ITEM 1. BUSINESS
Overview
The following discussion includes the operations of Farm Family Holdings, Inc. ("Farm Family Holdings"), a Delaware corporation incorporated in 1996, and its wholly owned subsidiaries, (collectively referred to as the "Company"). The primary subsidiary of Farm Family Holdings is Farm Family Casualty Insurance Company ("Farm Family Casualty"). The operations of the Company are also closely related with those of its affiliates, Farm Family Life Insurance Company ("Farm Family Life") and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family").
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family Mutual") converted from a mutual property and casualty insurance company to a stockholder owned property and casualty insurance company and became a wholly owned subsidiary of Farm Family Holdings pursuant to a plan of Reorganization and Conversion (the "Plan"). In addition, Farm Family Mutual was renamed Farm Family Casualty Insurance Company. As part of the Plan, Farm Family Holdings was formed and Farm Family Mutual policyholders received approximately 2,237,000 shares of Farm Family Holding's common stock and $11,735,000 in cash in exchange for their membership interest in Farm Family Mutual.
On July 23, 1996, Farm Family Holdings made an initial public offering of its common stock at a price of $16.00 per share. Farm Family Holdings received net proceeds of $41,453,000 for approximately 2,786,000 shares sold in the initial public offering. In addition, Farm Family Holdings received $3,427,000 for approximately 214,000 shares purchased by policyholders of Farm Family Mutual in a subscription offering. In addition, pursuant to the Plan, holders of Farm Family Mutual debt could elect to exchange their debt instruments for shares of common stock or cash. As a result, there were 17,000 common shares and $1,107,000 in cash exchanged for debt with an outstanding principal amount of $1,371,000.
Farm Family Casualty is a specialized property and casualty insurer of farms, agribusiness, other generally related businesses and residents of rural and suburban communities principally in the Northeastern United States. Farm Family Casualty provides property and casualty insurance coverages to members of the state Farm Bureau(R) Organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states, (collectively the "Farm Bureaus"), and has the exclusive endorsement of these organizations to provide such coverages to their members. Membership in a state or county Farm Bureau organization is a prerequisite for voluntary insurance coverage, except for employees of the Company and its affiliates.
Farm Family Casualty markets its insurance products through more than 200 Farm Family agents and field managers who are located in the rural and suburban communities it serves. These agents generally sell insurance products primarily for Farm Family Casualty and Farm Family Life. The Company believes that the distinctive focus of the Company and its agents on meeting the specialized insurance needs of rural communities has provided the Company with the knowledge and experience to adapt to changes in the demographics of its markets and in the nature of agricultural related businesses. In addition to insuring those engaged in agricultural pursuits such as dairy, vegetable and fruit farming, the Company insures a wide range of other businesses related to agriculture, such as distributors of agricultural products, horse breeding and training facilities, landscapers, nurseries, florists, wineries and growers of specialty products. The Company also offers businessowners products for certain retail and contractor businesses and for owners of apartment and office buildings, as well as a homeowners product.
The Company's principal strategy is to maintain its focus on meeting the specialized insurance needs of the rural and suburban communities in which it currently operates. The Company offers personal and commercial automobile products, and also property and liability products. The Company's flagship product, the Special Farm Package, is a flexible policy that can be adapted to meet the needs of a variety of agricultural and agricultural related businesses. As evidenced by its introduction of businessowners products in 1990, the Company also seeks to leverage its local reputation, agency force, knowledge and experience to expand its product offerings to a wider variety of customers in the rural and suburban communities in which it currently operates. In addition, the Company continues to seek to facilitate and expedite sales, underwriting and policy administration functions through the use of computer networking communications with the home office.
In 1997, the Company established a wholly owned subsidiary, Farm Family Financial Services, Inc. Through the establishment of this subsidiary, and its affiliation with a national broker-dealer, the Company's agents can offer financial products such as mutual funds, stocks, bonds and variable life insurance and variable annuity products to their clients.
Acquisition of Farm Family Life
Farm Family Holdings entered into an Option Purchase Agreement with the shareholders of Farm Family Life pursuant to which Farm Family Holdings was granted an option to acquire all of the outstanding capital stock of Farm Family Life, exercisable for a two year period which commenced on July 26, 1996. On February 26, 1998, the Board of Directors of Farm Family Holdings approved the exercise of the option to acquire Farm Family Life and its wholly owned subsidiary, United Farm Family. Farm Family Life is owned by the Farm Bureau organizations and their affiliates in New York, New Jersey, Delaware, West Virginia and all of the New England states. Under the Option Purchase Agreement, Farm Family Holdings will pay an exercise price of $37.5 million to acquire Farm Family Life, consisting of $31.5 million of common stock of Farm Family Holdings, and $6 million stated value of 6-1/8% voting preferred stock of Farm Family Holdings, less certain expenses to be paid by Farm Family Life in connection with the acquisition on behalf of the shareholders of Farm Family Life.
The Option Purchase Agreement was originally approved by the Company's shareholders on December 2, 1998. The closing of the acquisition was scheduled to occur on December 7, 1998, but was delayed when it was determined that in order for certain shareholders of Farm Family Life to provide unqualified opinions of counsel required by the Option Purchase Agreement as a condition to closing, such shareholders of Farm Family Life or their respective parent entities would need to obtain approval of the acquisition from their members.
As a result of this delay, the Option Purchase Agreement was amended by Amendment No. 2 dated as of January 14,1999 ("Amendment No.2") to, among other things, fix the price used to determine the number of shares of common and preferred stock to be issued, subject to a collar mechanism, at $35.72, which was the average closing price that would have been used if the closing had occurred on December 7, 1998. Under the collar mechanism, if the price per share of the Company's common stock on the last trading day prior to the closing (the "Closing Price") is greater than $42.86 or equal to or less than $25.00, the price used to determine the number of shares of the Company's common stock to be issued in the acquisition will equal $35.72 divided by a factor. The factor will be equal to 1.2 (if the Closing Price is greater than $42.86) or 0.7 (if the Closing Price is equal to or less than $25.00) multiplied by $35.72 divided by the Closing Price. If the Closing Price is $25.00 or less, the Company will also have the option to terminate the Option Purchase Agreement. In addition, Amendment No. 2 extended the date on which the Company or the shareholders of Farm Family Life may terminate the Option Purchase Agreement, if the closing has not occurred, to April 30, 1999.
The Option Purchase Agreement is subject to the approval of the members of certain shareholders of Farm Family Life or their respective parent entities. Farm Family Holdings resolicited the approval of its shareholders for the revised terms of the acquisition. On March 25, 1999, the Option Purchase Agreement as amended by Amendment No. 2, and the acquisition of Farm Family Life were approved by Farm Family Holdings' shareholders. Under the terms of Amendment No. 2, the shareholders of Farm Family Life have agreed to reimburse the Company for half of the expenses of resolicitation, up to $200,000. The acquisition of Farm Family Life is subject to certain closing conditions including the receipt of all required government approvals, among other things. Management expects to close the acquisition of Farm Family Life in the second quarter of 1999.
Related Party Transactions
The Company was organized through the efforts of certain Farm Bureaus, and its relationship with the Farm Bureaus in its ten state region continues to be a fundamental aspect of its business (see "Relationship with Farm Bureaus"). Many of the directors of the Company are also directors or executive officers of the Farm Bureaus and the selling shareholders of Farm Family Life under the Option Purchase Agreement.
The Company is a party to Membership List Purchase Agreements with each of the state Farm Bureaus in the ten states in which it conducts business. Pursuant to each Membership List Purchase Agreement, Farm Bureau membership lists are provided to the Company on an exclusive basis for the purpose of marketing its insurance products. The Membership List Purchase Agreements are for six years commencing on January 1, 1996. For the years ended December 31, 1998, 1997 and 1996, the Company paid a total of $660,000, $600,000 and $571,000, respectively, to the Farm Bureaus pursuant to the Membership List Purchase Agreements.
The operations of the Company are closely related with those of its affiliates, Farm Family Life and United Farm Family. The affiliated companies operate under similar Boards of Directors and have similar senior management. In addition, the affiliated companies share home office facilities, data processing equipment, certain personnel and other operational expenses.
Farm Family Casualty and Farm Family Life are parties to an Amended and Restated Expense Sharing Agreement, effective as of February 14, 1996 (the "Expense Sharing Agreement"), pursuant to which shared expenses for goods, services and facilities are allocated between the Company and Farm Family Life. Under the Expense Sharing Agreement, expenses are allocated in accordance with applicable provisions of the New York Insurance Law and regulations promulgated thereunder. Direct expenses are charged as incurred to the Company and Farm Family Life, as applicable, at cost. For each of the years ended December 31, 1998, 1997 and 1996, 68%, 67% and 65%, respectively, of aggregate operating expenses totaling $29.3, $29.4 million and $30.7 million, respectively, were allocated to the Company, under the Expense Sharing Agreement.
Farm Family Holdings, Farm Family Casualty and Farm Family Life were parties to a Lease Agreement dated July 1, 1988, as amended by Amendment to Lease Agreement, effective January 1, 1994, as so amended, (the "Lease Agreement") pursuant to which the Company leased home office space in Glenmont, New York from Farm Family Life. Annual rent incurred by Farm Family Casualty under the Lease Agreement was approximately $781,000, $760,000, and $712,000 for each of the years ended December 31, 1998, 1997, and 1996, respectively. In addition, Farm Family Holdings incurred annual rent expense of $37,000, $24,000 and $8,000 for the years ended December 31, 1998, 1997, and 1996, respectively pursuant to the Expense Sharing Agreement. The Lease Agreement expired December 31, 1998 and the parties entered into a new lease agreement effective January 1, 1999.
The Company and United Farm Family are parties to a service agreement dated July 25, 1988 (the "Service Agreement") pursuant to which the Company provides United Farm Family with certain administrative and special services necessary for its operations, including, but not limited to, claims management, underwriting, accounting, tax and auditing, investment management, and functional support services. In addition, the Company provides United Farm Family with certain personnel, property, equipment and facilities for its operations. For each of the years ended December 31, 1998, 1997, and 1996, Farm Family Casualty charged United Farm Family approximately $1.0 million, $0.5 million, and $0.7 million, respectively, in direct and allocated expenses and overhead under the Service Agreement.
Prior to January 1, 1998, the Company's reinsurance program included reinsurance agreements with United Farm Family. In accordance with the provisions of these reinsurance agreements, premiums earned, losses, and expenses ceded by the Company to United Farm Family were as follows:
The Company terminated all reinsurance agreements with United Farm Family effective December 31, 1997. However, United Farm Family retains liability for covered losses arising from occurrences prior to the termination date. Effective January 1, 1998, the Company's retention on a per risk basis increased from $100,000 to $300,000 and all reinsurance coverage is provided solely by non-affiliated reinsurers.
Products
The Company offers a variety of property and casualty insurance products primarily designed to meet the unique insurance needs of its agricultural clients and the general insurance needs of the rural and suburban communities in which it does business. Many policyholders have more than one policy with the Company, most commonly, a property policy (such as a Special Farm Package or homeowners policy) and an automobile policy.
The following table sets forth, by product, the direct premiums written, including assigned risk business, by the Company for the periods indicated:
*Includes $3.9, $6.3, and $4.7 million of assigned risk automobile for personal automobile business and $0.3, $0.7, and $0.5 million of assigned risk for commercial automobile business for each of the years ended December 31, 1998,1997, and 1996, respectively.
Personal Automobile. The Company's personal automobile policies provide the Company with more premium than any of the Company's other products. The Company's industry standard policies are generally marketed in conjunction with its other products, such as the Special Farm Package, the businessowners policy or the homeowners policy.
Special Farm Package. The Special Farm Package, is a flexible, multi-line package of insurance coverages that the Company regards as its "flagship" product. As a result of its flexible features, this product can be adapted to meet the needs of a variety of agricultural and related businesses. The Special Farm Package policy combines personal, farm and business property and liability insurance for the farm owner, as well as owners of other agricultural related businesses, such as horse breeding and training facilities, nurseries, wineries and greenhouses.
In October 1997, the Company began marketing the Country Estate program, a specialized version of the Special Farm Package. The Country Estate program covers rural residents where agricultural exposures are present, but agribusiness is not the main source of income for the household.
Commercial Automobile. Commercial automobile is primarily used for commercial automobiles utilized in conjunction with agricultural and related businesses.
Workers' Compensation. The Company generally does not seek to market or write its workers' compensation policy apart from a Special Farm Package or a businessowners policy.
Businessowners. The Company's businessowners product (based on the industry standard policy form) is designed to meet the needs of small businesses within its rural and suburban markets. This product is marketed to two distinct groups: (i) "mercantile businessowners" with property based risks, including apartment and office building owners and small to medium-sized retail businesses, such as florists and farm markets and (ii) small, established artisan contractors principally serving the agricultural community.
Special Home Package and Homeowners Policy. The Company's homeowners policy, introduced in 1989, is a standard homeowners multi-peril policy for the rural and suburban homeowner. Increasingly, the homeowners policy is being sold to provide coverage for the insured's principal residence, while the Special Home Package is used by the Company to insure rural-based, tenant occupied residences. Like the Special Farm Package, the Special Home Package combines personal and commercial property and liability coverages, and contains flexible features, which also allow it to be adapted to meet the needs of a variety of customers.
