of Life, Casualty or Holdings and the officer is not offered a position of comparable responsibility and compensation by the acquiring or resulting company ("Change in Control Termination"); (d) terminated by the officer for Good Reason ("Termination for Good Reason"); or (e) in the case of the Chief Executive Officer or an Executive Vice President, terminated by the officer within 30 days following the first anniversary of a Change in Control ("Change in Control Anniversary Termination"); AND 2. The officer executes a release of all claims against Life, Casualty and Holdings acceptable to Life, Casualty and Holdings. The termination of an officer's employment with Life, Casualty or Holdings, for any of the following reasons shall not be treated as a Severance Qualifying Condition: If an officer resigns, abandons his or her job, fails to return from an approved leave of absence or initiates termination on any similar basis other than pursuant to Elimination of Position Termination, Change in Control Termination, Termination for Good Reason or Change in Control Anniversary Termination; If an officer is terminated for Cause. An Eligible Officer wishing to terminate employment with the Companies pursuant to Subsection 1(c), 1(d) or 1(e) of the Severance Qualifying Conditions set forth above shall provide written notice thereof to the Director of Human Resources or, in the case of such notice given by the Director of Human Resources, to the Chief Executive Officer of the Companies. Such written notice shall set forth (i) the specific Severance Qualifying Event relied upon, (ii) the facts and circumstances claimed to provide a basis for termination pursuant to such Severance Qualifying Event; and (iii) the date of termination (which date shall not be less than fifteen (15) nor more than sixty (60) days after the giving of such notice). The decision of whether an officer's termination is a Severance Qualifying Condition shall be determined solely at the Companies' discretion. Policy In the event that an Eligible Officer becomes eligible to receive severance benefits as a result of meeting the Severance Qualifying Conditions set forth above, the Companies shall pay to the Eligible Officer and provide him or her with severance benefits equal to the following: 1. A lump sum amount equal to the Eligible Officer's unpaid salary, accrued vacation pay, unreimbursed business expenses and all other items earned by and owed to the Eligible Officer through and including the effective date of employment termination. 2. The greater of: (a) one week's Salary for each Year of Service; (b) in the case of an Elimination of Position Termination which occurs during the period which begins on October 31, 2000, and ends three years after the Merger Closing Date, the greater of: (i) two weeks' base salary for each Year of Service, up to a maximum of 12 months' base salary, or (ii) four weeks' base salary; or (c) (i) 36 months Salary in the case of the Chief Executive Officer; (ii) 24 months Salary in the case of an Executive Vice President; (iii) 12 months Salary in the case of a Senior Vice President; and (iv) 6 months Salary in the case of any officer other than the Chief Executive Officer, Executive Vice Presidents, and Senior Vice Presidents 3. A lump sum amount equal to the amount, if any, to which the Eligible Officer is entitled to receive under each of the Companies Annual Incentive Plans. This amount, if any, shall be paid to the Eligible Officer pursuant to the applicable Annual Incentive Plan(s). 4. A continuation for the period set forth in the applicable subsection of paragraph 2(c) of this Section of the Eligible Officer's medical, dental, group term life and disability insurance coverages. These benefits shall be provided by the Companies, to the extent permitted under the terms of such plans and applicable law, to the Eligible Officer beginning immediately upon the effective date of termination. Such benefits shall be provided at the same premium cost to the Eligible Officer, if any, and at the same coverage level, as in effect as of the Eligible Officer's effective date of termination. To the extent that the Companies are unable to provide for continuation of such benefits pursuant to the terms of such plans and applicable law, the Companies shall provide an equivalent benefit to the Eligible Officer. Notwithstanding the above, these insurance benefits shall be discontinued prior to the end of the stated continuation period in the event the Eligible Officer receives substantially similar benefits from a subsequent employer, as determined solely by the Plan Administrator in good faith. For purposes of enforcing this offset provision, the Eligible Officer shall be deemed to have a duty to keep the Director of Human Resources informed as to the terms and conditions of any subsequent employment and the corresponding