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, 1999 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 11, 1999 is 6,110,684. FARM FAMILY HOLDINGS, INC. INDEX Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1999 (Unaudited) and December 31, 1998 3 Consolidated Statements of Income and Comprehensive Income - Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited) 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 7 Report of Independent Accountants 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures of Market Risk 23 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 23 2 FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets ($ in thousands) (Unaudited) September 30, 1999 December 31, 1998 ------------------ ----------------- ASSETS Investments: Fixed maturities Available for sale, at fair value (Amortized cost: $998,466 in 1999 and $280,124 in 1998) $972,109 $293,120 Held to maturity, at amortized cost (Fair value: $7,952 in 1999 and $8,652 in 1998) 8,025 8,390 Equity securities - available for sale, at fair value (Cost: $42,817 in 1999 and $3,356 in 1998) 45,197 5,323 Mortgage loans 22,034 691 Policy loans 30,599 ---- Other invested assets 277 ---- -------------------------------------------------------------------------------------------------------------------- Total investments 1,078,241 307,524 -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 20,018 10,677 Insurance receivables: Reinsurance receivables 23,530 17,800 Premiums receivable, net 35,721 29,666 Deferred acquisition costs 17,096 13,668 Present value of future profits 29,403 ---- Accrued investment income 17,458 5,527 Property and equipment, net 14,483 ---- Deferred income tax asset, net ---- 1,694 Receivable from affiliates, net ---- 16,660 Other assets 5,654 3,287 -------------------------------------------------------------------------------------------------------------------- Total Assets $1,241,604 $406,503 ==================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses for property/casualty insurance $185,252 $174,435 Reserves for life policies and contract benefits 237,213 ---- Funds on deposit from policyholders 419,369 ---- Unearned premium reserve 76,728 71,209 Accrued dividends to policyholders 5,302 ---- Deferred income tax liability, net 18,750 ---- Reinsurance premiums payable 2,815 1,055 Accrued expenses and other liabilities 19,686 15,566 Participating policyholders' interest 91,399 ---- -------------------------------------------------------------------------------------------------------------------- Total liabilities 1,056,514 262,265 -------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Mandatory redeemable preferred stock, redemption value - $5,830 in 1999; 163,214 Series A shares issued and outstanding in 1999 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, 6,110,684 and 5,253,813 shares issued and outstanding 61 53 Additional paid-in capital 123,504 92,906 Retained earnings 55,519 41,554 Accumulated other comprehensive income 176 9,725 -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 179,260 144,238 -------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $1,241,604 $406,503 ==================================================================================================================== See accompanying notes to Consolidated Financial Statements. 3 FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income ($ in thousands, except per share data) (Unaudited) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 --------------------------------------------------------------------------------------------------------------------------------- Revenues: Premiums from property/casualty insurance $49,398 $45,660 $142,455 $133,404 Premiums from life and health insurance and contract charges 9,055 ---- 18,351 ---- Net investment income 18,343 4,815 40,619 14,333 Realized investment gains (losses), net (1,216) 192 (1,004) 534 Other income 287 269 1,023 752 --------------------------------------------------------------------------------------------------------------------------------- Total Revenues 75,867 50,936 201,444 149,023 --------------------------------------------------------------------------------------------------------------------------------- Losses, benefits, expenses and other: Losses and loss adjustment expenses on property/casualty insurance 37,378 32,936 106,787 99,063 Policyholder contract benefits 12,874 ---- 26,411 ---- Amortization expense 9,607 8,752 27,772 25,795 Other operating costs and expenses 5,863 2,850 14,781 9,478 Participating policyholders' interest 3,101 ---- 5,674 ---- --------------------------------------------------------------------------------------------------------------------------------- Total Losses, Benefits and Expenses 68,823 44,538 181,425 134,336 Gain on partial reduction of extended earnings liability ---- (6,318) ---- (6,318) --------------------------------------------------------------------------------------------------------------------------------- Total Losses, Benefits, Expenses and Other 68,823 38,220 181,425 128,018 Income before federal income tax expense and preferred stock dividends 7,044 12,716 20,019 21,005 Federal income tax expense 1,872 4,258 5,865 6,814 --------------------------------------------------------------------------------------------------------------------------------- Income before preferred stock dividends 5,172 8,458 14,154 14,191 Preferred stock dividends 104 ---- 189 ---- --------------------------------------------------------------------------------------------------------------------------------- Net income attributable to common stockholders 5,068 8,458 13,965 14,191 --------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during the period (net of deferred tax expense (benefit) of ($754), $1,879, ($5,007) and $2,186, respectively) (1,401) 3,489 (9,300) 4,060 Reclassification adjustment for gains included in net income (net of tax expense of $79, $101, $134 and $208, respectively) (146) (188) (249) (386) --------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) (1,547) 3,301 (9,549) 3,674 --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income $3,521 $11,759 $4,416 $17,865 ================================================================================================================================= Per Share Data: Net income - basic $0.83 $1.61 $2.41 $2.70 ================================================================================================================================= Net income - diluted $0.82 $1.59 $2.38 $2.67 ================================================================================================================================= Basic weighted average shares outstanding 6,110,684 5,253,813 5,806,228 5,253,813 ================================================================================================================================= Diluted weighted average shares outstanding 6,192,764 5,303,707 5,863,363 5,306,257 ================================================================================================================================= See accompanying notes to Consolidated Financial Statements. 4 FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows ($ in thousands) (Unaudited) For the Nine Months Ended September 30, ------------------- 1999 1998 ----------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $13,965 $14,191 ----------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Realized investment losses (gains), net 1,004 (534) Amortization of bond discount 2,257 231 Amortization and depreciation 29,093 25,795 Interest credited to policyholders 11,592 ---- Deferred income taxes (986) 1,048 Gain on partial reduction of extended earnings liability ---- (6,318) Participating policyholders' interest 5,674 ---- Dividends to policyholders (4,780) ---- Capitalization of deferred acquisition costs (30,929) (27,277) Loss on sale of property and equipment 9 ---- Changes in: Reinsurance receivables (2,853) (9,922) Premiums receivable, net (6,055) (5,497) Accrued investment income 637 373 Receivable from affiliates, net 1,471 447 Other assets (295) 399 Reserves for property/casualty insurance losses and loss adjustment expenses 10,817 20,344 Reserves for life policies and contract benefits 6,908 ---- Unearned premium reserve 5,519 7,046 Reinsurance premiums payable 1,760 625 Accrued expenses and other liabilities (338) 1,712 ----------------------------------------------------------------------------------------------------------------------- Total adjustments 30,505 8,472 ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 44,470 