Umbrella Liability. The Company writes commercial and personal line excess liability policies covering business, farm and personal liabilities of its policyholders in excess of amounts covered under Special Farm Package,
homeowners, businessowners and automobile policies. Such policies are available with limits of $1.0 million to $5.0 million. The Company does not generally seek to market its excess liability policies unless it also writes an underlying liability policy.
Commercial General Liability. The Company writes an industry standard commercial general liability policy which is generally marketed in connection with the Special Farm Package, or other property insurance coverage. The commercial general liability policy is generally not written apart from these other policies. The policy is usually written by the Company for unique business situations, such as horse breeding and training facilities and certain landscaper risks, which do not meet the criteria for liability coverage under a businessowners or Special Farm Package policy. The policy insures businesses against third party liability from accidents occurring on their premises or arising out of their operations or products. Most of the Company's products liability line is written as part of the commercial general liability product.
Pollution. The Company writes a small number of pollution liability policies covering specified farm risks on a "claims-made" basis. The policy insures against losses incurred from third party liability, including bodily injury and property damages, for pollution incidents, such as those caused from pesticides, fertilizers, herbicides and manure piles. An "extended reporting period" option is available under certain circumstances which allows for claim reporting after the policy expiration. As of December 31, 1998, the Company had approximately 226 pollution policies in force.
Marketing
The following table sets forth the Company's direct written premiums by state for the periods indicated:
As of December 31, 1998, the Company marketed its property and casualty insurance products in its ten state region through approximately 187 primarily career agents, 12 independent agents and 10 field managers. Many of the Company's agents are established residents of the rural and suburban communities in which they operate and often have specific prior experience in agricultural related businesses. In addition to marketing the Company's property and casualty insurance products, the agency force also markets life insurance products for Farm Family Life. In 1998, agent compensation was comprised entirely of commissions earned by the Company's agents for premiums written by the agents during 1998. The commissions earned by the Company's agents are determined by applying a commission rate to the amount of the premiums written by the agent. The Company applies a fixed commission rate to determine commissions earned on workers compensation and umbrella business produced by its agents. For automobile business and property liability business, the commission rate varies monthly based upon the loss ratio of such business written by the agent during the previous twelve month period. The Company has designed its commission program in this manner to encourage agents to produce profitable business for the Company.
The Company emphasizes personal contact between its agents and the policyholders. The Company believes that its name recognition, policyholder loyalty and policyholder satisfaction with agent and claims relationships are the principal sources of new customer referrals, cross-selling of additional insurance products and policyholder retention. In addition, the Company believes that its relationship with the Farm Bureaus in its target markets promotes the Company's name recognition and new customer referrals among Farm Bureau members (see " Relationship with Farm Bureaus").
Relationship with Farm Bureaus
The Company was organized in 1955 through the efforts of certain Farm Bureaus, and its relationship with the Farm Bureaus in its ten state region continues to be a fundamental aspect of its business. These Farm Bureaus are affiliated with the American Farm Bureau Federation, the nation's largest general farm organization with over 4.9 million members, which has traditionally sought to advance the interests of the agricultural community. The Company was established through the efforts of certain Farm Bureaus to provide property and casualty insurance for Farm Bureau members in the Northeast. Substantially all of the directors of the Company are associated with Farm Bureau organizations in the Northeast. The Company has the exclusive endorsement of the Farm Bureaus to market property and casualty insurance in the ten states in which it operates.
The endorsement of the Farm Bureaus generally means that the Farm Bureaus provide the Company with the right to utilize their membership lists and authorize the use of their name and service marks in connection with the marketing of the Company's products. In exchange for these rights, the Company pays to each of the Farm Bureaus an annual fee of $7.50 per Farm Bureau member, pursuant to agreements with each Farm Bureau (the "Membership List Purchase Agreements"). The current term of each Membership List Purchase Agreement is six years, commencing on January 1, 1996. Pursuant to the Membership List Purchase Agreements, the Farm Bureaus may not endorse the products of other property and casualty insurers within the Company's ten state region. Farm Family Life has entered into similar membership list purchase agreements with each of the Farm Bureaus.
Underwriting
The Company seeks to underwrite its commercial and personal insurance risks by evaluating loss experience and underwriting profitability with consistently applied standards. The Company maintains information on all aspects of its business, which is routinely reviewed by the Company's staff of underwriters in relationship to product line profitability. The Company's underwriters generally specialize by agency territory, or line of business. Specific information is monitored with regard to individual insureds, which is used to assist the Company in making decisions about policy renewals or modifications.
The Company concentrates on its established major product lines (personal and commercial auto, Special Farm Package, businessowners and homeowners policies). It generally does not pursue the development of products with risk profiles with which it is not familiar, nor does it, typically, actively market its automobile, workers' compensation or general liability policies except to policyholders who may also purchase its Special Farm Package, businessowners or homeowners products. The Company typically seeks to sell multiple products to a household to enhance persistency and profitability. The Company believes its extensive knowledge of local markets in its region is a key element in its underwriting process.
Claims
Claims on insurance policies written by the Company are usually investigated and settled by one of the Company's claim adjusters or claim managers. The Company's claim adjusters are strategically located throughout its service territory in twelve offices. The Company's claim philosophy emphasizes timely investigation, evaluation and settlement of claims, while maintaining adequate reserves and controlling claim adjustment expenses. The claim philosophy is designed to support the Company's marketing efforts by providing agents and policyholders with prompt service.
Claim settlement authority levels are established for each adjuster and claim manager based upon the employee's ability and level of experience. Claim are reported directly to the claims department, located at a field office or through the Company's central claim processing unit located in the home office. Specialized units exist at the home office for no-fault automobile, subrogation and large, litigated and certain other claims. The Company also has a special investigative unit to investigate suspected insurance fraud, including arson. The claims department is responsible for reviewing all claims, obtaining necessary documentation, estimating the loss reserves and resolving the claims.
Claims for New York private passenger assigned risk business are handled by outside claim adjusting firms that specialize in this line of business. As of January 1, 1999, claims on new and renewal workers compensation policies are handled by an outside adjusting firm that specializes in workers compensation claims.
Reinsurance
Reinsurance Ceded
The Company's reinsurance arrangements are placed with non-affiliated reinsurers through a reinsurance broker. In addition, through December 31, 1997, certain reinsurance coverages were also placed directly with United Farm Family (see "Related Party Transactions"). Prior to January 1, 1998, the largest net per risk exposure retained by the Company on any one individual property or casualty risk was $100,000. Prior to January 1, 1998 , United Farm Family covered property and casualty risks in excess of $100,000 on an excess of loss basis up to $300,000 per risk. Effective January 1, 1998, the largest net per risk exposure retained by the Company on any one individual property or casualty risk is $300,000. Per risk property losses in excess of $300,000 but less than $4 million are reinsured on an excess of loss basis by unaffiliated reinsurers. Casualty losses per risk in excess of $300,000 but less than $1 million (which is generally the maximum limit of liability written by the Company's casualty insurance policies, other than workers' compensation and umbrella liability policies) are covered on an excess of loss basis by unaffiliated reinsurers. Clash coverage, which provides coverage for a single event that results in multiple casualty losses to the Company's insureds, is provided by unaffiliated reinsurers and covers casualty losses, including workers' compensation, in excess of $1 million but less than $5 million. In addition, workers' compensation claims, on a per occurrence basis with a $600,000 per person limit, in excess of $5 million but less than $20 million are separately reinsured on an excess of loss basis by an unaffiliated reinsurer. Prior to January 1, 1998, the Company reinsured 95% of its umbrella liability losses (including a 5% quota share participation by United Farm Family) under $1 million per loss on a quota share basis and 100% of umbrella liability losses in excess of $1 million up to $5 million per loss with unaffiliated reinsurers. Effective January 1, 1998, umbrella losses per occurrence in excess of $300,000 but less than $2 million are covered on an excess of loss basis with unaffiliated reinsurers. In addition, the Company reinsures 100% of its umbrella liability losses in excess of $2 million up to $5 million per loss with unaffiliated reinsurers. Facultative reinsurance coverage is obtained for property policies written for limits in excess of $4 million per risk, casualty risks in excess of $1 million, and umbrella policies written for limits in excess of $5 million.
The Company's property catastrophe reinsurance is placed with non-affiliated reinsurers and provides for recovery of 95% of the losses over $3 million up to a maximum of $51 million per occurrence. The Company retains the first $3 million of losses per occurrence under its property catastrophe program.
The Company also has aggregate stop loss reinsurance covering net losses incurred in excess of 66% of the Company's net earned premiums, up to a maximum of $12.5 million per accident year, for accident years 1998 and 1999. Aggregate stop loss reinsurance covers the Company's direct written and assumed reinsurance business, net of inuring reinsurance ceded. This coverage is provided by non-affiliated reinsurers, covers each accident year separately, and includes the premium and losses of the Company's affiliate, United Farm Family.
The insolvency or inability of any reinsurer to meet its obligations to the Company could have a material adverse effect on the results of operations or financial condition of the Company. As of December 31, 1998, more than 95% of the Company's reinsurance program was provided by reinsurers which were rated "A-" (Excellent) or above by A.M. Best Company, Inc. ("A.M. Best").
The Company terminated all reinsurance agreements with United Farm Family effective December 31, 1997, although, United Farm Family retains liability for covered losses arising from occurrences prior to the termination date. Effective January 1, 1998, all reinsurance agreements are provided solely by non-affiliated reinsurers.
Reinsurance Assumed
The Company assumes voluntary reinsurance covering primarily property, property catastrophe and casualty risks located outside of the Northeast. The Company believes that, among other benefits, its assumed reinsurance arrangements enhance the Company's geographic spread of risk. The Company also assumed an insignificant amount of reinsurance covering substandard automobile policies from United Farm Family through December 31, 1997. For the year ended December 31, 1998, the Company earned premiums of $11.2 million under various voluntary proportional and non-proportional reinsurance agreements. In addition, the Company has a retrocessional reinsurance program covering the Company's assumed business, which is placed with unaffiliated reinsurers and provides for recovery of 95% of losses over $1 million up to a maximum of $4 million per occurrence and 75% of losses over $4 million up to a maximum of $6 million.
Loss and Loss Adjustment Expense ("LAE") Reserves
The Company's reserve for losses is an estimate of the unpaid amount, as of December 31, of the losses incurred in both the current year and all prior years. The LAE reserve is an estimate of the unpaid expenses required to settle losses incurred in both the current year and all prior years. The Company is required to maintain reserves for payment of estimated loss and LAE for both reported claims and claims which have been incurred but not yet reported. The ultimate liability incurred by the Company may differ materially from current reserve estimates.
Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made. Although claims for which reserves are established may not be paid for many years, reserves for losses and LAE are not discounted, except for certain lifetime workers' compensation indemnity reserves where the reserves are discounted at 3.5%.
The following table provides a reconciliation of beginning and ending loss and LAE reserve balances of the Company for each of the years in the three year period ended December 31, 1998.
Analysis of Loss and Loss Adjustment Expense Development
The following table reflects the development of losses and loss adjustment expenses for the periods indicated at the end of that year and each subsequent year. Each calendar year-end reserve includes the estimated unpaid liabilities for losses and loss adjustment expenses for that accident year and for all prior accident years. The data presented under the caption "Cumulative Amount of Reserves Paid Through" shows the cumulative amounts paid related to the reserve as of the end of each subsequent year. The data presented under the caption "Reserves, Net, Reestimated as of" shows the original recorded reserve as adjusted as of the end of each subsequent year to reflect the cumulative amounts paid and all other facts and circumstances discovered during each such year. The line "Cumulative Redundancy (Deficiency)" reflects the difference between the latest reestimated reserve amount and the reserve amount as originally established.
In evaluating the information in the table below, it should be noted that each amount includes the effects of all changes in amounts of prior periods. For example, if a loss determined in 1996 to be $150,000 was first reserved in 1993 at $100,000, the $50,000 deficiency (actual loss minus original estimate) would be included in the cumulative deficiency in each of the years 1993 through 1995 shown below. This table presents development data by calendar year and does not relate the data to the year in which the accident actually occurred. Conditions and trends that have affected the development of these reserves in the past may not necessarily recur in the future.
The following table sets forth the development of loss and loss adjustment expenses reserves of the Company for the ten-year period ended December 31, 1998:
Prior to 1990, the Company had a history of cumulative deficiencies in reserving for losses and LAE. These deficiencies were primarily caused by the underestimation of reserves for workers' compensation, automobile and other liability claims. In 1991, the Company reviewed and revised its process for estimating reserves for losses and LAE, and in recent years the Company has generally experienced overall redundancies. The redundancies December 31, 1998 of $9.0 million, $6.8 million and $3.9 million for the December 31, 1995, 1996 and 1997 reserves, respectively, were primarily attributable to favorable development of IBNR and case reserves for personal automobile, commercial automobile, automobile physical damage, and workers' compensation claims.