benefits earned from such employment and shall provide, or cause to provide, to the Director of Human Resources in writing correct, complete and timely information concerning the same. 5. The Eligible Officer shall be entitled, at the expense of the Companies, to receive standard outplacement services from a nationally recognized outplacement firm of the Companies' selection, for a period of up to two (2) years from the effective date of termination. Such services shall be at the Companies' expense to a maximum amount of twenty percent (20%) of the Eligible Officer's annual rate of base salary as of the effective date of termination. Any bonuses or performance or merit reviews that are pending or in process shall not affect the amount of any officer's severance benefits. In the event an officer becomes eligible for severance benefits pursuant to this Officer Severance Pay Plan due to a Severance Qualifying Event with respect to Life, Casualty or Holdings or any combination of the Companies less than all three of the Companies, then Salary shall include only the amount of Salary which would be allocated to the company for which there is a Severance Qualifying Event for the Eligible Officer pursuant to the Amended and Restated Expense Sharing Agreement dated February 14, 1996 or any successor agreement thereto. The decision of how benefits will be paid will be made by the Companies in their sole discretion. The Companies will pay all benefits under this plan from their general assets. Certain Additional Payments by the Companies In the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Companies (or any of their affiliated entities) or any entity which effectuates a Change in Control (or any of its affiliated entities) to or for the benefit of an Eligible Officer (whether pursuant to the terms of this Officer Severance Pay Plan or otherwise, but determined without regard to any additional payments required under this Section) (the "Payments") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed), or any interest or penalties are incurred by the Eligible Officer with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Companies shall pay to the Eligible Officer an additional payment (a "Gross Up Payment") in an amount such that after payment by the Eligible Officer of all taxes (including any Excise Tax) imposed upon the Gross Up Payment, the Eligible Officer retains an amount of the Gross Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Gross Up Payment in the Eligible Officer's adjusted gross income and the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Gross Up Payment is to be made. For purposes of determining the amount of the Gross Up Payment, the Eligible Officer shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross Up Payment is to be made, (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (iii) have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross Up Payment in the Eligible Officer's adjusted gross income. Subject to the provisions of this Section, all determinations required to be made under this Section, including whether and when a Gross Up Payment is required and the amount of such Gross Up Payment, and the assumptions to be utilized in arriving at such determinations, shall be made by tax counsel, compensation consultants or auditors of nationally recognized standing (the "Independent Advisors") selected by the Companies and reasonably acceptable to the Eligible Officer which shall provide detailed supporting calculations both to the Companies and the Eligible Officer within fifteen (15) business days of the receipt of notice from the Companies or the Eligible Officer that there has been a Payment, or such earlier time as is requested by the Companies (collectively, the "Determination"). All fees and expenses of the Independent Advisors shall be borne solely by the Companies. The Gross Up Payment under this Section with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Independent Advisors determine that no Excise Tax is payable by the Eligible Officer, it shall furnish the Eligible Officer with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on the Eligible Officer's applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The Determination by the Independent Advisors shall be binding upon the Companies and the Eligible Officer. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross Up Payment is made, the Eligible Officer shall repay to the Companies at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to the Eligible Officer or otherwise realized as a benefit by the Eligible Officer) the portion of the Gross Up Payment that would not have been paid if such Excise Tax had been applied in initially calculating the Gross Up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross Up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross Up Payment), the Companies shall make an additional Gross Up Payment and shall indemnify and hold the Eligible Officer harmless in respect of such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. The Eligible Officer shall cooperate, to the extent his or her expenses are reimbursed by the Companies, with any reasonable requests by the Companies in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax. Review of Denial of Benefits/Appeal Process If an officer does not receive benefits to which the officer thinks he or she is entitled, the officer may file a claim for those benefits. The Director of Human Resources will rule on the claims within 60 days of receipt of the claim. In the case of claims made by the Director of Human Resources, the Chief Executive Officer of the Companies shall make such review and determination. If claims are denied, in whole or in part, the officer will be notified in writing. A copy of the ruling and a statement supporting the decision will be given to the officer. The notice will indicate why the claims were denied, and either describe any additional information necessary to grant a claim or instruct the officer on how to appeal the denial. After an officer receives notice of denial of his or her claims, the officer may appeal to the Plan Administrator, in writing within 60 days. If the officer does not make an appeal within 60 days, the original decision will become final. The officer may include in the written appeal any reasons for appeal and any information to support the officer's rights to benefits. The Plan Administrator will then reexamine all the facts and come to a final decision. The officer will be notified of this decision within 60 days of the time that the officer submits the written appeal, unless there are special circumstances, such as a hearing. The officer will be notified if an extension is required. However, in no case will the officer receive the Plan Administrator's decision later than 120 days after the appeal is submitted. The notice of final decision will include specific reasons for the decision and identify the plan provisions relied upon. Fees and Expenses of Eligible Officers The Companies shall reimburse the Eligible Officer for all reasonable legal, accounting, actuarial and related fees and expenses incurred by the Eligible Officer in seeking in good faith to obtain or enforce any benefit or right provided by this Officer Severance Pay Plan or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code (or such other Code Section imposing a similar tax that may hereafter be enacted) to the Payments or to a Gross Up Payment, each as previously defined herein. Such reimbursement shall be made within ten (10) business days after receipt of the Eligible Officer's written request for reimbursement accompanied with such evidence of fees and expenses incurred as the Companies reasonably may require. Amendment or Termination of the Plan The Companies reserve the right to amend or terminate the plan at any time, with or without advance notice, by action of the Board of Directors. Provided, however, that no amendment or termination of the plan will reduce the amount the Companies agree to pay officers covered by the Plan at the time of the amendment or termination, in the event of a Severance Qualifying Condition below the following amounts: 1. 36 months Salary in the case of the Chief Executive Officer; 2. 24 months Salary in the case of an Executive Vice President; 3. 12 months Salary in the case of a Senior Vice President; and 4. 6 months Salary in the case of an officer other than the Chief Executive Officer, Executive Vice Presidents and Senior Vice Presidents. Further, it is provided, that no amendment or termination of the plan adversely affecting the right of any officer employed by the Company on October 31, 2000 to severance pay hereunder due to a Change in Control of Life, Casualty or Holdings, shall be effective if made after the Board of Directors has approved such Change in Control. Employee rights under ERISA As a participant in this plan, officers are entitled to certain rights and protection under ERISA. ERISA provides that all plan participants shall be entitled to: Examine, free of charge, at the administrative office in their geographic area, all plan documents and copies of all documents filed by the plan with the U.S. Department of Labor. Obtain copies of all plan documents and other plan information upon written request to theplan administrator. The plan administrator may make a reasonable charge for the copies. In addition to creating rights for the plan participants, ERISA imposes obligations on the people who are responsible for the operation of the plan. The people who operate the plan, called "fiduciaries" of the plan, have a duty to do so prudently and in the interest of all plan participants and beneficiaries. No one, including