22,663 ----------------------------------------------------------------------------------------------------------------------- Investing Activities Proceeds from sales: Fixed maturities - available for sale 29,104 1,414 Equity securities 2,796 ---- Investment collections: Fixed maturities - available for sale 43,035 36,709 Fixed maturities - held to maturity 342 376 Equity securities 663 ---- Mortgage loans 357 950 Other invested assets 275 ---- Investment purchases: Fixed maturities - available for sale (96,135) (59,047) Equity securities (1,455) ---- Mortgage loans (2,275) ---- Policy loans issued, net (156) ---- Change in other invested assets 1 77 Purchases of property and equipment (1,625) ---- Proceeds from sale of property and equipment 3 ---- Net cash of subsidiary at date of acquisition 3,295 ---- Acquisition expenses (1,895) ---- ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (23,670) (19,521) ----------------------------------------------------------------------------------------------------------------------- 5 FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows - Cont'd ($ in thousands) (Unaudited) For the Nine Months Ended September 30, ------------------- 1999 1998 ----------------------------------------------------------------------------------------------------------------------- Financing Activities Contractholder fund deposits 69,135 ---- Contractholder fund withdrawals (80,594) ---- Principal payments on debt ---- (1,268) ----------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (11,459) (1,268) ----------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 9,341 1,874 Cash and cash equivalents, beginning of period 10,677 11,484 ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $20,018 $13,358 ======================================================================================================================= See accompanying notes to Consolidated Financial Statements. 6 Notes to Consolidated Financial Statements (Unaudited) 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"). 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, 1998 Form 10-K and June 30, 1999 Form 10-Q. 2. Farm Family Life Acquisition - Pro Forma Results of Operations The following unaudited pro forma information for the Company gives effect to the Farm Family Life acquisition as if it happened at the beginning of the periods presented. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of what would have resulted had the acquisition been made on the dates indicated, or future results. Nine Months Ended ($ in thousands, except per share data) September 30, ------------- 1999 1998 ---- ---- Revenues $224,196 $217,938 Net income attributable to common stockholders $14,832 $16,388 Net income per common share - diluted $2.40 $2.66 Net income for the nine months ended September 30, 1998 included a gain of $4,107,000 ($6,318,000 less taxes of $2,211,000) or $0.77 per share as a result of the reduction of a significant portion of the Company's liability for its extended earnings program with its agents. 7 3. 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, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income available to common stockholders $5,068,000 $8,458,000 $13,965,000 $14,191,000 ======================================================== Weighted-average number of shares in basic earnings per share 6,110,684 5,253,813 5,806,228 5,253,813 Effect of stock options 82,080 49,894 57,135 52,444 -------------------------------------------------------- Weighted-average number of shares in diluted earnings per share 6,192,764 5,303,707 5,863,363 5,306,257 ======================================================== Basic net income per share $0.83 $1.61 $2.41 $2.70 ======================================================== Diluted net income per share $0.82 $1.59 $2.38 $2.67 ======================================================== 4. 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"). This statement, which is effective for the Company for the year beginning January 1, 2001, establishes accounting and reporting standards for derivative instruments and for hedging activities. Statement 133 requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. Management believes that Statement 133 will not have a material impact on the Company's consolidated financial statements. 5. 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. 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, 1999 and 1998, approximately 62% and 63%, 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. 8 5. Contingencies - Continued 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, 1999, the Company was guarantor of $704,000 for such payments. The Company expects to enforce the terms of the guarantee in the event of default by a successor agent. The Company's liability for funds on deposit from policyholders includes amounts subject to discretionary withdrawal from annuity investment contracts. Withdrawal characteristics of annuity deposit liabilities as of September 30, 1999 are as follows: ($ in thousands) Amount % of Total ------ ---------- Subject to discretionary withdrawal at book value less surrender charge of 5% or more $63,847 21.1% Subject to discretionary withdrawal at book value less no or minimal surrender charge 230,073 76.0% Not subject to discretionary withdrawal 8,898 2.9% ------------------------------- Total annuities and deposit fund liabilities $302,818 100.0% ------------------------------- Many of the Company's existing computer programs and other computer systems upon which the Company relies were created using only two digits to identify a year in the date field. If not corrected, many of these computer applications could fail or produce erroneous results. In 1996, management began considering Year 2000 issues as they affect the Company and began to develop a Year 2000 plan. The Company's overall plan for dealing with the Year 2000 problem covers information technology ("IT") systems, non-IT systems, and third-party providers. The Company has established a Year 2000 team to lead the Company's activities relating to its Year 2000 issues. The Company's Year 2000 team works with the Company's senior management, legal and business units on Year 2000 issues. Despite the Company's efforts to address its Year 2000 issues, there can be no assurances that Year 2000 related failures of the Company's IT systems, or that Year 2000 related failures by third parties with which the Company interacts, will not have a material adverse effect on the Company's results of operations, liquidity and financial condition. In addition to its own computer systems and third-party providers, the Company may also have exposure in its property/casualty operations to Year 2000 claims asserted under certain insurance policies it has sold to customers. There can be no assurances that Year 2000 related claims will not emerge and that such claims will not have a material adverse effect on the Company's results of operations, liquidity and financial condition. 9 6. 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: ($ in thousands) Three months ended Nine months ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Premium Revenues Property and casualty insurance $49,398 $45,660 $142,455 $133,404 Life insurance 9,055 ---- 18,351 ---- ----------------------------------------------------- Total premium revenues $58,453 $45,660 $160,806 $133,404 ===================================================== Net Investment Income Property and casualty insurance $5,220 $4,688 $15,069 $13,935 Life insurance 13,004 ---- 25,209 ---- Corporate and other 94 127 304 398 Intersegment eliminations 25 ---- 37 ---- ----------------------------------------------------- Total investment income $18,343 $4,815 $40,619 $14,333 ===================================================== Amortization Expense Property and casualty insurance Amortization of deferred acquisition costs $9,398 $8,752 $26,909 $25,795 Life insurance Amortization of deferred acquisition costs 334 ---- 591 ---- Amortization of present value of future profits (125) ---- 272 ---- ----------------------------------------------------- Total amortization expense $9,607 $8,752 $27,772 $25,795 ===================================================== Other Operating Costs and Expenses Property and casualty insurance Underwriting expenses $2,546 $2,410 $7,671 $8,335 Dividends to policyholders 51 64 159 119 Life insurance Other operating costs and expenses 3,115 ---- 6,493 ---- Corporate and other 376 376 908 1,024 Intersegment eliminations (225) ---- (450) ---- ----------------------------------------------------- Total