The Company believes that its reserves at December 31, 1998 are adequate. Conditions and trends that have historically affected the Company's claims may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future deficiencies or redundancies based on the results set forth above. Future adjustments to loss reserves and LAE that are unanticipated by the Company could have a material adverse impact upon the Company's financial condition and results of operations.
Investments
An important component of the operating results of the Company has been the return on invested assets. The Company's investment objective is to maximize current yield while maintaining safety of capital together with adequate liquidity for its insurance operations. Since 1995, the Company has significantly reduced its holdings of non-investment grade fixed maturity securities and improved the overall credit quality of its invested assets.
At December 31, 1998, the Company had cash and invested assets with an aggregate carrying value of $318.2 million. The Company primarily invests in high quality fixed maturity securities and to a lesser extent, equity securities. At December 31, 1998, 94.8% of the Company's total cash and invested assets consisted of fixed maturities, 3.4% consisted of cash and short-term investments, 1.7% consisted of equity securities, and the remainder consisted of mortgage loans.
Prior to September 1, 1997, the Company exclusively managed its invested assets internally. During 1997, the Company retained the services of a professional asset management firm, specializing in the management of investments for insurance companies, to supplement its internal capabilities and improve upon the management of its investments in fixed maturities. The investment activities are subject to oversight by management of the Company as well as an Investment Committee of the Board of Directors. The Company continues to manage its equity securities, cash and short-term investments, and mortgage loans internally.
The Company actively manages and monitors its exposure to credit risk. Invested assets are reviewed regularly for credit quality. Investments which have experienced payment delinquencies, adverse changes in credit ratings or deterioration in the financial condition of the borrower, or which have otherwise been identified as having potential adverse credit implications are placed on a credit watch report. Management and the investment committee on a regular basis review securities placed on the credit watch list. At December 31, 1998, the Company had identified five securities, with an aggregate carrying value of $6.0 million on the credit watch report. None of these securities were considered non-performing or in default. In addition, Farm Family Casualty's holdings of NAIC Class 3 through 6 bonds, generally considered non-investment
grade, were $6.0 million or 2.0% of its fixed maturity portfolio, at December 31, 1998. Due to uncertainties in the economic environment, however, it is possible that the quality of investments currently held in the Company's investment portfolio may change.
The average effective duration and average maturity of the Company's fixed maturity investments as of December 31, 1998 were approximately 4.3 and 9.7 years, respectively. As a result, the market value of the Company's investments may fluctuate significantly in response to changes in interest rates. In addition, the Company may also be likely to experience investment losses to the extent its liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.
For the year ended December 31, 1998, compared with the prior year, the amortized cost of the Company's cash and invested assets increased 10.3% to $303.2 million, primarily as a result of the cash flow from the Company's operations. For the years ended December 31, 1998, 1997 and 1996, the Company's net investment income, average cash and invested assets and return on average cash and invested assets were as follows:
The return on average cash and invested assets is calculated by dividing net investment income for the year by average cash and invested assets for the year. The reduction in the return on average cash and invested assets during 1998 was primarily attributable to an overall reduction in the prevailing interest rates as well as an increase in the Company's investment in tax exempt fixed maturities. The Company's after-tax income has been increased by investing in investment grade tax exempt securities, which generally produce more after-tax investment income than taxable investment grade fixed maturity securities.
The following table sets forth certain information concerning the Company's investments:
(1) Fixed maturities (bonds, redeemable preferred stocks and mortgage-backed securities) and equity securities in the Available for Sale Portfolio are carried at market value in the consolidated financial statements of the Company. Mortgage loans, short-term investments and other invested assets are carried at cost, which approximates market value. 2) Fixed maturities in the Held to Maturity Portfolio are carried at amortized cost. (3) The Company primarily obtains market value information through the pricing service offered by Interactive Data Corporation. Market values are also obtained, to a lesser extent, from various brokers who provide price quotes.
The Company's investments in fixed maturity securities are comprised primarily of intermediate-term, investment grade securities. The table below contains additional information concerning the investment ratings of the Company's fixed maturity investments at December 31, 1998.
(1) The ratings set forth in this table are based on the ratings, if any, assigned by Standard & Poor's Corporation ("S&P"). If S&P's ratings were unavailable, the equivalent ratings supplied by Moody's Investors Services, Inc., Fitch Investors Service, Inc. or the NAIC were used where available. The percentage of securities that were not assigned a rating by S&P at December 31, 1998 was 2.9%. (2) Fixed maturities in the Available for Sale Portfolio are carried at market value in the consolidated financial statements of the Company. (3) Fixed maturities in the Held to Maturity Portfolio are carried at amortized cost. (4) Represents percent of market value for classification as a percent of total for each portfolio.
The table below sets forth the maturity profile of the Company's fixed maturity investments as of December 31, 1998:
(1) Fixed maturities in the Available for Sale portfolio are carried at market value in the consolidated financial statements of the Company. Fixed maturities in the Held to Maturity portfolio are carried at amortized cost.
(2) The Company obtains market value information primarily through the pricing service offered by Interactive Data Corporation. Market values are also obtained, to a lesser extent, from various brokers who provide price quotes
The stated maturity date of each fixed maturity investment is used to determine the number of years to maturity. However, many of the Company's fixed maturity investments are subject to call provisions that give the issuer the option of redeeming the investment before its stated maturity date. Therefore the actual maturity may be earlier than is shown in the table.
Information Services
The Company's automated information processing capabilities are supported by centralized computer systems and a network of personal computers linking agents, claims offices and service centers with the Company's home office data center and information services division. This network enables field employees and agents to work directly with clients in response to service questions and policy transactions. A specialized client information system containing policy and claim information for each customer's portfolio is utilized by the Company's agents to monitor policy activity. Also, personalized summaries of material events affecting each agent's policies are updated daily on the network and forwarded to agents. Substantially all of the Company's information services equipment, including the centralized computer systems and computer network, is owned by Farm Family Life. Information systems equipment expenses are shared by the Company and Farm Family Life pursuant to the Expense Sharing Agreement (see "Related Party Transactions").
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns a Best's Rating of "A" (Excellent), its third highest rating category, to Farm Family Casualty. A.M. Best assigns "A" or "A-" ratings to companies, which, in its opinion, have demonstrated excellent overall performance when, compared to the standards established by A.M. Best. Companies rated "A" or "A-" have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity, as well as the company's book of business,
the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competency of its management and its market presence. No assurance can be given that A.M. Best will not downgrade the Company's current rating in the future.
Competition
The property and casualty insurance market is highly competitive. The Company competes with stock insurance companies, mutual insurance companies, local cooperatives and other underwriting organizations. Certain of these competitors have substantially greater financial, technical and operating resources than the Company. The Company's ability to compete successfully in its principal markets is dependent upon a number of factors, many of which (including market and competitive conditions) are outside the Company's control. The lines of insurance written by the Company are subject to significant price competition. Some companies may offer insurance at lower premium rates through the use of salaried personnel or other methods, rather than agents paid on a commission basis, as the Company does. In addition to price, competition in the lines of business written by the Company is based on the quality of the products, quality and speed of service (including claims service), financial strength, ratings, distribution systems and technical expertise.
Seasonality
Although the insurance business generally is not seasonal, losses and loss adjustment expenses incurred by the Company tend to be higher for periods of severe or inclement weather.
Employees
The Company shares most of its employees with Farm Family Life. As of December 31, 1998, the total number of full time employees of the Company and Farm Family Life was 461 employees in the aggregate, of which 324 were employed in the home office. Based on annual time studies, 67% of total employee expenses, including salary expense, is currently allocated to the Company and 33% is allocated to Farm Family Life and United Farm Family (see "Certain Relationships and Related Transactions"). None of these employees are covered by a collective bargaining agreement, and the Company believes that its employee relations are good.
Effect of Regulation
General
The Company is regulated by government agencies in the states in which it does business. Such regulation usually includes (i) regulating premium rates and policy forms, (ii) setting minimum capital and surplus requirements, (iii) regulating guaranty fund assessments and residual markets, (iv) licensing companies, adjusters and agents, (v) approving accounting methods and methods of setting statutory loss and expense reserves, (vi) setting requirements for and limiting the types and amounts of investments, (vii) establishing requirements for the filing of annual statements and other financial reports, (viii) conducting periodic statutory examinations of the affairs of insurance companies, (ix) approving proposed changes in control and (x) limiting the amount of dividends that may be paid without prior regulatory approval.
Insurance companies are also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. These include redefinitions of risk exposure in areas such as products liability, environmental damage and workers' compensation. Certain state insurance departments and legislatures may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Several states place restrictions on the ability of insurers to discontinue or withdraw from certain lines of insurance. Such developments may adversely affect the profitability of various lines of insurance.
Effective March 22, 1999, all insurers in New Jersey were required to reduce personal automobile rates by approximately 15% pursuant to the Automobile Insurance Cost Reduction Act of 1998 (The "Act"). The Company's direct premium written for New Jersey personal automobile business in 1998 was $27.2 million which was approximately 14.7% of its total direct written premium, for the year ended December 31, 1998. The Act also made coverage and other changes to the statutory requirements governing personal automobile insurance in New Jersey which are intended to reduce losses, and loss adjustment expenses. The impact on the Company's losses and loss adjustment expenses, if any, cannot be determined at this time.
Risk-Based Capital
State insurance departments have adopted a methodology developed by the NAIC for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital formula that attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potential inadequately capitalized companies. Under the formula, a company determines its "risk-based capital" ("RBC") by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). The risk-based capital rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" of RBC. Based on calculations made by the Company, the risk-based capital level for the Company exceeds a level that would trigger regulatory attention. At December 31, 1998, the Company's total adjusted capital was $105.2 million, and the threshold requiring the least regulatory attention was $15.5 million.
NAIC-IRIS Ratios
The NAIC's Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 12 ratios for the property and casualty insurance industry and specifies a range of "usual values" for each ratio. Departure from the "usual value" range on four or more ratios may lead to increased regulatory oversight from individual state insurance commissioners. The Company did not have any ratios which varied from the "usual value" range in 1998, 1997, or 1996.
Risk Factors
In addition to the normal risks of business, the Company is subject to significant risk factors, including but not limited to: (i) the inherent uncertainty in the process of establishing property-casualty loss reserves, including reserves for the cost of pollution claims, and the fact that ultimate losses could materially exceed established loss reserves and have a material adverse effect on results of operations and financial condition; (ii) the potential material adverse impact on its financial condition, results of operations and cash flow of losses arising out of catastrophes; (iii) the fact that the insolvency or inability of any reinsurer to meet its obligations to Farm Family Casualty may have a material adverse effect on the business and results of operations of the Company; (iv) the need for Farm Family Casualty to maintain appropriate levels of statutory capital and surplus, particularly in light of continuing scrutiny by rating organizations and state insurance regulatory authorities, and to maintain acceptable financial strength and claims-paying ability ratings; (v) the fact that there can be no assurance that Farm Family Casualty will be able to maintain its current A.M. Best rating and that the Company's business and results of operations could be materially adversely affected by a rating downgrade; (vi) the fact that the property and casualty market is highly competitive and certain of its competitors may have substantially greater financial, technical and operating resources than the Company; (vii) the extensive regulation and supervision to which Farm Family Casualty is subject, various regulatory initiatives that may affect the Company, and regulatory and other legal actions involving the Company; (viii) Farm Family Holdings' primary reliance, as a holding company, on dividends and other payments from Farm Family Casualty for funds to meet its obligations, and regulatory restrictions on Farm Family Casualty to pay such dividends; (ix) the inherent uncertainty in the economic environment which may cause the quality of the investments currently held in the Company's investment portfolio to change; (x) the impact on the revenues and profitability of the Company from prevailing economic, regulatory, demographic and other conditions in New York, New Jersey and the other states in which the company operates; (xi) the fact that since a substantial portion of the Company's business is concentrated in a relatively small number of states, a significant change in or the termination of the Company's relationship with the Farm Bureaus in certain of these states could have a materially adverse effect on the Company's results of operations and financial condition; (xii) the fact that the Company has experienced, and can be expected in the future to experience, storm and weather related losses which may have a material adverse impact on the Company's results of operations, financial condition and cash flow; (xiii) the impact of the Year 2000 related issues on the business of the Company;, and (xiv) the impact of the mandated rate reduction for New Jersey personal automobile business.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
With the exception of historical information, the matters discussed or incorporated by reference in this Report on Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current knowledge, expectations, estimates, beliefs and assumptions. The forward-looking statements in this Report on Form 10-K include, but are not limited to, statements with respect to Farm Family Holdings' potential acquisition of Farm Family Life, the impact of the potential acquisition of Farm Family Life on the earnings and shareholder value of Farm Family Holdings, the Company's ability to successfully address its Year 2000 issue, the impact of the mandated rate reduction for New Jersey personal automobile business, the Company's dividend policy, the Company's ability to adapt to changes in the demographics of its markets and in the nature of agricultural related businesses, the ability of the Company's reinsurance arrangements to balance the geographical concentrations of the Company's risks, the Company's investment objectives and expected rates of return, the adequacy of the Company's reserves, capital resources and other financial items, the plans and objectives of the Company or its management, future economic performance and assumptions underlying statements regarding the Company or its business. Readers are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those estimated, projected, or predicted. The forward-looking statements in this Report on Form 10-K are not guarantees of future performance and are subject to a number of important risks and uncertainties, many of which are outside the Company's control, that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, the results of operations of the Company and Farm Family Life, fluctuations in the market value of shares of Farm Family Holdings' common stock, the satisfaction of the closing conditions set forth in the Option Purchase Agreement (which conditions include, but are not limited to, the approval of Farm Family Holdings' shareholders and receipt of all required governmental approvals), factors relating to the Company's ability to successfully address its Year 2000 issue, factors relating to the mandated rate reduction for New Jersey personal automobile business, 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 reinsurance programs, developments in the securities markets and the impact thereof on the Company's investment portfolio and other risk factors listed from time to time in the Company's Securities and Exchange Commission Filings. Accordingly, there can be no assurance that the actual results will conform to the forward-looking statements in this Report on Form 10-K.