the Companies or any other person, may discriminate against employees to prevent them from obtaining a benefit or exercising their rights under ERISA. If a claim for a benefit is denied in whole or in part, an employee must receive a written explanation of the reason for the denial. Employees also have the right to have the plan administrator review and reconsider any claim. Under ERISA, there are steps employees can take to enforce the above rights. For instance, if a participant in the plan requests materials from the plan administrator and does not receive them within thirty days, the participant may file suit in a federal court. In such a case, the court may require the plan administrator to provide the materials and pay up to $100 a day until the participant receives the materials, unless the materials were not sent because of reasons beyond the control of the plan administrator. If a claim for benefits is denied or ignored, in whole or in part, the participant may file suit in a state or federal court. If any employee is discriminated against for asserting that person's rights, assistance may be sought from the U.S. Department of Labor or the participant may file suit in a federal court. The court will decide who should pay court costs and legal fees. If the participant is successful, the court may order the person sued to pay these costs and fees. If the participant loses, the court may order that person to pay these costs and fees, for example, if it finds a claim is frivolous. If a participant has any questions about the plan, the participant should contact the Human Resources Department of the Companies. If a participant has any questions about this statement or about his or her rights under ERISA, the nearest area office of the Labor-Management Services Administration, U.S. Department of Labor, should be contacted. General Information. Eligible Officers should note the following information about the severance plan: Plan Sponsor. The Plan is sponsored by: Farm Family Life Insurance Company Farm Family Casualty Insurance Company Farm Family Holdings, Inc. P.O. Box 656 Albany, New York 12201-0656 Telephone Number (518) 431-5000 Plan Administrator: Farm Family Life Insurance Company is the plan administrator. The plan administrator makes the rules and regulations necessary to administer the plan. The plan administrator shall have the responsibility and discretionary authority to interpret the terms of this plan, to determine eligibility for benefits and to determine the amount of the benefits. The interpretations and determinations of the plan administrator shall be final and binding. Agent for legal process: The Director of Human Resources of Life and Casualty shall be the agent for service of legal process for all of the Companies. Any communications should be sent to the following address: Director of Human Resources Farm Family Life Insurance Company Farm Family Casualty Insurance Company 344 Route 9W Glenmont, NY 12077 Mailing Address: P.O. Box 656 Albany, NY 12201-0656 Legal process may also be served on the plan administrator at the following address: Farm Family Life Insurance Company Attn.: Human Resources Department 344 Route 9W Glenmont, NY 12077 Mailing Address: P.O. Box 656 Albany, NY 12201-0656 Plan year: The records of the plan are kept on a calendar year basis. Identification number: If an officer needs to discuss the plan with a federal government agency, he or she should reference the plan number 510. The Company's employer identification numbers are: Farm Family Life Insurance Company 14-1400831 Farm Family Casualty Insurance Company 14-1415410 Farm Family Holdings, Inc. 14-1789227 Notices Any notice, consent or demand required or permitted to be given under this Officer Severance Pay Plan shall be in writing and shall be signed by the party giving or making the same. If such notice, consent or demand is mailed to an Eligible Officer or to the Companies, it shall be sent by United States certified mail, postage prepaid, and addressed as set forth below. If to an Eligible Officer: To such officer's last known address as shown on the records of the Company If to the Director of Human Resources: Director of Human Resources Farm Family Life Insurance Company Farm Family Casualty Insurance Company 344 Route 9W Glenmont, NY 12077 Mailing Address: P.O. Box 656 Albany, NY 12201-0656 If to the Plan Administrator: Farm Family Life Insurance Company Attn.: Human Resources Department 344 Route 9W Glenmont, NY 12077 Mailing Address: P.O. Box 656 Albany, NY 12201-0656 The date of such mailing shall be deemed the date of notice, consent or demand. An officer may change the address to which notice is to be sent by giving notice of the change of address in the manner aforesaid. IN WITNESS WHEREOF, Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, and Farm Family Holdings, Inc., each