other operating costs and expenses $5,863 $2,850 $14,781 $9,478 ===================================================== 10 6. Segment Information - Continued ($ in thousands) Three months ended Nine months ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net Income Operating Income Property and casualty insurance $4,439 $4,389 $12,855 $10,143 Life insurance 963 ---- 1,598 ---- Corporate and other (159) (162) (504) (406) ------------------------------------------------------- Total consolidated operating income 5,243 4,227 13,949 9,737 Realized investment gains, net of tax (175) 124 16 347 Gain on partial reduction of extended earnings liability, net of tax ---- 4,107 ---- 4,107 ------------------------------------------------------- Total net income $5,068 $8,458 $13,965 $14,191 ======================================================= Federal Income Tax Expense (Benefit) Property and casualty insurance $1,274 $4,350 $4,741 $7,032 Life insurance 808 ---- 1,357 ---- Corporate and other (210) (92) (233) (218) ------------------------------------------------------- Total federal income tax expense $1,872 $4,258 $5,865 $6,814 ======================================================= September 30, December 31, 1999 1998 ---- ---- Assets Property and casualty insurance $445,041 $397,038 Life insurance 821,728 ---- Corporate and other 71,593 35,417 Intersegment eliminations (96,758) (25,952) ------------------------------ Total assets $1,241,604 $406,503 ============================== 11 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, 1999, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 1999 and the consolidated statement of cash flows for the nine-month period ended September 30, 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 generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1998, and the related consolidated statements of income and comprehensive income and of cash flows for the year then ended (not presented herein), and in our report dated February 10, 1999 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 1998, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP Albany, New York October 21, 1999 12 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") and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere within this document. The Company's operating results are subject to significant fluctuations from period to period depending upon, among other factors, the frequency and severity of losses from weather related and other catastrophic events, the effect of competition and regulation on the pricing of products, changes in interest rates, 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 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. In all such states, residual market premium rates are subject to the approval of the state insurance department and have generally been inadequate. The amount of future losses or assessments from residual market mechanisms cannot be predicted with certainty and could have a material adverse effect on the Company's results of operations. For the nine-month periods ended September 30, 1999 and 1998, 35.0% and 34.5%, respectively, of the Company's property and casualty direct written premiums were derived from policies written in New York and, for the same periods, 26.8% and 28.4%, respectively, were derived from policies written in New Jersey. For these same periods, no other state accounted for more than 10.0% of the Company's property and casualty direct written premiums. As a result, the Company's results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States generally. Many computer programs and other computer systems upon which the Company relies were created using only two digits to identify a year in the date field. If not corrected, many of these computer applications could fail or produce erroneous results. In 1996, management began considering Year 2000 issues as they affect the Company and began to develop a Year 2000 plan. The Company's overall plan for dealing with the Year 2000 problem covers information technology ("IT") systems, non-IT systems, and third-party providers. The Company has established a Year 2000 team to lead the Company's activities relating to its Year 2000 issues. The Company's Year 2000 team works with the Company's senior management, legal and business units on Year 2000 issues. The Company's current state of readiness with respect to each of its IT systems, non-IT systems and third-party providers is discussed below. The Company uses a process consisting of the following five phases to approach Year 2000 compliance of its IT systems: (1) Inventory (cataloging the systems portfolio); (2) Assessment (identifying possible Year 2000 related failures and developing strategies to remediate them); (3) Remediation (creating or acquiring corrections to deficiencies); (4) Testing (confirming whether remediation is successful); and (5) Implementation (installing solutions). Critical IT systems include product administration systems, key financial systems and core IT infrastructure. Management of the Company believes that the phases of inventory, assessment, remediation, testing and implementation for critical IT systems currently in use by the Company have been completed. Noncritical IT systems include certain other business applications which the Company does not believe to be critical. The 13 inventory phase has been completed for the Company's noncritical IT systems. The assessment, remediation, testing and implementation phases for the Company's noncritical IT systems are ongoing and are expected to be completed by the end of 1999. The Company has tested the operation of IT systems working together in an integrated test environment that replicated the Company's live environment. This test exercised software and hardware using dates advanced to Year 2000 and beyond. There can be no assurances that this integrated testing discovered all potential Year 2000 problems. Non-IT systems typically include embedded technology such as microcontrollers. The Company's non-IT systems include machinery and equipment in the buildings it occupies, such as elevators, telephone equipment, HVAC, security and alarm systems and print shop/mail room equipment. The Company is reviewing these systems for Year 2000 compliance with the third-party providers the Company uses to service and maintain this equipment. The Company's Year 2000 effort also includes a systematic assessment of the Year 2000 compliance status of third-party providers. The Company believes loss of public utilities, phone, banking, mail or certain outsourced processing services could have an immediate adverse impact on the Company's operations, which under certain circumstances could be material. The Company has contacted each of its third-party providers, through letters, questionnaires and/or interviews depending upon the nature of the product or service supplied, to determine if the provider is Year 2000 compliant. As of September 30, 1999, the Company has received responses from approximately 90% of such third-parties. These responses generally state that the third-party providers believe they will be Year 2000 compliant and that no products or services provided will be materially affected. However, few providers have given written assurances directly to the Company that they are currently Year 2000 compliant. The Company continues to monitor the status of third-party providers' Year 2000 compliance. Management believes that the process of evaluating the Year 2000 compliance status of the Company's third-party providers who provide critical services and products has been substantially completed. At this time, the Company has not changed its dependency on any of these third-party providers because of concerns about their Year 2000 compliance status and plans. The Company does not separately track the internal costs incurred for the Year 2000 project which are principally the related payroll costs for its IT staff. However, the Company has identified certain costs related to the Year 2000 project including costs related to outside consultants and software and hardware applications. The identified costs incurred for the nine months ended September 30, 1999 were approximately $122,000. The total identified costs related to the Year 2000 project to date are approximately $600,000, of which $584,000 was expensed and $16,000 was capitalized. Based on information currently available, the total identified remaining costs expected to be incurred for the Year 2000 projects are estimated to be $30,000. These costs are being funded through operating cash flows. These amounts include costs