There are no family relationships among any of such officers nor are there any arrangements or understandings between any person pursuant to which he/she was elected as an officer. All officers serve at the pleasure of the Board of Directors, but subject to the foregoing, are elected for terms of approximately one year until the next Annual Meeting of the Company.
Mr. Bettini currently serves as a Director of Ambanc Holding Co., Inc.
The Registrant or its Subsidiary has employed all the Executive Officers of the Registrant in various executive or administrative capacities for at least five years, except for the following:
Mr. Walsh has served as Executive Vice President - Finance & Treasurer of Farm Family Holdings since December 1996 and Executive Vice President - Finance & Treasurer of Farm Family Casualty since April 1997, as Executive Vice President - Finance of Farm Family Casualty from December 1996 to April 1997, and as Treasurer of Farm Family Holdings from October 1996 to December 1996. Mr. Walsh was Senior Vice President - Finance of Farm Family Casualty from March 1996 to December 1996, and was previously Director of Corporate Development for Farm Family Casualty from August 1995 to March 1996. Previously, Mr. Walsh was Vice President, Finance & Chief Financial Officer with MPW Industrial Services, Inc., Columbus, OH, from April 1994 to August 1995, Corporate Controller of NSC Corporation, Methuen, MA from July 1992 to April 1994 and Senior Manager at KPMG Peat Marwick from July 1983 to July 1992. Mr. Walsh currently serves as a director of MPW Industrial Services Group, Inc.
Mr. Hooker has served as Senior Vice President - Marketing of Farm Family Casualty since August 1998. Previously, Mr. Hooker held positions of Agent, Associate Agency Manager, and Associate Regional Manager with Farm Family Casualty from December 1992 to August 1998.
ITEM 2.
ITEM 2. PROPERTIES - -------------------
Farm Family Casualty currently leases space for its home office in Glenmont, New York from Farm Family Life. The lease agreement provides for Farm Family Casualty to pay Farm Family Life an annual rental of approximately $781,000. In addition, Farm Family Holdings incurred annual rental expense of approximately $37,000 pursuant to the Expense Sharing Agreement. See "Related Party Transactions"
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - --------------------------
The Company is subject to litigation in the normal course of business. Based upon information presently available to it, management believes that resolution of these legal actions will not have a material adverse effect on the Company's consolidated results of operations and financial condition. However, given the uncertainties attendant to litigation, there can be no assurance that the Company's consolidated results of operations and financial condition will not be materially adversely affected by any threatened or pending litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
Farm Family Holdings' held a special meeting of Stockholders on December 2, 1998. At the meeting, (i) the Option Purchase Agreement (in effect prior to Amendment No. 2) among Farm Family Holdings, Inc. and Farm Family Life was approved and adopted, and (ii) the consummation of the transactions contemplated in the Option Purchase Agreement (in effect prior to Amendment No. 2), including the Company's acquisition of all the outstanding capital stock of Farm Family Life was approved. The number of votes cast for, against or withheld, and the number of abstentions with respect to each such matter is set forth below:
The Option Purchase Agreement was subsequently amended by Amendment No. 2. The Company resolicited the approval of the revised terms of the acquisition andat a Special Meeting of Stockholders held on March 25, 1999, the Option Purchase Agreement, as amended by Amendment No. 2, and the acquisition of Farm Family Life were approved by Farm Family Holdings' shareholders.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED - ------------------------------------------------------------- STOCKHOLDER MATTERS -------------------
The Company's common stock is traded on the New York Stock Exchange. There were approximately 28,023 registered holders of the Company's common stock at February 25, 1999. The Company currently intends to retain any earnings in order to develop its business and support its operations, and, as such, does not anticipate that it will pay any dividends to stockholders in the foreseeable future. The declaration of dividends in the future is at the discretion of the Board of Directors of the Company, subject to certain regulatory constraints and will depend upon, among other things, the Company's results of operations, financial condition, cash requirements, future prospects and other factors.
The high and low New York Stock Exchange closing market prices for the Company's common stock for each quarter since the Company's initial public offering on July 26, 1996, at a price of $16 per share, were as follows:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The following table sets forth certain consolidated financial data of the Company and its subsidiaries prior to and after the reorganization pursuant to the Plan that took place during 1996. The consolidated statement of income data set forth below for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 and the consolidated balance sheet data as of December 31, 1998, 1997, 1996, 1995 and 1994 are derived from the consolidated financial statements of the Company which have been audited by PricewaterhouseCoopers, independent auditors. This data should be read in conjunction with Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ----------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS -----------------------------------
The "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14 - 23 of the Company's 1998 Annual Report is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ---------------------------------------------------------------------
The Quantitative and Qualitative Disclosures about Market Risk under the caption "Market Sensitive Instruments and Risk Management" on page 16 of the Company's 1998 Annual Report is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
The consolidated financial statements of the Company, including the accompanying notes to the consolidated financial statements and Report of Independent Accountants on pages 24 - 44 of the Company's 1998 Annual Report are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ---------------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURE -----------------------------------
There were no disagreements with the Company's independent auditors.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
Certain information regarding directors of the Company located in the Proxy Statement under the caption "Item 1 - Election of Directors" is incorporated herein by reference.
Information regarding executive officers of the Company in Item 1 of Part 1 of this Report under the caption "Executive Officers of the Registrant" is incorporated herein by reference.
Information required by Item 405 of Regulation S-K of the Securities Exchange Act of 1934 located in the Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - ---------------------------------
Information regarding executive compensation located in the Proxy Statement under the captions "Item 1 - Election of Directors - Compensation of Directors", "Executive Compensation - Summary Compensation Table, Options, Severance Plan, Pension Benefits, Change of Control Arrangements and Compensation Committee Interlocks and Insider Participation" is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -----------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners and management located in the Proxy Statement under the caption "Stock Ownership of Management and Certain Beneficial Owners" is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ---------------------------------------------------------
Information regarding certain relationships and related transactions located in the Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON - ----------------------------------------------------------------- FORM 8-K --------
(a) 1 and 2 An "Index to Financial Statements and Financial Statement Schedules" has been filed as a part of this Report beginning on page I hereof.
(a) 3 Exhibits:
An "Exhibit Index" has been filed as a part of this Report beginning on page E-Index hereof and is incorporated herein by reference.
(b) Reports on Form 8-K:
On October 27, 1998, a Report on Form 8-K was filed regarding a press release announcing the results of its operations for the three months and the nine months ended September 30, 1998 and that the Board of Directors approved the exercise of the Company's option to acquire Farm Family Life Insurance Company.
On December 3, 1998, a Report on Form 8-K was filed regarding a press release announcing that on December 2, 1998 at a Special Meeting of Stockholders, the Company's stockholders voted to approve and adopt an Amended and Restated Option Purchase Agreement, and to approve the Company's acquisition of all of the outstanding capital stock of the Farm Family Life Insurance Company.
On December 23, 1998, a Report on Form 8-K was filed regarding a press release announcing that a committee of its independent directors and a committee representing the shareholders of Farm Family Life Insurance Company have negotiated the terms of an amendment of the Option Purchase Agreement pursuant to which Farm Family Holdings, Inc. proposes to acquire Farm Family Life Insurance Company.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FARM FAMILY HOLDINGS, INC.
By: /s/ Philip P. Weber Philip P. Weber, President ------------------- March 31, 1999
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Year Ended December 31, 1998
The following consolidated financial statements, notes thereto and related information of Farm Family Holdings, Inc. and Subsidiaries are incorporated herein by reference to the Company's Annual Report.
Page in Annual Report -------------
Consolidated Statements of Income and Comprehensive Income 24
Consolidated Balance Sheets 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
Report of Independent Accountants 44
The following additional financial statement schedules are furnished herewith pursuant to the requirements of Form 10-K.
Page ---- Report of Independent Accountants II
Schedule I Summary of Investments - Other than Investments in Related Parties III
Schedule II Condensed Financial Information of the Registrant IIII
Schedule IV Reinsurance VIII
Schedule VI Supplemental Information Concerning Property - Casualty Insurance Operations VIIII
Report of Independent Accountants
To the Board of Directors of Farm Family Holdings, Inc.
Our audits of the consolidated financial statements referred to in our report dated February 10, 1999, appearing on page 44 of the 1998 Annual Report to Shareholders of Farm Family Holdings, Inc. and Subsidiaries (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
Albany, New York February 10, 1999
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION ($ in Thousands)
Basis of Presentation
The financial statements of the registrant should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Farm Family Holdings, Inc. 1998 Annual Report.
The accompanying condensed financial information includes the accounts of Farm Family Holdings, Inc. Farm Family Holdings, Inc. was incorporated on February 14, 1996.
EXHIBIT INDEX -------------
FARM FAMILY HOLDINGS, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 Sequential Page Number 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.
4.1 Rights Agreement, dated as of July 29, 1997, between the Company and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on July 30, 1997)
10.1 Amended and Restated Option Purchase Agreement, dated February 26, 1998 among Farm Family Holdings, Inc. and the Shareholders of Farm Family Life Insurance Company, as amended by Amendment No. 1 dated as of April 28, 1998 and Amendment No. 2 dated as of January 14, 1999 (Incorporated by reference to the Proxy Statement of Farm Family Holdings, Inc. dated February 17, 1999)
**10.2 Amended and Restated Expense Sharing Agreement, made effective as of February 14, 1996, by and among Farm Family Mutual Insurance Company, Farm Family Life Insurance Company and Farm Family Holdings, Inc.
*10.3 Indenture of Lease, made the 1st day of January 1988, between Farm Family Life Insurance Company and Farm Family Mutual Insurance Company as amended by the Amendment to Lease, effective January 1, 1994
10.4 Underlying Multi-Line Per Risk Reinsurance Contract, effective January 1, 1995, issued to Farm Family Mutual Insurance Company by The Subscription Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Thereto, as amended by Addendum No. 1, effective January 1, 1996 (Incorporated by reference to Registration Statement No. 333-4446), Addendum No. 2, effective January 1, 1996, Addendum No. 3, effective July 26, 1996 (Incorporated by reference to Farm Family Holdings, Inc. 1997 Form 10-K for the year ended December 31, 1996), Addendum No. 4, effective January 1, 1997 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31, 1997), and Termination Addendum, effective December 31, 1997 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K/A for the year ended December 31, 1997)
10.5 Umbrella Quota Share Reinsurance Contract, effective January 1, 1995, issued to Farm Family Mutual Insurance Company and United Farm Family Insurance Company, as amended by Addendum No. 1, effective January 1, 1995 (Incorporated by reference to Registration Statement No. 333-4446), and Addendum No. 2 effective July 26, 1996 (Incorporated by reference to Farm Family Holdings, Inc. 1997 Form 10-K for the year ended December 31, 1996), Addendum No. 3, effective January 1, 1997 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31, 1997), and Termination Addendum, effective January 1, 1998 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K/A for the year ended December 31, 1997)
*10.8 Service Agreement, made effective as of July 25, 1988 by and between Farm Family Mutual Insurance Company and United Farm Family Insurance Company
10.9 Form of Membership List Purchase Agreement between Farm Family Mutual Insurance Company and each of the Farm Bureaus (Incorporated by reference to Registration Statement No. 333-4446) as amended by Amendment No. 1 to Membership List Purchase Agreements effective July 26 1996 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31, 1997)
*10.10 Farm Family Mutual Insurance Company 8% Subordinated Surplus Certificate, as amended by Certificate of Amendment No. 1 and Trust Indenture, dated as of December 26, 1976 relating to the 8% Subordinated Surplus Certificates
*10.11 Farm Family Mutual Insurance Company 5% Debenture, as amended by Certificate of Amendment, effective January 1, 1969, Certificate of Amendment No. 2, effective January 1, 1979, Certificate of Amendment No. 3 and Supplemental Trust Indenture, dated as of August 25, 1955 Amending Trust Indenture, dates as of May 16, 1955 Relating to The 5% Debentures, as amended by Certificate of Amendment, dated as of August 25, 1955, Certificate of Amendment No. 2, dated as of August 25, 1955, Certificate of Amendment No. 3 dated as of August 25, 1955
10.12 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, Farm Family Holdings, Inc. Officer Severance Pay Plan Effective October 27, 1998
*10.13 Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted as of January 1, 1994
10.14 Farm Family Holdings, Inc. Directors' Deferred Compensation Plan, effective January 1, 1997 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996) as amended by Amendment No. 1 dated as of October 27, 1998 Farm Family Holdings, Inc. Officers' Deferred Compensation Plan, effective January 1, 1997
10.15 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996) as amended by Amendment No. 1 dated as of October 27, 1998
10.16 Farm Family Holdings, Inc. Annual Incentive Plan effective, as amended and restated as of October 27, 1998
10.17 Farm Family Supplemental Profit Sharing and Money Purchase Plan effective January 1, 1997 **10.18 Tax Payment Allocation Agreement effective January 1, 1996 by and between Farm Family Holdings, Inc. and Farm Family Casualty Insurance Company
10.19 Excess Catastrophe Reinsurance Contract issued to Farm Family Casualty Insurance Company effective January 1, 1997 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31, 1997)
10.20 Farm Family Holdings, Inc. Omnibus Securities Plan, as amended by Amendment No. 1 dated February 13, 1997 (Incorporated by reference to the Proxy Statement of Farm Family Holdings, Inc. dated March 7, 1997) as amended by Amendment No. 2 dated as of October 27, 1998
13 Farm Family Holdings, Inc. 1998 Annual Report iii
21 Subsidiaries of the Registrant xxxv
*Incorporated by reference to Registration Statement No. 333-4446
**Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996
Exhibit 10.12 SUMMARY PLAN DESCRIPTION
FARM FAMILY LIFE INSURANCE COMPANY FARM FAMILY CASUALTY INSURANCE COMPANY FARM FAMILY HOLDINGS, INC.