by authority of its Board of Directors, have caused this Officer Severance Pay Plan to be duly executed as of the date and year first above written. FARM FAMILY LIFE INSURANCE COMPANY By: /s/ Philip P. Weber ---------------------------------------- Philip P. Weber President & Chief Executive Officer FARM FAMILY CASUALTY INSURANCE COMPANY By: /s/ Philip P. Weber ---------------------------------------- Philip P. Weber President & Chief Executive Officer . FARM FAMILY HOLDINGS, INC. By: /s/ Philip P. Weber ---------------------------------------- Philip P. Weber President & Chief Executive Officer Exhibit 10.13 AMENDMENT NO. 2 TO THE FARM FAMILY HOLDINGS, INC. ANNUAL INCENTIVE PLAN This AMENDMENT NO. 2 TO THE Farm Family HOLDINGS, INC. ANNUAL INCENTIVE PLAN, dated as of October 31, 2000 (this "Amendment No. 2"), was adopted by the Board of Directors of Farm Family HOLDINGS, INC. (the "Company"), at a meeting duly called and held on October 31, 2000. WHEREAS, the Board of Directors of the Company (the "Board") adopted the Farm Family Holdings, Inc. Annual Incentive Plan, effective January 1, 1997, as amended and restated as of October 27, 1998 (as amended and restated, the "Plan"); and WHEREAS, pursuant to Section 8.06 of the Plan, the Board has the right to amend the Plan at any time; and WHEREAS, the Board desires to amend and modify the Plan as set forth herein. NOW, THEREFORE, the Plan shall be, and hereby is, amended and modified, effective October 31, 2000, as follows: 1. Article 1 is hereby amended by redesignating former Sections 1.06 through 1.10 to new Sections 1.07 through 1.11 and adding new Section 1.06, which shall read as follows: "1.06 Designated Officers: The term "Designated Officers" shall mean Philip P. Weber, Timothy A. Walsh, Victoria M. Stanton, and James J. Bettini." 2. Article 1 is further amended by redesignating former Sections 1.11 through 1.17 to new Sections 1.14 through 1.20 and adding new Sections 1.12 and 1.13, which shall read as follows: "1.12 Merger Agreement: The term "Merger Agreement" shall mean the Agreement and Plan of Merger dated October 31, 2000 among American National Insurance Company, American National Acquisition Company, and Farm Family Holdings, Inc." "1.13 Merger Closing Date: The "Merger Closing Date" means the effective time of the Merger contemplated by the Merger Agreement." 3. Article 3, Section 3.03 is amended by the addition of the following sentence at the end of such Section: "Provided further that on the Merger Closing Date, each Designated Officer shall cease to participate in the Plan as of the Merger Closing Date except for a Designated Officer who has terminated employment prior to the Merger Closing Date with the result that the Employment Agreement referred to in Section 5.12 of the Merger Agreement with the Designated Officer does not become effective." 4. Article 6, Section 6.06 is amended by the addition of the following sentence at the end of such Section: "In no event shall the Company be permitted to amend the Plan to reduce any benefits provided pursuant to Sections 6.07 or 6.08 herein." 5. Article 6 is hereby amended by adding new Sections 6.07 and 6.08, which shall read as follows: "6.07 2000 Bonus: Notwithstanding any language in the Plan to the contrary, for the 2000 Plan Year Participants shall be paid a bonus in an amount equal to the greater of: (a) the Participant's Earned Award, as determined pursuant to Article 6 of the Plan, or (b) the Participant's Target Award Opportunity, as determined pursuant to Article 4 of the Plan. The 2000 Bonus described herein shall be paid to each Participant on the earlier of: (i) the date the 2000 Bonus would otherwise be paid in the ordinary course of business consistent with past practices, or (ii) the Merger Closing Date." "6.08 Stub Period Bonus: Notwithstanding any language in the Plan to the contrary, for the 2001 Plan Year Participants shall be paid a bonus in an amount equal to: (a) the greater of the Participant's Earned Award, as determined pursuant to Article 6 of the Plan or the Participant's Target Award Opportunity, as determined pursuant to Article 4 of the Plan, multiplied by (b) a fraction, (i) the numerator of which is the number of days in the 2001 Plan Year up to and through the Merger Closing Date, and (ii) the denominator of which is 365. The Stub Period Bonus shall be paid to each Participant on the Merger Closing Date." 6. Except as amended and modified by this Amendment No. 2, all other terms of the Plan shall remain unchanged. IN WITNESS WHEREOF, Farm Family Holdings, Inc., by authority of its Board of Directors, has caused this Amendment No. 2 to be duly executed as of the date and year first above written. FARM FAMILY HOLDINGS, INC. By: /s/ Philip P. Weber ----------------------------------------------- Philip P. Weber Title: President & Chief Executive Officer