relating to Farm Family Life and United Farm Family, including costs incurred by Farm Family Life and United Farm Family prior to Farm Family Holdings' acquisition of Farm Family Life on April 6, 1999. The Company's estimated costs of the Year 2000 project are based on management's best estimates, which were derived from numerous assumptions, including the extent of remaining remediation and testing activities, availability of certain resources and other factors. The phases of inventory, assessment, remediation, testing and implementation of the Company's software for Year 2000 issues have been done primarily by the Company's existing IT staff. Correction of Year 2000 issues is a high priority project and certain other less critical IT projects have been deferred due to Year 2000 efforts; however, the Company does not believe the deferral of other IT projects has had a material effect on the Company's financial condition or results of operations in 1998 or during the nine months ended September 30, 14 1999. The Company's IT staff has continued to work on other high priority projects concurrent with the Year 2000 project. The Company has not conducted a comprehensive analysis of the operational problems and costs that would be reasonably likely to result from the failure to achieve Year 2000 compliance on a timely basis. The Company believes that its most reasonably likely worst case Year 2000 scenarios may include these elements: (1) one or more parts of the Company's IT systems will operate incorrectly, thereby resulting in a temporary shutdown or miscalculations in a system which may have an adverse effect on the Company's operations and (2) one or more of the Company's third-party providers will be unable to provide the products or services expected which may have an adverse effect on the Company's operations. Based on the testing already completed, the Company believes that its software and hardware will perform substantially as planned when Year 2000 processing begins. The Company has developed Year 2000 contingency plans for critical services and products provided by third-parties and for internal critical IT systems. The contingency plans vary depending on the circumstances, but most often include alternate or backup procedures and systems, both automated and manual. Management intends to validate these plans as practicable and implement them by the end of 1999. The extent to which the contingency plans will minimize disruptions of critical business processes is not determinable. Despite the Company's efforts to address its Year 2000 issues, there can be no assurances that Year 2000 related failures of the Company's IT systems, or that Year 2000 related failures by third parties with which the Company interacts, will not have a material adverse effect on the Company's results of operations, liquidity and financial condition. In addition to its own computer systems and third-party providers, the Company may also have exposure in its property/casualty operations to Year 2000 claims asserted under certain insurance policies it has sold to customers. Although the Company does not issue insurance policies intended to cover risks related to the Year 2000 issue, there can be no certainty regarding future judicial or legislative interpretations of coverage. There can be no assurances that Year 2000 related claims will not emerge and that such claims will not have a material adverse effect on the Company's results of operations, liquidity and financial condition. Safe Harbor Statement under The Private Securities Litigation Reform Act of 1995: With exception of historical information, the matters discussed or incorporated by reference in this Report on Form 10-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 of the plans and objectives of the Company or its management, statements of future economic performance, projections of revenue, earnings, capital structure and other financial items 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, the results of operations of the Company, fluctuations in the market value of shares of the Company's common stock, exposure to catastrophic loss, geographic concentration of loss exposure, general economic conditions and conditions specific to the property and casualty 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 15 reinsurance programs, developments in the securities markets and the impact thereof on the Company's investment portfolio, factors relating to the Company's ability to successfully address its Year 2000 issues and other risks listed from time to time in the Company's Securities and Exchange Commission filings, including the Form 10-K filed for the fiscal year ended December 31, 1998. Additional risks and uncertainties that may cause actual results of operations and business of Farm Family Life to differ materially from those contemplated or projected, forecasted, estimated or budgeted in such forward looking statements, include, among others: (i) assumptions regarding future morbidity, persistency, lapse rates, expenses, mortality and interest rates used in calculating reserve and liability amounts; (ii) significant variations of actual experience from that assumed by Farm Family Life as to the expected morbidity, lapse rates and other factors in developing pricing and other terms of its life insurance products; (iii) the ability of Farm Family Life to maintain its current rating from A.M. Best Company, Inc.; (iv) changes in interest rates causing a reduction of investment income, operating cash flow and other sources which affect Farm Family Life's ability to pay policyholder benefits; (v) policyholder lapses resulting from interest rate fluctuations; (vi) inability of Farm Family Life to maintain appropriate levels of statutory capital and surplus, particularly in light of continuing scrutiny by rating organizations and state insurance regulatory authorities, and to maintain acceptable financial strength and claim-paying ratings; (vii) a significant change in or termination of Farm Family Life's relationship with the Farm Bureaus(R) in the states where Farm Family Life's business is concentrated; (viii) adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves and other financial viability requirements; (ix) heightened competition, including, specifically the intensification of price competition, the entry of new or existing competitors and the formation of new products by new and existing competitors which may have substantially greater technical, financial and operating resources; (x) inability to carry out marketing and sales plans; (xi) loss of key executives; (xii) general economic and business conditions which are less favorable than expected; (xiii) unanticipated changes in industry trends; and (xiv) the reserving policies and the adequacy of the reinsurance of Farm Family Life. Accordingly, there can be no assurance that actual results will conform to the forward-looking statements in this Form 10-Q. 16 Results of Operations The Three Months Ended September 30, 1999 Compared to the Three Months Ended September 30, 1998 Insurance Premiums and Contract Charges Premium revenue increased to $58.5 million for the three months ended September 30, 1999 from $45.7 million for the same period in 1998. Premium revenue for property and casualty insurance increased $3.7 million, during the three months ended September 30, 1999 to $49.4 million from $45.7 million for the same period in 1998. The increase in premium revenue for the third quarter of 1999 was primarily attributable to an increase of $1.7 million in premium revenue derived from Farm Family Casualty's direct writings and a decrease in premium revenue ceded to Farm Family Casualty's reinsurers of $1.7 million. The $1.7 million increase in earned premiums on additional business directly written by Farm Family Casualty was primarily attributable to an increase of $0.8 million, or 1.9%, in earned premiums from Farm Family Casualty's primary products (personal and commercial automobile products other than assigned risk automobile business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package) and an increase of $0.9 million, or 12.8%, in earned premiums from other products. The increase in earned premiums from other products was primarily attributable to an increase in sales of workers compensation products in Massachusetts and New York. Farm Family Casualty had approximately 171,900 total policies in force at September 30, 1999. The number of policies in force related to Farm Family Casualty's primary products increased by 3.8% to approximately 141,400 as of September 30, 1999 from approximately 136,200 as