OFFICER SEVERANCE PAY PLAN Effective October 27, 1998
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 and as further amended October 27, 1998, 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;
(d) habitual drunkenness or habitual drug abuse;
(e) material and willful disclosure of any confidential information;
(f) unlawful discrimination and/or unlawful sexual harassment by an officer;
(g) serious breach of Life's, Casualty's or Holding's policies; or
(h) continuing inattention to or continuing neglect of the duties to be performed by an officer which inattention or neglect is not the result of illness or accident.
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 holders of common stock of Life, Casualty or Holdings immediately prior to the Business Combination have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the Business Combination as immediately before;
(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 theplan administrator. The plan administrator may make a reasonable charge for the copies.
In addition to creating rights for the plan participants, ERISA imposes obligations on the people who are responsible for the operation of the plan. The people who operate the plan, called "fiduciaries" of the plan, have a duty to do so prudently and in the interest of all plan participants and beneficiaries.
No one, including the Companies or any other person, may discriminate against employees to prevent them from obtaining a benefit or exercising their rights under ERISA.
If a claim for a benefit is denied in whole or in part, an employee must receive a written explanation of the reason for the denial. Employees also have the right to have the plan administrator review and reconsider any claim.
Under ERISA, there are steps employees can take to enforce the above rights. For instance, if a participant in the plan requests materials from the plan administrator and does not receive them within thirty days, the participant may file suit in a federal court. In such a case, the court may require the plan administrator to provide the materials and pay up to $100 a day until the participant receives the materials, unless the materials were not sent because of reasons beyond the control of the plan administrator. If a claim for benefits is denied or ignored, in whole or in part, the participant may file suit in a state or federal court.
If any employee is discriminated against for asserting that person's rights, assistance may be sought from the U.S. Department of Labor or the participant may file suit in a federal court. The court will decide who should pay court costs and legal fees. If the participant is successful, the court may order the person sued to pay these costs and fees. If the participant loses, the court may order that person to pay these costs and fees, for example, if it finds a claim is frivolous.
If a participant has any questions about the plan, the participant should contact the Human Resources Department of the Companies. If a participant has any questions about this statement or about his or her rights under ERISA, the nearest area office of the Labor-Management Services Administration, U.S. Department of Labor, should be contacted.
General Information. Eligible Officers should note the following information about the severance plan:
Plan Sponsor. The Plan is sponsored by:
Farm Family Life Insurance Company Farm Family Casualty Insurance Company Farm Family Holdings, Inc. P.O. Box 656 Albany, New York 12201-0656 Telephone Number (518) 431-5000
Plan Administrator: Farm Family Life Insurance Company is the plan administrator. The plan administrator makes the rules and regulations necessary to administer the plan. The plan administrator shall have the responsibility and discretionary authority to interpret the terms of this plan, to determine eligibility for benefits and to determine the amount of the benefits. The interpretations and determinations of the plan administrator shall be final and binding.
Agent for legal process: The 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 10.14 AMENDMENT NO. 1 TO THE FARM FAMILY HOLDINGS, INC. DIRECTORS' DEFERRED COMPENSATION PLAN
This AMENDMENT NO. 1 TO THE FARM FAMILY HOLDINGS, INC. DIRECTORS' DEFERRED COMPENSATION PLAN, dated as of October 27, 1998 (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 October 27, 1998.
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 (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 October 27, 1998, as follows:
1. Section 1.05(a) is hereby amended and replaced in its entirety to read as follows:
"(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 the Company or a subsidiary or employee benefit plan of the Company or subsidiary, 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 the Company then outstanding."
2. The following paragraph is hereby added to the end of Section 1.05:
"Provided, however, that the acquisition of Farm Family Life Insurance Company by Farm Family Holdings, Inc. pursuant to the Amended and Restated Option Purchase Agreement dated as of February 26, 1998 by and among Farm Family Holdings, Inc. and the shareholders of Farm Family Life Insurance Company, 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. 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
Date: November 8, 1998 ------------------------
Exhibit 10.15 AMENDMENT NO. 1 TO THE FARM FAMILY HOLDINGS, INC. OFFICERS' DEFERRED COMPENSATION PLAN
This AMENDMENT NO. 1 TO THE FARM FAMILY HOLDINGS, INC. OFFICERS' DEFERRED COMPENSATION PLAN, dated as of October 27, 1998 (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 October 27, 1998.
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 (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 October 27, 1998, as follows:
1. Section 1.05(a) is hereby amended and replaced in its entirety to read as follows:
"(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 the Company or a subsidiary or employee benefit plan of the Company or subsidiary, 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 the Company then outstanding."
2. The following paragraph is hereby added to the end of Section 1.05:
"Provided, however, that the acquisition of Farm Family Life Insurance Company by Farm Family Holdings, Inc. pursuant to the Amended and Restated Option Purchase Agreement dated as of February 26, 1998 by and among Farm Family Holdings, Inc. and the shareholders of Farm Family Life Insurance Company, 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. 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
Date: November 8, 1998 ------------------------
Exhibit 10.16 FARM FAMILY HOLDINGS, INC.
ANNUAL INCENTIVE PLAN
(AS AMENDED AND RESTATED AS OF OCTOBER 27, 1998)
Farm Family Holdings, Inc. hereby establishes this Annual Incentive Plan (the "Plan") for certain key employees of the Company and its affiliates who are selected for participation in the Plan. The Plan is comprised of this Plan document and each valid, executed Annual Incentive Plan Notice for a Participant.
ARTICLE 1 DEFINITIONS
1.01 Board of Directors: The Board of Directors of the Company.
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;
(d) habitual drunkenness or habitual drug abuse;
(e) material and willful disclosure of any confidential information:
(f) unlawful discrimination and/or unlawful sexual harassment by an officer;
(g) serious breach of the Company's policies; or
(h) continuing inattention to or continuing neglect of the duties to be performed by an employee which inattention or neglect is not the result of illness or accident.
1.03 Change in Control: A change in control of the Company 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 the Company 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 the Company or a subsidiary or employee benefit plan of the Company or subsidiary, 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 Company's common stock then outstanding;
(b) stockholders approve a merger, consolidation or other business combination (a "Business Combination") other than a Business Combination in which holders of common stock of the Company immediately prior to the Business Combination have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the Business Combination as immediately before;
(c) stockholders approve either (i) an agreement for the sale or disposition of all or substantially all of the Company's assets to any entity that is not a subsidiary of the Company, 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 the Company or a subsidiary, 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 Farm Family Life Insurance Company by Farm Family Holdings, Inc. pursuant to the Amended and Restated Option Purchase Agreement dated as of February 26, 1998 by and among Farm Family Holdings, Inc. and the shareholders of Farm Family Life Insurance Company, 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.
1.04 Company: Farm Family Holdings, Inc., a Delaware corporation, and any successor thereto.
1.05 Committee: The Compensation Committee of the Board of Directors of the Company or such other committee appointed by the Board. If at any time there is no Committee, then the functions of the Committee specified in the Plan shall be exercised by the Board.
1.06 Disability: The total and permanent disability as determined under the Company's long term disability program.
1.07 Earned Award: The amount of incentive award to be paid to a Participant calculated pursuant to Section 6.01 hereof.
1.08 Effective Date: January 1, 1997.
1.09 Employee: An individual who is employed by the Company or an affiliate thereof.
110 ERISA: The Employee Retirement Income Security Act of 1974, as amended.
1.11 Notice: The Annual Incentive Plan Notice for a Participant for a Plan Year.
1.12 Participant: An employee who is selected by the Committee as eligible to participate in the Plan for a Plan Year.
1.13 Plan: This Plan document, together with each executed, valid Notice.
1.14 Plan Year: The calendar year. The first Plan Year begins January 1, 1997.
1.15 Retirement: The Normal or Early Retirement as those terms are defined in the Farm Family Profit Sharing and Money Purchase Plan or any successor plan thereto.
1.16 Secretary: The Corporate Secretary of the Company.
1.17 Severance Qualifying Termination: An officer's termination pursuant to which the officer qualifies for severance benefits as determined under the Farm Family Life Insurance Company, Farm Family Casualty Insurance Company and Farm Family Holdings, Inc. Officer Severance Pay Plan, as the same may be amended from time to time.
ARTICLE 2 OBJECTIVES
2.01 Objectives: The objectives of the Annual Incentive Plan are to:
(a) provide incentives and financial rewards to the employees of the Company and its affiliates for their contribution to improving the profitability of the Company and its affiliates;
(b) enable the Company to pay a fully-competitive total cash compensation package; and
(c) facilitate the attraction and retention of executives.
ARTICLE 3 ELIGIBILITY
3.01 Eligibility: Officers and other key employees of the Company, its subsidiaries and its affiliates (but excluding members of the Committee and any person who serves only as a director) who are responsible for or contribute to the management, growth and/or profitability of the business of the Company, or its subsidiaries, may be designated as Participants.
3.02 Part-year Participants: An employee who is employed after January 1 but prior to September 1 may be designated a Participant for the Plan Year in which he commenced employment. An employee who is employed on or after September 1 may not be designated a Participant for the Plan Year in which he commenced employment.
3.03 Cessation of Eligibility: An individual shall cease to be a Participant for any Plan Year in which the individual's employment with the Company or its affiliates is terminated voluntarily by the individual or involuntarily for Cause. Provided, however, that a Participant who is an officer of the Company or its affiliate who terminates his or her employment with the Company or its affiliate pursuant to a Severance Qualifying Termination shall be entitled to payment under the Plan as provided herein.
ARTICLE 4 AWARD OPPORTUNITIES AND PERFORMANCE FACTORS
4.01 Levels of Award Opportunities: Award Opportunities have the following levels:
(a) Threshold Award Opportunity: 50% of the amount which will be paid for Target Performance.
(b) Target Award Opportunity: The amount paid for Target Performance.
(c) Outstanding Award Opportunity: 150% of the amount paid for Target Performance.
4.02 Performance Factors: Each level of performance shall have the following Performance Factors:
(a) Below Threshold Performance: will have a Performance Factor of 0.
(b) Threshold Performance: will have a Performance Factor of 0.5.
(c) Target Performance: will have a Performance Factor of 1.0.
(d) Outstanding Performance: will have a Performance Factor of 1.5.
(e) Above Outstanding Performance: will have a Performance Factor of 1.5.
4.03 Interpolation of Performance Factors: The Performance Factors for performance between Threshold and Outstanding Performance levels will be interpolated.
4.04 Limitations on Award Opportunities: No award will be paid for below Threshold Performance. No award will exceed the amount payable for Outstanding Performance.
ARTICLE 5 PERFORMANCE MEASUREMENT
5.01 Performance Measures: The performance of each Participant will be assessed according to the achievement of predefined goals derived from the Company's and its affiliates' strategic plans and budgets. These goals will be chosen each year and identified as Performance Measures on the Participant's Notice, weighted according to the Participant's relative responsibilities to the Company and its affiliates and according to their relative importance.
5.02 Levels of Performance: Performance Measures will be stated in terms of the following levels of performance:
(a) Threshold Performance: which will be defined to be 90% achievement of budget or a similar level of any performance measure which is not budget-related;
(b) Target Performance: which will generally be defined to be 100% achievement of budget or a similar level of any performance measure which is not budget-related; or
(c) Outstanding Performance: which will generally be defined to be 110% achievement of budget or a similar level of any performance measure which is not budget-related.
5.03 Performance Measurement: The Performance Measures and weights for each Participant will be set forth in a Notice for each Plan Year.