of September 30, 1998. The decrease in premium revenue ceded to reinsurers of $1.7 million was primarily attributable to a reduction in premiums ceded pursuant to Farm Family Casualty's aggregate stop loss reinsurance program as a result of favorable loss experience for the 1999 accident year. Property and casualty net written premiums increased $3.9 million to $50.2 million for the three months ended September 30, 1999 compared to $46.3 million for the same period in 1998. The increase in net written premiums was primarily attributable to an increase of $2.8 million in Farm Family Casualty's direct writings excluding personal automobile business in New Jersey, a decrease of $1.9 million in written premiums ceded to Farm Family Casualty's reinsurers, and the inclusion of United Farm Family's direct writings of $0.5 million. These increases were partially offset by a decrease of $1.5 million in direct written premiums for personal automobile business in New Jersey. The reduction in personal automobile business in New Jersey was primarily attributable to the New Jersey legislation mandating a rate roll back for personal automobile business in New Jersey, effective March 22, 1999. Geographically, the increase in Farm Family Casualty's direct writings came from New York, Massachusetts, Connecticut, West Virginia, New Hampshire, Delaware, Vermont and Rhode Island. In addition, direct writings of all the Company's primary products, except personal automobile, increased during the third quarter of 1999. Life insurance premium revenue was $9.1 million for the three months ended September 30, 1999. This amount includes premiums and contract charges primarily from the sale of individual whole life, term and universal life products, and disability income insurance products. Net Investment Income Net investment income increased $13.5 million to $18.3 million for the three months ended September 30, 1999 from $4.8 million for the same period in 1998. Net investment income for the property and casualty insurance segment increased $0.5 million, or 11.3%, to $5.2 million for the three months ended September 30, 1999 from $4.7 million for the same period in 1998. 17 The taxable equivalent yield on the property and casualty insurance segment's investment portfolio was 6.9% and 7.1% for the three months ended September 30, 1999 and 1998, respectively. The increase in net investment income for the property and casualty insurance segment was primarily the result of an increase in the average cash and invested assets (at amortized cost) of $31.5 million, or 11.2%, for Farm Family Casualty and the inclusion of United Farm Family, which accounted for $0.4 million of the increase in investment income and an additional $26.5 million in average cash and invested assets (at amortized cost). The overall increase in cash and invested assets was greater than the overall increase in net investment income for the three months ended September 30, 1999 primarily as a result of an increase in the investment in tax-exempt fixed maturity securities. The investment income from the property and casualty insurance segment's tax-exempt securities increased to $1.1 million for the three months ended September 30, 1999 from $0.7 million for the same period in 1998. United Farm Family's investment income from tax-exempt securities was not material for the three months ended September 30, 1999. After-tax income has been increased by investing in tax-exempt securities which generally produce more after-tax investment income than taxable investment grade fixed maturity securities when market conditions are favorable. Net investment income for the life insurance segment was $13.0 million for the three months ended September 30, 1999. The yield on fixed maturity investments (at amortized cost) was 7.0% for that period. Losses and Loss Adjustment Expenses Losses and loss adjustment expenses on property and casualty insurance increased $4.5 million, or 13.5%, to $37.4 million for the three months ended September 30, 1999 from $32.9 million for the same period in 1998. Losses and loss adjustment expenses were 75.7% of premium revenue for the three months ended September 30, 1999 compared to 72.1% of premium revenue for the same period in 1998. United Farm Family's losses and loss adjustment expenses were $1.0 million for the three months ended September 30, 1999. Excluding United Farm Family, losses and loss adjustment expenses were 74.1% of premium revenue for the three months ended September 30, 1999 compared to 72.1% for the same period in 1998. The increase in losses as a percent of premium revenue accounted for 1.6% of the total 2.0% increase and was primarily attributable to a reduction of losses ceded pursuant to Farm Family Casualty's aggregate stop loss reinsurance program. The remaining 0.4% increase resulted from an increase in loss adjustment expenses. Amortization Expense Amortization expense increased $0.8 million, or 9.8%, to $9.6 million for the three months ended September 30, 1999 from $8.8 million for the same period in 1998. The increase was primarily attributable to an increase in amortization of deferred acquisition costs for the property and casualty segment of $0.6 million resulting from increased deferred acquisition costs due to the growth of Farm Family Casualty. Other Operating Costs and Expenses Other operating costs and expenses increased $3.0 million to $5.9 million for the three months ended September 30, 1999 from $2.9 million for the same period in 1998. The increase was primarily due to the inclusion of Farm Family Life's other operating costs and expenses of $3.1 million. For the three months ended September 30, 1999, property and casualty insurance underwriting expenses (including amortization expenses) were 24.2% of premium revenue compared to 24.4% for the same period in 1998. Excluding United Farm Family, for the three months ended September 30, 1999, property and casualty insurance underwriting expenses (including amortization expenses) were 23.7% of premium revenue compared to 24.4% for the same period in 1998. Participating Policyholders' Interest Participating policyholders' interest of $3.1 million for the three months ended September 30, 1999 is attributable to the inclusion of Farm Family Life in the operations of the Company for the third quarter of 1999. 18 Federal Income Tax Expense Federal income tax expense decreased $2.4 million to $1.9 million for the three months ended September 30, 1999 from $4.3 million for the same period in 1998. Federal income tax expense was 26.6% of income before federal income tax expense and preferred stock dividends for the three months ended September 30, 1999 compared to 33.5% for the same period in 1998. The reduction is primarily due to an increase in interest income from tax-exempt securities. Net Income Attributable to Common Stockholders Net income decreased $3.4 million to $5.1 million for the three months ended September 30, 1999 from $8.5 million for the same period in 1998 primarily due to a net gain of $4.1 million ($6.3 million less taxes of $2.2 million) recorded in 1998 as a result of the reduction of a significant portion of the Company's liability for its extended earnings program with its agents, partially offset by the foregoing factors. The Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September 30, 1998 Insurance Premiums and Contract Charges Premium revenue increased to $160.8 million for the nine months ended September 30, 1999 from $133.4 million for the same period in 1998. Premium revenue for property and casualty insurance increased $9.1 million, during the nine months ended September 30, 1999 to $142.5 million from $133.4 million for the same period in 1998. The increase in property and casualty premium revenue was primarily attributable to the following relating to Farm Family Casualty: an increase of $6.0 million in premium revenue from direct writings, an increase of $2.1 million in voluntary assumed reinsurance business and a decrease of $0.7 million in premiums ceded to reinsurers. The $6.0 million increase in earned premiums on additional business directly written by Farm Family Casualty was primarily attributable to an increase of $4.9 million, or 4.4%, in earned premiums from Farm Family Casualty's primary products (personal and commercial automobile products other than assigned risk automobile business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package) and an increase of $1.1, or 4.9%, million in earned premiums from other products. Farm Family Casualty had approximately 171,900 total policies in force at September 30, 1999. The number of policies in