ARTICLE 6 PAYMENT OF AWARDS
6.01 Calculation of Earned Awards: The Earned Award for each Participant for a Plan Year shall be calculated as follows:
(a) The Performance Factor will be calculated for each Performance Measure based on the Participant's actual performance.
(b) The Adjusted Performance Factor for each Performance Measure will be calculated by multiplying the weight for each Performance Measure by the Performance Factor.
(c) The Total Adjusted Performance Factor will be the sum of all Adjusted Performance Factors for the Participant.
(d) The Earned Award will be equal to the Target Award Opportunity multiplied by the Total Adjusted Performance Factor.
An example of the Earned Award calculation is set forth in Exhibit A attached hereto.
6.02 Determination of Awards: The Earned Award for each Participant for a Plan Year will be based solely on the Company's and its affiliates' records. The Earned Award for each Participant for a Plan Year will be determined within a reasonable time period after the end of the Plan Year.
6.03 Payment of Awards: Payment of Earned Awards will be made within a reasonable time period after the end of the Plan Year but in no event later than 90 days after close of the Company's books for the Plan Year. Participants may elect to defer receipt of their Earned Awards pursuant to the Company's Officers' Deferred Compensation Plan. The Company will deduct from all payments due a Participant, taxes required by law to be withheld with respect to such payments.
6.04 Change in Control: In the event of a Change in Control, each Participant will receive payment of the greater of his actual Earned Award or his Target Award Opportunity for the Plan Year in which the Change in Control occurs regardless of the level of performance actually achieved.
6.05 Change in Employment Status: The effect of a change in the employment status of an Participant during a Plan Year shall be determined as follows:
(a) New Hire or Promotion During the Plan Year: The Participant will be paid the Earned Award prorated for the number of days of the Plan Year that the Participant was employed in the eligible position.
(b) Death, Retirement or Disability During the Plan Year: The Participant will be paid the Earned Award prorated for the number of days of the Plan Year that the Participant was employed in the eligible position.
(c) Voluntary Termination Other Than a Severance Qualifying Termination: The Participant will forfeit any Earned Award for the Plan Year in which he voluntarily terminates employment with the Company or its affiliates, provided that such voluntary termination does not constitute a Severance Qualifying Termination.
(d) Severance Qualifying Termination: The Participant will be paid the Earned Award prorated for the number of days of the Plan Year that the Participant was employed by the Company in the eligible position, provided, however, that, in the event of a Change in Control during the Plan Year, the Participant will receive payment of the greater of his actual Earned Award or Target Award Opportunity for the Plan Year in which the Change in Control occurs, regardless of achievement of Target Performance, prorated for the number of days of the Plan Year that the Participant was employed in the eligible position.
(e) Involuntary Termination for Cause: The Participant will forfeit any award for the Plan Year in which he is terminated for Cause.
6.06. Amendment or Termination of Plan: In the event of an amendment or termination of the Plan which reduces the amount any Participant will receive pursuant to the Plan for the Plan Year in which the amendment or termination is first effective, each such Participant will receive for such Plan Year payment of the greater of his actual Earned Award calculated under the Plan, as amended, or his Target Award Opportunity for the Plan Year without giving any effect to such amendment or termination.
ARTICLE 7 ADMINISTRATION
7.01 Appointment of Committee: The general administration of the Plan and the responsibility for carrying out its provisions shall be placed with the Committee which shall be appointed from time to time by the Board of Directors.
7.02 Compensation of Committee: The members of the Committee shall not receive compensation for their services as such, other than regular meeting fees, and, except as required by law, no bond or other security need be required of them in such capacity in any jurisdiction.
7.03 Rules of Plan: Subject to the limitations of the Plan, the Committee may, from time to time, establish policies for the administration of the Plan and the transaction of its business. The Committee may correct errors, however arising, and, as far as possible, adjust any award payments accordingly. The determination of the Committee as to the interpretation of the provisions of the Plan or any disputed question with respect to the Plan shall be conclusive upon all interested parties.
7.04 Agents and Employees: The Committee may authorize one or more agents to execute or deliver any instrument. The Committee may appoint or employ such agents, counsel, auditors, physicians, clerical help and actuaries as in the Committee's judgment shall be reasonable or necessary for the proper administration of the Plan.
7.05 Records: The Committee shall maintain accounts showing the transactions of the Plan. The Committee shall prepare and submit annually to the Board of Directors a report setting forth the amounts paid to Participants for the Plan Year. The report to the Board of Directors shall also include a brief account of the operation of the Plan for the Plan Year.
7.06 Delegation of Authority: With the consent of the Board of Directors, the Committee may, by resolution, delegate to any person or persons any or all of its rights and duties hereunder. Any such delegation shall be valid and binding on all persons, and the person or persons to whom any such authority has been delegated shall, upon written acceptance of such authority, have full power to act in all matters so delegated until the authority expires by its terms or is revoked by the Committee.
7.07 Indemnification: The Company shall indemnify each member of the Committee for all expenses and liabilities (including reasonable attorneys' fees) arising out of the administration of the Plan, other than any expenses or liabilities resulting from the Committee's own gross negligence or willful misconduct. The foregoing right of indemnification shall be in addition to any other rights to which the members of the Committee shall be entitled as a matter of law.
ARTICLE 8 MISCELLANEOUS
8.01 No Trust Created: Nothing contained in the Plan, and no action taken pursuant to the Plan by the Company or any Participant shall create, or be construed to create, a trust of any kind, or a fiduciary relationship between the Company and the Participant, or any other person
8.02 Benefits Payable Only From General Corporate Assets - Unsecured General Creditor Status of Participant: Payments to any Participant shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Company. Title to and beneficial ownership of any assets, whether cash or investments which the Company may earmark to pay Awards hereunder, shall at all times remain in the Company and no Participant shall have any property interest whatsoever in any specific asset of the Company. No person shall have any interest in any such assets by virtue of the provisions of this Plan. The Company's obligation hereunder shall be unfunded, for tax purposes and for purposes of Title I of ERISA, and an unsecured promise to pay money in the future. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company, and no such person shall have nor acquire any legal or equitable right, interest or claim in or to any property or asset of the Company.
There is no obligation on the part of the Company to fund for any liability which accrues as a result of the Plan.
8.03 No Contract of Retention: Nothing contained herein shall be construed to be a contract of employment as an Employee for any term of years, nor as conferring upon any Participant the right to continue to be employed as an Employee in the Participant's present capacity, or in any capacity. It is expressly understood that the Plan relates merely to the promise of payment of annual incentive compensation for the Participant's services as an Employee.
8.04 Benefits Not Transferable: The Participant shall not have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder. A Participant's rights to payments under the Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors of the Participant, and no such amounts shall be subject to seizure by any creditor of any Participant, by a proceeding at law or in equity, nor shall such amounts be transferable by operation of law in the event of bankruptcy, insolvency or death of the Participant. Any such attempted assignment or transfer shall be void.
8.05 Determination of Benefits: A Participant who believes that such Participant is being denied a benefit to which the Participant is entitled under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Committee, setting forth the Participant's claim. The request must be addressed to the Secretary at the principal place of business of the Company.
Upon receipt of a claim, the Secretary shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Committee may, however, extend the reply period for an additional ninety (90) days for reasonable cause.
If the claim is denied in whole or in part, the Committee shall render a written opinion, using language calculated to be understood by the Claimant, setting forth:
(a) The specific reason or reasons for such denial;
(b) The specific reference to pertinent provisions of the Plan upon which such denial is based;
(c) A description of any additional material or information necessary for the Claimant to perfect his claim and an explanation why such material or such information is necessary; and
(d) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review and the time period within which such review must be requested.
Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Board of Directors review the determination of the Committee. Such request must be addressed to the Board of Directors at the principal place of business of the Company. The Claimant or the Claimant's duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Board of Directors. If the Claimant does not request a review of the Committee's determination by the Board of Directors within such sixty (60) day period, the Claimant shall be barred and estopped from challenging the Committee's determination.
Within sixty (60) days after the Board of Directors' receipt of a request for review from a Claimant, the Board of Directors shall review the Committee's determination. If the Claimant is a member of the Board of Directors, the Claimant shall be precluded from participating in the Board of Directors' review of the Claimant's claim. After considering all material presented by the Claimant, the Board of Directors shall render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of the Plan upon which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Board of Directors shall so notify the Claimant and will render the decision as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review from the Claimant.
8.06 Amendment or Termination: The Board of Directors, without the consent of any Participant, may amend or terminate the Plan at any time provided, however, that in the event of an amendment or termination of the Plan which reduces the amount any Participant will receive pursuant to the Plan, each such Participant shall be entitled to the payment set forth in Section 6.06 hereof for the Plan Year in which such amendment or termination is first effective.
8.07 Severability of Provisions: If any provision of the Plan is held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of the Plan, and the Plan shall be construed and enforced as if such invalid or unenforceable provision had not been included in the Plan.
8.08 Headings: Headings used throughout the Plan are for convenience only and shall not be given legal significance.
8.09 Inurement: The Plan shall be binding upon and shall inure to the benefit of, the Company and its successors and assigns, and the Participants and their Designated Beneficiaries and the successors, heirs, executors, administrators and beneficiaries thereof.
8.10 Notice: Any notice, consent or demand required or permitted to be given under the 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 a party hereto, it shall be sent by United States certified mail, postage prepaid, and addressed to such party's last known address as shown on the records of the Company. The date of such mailing shall be deemed the date of notice, consent or demand. Any party hereto may change the address to which notice is to be sent by giving notice of the change of address in the manner aforesaid.
8.11 Governing Law: The Plan and the rights of the parties hereunder shall be governed by and be construed in accordance with the laws of the State of New York.
8.12 Pronouns: Any masculine term used in the Plan shall include the feminine and any singular term shall include the plural, unless the text indicates otherwise.
IN WITNESS WHEREOF, the Company has hereby executed this Plan, as of the date written below.
FARM FAMILY HOLDINGS, INC.
By: /s/ Philip P. Weber -------------------- Philip P. Weber
Title: President & Chief Executive Officer -----------------------------------
Date: November 8, 1998 ----------------
Exhibit 10.20 AMENDMENT NO. 2 TO THE FARM FAMILY HOLDINGS, INC. OMNIBUS SECURITIES PLAN
This AMENDMENT NO. 2 TO THE FARM FAMILY HOLDINGS, INC. OMNIBUS SECURITIES PLAN, dated as of October 27, 1998 (this "Amendment No. 2) was adopted by the Board of Directors of FARM FAMILY HOLDINGS, INC. (the "Company"), at a meeting duly called and held on October 27, 1998.
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 (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 October 27, 1998, as follows:
1. Subsection (a) of the definition of "Change of Control" is hereby amended and replaced in its entirety to read as follows:
"(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 the Company or a subsidiary or employee benefit plan of the Company or subsidiary, 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 the Company then outstanding;"
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
Farm Family Holdings, Inc. Exhibit 13 1998 Annual Report
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Corporate Profile
The following discussion and analysis of financial condition and results of operations includes the operations of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiaries (collectively referred to as the "Company"). The primary subsidiary of Farm Family Holdings is Farm Family Casualty Insurance Company ("Farm Family Casualty"). The operations of the Company are also closely related with those of its affiliates, Farm Family Life Insurance Company ("Farm Family Life") and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family").
Farm Family Casualty
Farm Family Casualty is a specialized property and casualty insurer of farms, other generally related businesses and residents of rural and suburban communities principally in the Northeastern United States. Farm Family Casualty provides property and casualty insurance coverages to members of the state Farm Bureau(R) organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states. Membership in a state Farm Bureau organization is a prerequisite for voluntary insurance coverage (except for employees of the Company and its affiliates).
Farm Family Financial Services, Inc.
During 1997, the Company created Farm Family Financial Services, Inc., a wholly owned subsidiary. Farm Family Financial Services, Inc. entered into a mutually beneficial agreement with a national broker-dealer that allows certain of the Company's agents to offer mutual funds and other securities products to their clients.
Acquisition of Farm Family Life
Farm Family Holdings entered into an Option Purchase Agreement with the shareholders of Farm Family Life pursuant to which Farm Family Holdings was granted an option to acquire all of the outstanding capital stock of Farm Family Life, exercisable for a two year period which commenced on July 26, 1996. On February 26, 1998, the Board of Directors of Farm Family Holdings approved the exercise of the option to acquire Farm Family Life and it's wholly owned subsidiary, United Farm Family. Farm Family Life is owned by Farm Bureau organizations and their affiliates in New New York, New Jersey, Delaware, West Virginia and all of the New England states. Under the Option Purchase Agreement, Farm Family Holdings will pay an exercise price of $37.5 million to acquire Farm Family Life, consisting of $31.5 million of common stock of Farm Family Holdings, and $6 million stated value of 6-1/8% voting preferred stock of Farm Family Holdings, less certain expenses to be paid by Farm Family Life in connection with the acquisition on behalf of the shareholders of Farm Family Life.
The Option Purchase Agreement was approved by the Company's shareholders on December 2, 1998. The closing of the acquisition was scheduled to occur on December 7, 1998, but was delayed when it was determined that in order for certain shareholders of Farm Family Life to provide unqualified opinions of counsel required by the Option Purchase Agreement as a condition to closing, such shareholders of Farm Family Life or their respective parent entities would need to obtain approval of the acquisition from their members.
As a result of this delay, the Option Purchase Agreement was amended to, among other things, fix the price used to determine the number of shares of common and preferred stock to be issued, subject to a collar mechanism, at $35.72, which was the average closing price that would have been used if the closing had occurred on December 7, 1998. Under the collar mechanism, if the price per share of the Company's common stock on the last trading day prior to the closing (the "Closing Price") is greater than $42.86 or equal to or less than $25.00, the price used to determine the number of shares of the Company's common stock to be issued in the acquisition will equal $35.72 divided by a factor. The factor will be equal to 1.2 (if the Closing Price is greater than $42.86) or 0.7 (if the Closing Price is equal to or less than $25.00) multiplied by $35.72 divided by the Closing Price. If the Closing Price is $25.00 or less, the Company will have the option to terminate the Option Purchase Agreement. In addition, the date on which the Company or the shareholders of Farm Family Life may terminate the Option Purchase Agreement, if the closing has not occurred, was extended to April 30, 1999.
The amendment to the Option Purchase Agreement is subject to the approval of the members of certain shareholders of Farm Family Life or their respective parent entities, and the shareholders of the Farm Family Holdings. On February 24, 1999, Farm Family Holdings began resoliciting the approval of its shareholders for the revised terms of the acquisition. Under the terms of the amendment, the shareholders of Farm Family Life have agreed to reimburse the Company for half of the expenses of resolicitation, up to $200,000. The acquisition of Farm Family Life is also subject to certain closing conditions, including the receipt of all required government approvals. Management expects to close the acquisition of Farm Family Life in the second quarter of 1999.
1998 Financial Highlights
The Company's operating income for the year ended December 31, 1998 decreased to $14.3 million compared to $15.0 million in 1997. On a per share basis (diluted), operating income for 1998 was $2.69 compared to $2.84 in 1997. Operating earnings exclude realized investment gains (losses), extraordinary items, the gain on partial reduction of the Company's extended earnings liability, the adjustments to restate prior period financial statements for the Company's extended earnings liability, nonrecurring charges, and the related taxes thereon. The slight decrease in operating income during 1998 was primarily attributable to an increase in weather related losses which partially offset the increase in premiums and the impact of the Company's expense management program. Premium revenue increased 21.8% during the year ended December 31, 1998 to $181.7 million from $149.2 million in 1997. In addition, the Company's GAAP combined ratio was 99.9% for 1998 compared to 98.3% in 1997.
During 1998, the Company restated certain amounts within its consolidated financial statements related to the Company's retroactive adoption effective January 1, 1994 of Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" ("Statement 112") to account for the Company's extended earnings program with its agents and agency managers. Previously, the Company accounted for its extended earnings program pursuant to Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies". The impact and nature of the Company's retroactive adoption of Statement 112 is more fully described in Note 2 "Prior Period Adjustments" and Note 13 "Commitments, Contingencies, and Uncertainties" in the notes to the Company's consolidated financial statements included herein.
Operating Environment
The Company's operating results are subject to significant fluctuations from period to period depending upon, among other factors, the frequency and severity of losses from weather related and other catastrophic events, the effect of competition and regulation on the pricing of products, changes in interest rates, general economic conditions, tax laws and the regulatory environment. As a condition of its license to do business in various states, the Company is required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. In all such states, residual market premium rates are subject to the approval of the state insurance departments. Residual market premium rates for automobile insurance have generally been inadequate. The amount of future losses or assessments from residual market mechanisms cannot be predicted with certainty and could have a material adverse effect on the Company's results of operations.
For the years ended December 31, 1998, 1997, and 1996, 34.8%, 36.5% and 38.6%, respectively, of the Company's direct written premiums were derived from policies written in New York and 28.3%, 26.4% and 22.6%, respectively, were derived from policies written in New Jersey. For these periods, no other state accounted for more than 10.0% of the company's direct written premiums. 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, generally.
Market-Sensitive instruments and risk management
The Company's investment objective is to maximize after tax yield while maintaining safety of capital and providing adequate liquidity for its insurance operations. The Company seeks to meet these objectives and simultaneously manage interest rate risk and market risk by investing in investment-grade fixed maturity securities that have similar cash flows to the liabilities they support, and are diversified by industry, issuer, type and geography. The Company utilizes the services of a professional asset management firm specializing in the management of assets for insurance companies to assist in meeting these objectives. The Company's invested assets are managed to maximize long term risk adjusted returns consistent with and in support of product liabilities and the capital position of the Company.
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 December 31, 1998 levels, the Company's fixed maturity portfolio would decline in fair value by approximately $15.6 million.
The calculations involved in the computer simulations the Company utilized for the sensitivity analysis incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, the potential changes in value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material.
The Company has not utilized options, interest rate swaps, or other derivative financial instruments to hedge interest rate risk.
Year 2000
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 result. 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 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 is contacting 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 Defmber 31, 1998, the Company had received responses from approximately 90% of such third-parties. Many of the responses indicate that the products or services provided are expected to be Year 2000 compliant. However, few providers have provided written assurances that they are currently Year 2000 compliant. The Company continues to track the status of third-party providers' Year 2000 compliance progress and a follow-up program is under way with providers that have not responded. 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 will be completed by June 30, 1999.
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 through December 31, 1998 were approximately $334,000, which were expensed as incurred. Based on information currently available, the total identified remaining costs expected to be incurred for the Year 2000 projects are estimated to be $95,000. These costs are being funded through operating cash flows. These estimated costs are the costs allocated to the Company and do not include the costs allocated to Farm Family Life and United Farm Family in accordance with sharing arrangements among the companies. The Company's estimated costs for 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 1997 or during 1998. 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. Because of the progress which has been made toward achieving Year 2000 compliance with the Company's IT systems, an IT system contingency plan has not been developed. The Company believes that its testing of its critical hardware and software will reveal any significant Year 2000 problems, that such problems will be capable of remediation, and that the Company's software and hardware will perform substantially as planned when Year 2000 processing begins. If testing reveals material problems that cannot be remediated, then the Company intends to develop such contingency plans as are practical based on the alternatives available. A contingency plan has not been developed for dealing with the scenario where one or more of the Company's third-party providers will be unable to provide the services expected. If management believes that a third-party provider is not Year 2000 compliant, or that a third-party provider's Year 2000 compliance status is uncertain, then the Company intends to seek other providers or develop such contingency plans as are practical based on the alternatives available.
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.
Products
The Special Farm Package is a flexible, multi-line package of insurance coverages, which the Company regards as its "flagship" product. For the year ended December 31, 1998, 22.0% of the Company's total direct written premiums were derived from the Special Farm Package product.
The Company concentrates on its primary products: personal and commercial automobile, the Special Farm Package, businessowners, homeowners and Special Home Package policies. The Company underwrites its commercial and personal lines risks by evaluating historical loss experience, current prevailing market conditions, and product profitability with consistently applied standards. The adequacy of premium rates is affected mainly by the severity and frequency of claims and changes in the competitive, legal and regulatory environment in which the Company operates.
Expense Management
During 1998, the Company continued the expense management initiatives it began during 1996. The goal of the Company's expense management initiatives is to continually review its cost structure and reduce or eliminate certain expenses. Additionally, the Company seeks to tie expenses to operating results so that expenses become increasingly more variable with the Company's profitability and less fixed or volume sensitive. As a result, portions of the compensation for agents, employees and management are influenced by the Company's operating results. These programs help to align the Company's interests more directly with those of its shareholders. As a result of these initiatives, as well as an increase in the Company's premium revenue at a greater rate than its expenses, the Company's underwriting expenses as a percent of premium revenue were reduced during 1998 to 26.0% compared to 29.0% for 1997. Further, the Company's underwriting expenses as a percentage of premium revenue for the fourth quarter of 1998 were 25.0%.
Future Application of Accounting Standards
In June 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, 2000, 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 does not believe that Statement 133 will have a material impact on the Company's financial statements.
Results of Operations
The Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Premiums
Premium revenue increased $32.5 million, or 21.8%, during the year ended December 31, 1998 to $181.7 million from $149.2 million in 1997. The increase in premium revenue in 1998 resulted from an increase of $20.0 million in earned premiums on additional business directly written by the Company (principally in New Jersey and New York), an increase of $3.4 million in earned premiums assumed by the Company, and a decrease of $9.1 million in earned premiums ceded to reinsurers.
The $20.0 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $18.2 million, or 13.6%, in earned premiums from the Company'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), an increase of $1.8 million in earned premiums on workers' compensation business, and an increase of $1.1 million in earned premiums the Company's other products. These increases were somewhat offset by a decrease of $1.1 million in earned premiums from assigned risk automobile business. Premiums earned on personal automobile policies directly written by the Company (excluding assigned risk personal automobile) accounted for $62.7 million or 34.7% of the Company's premium revenue in 1998 compared to $52.9 million or 32.9% in 1997. Premiums earned on personal automobile policies in the state of New Jersey accounted for $7.0 million of the $20.0 million increase in earned premiums from the Company's primary products. The number of policies in force of the Company's primary products increased by 8.7% to approximately 138,000 in 1998 from approximately 127,000 in 1997 and the average premium earned for each such policy increased by 4.6% in 1998 compared to 1997.
The decrease in premiums ceded to reinsurers of $9.1 million was primarily attributable to the termination of the reinsurance agreements with the Company's affiliate, United Farm Family. The Company's reinsurance assumed premiums increased as a result of both new reinsurance contracts written in 1998 and increases in premiums for reinsurance contracts renewed.
Net Investment Income
Net investment income increased $1.0 million, or 5.8%, to $19.1 million for the year ended December 31, 1998 from $18.1 million in 1997. The taxable equivalent yield on the Company's investment portfolio was 7.01% and 7.29% for the years ended December 31, 1998 and 1997, respectively. The increase in net investment income was primarily the result of an increase in cash and invested assets (at amortized cost) of approximately $28.3 million, or 10.3%. The increase in cash and invested assets was greater than the increase in net investment income for the year ended December 31, 1998 primarily as a result of a decline in prevailing interest rates as well as an increase in the Company's investment in tax exempt fixed maturity securities. The Company's investment income from tax exempt securities increased to $2.7 million in 1998 from $1.4 million in 1997. The Company's 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.
Net Realized Investment Gains (Losses)
Net realized investment gains were $0.5 million for the year ended December 31, 1998 compared to $5.4 million in 1997. During 1997, the Company sold a common stock investment which resulted in a realized gain of $5.7 million.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $31.0 million, or 30.0%, to $134.3 million for the year ended December 31, 1998 from $103.3 million in 1997. The increase in loss and loss adjustment expenses was primarily attributable to a 21.8% increase in premium revenue in 1998 as compared to 1997. Loss and loss adjustment expenses were 73.9% of premium revenue in 1998 compared to 69.2% of premium revenue in 1997. The increase in loss and loss adjustment expenses as a percent of premium revenue was attributable to an increase in weather related losses and certain other factors during the year ended December 31, 1998 compared to the same period in 1997.
Loss and loss adjustment expenses incurred by the Company for the year ended December 31, 1998 were reduced by $3.2 million as a result of coverage provided by the Company's aggregate stop loss reinsurance program. This program, which became effective January 1, 1998, covers net losses incurred on the Company's direct written, as well as its reinsurance assumed business.
Losses related to the Company's direct writings believed to be weather related aggregated $11.7 million in 1998 compared to $5.2 million in 1997. The increase in weather related losses was primarily attributable to severe ice storms which impacted the upstate New York and Maine territories in which the Company writes business during the first three months of 1998, and tornadoes and severe thunderstorms which impacted the Northeast during the second quarter of 1998.
The Company incurred an additional $3.9 million of losses in 1998, as compared to 1997, on its personal and commercial automobile business. The ratio of losses incurred to premiums earned for the Company's personal and commercial automobile business was 69.3% for the year ended December 31, 1998 compared to 65.1% in 1997. The Company also incurred an additional $1.4 million of losses in 1998 as compared to 1997 on its workers compensation business. The loss ratio for worker's compensation was 53.1% for the year ended December 31, 1998 compared to 41.7% for the same period in 1997.
Loss and loss adjustment expenses on the Company's voluntary assumed business increased $2.6 million in 1998 as compared to 1997 and was 60.0% of earned premiums for such business for the year ended December 31, 1998 compared to 57.7% in 1997. The increase in the ratio of loss and loss adjustment expenses to earned premiums on business assumed was primarily attributable to losses caused by severe weather in the Midwest.
Underwriting Expenses
Underwriting expenses increased $3.9 million, or 9.0%, to $47.2 million for the year ended December 31, 1998 from $43.3 million for the same period in 1997. For the year ended December 31, 1998, underwriting expenses were 26.0% of premium revenue compared to 29.0% in 1997. The 1997 underwriting expenses include the impact of the prior period adjustment made to reflect the Company's retroactive adoption of Statement 112 to account for the Company's extended earnings program, as discussed previously. Excluding the impact of this prior period adjustment, the underwriting expenses were 28.0% of premium revenue for 1997. The reduction in the Company's underwriting expense ratio was primarily attributable to a smaller relative increase in overhead expenses than in premium revenue for the year and the Company's continued expense management initiatives which began in 1996.