force related to Farm Family Casualty's primary products increased by 3.8% to approximately 141,400 as of September 30, 1999 from approximately 136,200 as of September 30, 1998. Property and casualty net written premiums increased $5.2 million, or 3.6%, to $147.4 million for the nine months ended September 30, 1999 compared to $142.2 million for the same period in 1998. The increase in property and casualty net written premiums for the first nine months of 1999 was primarily attributable to an increase of $7.4 million or 6.3% in direct writings by Farm Family Casualty excluding personal automobile business in New Jersey and assigned risk automobile business premiums, an increase of $1.1 million in Farm Family Casualty's assigned risk automobile business premiums, and the inclusion of United Farm Family's direct written premium of $0.9 million. These increases were partially offset by a decrease of $3.1 million in direct written premiums for personal automobile business in New Jersey and by an increase of $1.3 million in premiums ceded by Farm Family Casualty to its reinsurers. The reduction in personal automobile business in New Jersey was primarily attributable to the New Jersey legislation mandating a rate roll back for personal automobile business in New Jersey, effective March 22, 1999. Geographically, the increase in Farm Family Casualty's direct writings came from New York, New Jersey, Massachusetts, Connecticut, West Virginia, New Hampshire, Vermont and Rhode Island. In addition, direct writings of all of Farm Family Casualty's primary products, except personal automobile, increased during the nine months ended September 30, 1999. 19 Life insurance premium revenue was $18.4 million. This amount includes premiums and contract charges primarily from the sale of individual whole life, term and universal life products, and disability income insurance products, subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. Net Investment Income Net investment income increased $26.3 million to $40.6 million for the nine months ended September 30, 1999 from $14.3 million for the same period in 1998. Net investment income for the property and casualty insurance segment increased $1.2 million, or 8.1% to $15.1 million for the nine months ended September 30, 1999 from $13.9 million for the same period in 1998. The taxable equivalent yield on the property and casualty insurance segment's investment portfolio was 6.9% and 7.1% for the nine months ended September 30, 1999 and 1998, respectively. The increase in net investment income for the property and casualty insurance segment was primarily the result of an increase in the average cash and invested assets (at amortized cost) of $31.2 million, or 11.3%, for Farm Family Casualty and the inclusion of United Farm Family, which accounted for $0.8 million of the increase in investment income and an additional $27.4 million in average cash and invested assets (at amortized cost). The overall increase in cash and invested assets was greater than the overall increase in net investment income for the nine months ended September 30, 1999 primarily as a result of an increase in the investment in tax-exempt fixed maturity securities. The investment income from the property and casualty insurance segment's tax-exempt securities increased to $3.2 million for the nine months ended September 30, 1999 from $1.7 million for the same period in 1998. United Farm Family's investment income from tax-exempt securities was not material for the nine months ended September 30, 1999. After-tax income has been increased by investing in tax-exempt securities which generally produce more after-tax investment income than taxable investment grade fixed maturity securities when market conditions are favorable. Net investment income for the life insurance segment was $25.2 million for the nine months ended September 30, 1999, which represents net investment income for Farm Family Life since its acquisition by Farm Family Holdings on April 6, 1999. The yield on fixed maturity investments (at amortized cost) was 6.8% for that period. Losses and Loss Adjustment Expenses Losses and loss adjustment expenses on property and casualty insurance increased $7.7 million, or 7.8%, to $106.8 million for the nine months ended September 30, 1999 from $99.1 million for the same period in 1998. Losses and loss adjustment expenses were 75.0% of premium revenue for the nine months ended September 30, 1999 compared to 74.3% of premium revenue for the same period in 1998. Excluding United Farm Family, losses and loss adjustment expenses were 73.7% of premium revenue for the nine months ended September 30, 1999 compared to 74.3% for the same period in 1998. The decrease in losses and loss adjustment expenses as a percent of premium revenue (excluding United Farm family) was primarily attributable to a decrease in weather related losses for Farm Family Casualty during the nine months ended September 30, 1999 compared to the same period in 1998. Amortization Expense Amortization expense increased $2.0 million, or 7.7%, to $27.8 million for the nine months ended September 30, 1999 from $25.8 million for the same period in 1998. The increase was primarily attributable to the inclusion of amortization expense of deferred acquisition costs and present value of future profits for the life insurance segment of $0.9 million and an increase in amortization of deferred acquisition costs for the property and casualty segment of $1.1 million. 20 Other Operating Costs and Expenses Other operating costs and expenses increased $5.3 million to $14.8 million for the nine months ended September 30, 1999 from $9.5 million for the same period in 1998. The increase was primarily due to the inclusion of Farm Family Life's other operating costs and expenses of $6.5 million in 1999 partially offset by a decrease in property and casualty underwriting expenses of $0.7 million and an increase in intersegment eliminations of $0.5 million for the nine months ended September 30, 1999 compared to the same period in 1998. For the nine months ended September 30, 1999, property and casualty insurance underwriting expenses (including amortization expenses) were 24.3% of premium revenue compared to 25.6% for the same period in 1998. The decrease in underwriting expenses as a percent of premium revenue was primarily attributable to a greater relative increase in the Company's premium revenue than in the level of overhead expenses, as well as the continuation of a company-wide expense management program, partially offset by the inclusion of the costs and expenses for United Farm Family since its acquisition by Farm Family Holdings. Excluding United Farm Family, for the nine months ended September 30, 1999, property and casualty underwriting expenses (including amortization expenses) were 24.0% of premium revenue compared to 25.6% for the same period in 1998. Participating Policyholders' Interest Participating policyholders' interest of $5.7 million for the nine months ended September 30, 1999 is attributable to the inclusion of Farm Family Life since its acquisition by Farm Family Holdings. Federal Income Tax Expense Federal income tax expense decreased $0.9 million to $5.9 million for the nine months ended September 30, 1999 from $6.8 million for the same period in 1998. Federal income tax expense was 29.3% of income before federal income tax expense and preferred stock dividends for the nine months ended September 30, 1999 compared to 32.4% for the same period in 1998. The reduction is primarily due to an increase in interest income from tax-exempt securities. Net Income Attributable to Common Stockholders Net income decreased $0.2 million to $14.0 million for the nine months ended September 30, 1999 from $14.2 million for the same period in 1998 primarily due to a net gain of $4.1 million recorded in 1998 as a result of the reduction of a significant portion of the Company's liability for its extended earnings program with its agents, partially offset by the foregoing factors. Liquidity and Capital Resources Net cash provided by operating activities was $44.5 million and $22.7 million during the nine month periods ended September 30, 1999 and 1998, respectively. The increase in net cash provided by operating activities was primarily attributable to the additional operating cash flow from Farm Family Life. Net cash used in investing activities was $23.7 million during the nine months ending September 30, 1999 compared to $19.5 million for the same period in 1998. The increase in cash used in investing activities resulted primarily from an increase in investment purchases offset partially by an increase in cash resulting from the acquisition of Farm Family Life. The Company has in place unsecured lines of credit with two banks under which it may borrow up to $17.0 million. At September 30, 1999, no amounts were outstanding on the lines of credit. 21 Future Application of Accounting Standards In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"). This statement, which is effective for the Company for the year beginning January 1, 2001, establishes accounting and reporting standards for derivative instruments and for hedging activities. Statement 133 requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. Management believes that the adoption of Statement 133 will not have a material impact on the Company's financial statements. 22 PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK The Company's market risks of financial instruments and investment objectives have not materially changed since December 31, 1998. With the acquisition of Farm Family Life effective April 6, 1999, however, the total amount of fixed maturity investments has increased substantially. The carrying value of the total fixed maturity portfolio at September 30, 1999 was $980.1 million compared to $301.5 million at December 31, 1998. The fair value of the Company's fixed maturity portfolio is sensitive to changes in interest rates. The Company estimates that if interest rates were to increase by 100 basis points from their September 30, 1999 levels, the Company's fixed maturity portfolio would decline in fair value by approximately $54.0 million. The calculation of interest rate sensitivity uses numerous assumptions, requires significant estimates and assumes an immediate change in interest rates without any management of the investment portfolio in reaction to such a change. Consequently, the estimated change in the carrying value of the Company's fixed maturity portfolio will likely be different from the actual changes experienced under the given interest rate scenario, and the difference may be material. 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, 1999 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 *3.1 Certificate of Incorporation of Farm Family Holdings, Inc. *3.2 Bylaws of Farm Family Holdings, Inc. 3.3 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) 3.4 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) 3.5 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) 23 Exhibit Number Document Description - -------------- -------------------- 4.1 Rights Agreement, dated as of July 29, 1997, between Farm Family Holdings, Inc. and The Bank of New York (incorporated by reference to Exhibit 4.1 to Farm Family Holdings, Inc.'s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on June 14, 1999) 4.2 Registration Rights Agreement, dated as of April 6, 1999 by and among Farm Family Holdings, Inc. and the Shareholders of Farm Family Life Insurance Company (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended June 30, 1999) 10.1 Amendment No. 1 to the Farm Family Holdings, Inc. Annual Incentive Plan effective July 28, 1999 (filed herewith) 10.2 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, Farm Family Holdings, Inc. Officer Severance Pay Plan effective July 28, 1999 (filed herewith) 10.3 Amendment No. 3 to the Farm Family Holdings, Inc. Omnibus Securities Plan effective July 28, 1999 (filed herewith) 10.4 Amendment No. 1 to the Farm Family Life Insurance Company Annual Incentive Plan effective July 28, 1999 (filed herewith) 10.5 Amendment No. 2 to the Farm Family Holdings, Inc. Officers' Deferred Compensation Plan effective July 28, 1999 (filed herewith) 10.6 Amendment No. 2 to the Farm Family Holdings, Inc. Directors' Deferred Compensation Plan effective July 28, 1999 (filed herewith) 10.7 Amendment No. 2 to Farm Family Supplemental Profit Sharing and Money Purchase Plan effective July 28, 1999 (filed herewith) 27 Financial Data Schedule *Incorporated by reference to Registration Statement No. 333-4446 Reports on Form 8-K - ------------------- A report on Form 8-K was filed on July 12, 1999 reporting a press release issued announcing that the Company has been added to the Russell 2000 Index of small-capitalization stocks. A report on Form 8-K was filed on August 2, 1999 reporting a press release issued announcing results of its operations for the second quarter ended June 30, 1999. 24 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 12, 1999 By:/s/ Philip P. Weber - ------------------ ---------------------------------------------------- (Date) Philip P. Weber, President & Chief Executive Officer (Principal Executive Officer) November 12, 1999 By:/s/ Timothy A. Walsh - ------------------ ---------------------------------------------------- (Date) Timothy A. Walsh, Executive Vice President - Finance & Treasurer (Principal Financial & Accounting Officer) 25 EXHIBIT 10.1 AMENDMENT NO. 1 TO THE FARM FAMILY HOLDINGS, INC. ANNUAL INCENTIVE PLAN This AMENDMENT NO. 1 TO THE FARM FAMILY HOLDINGS, INC. ANNUAL INCENTIVE PLAN, dated as of July 28, 1999 (this "Amendment No. 1"), was adopted by the Board of Directors of FARM FAMILY HOLDINGS, INC. (the "Company"), at a meeting duly called and held on July 28, 1999. 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 July 28, 1999, as follows: 1. Section 1.02 is hereby amended and replaced in its entirety to read as follows: 1.02 Cause: An employee's: (a) felony conviction or the failure of an employee 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 the Company; (c) theft, participation in any material fraudulent conduct, or other acts involving material misappropriation of property; or (d) willful and continued failure by the employee to substantially perform the employee's duties properly assigned to the employee (other than any such failure resulting from the employee'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 employee has not substantially performed his/her duties. For purposes of determining Cause, no act, or failure to act, on the employee'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 employee shall not be deemed to have been terminated for Cause without (i) reasonable notice to the employee setting forth the reasons for the Company's intention to terminate for Cause, (ii) an opportunity for the employee, together with the employee's counsel, to be heard before the Board, and (iii) delivery to the employee of a notice of termination from the Board finding that in the good faith opinion of a majority of the Board, the employee was guilty of conduct set forth in this Section. 2. Section 1.03(b) is hereby amended and replaced in its entirety to read as follows: "(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 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company or Farm Family Holdings, Inc. 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;" 3. Except as amended and modified by this Amendment No. 1, 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. 1 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 EXHIBIT 10.2 SUMMARY PLAN DESCRIPTION FARM FAMILY LIFE INSURANCE COMPANY FARM FAMILY CASUALTY INSURANCE COMPANY FARM FAMILY HOLDINGS, INC. OFFICER SEVERANCE PAY PLAN Effective July 28, 1999 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, and as further amended July 28, 1999, 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") are eligible for severance benefits under 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. 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. 4. 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. 5. 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 due to the elimination of the officer's position and 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 Vice President - Human Resources or, in the case of such notice given by the Vice President - 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 or (b) (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(b) 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 Vice President - 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 Vice President - 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 Vice President-Human Resources will rule on the claims within 60 days of receipt of the claim. In the case of claims made by the Vice President-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 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 the plan 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 Vice President-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: Vice President-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 Vice President-Human Resources: Vice President-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. EXHIBIT 10.3 AMENDMENT NO. 3 TO THE FARM FAMILY HOLDINGS, INC. OMNIBUS SECURITIES PLAN This AMENDMENT NO. 3 TO THE FARM FAMILY HOLDINGS, INC. OMNIBUS SECURITIES PLAN, dated as of July 28, 1999 (this "Amendment No. 3") was adopted by the Board of Directors of FARM FAMILY HOLDINGS, INC. (the "Company"), at a meeting duly called and held on July 28, 1999. WHEREAS, the Board of Directors of the Company (the "Board") adopted the Farm Family Holdings, Inc. Omnibus Securities Plan dated as of December 13, 1996 as amended by Amendment No. 1 to the Farm Family Holdings, Inc. Omnibus Securities Plan dated as of February 13, 1997 and Amendment No. 2 to the Farm Family Holdings, Inc. Omnibus Securities Plan dated as of October 27, 1998 (as amended, the "Plan"); WHEREAS, pursuant to Article XI of the Plan, the Board has the right to alter or amend the Plan from time to 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 July 28, 1999, as follows: 1. Subsection (b) of the definition of "Change of Control" is hereby amended and replaced in its entirety to read as follows: "(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 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company or Farm Family Holdings, Inc. 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;" 2. Except as amended and modified by this Amendment No. 3, 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. 3 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 EXHIBIT 10.4 AMENDMENT NO. 1 TO THE FARM FAMILY LIFE INSURANCE COMPANY ANNUAL INCENTIVE PLAN This AMENDMENT NO. 1 TO THE FARM FAMILY LIFE INSURANCE COMPANY ANNUAL INCENTIVE PLAN, dated as of July 28, 1999 (this "Amendment No. 1"), was adopted by the Board of Directors of FARM FAMILY LIFE INSURANCE COMPANY (the "Company"), at a meeting duly called and held on July 28, 1999. WHEREAS, the Board of Directors of the Company (the "Board") adopted the Farm Family Life Insurance Company 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 July 28, 1999, as follows: 1. Section 1.02 is hereby amended and replaced in its entirety to read as follows: 1.02 Cause: An employee's: (a) felony conviction or the failure of an employee 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 the Company; (c) theft, participation in any material fraudulent conduct, or other acts involving material misappropriation of property; or (d) willful and continued failure by the employee to substantially perform the employee's duties properly assigned to the employee (other than any such failure resulting from the employee'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 employee has not substantially performed his/her duties. For purposes of determining Cause, no act, or failure to act, on the employee'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 employee shall not be deemed to have been terminated for Cause without (i) reasonable notice to the employee setting forth the reasons for the Company's intention to terminate for Cause, (ii) an opportunity for the employee, together with the employee's counsel, to be heard before the Board, and (iii) delivery to the employee of a notice of termination from the Board finding that in the good faith opinion of a majority of the Board, the employee was guilty of conduct set forth in this Section. 2. Section 1.03(b) is hereby amended and replaced in its entirety to read as follows: "(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 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company or Farm Family Holdings, Inc. 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;" 3. Except as amended and modified by this Amendment No. 1, all other terms of the Plan shall remain unchanged. IN WITNESS WHEREOF, Farm Family Life Insurance Company by authority of its Board of Directors, has caused this Amendment No. 1 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 Title: President & Chief Executive Officer EXHIBIT 10.5 AMENDMENT NO. 2 TO THE FARM FAMILY HOLDINGS, INC. OFFICERS' DEFERRED COMPENSATION PLAN This AMENDMENT NO. 2 TO THE FARM FAMILY HOLDINGS, INC. OFFICERS' DEFERRED COMPENSATION PLAN, dated as of July 28, 1999 (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 July 28, 1999. WHEREAS, the Board of Directors of the Company (the "Board") adopted the Farm Family Holdings, Inc. Officers' Deferred Compensation Plan, dated as of November 1, 1996, as amended by Amendment No. 1 to the Farm Family Holdings, Inc. Officers' Deferred Compensation Plan dated as of October 27, 1998 (as amended, the "Plan"); and WHEREAS, pursuant to Section 7.06 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 July 28, 1999, as follows: 1. Section 1.05(b) is hereby amended and replaced in its entirety to read as follows: "(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 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company or Farm Family Holdings, Inc. 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;" 2. 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 EXHIBIT 10.6 AMENDMENT NO. 2 TO THE FARM FAMILY HOLDINGS, INC. DIRECTORS' DEFERRED COMPENSATION PLAN This AMENDMENT NO. 2 TO THE FARM FAMILY HOLDINGS, INC. DIRECTORS' DEFERRED COMPENSATION PLAN, dated as of July 28, 1999 (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 July 28, 1999. WHEREAS, the Board of Directors of the Company (the "Board") adopted the Farm Family Holdings, Inc. Directors' Deferred Compensation Plan, dated as of November 1, 1996, as amended by Amendment No. 1 to the Farm Family Holdings, Inc. Directors' Deferred Compensation Plan dated as of October 27, 1998 (as amended, the "Plan"); and WHEREAS, pursuant to Section 7.06 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 July 28, 1999, as follows: 1. Section 1.05(b) is hereby amended and replaced in its entirety to read as follows: "(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 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company or Farm Family Holdings, Inc. 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;" 2. 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 EXHIBIT 10.7 AMENDMENT NO. 2 TO FARM FAMILY SUPPLEMENTAL PROFIT SHARING AND MONEY PURCHASE PLAN WHEREAS, Farm Family Life Insurance Company and Farm Family Casualty Insurance Company (the "Principal Employers") adopted an amended and restated Farm Family Supplemental Profit Sharing and Money Purchase Plan effective as of January 1, 1997, as amended by Amendment No. 1 to Farm Family Supplemental Profit Sharing and Money Purchase Plan effective as of April 27, 1999 (as amended, the "Plan"), for the benefit of eligible employees of the Principal Employers as well as eligible employees of Farm Family Holdings, Inc. and United Farm Family Insurance Company (collectively with the Principal Employers, the "Employers"); and WHEREAS, pursuant to Section 10 of the Plan, the Principal Employers have the right to amend or modify the Plan from time to time; and WHEREAS, the Principal Employers now wish to amend the Plan as set forth herein. NOW, THEREFORE, the Plan is hereby amended, effective as of July 28, 1999, as follows: 1. Paragraph (b) of Section 2., Definitions, is hereby amended and replaced in its entirety to read as follows: "(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 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company or Farm Family Holdings, Inc. 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;" 2. Except as specifically set forth in this Amendment No. 2, the terms and conditions of the Plan shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, Farm Family Life Insurance Company and Farm Family Casualty Insurance Company, as Principal Employers under the Plan, have caused this Amendment No. 2 to be adopted. ATTEST: FARM FAMILY LIFE INSURANCE COMPANY By: /s/ Victoria M. Stanton By: /s/ Philip P. Weber ----------------------- ------------------- Secretary Philip P. Weber President & C.E.O. ATTEST: FARM FAMILY CASUALTY INSURANCE COMPANY By: /s/ Victoria M. Stanton By: /s/ Philip P. Weber ----------------------- ------------------ Secretary Philip P. Weber President & C.E.O. IN WITNESS WHEREOF, Farm Family Holdings, Inc. and United Farm Family Insurance Company, as Employers under the Plan, have caused this Amendment No. 2 to be adopted. ATTEST: FARM FAMILY HOLDINGS, INC. By: /s/ Victoria M. Stanton By: /s/ Philip P. Weber ----------------------- ------------------- Secretary Philip P. Weber President & C.E.O. ATTEST: UNITED FARM FAMILY INSURANCE COMPANY By: /s/ Victoria M. Stanton By: /s/ Philip P. Weber ----------------------- ------------------- Secretary Philip P. Weber President & C.E.O.