Gain on Partial the Reduction of Extended Earnings Liability
The Company recorded a gain of $6.3 million on the partial reduction of its extended earnings liability during the year ended December 31, 1998, which was the result of modifications made to the agreements with the Company's agents and agency managers that relieved the Company of the primary obligation to make extended earnings payments. The Company is primarily liable for its remaining extended earnings liability which represents the aggregate amount owed by the Company to eligible former agents who have terminated their association with the Company and are currently receiving extended earnings payments.
Federal Income Tax Expense
Federal income tax expense decreased $1.0 million to $8.2 million in 1998 from $9.2 million in 1997. Federal income tax expense was 30.7% of income before federal income taxes in 1998 compared to 34.5% in 1997. The decrease in the Company's federal income tax expense as a percentage of income before federal income tax expense for the year ended December 31, 1998 as compared to 1997 was primarily attributable to an increase in tax exempt interest income earned on the Company's investments reflecting the Company's increased investment in tax exempt fixed maturity securities.
Net Income
Net income increased $1.2 million to $18.7 million in 1998 from $17.5 million in 1997 primarily as a result of the foregoing factors, including the gain on the partial reduction of the Company's extended earnings liability of $6.3 million recognized in 1998.
The Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Premiums
Premium revenue increased $18.4 million, or 14.1%, during the year ended December 31, 1997 to $149.2 million from $130.8 million in 1996. The increase in premium revenue in 1997 resulted from an increase of $18.2 million in earned premiums on additional business directly written by the Company (principally in New Jersey and New York) and an increase of $3.7 million in earned premiums assumed by the Company, offset by an increase of $3.5 million in earned premiums ceded to reinsurers. The $18.2 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $15.8 million, or 13.4%, in earned premiums from the Company'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), an increase of $1.0 million in earned premiums on workers' compensation business, an increase of $0.5 million in earned premium from assigned risk automobile business, and an increase of $0.9 million in earned premium from the Company's other products. Premiums earned on personal automobile policies in the state of New Jersey accounted for $6.5 million of the $18.2 million increase in earned premiums from the Company's primary products. The number of policies of the Company's primary products increased by 11.4% to approximately 127,000 in 1997 from approximately 114,000 in 1996 and the average premium earned for each such policy increased by 1.6% in 1997.
Net Investment Income
Net investment income increased $2.1 million, or 13.3%, to $18.1 million for the year ended December 31, 1997 from $16.0 million in 1996. The increase in net investment income was primarily the result of an increase in cash and invested assets (at amortized cost) of approximately $36.4 million, or 15.3%. The increase in average cash and invested assets was primarily attributable to the investment of available operating cash flows during 1997. The return realized on the Company's cash and invested assets was 7.0% in 1997 and 7.5% in 1996.
Net Realized Investment Gains (Losses)
Net realized investment gains were $5.4 million for the year ended December 31, 1997 compared to a loss of $0.6 million in 1996. The increase in realized investment gains was primarily attributable to a realized gain on the sale of a common stock investment in 1997.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $8.3 million, or 8.8%, to $103.3 million for the year ended December 31, 1997 from $95.0 million in 1996. The increase in losses and loss adjustment expenses was primarily attributable to the overall growth in the Company's business. Loss and loss adjustment expenses were 69.2% of premium revenue in 1997 compared to 72.6% of premium revenue in 1996. Losses and loss adjustment expenses believed to be weather related aggregated $5.2 million in 1997 compared to $10.6 million in 1996.
Underwriting Expenses
Underwriting expenses increased $3.8 million, or 9.7%, to $43.3 million for the year ended December 31, 1997 from $39.5 million for the same period in 1996. For the year ended December 31, 1997, underwriting expenses were 29.0% of premium revenue compared to 30.2% in 1996. The reduction in the Company's underwriting expense ratio was primarily attributable to a smaller relative increase in overhead expenses than in premium revenue for the period and the Company's continued expense management initiatives which began in 1996.
Federal Income Tax Expense
Federal income tax expense increased $5.9 million to $9.2 million in 1997 from $3.3 million in 1996. Federal income tax expense was 34.5% of income before federal income taxes in 1997 compared to 30.3% in 1996. The increase in income tax expense was primarily the result of the Company's increased premium volume and favorable operating results during 1997.
Net Income
Net income increased $11.5 million to $17.5 million in 1997 from $6.0 million in 1996 primarily as a result of the foregoing factors and the impact of $1.5 million of expenses related to the demutualization of the Company which the Company has identified as an extraordinary item in 1996, as well as the implementation of a voluntary early retirement program which resulted in a one time charge to earnings of $0.8 million net of tax in the last quarter of 1996.
Liquidity and Capital Resources
Historically, the principal sources of the Company's cash flow have been premiums, investment income, maturing investments, and proceeds from sales of invested assets. In addition to the need for cash flow to meet operating expenses, the liquidity requirements of the Company relate primarily to the payment of losses and loss adjustment expenses. The liquidity requirements of the Company vary because of the uncertainties regarding the settlement dates for liabilities for unpaid claims and because of the potential for large losses, either individually or in the aggregate.
At December 31, 1998, the Company's cash and invested assets, at amortized cost, was $303.2 million, a $28.3 million increase from 1997. The increase is primarily the result of the investment of operating cash flows. During 1998, the Company continued to invest primarily in investment grade fixed maturities to maintain the overall quality of its investment portfolio. The Company also increased its investments, at amortized cost, in tax exempt bonds from $31.7 million in 1997 to $78.8 million in 1998. The market value of the Company's fixed maturity investments is subject to fluctuations directly attributable to prevailing rates of interest as well as other factors. As of December 31, 1998 and 1997, the aggregate market value of the Company's fixed maturity investments exceeded the aggregate amortized cost of such investments by $13.3 million and $10.6 million, respectively.
Fixed maturity securities, at amortized cost, rated as investment grade by the National Association of Insurance Commissioners were $282.0 million, or 97.7% of its fixed maturity portfolio, at December 31, 1998 compared to $248.9 million, or 96.5% of its fixed maturity portfolio, at December 31, 1997. Corporate bonds constituted most of the non-investment grade securities held by the Company as of December 31, 1998 and 1997. The mortgage-backed securities held by the Company as of December 31, 1998 were primarily GNMA, FNMA, and Federal Home Loan Mortgage Corp. pass-through securities. The Company currently has no investments in such derivative financial instruments as futures, forward, swap, or option contracts, or other financial instruments with similar characteristics.
The Company has in place unsecured lines of credit with two banks under which it may borrow up to $12.0 million at an annual interest rate equal to the lending bank's prime rate. At December 31, 1998, no amounts were outstanding on the lines of credit. In addition, the Company's reinsurance intermediary has extended to the Company a "Rapid Recovery Facility" under which the Company, at its option, can receive cash advances of up to $8.0 million within 48 hours of experiencing a catastrophic loss. There is no interest rate associated with this facility. The Company did not utilize this facility in 1998, 1997 or 1996.
On April 1, 1998, the Company redeemed $1.3 million principal amount of surplus notes bearing interest at a rate of eight percent per annum. Interest expense incurred by the Company on the surplus notes for the years ended December 31, 1998, 1997 and 1996 was $25,000, $102,000 and $167,000, respectively.
Net cash provided by operating activities was $29.5 million, $31.4 million, and $11.8 million during the years ended December 31, 1998, 1997, and 1996, respectively. The decrease in net cash provided by operating activities in 1998 was primarily attributable to an increase in losses paid. The increase in net cash provided by operating activities in 1997 compared to 1996 was primarily attributable to the increase in premiums collected, interest and dividends received, and a reduction in losses paid relative to the increase in premiums collected.
Net cash used in investing activities was $28.0 million, $29.6 million, and $41.1 million during the years ended December 31, 1998, 1997, and 1996, respectively. The decrease in net cash used in investing activities in 1998 resulted primarily from an increase in investment collections from fixed maturities available for sale due to an increase in the redemption of fixed maturities. During 1998, issuers paid $26.9 million to redeem fixed maturities prior to their stated maturity, compared to $10.6 million in 1997. The decrease in net cash used in investing activities in 1997 compared to 1996 resulted primarily from an increase in investment collections from fixed maturities available for sale and proceeds from sales of equity securities.
Net cash provided by financing activities for the year ended December 31, 1996 of $30.9 million was the result of the Company's initial public offering of its common stock on July 23, 1996. The Company received net proceeds of $41.5 million for approximately 2,786,000 shares sold in the initial public offering, including the underwriters' over-allotment, as well as $3.4 million for approximately 214,000 shares sold in a subscription offering to policyholders. The Company made payments of $11.7 million to policyholders in exchange for their membership interest in Farm Family Mutual Insurance Company and $1.1 million to holders of Farm Family Mutual Insurance Company debt pursuant to the Plan of Reorganization and Conversion. In addition, the net proceeds were utilized to pay certain expenses associated with the initial public offering of $1.1 million. Subsequent to the initial public offering, Farm Family Holdings made an $18.0 million capital contribution to Farm Family Casualty.
Effective December 31, 1997, the Company revised its reinsurance program. The Company's reinsurance agreements with its affiliate, United Farm Family, were terminated effective December 31, 1997. As a result, the Company's retention per claim under its current reinsurance program increased from $100,000 to $300,000 in 1998. In addition, the Company entered into an agreement which provides reinsurance protection within certain dollar limits for losses in excess of a predetermined ratio of losses to earned premiums. This agreement covers all direct and assumed voluntary business as well as mandatory residual market mechanisms. The Company's reinsurance program is structured to partially mitigate the impact of large or unusual losses as well as the aggregation of smaller, more frequent losses on liquidity and operating results.
The New York Insurance Law regulates the distribution of dividends and other payments to Farm Family Holdings by Farm Family Casualty. As of December 31, 1998, the maximum amount of dividends that could be paid by Farm Family Casualty without the prior approval of the New York State Insurance Department is $3.0 million. Such restrictions or any subsequently imposed restrictions may in the future affect the liquidity of Farm Family Holdings. Management believes that the Company's liquidity and capital resources are adequate for the coming year.
See accompanying notes to Consolidated Financial Statements.
See accompanying notes to Consolidated Financial Statements.
See accompanying notes to Consolidated Financial Statements.
1. Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include the accounts of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiaries (collectively referred to as the "Company"). The primary subsidiary of Farm Family Holdings is Farm Family Casualty Insurance Company ("Farm Family Casualty"). All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company provides property and casualty insurance coverage's to members of the state Farm Bureau(R) organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states. Membership in the state Farm Bureau organizations is a prerequisite for voluntary insurance coverage, except for employees of the Company and its affiliates.
The operations of the Company are closely related with those of its affiliates, Farm Family Life Insurance Company ("Farm Family Life") and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family") (see Note 11). Farm Family Life is a stock life insurance company owned by the state Farm Bureau organizations of the ten states in which the Company operates. Farm Family Holdings has entered into an Option Purchase Agreement with the shareholders of Farm Family Life pursuant to which Farm Family Holdings proposes to acquire Farm Family Life subject to certain conditions (see Note 16). The Company and Farm Family Life are affiliated by common management, shared agents and employees and similar Boards of Directors.
Investments:
Fixed maturities include bonds, redeemable preferred stocks and mortgage-backed securities. Investments in fixed maturities which the Company has both the ability and positive intent to hold to maturity are classified as held to maturity and carried at amortized cost. Investments classified as held to maturity on the Company's consolidated balance sheets consist primarily of private placements. Fixed maturities which may be sold prior to their contractual maturity are classified as available for sale and are carried at fair value on the Company's consolidated balance sheets. The difference between amortized cost and fair value of fixed maturities classified as available for sale, net of deferred income taxes, is reflected as a component of stockholders' equity.
Equity securities include common and non-redeemable preferred stocks which are carried at fair value. The difference between cost and fair value of equity securities, less deferred income taxes, is reflected as a component of stockholders' equity.
Mortgage loans are carried at their outstanding principal balance.
The carrying values of all investments are reviewed on an ongoing basis. If this review indicates a decline in fair value below cost is other than temporary, the Company's carrying value in the investment is reduced to its estimated realizable value and a specific write-down is taken. Such write-downs are included in realized investment gains and losses.
Short-term investments are carried at cost which approximates fair value.
Investment income consists primarily of interest and dividends. Interest is recognized on an accrual basis and dividends are recorded on the ex-dividend date. Interest income on mortgage-backed securities is determined by the effective yield method based on estimated principal repayments. Realized investment gains and losses are determined on a specific identification basis.
Income Taxes:
The income tax provision is calculated under the liability method. Deferred income tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities and the enacted tax rates. The principal assets and liabilities giving rise to such differences are reserves for losses and loss adjustment expenses, unearned premiums, and deferred acquisition costs. Deferred income taxes also arise from unrealized investment gains or losses on equity securities and fixed maturities classified as available for sale.
Stock Compensation Plan:
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123") applies to all stock-based employee compensation plans (except employee stock ownership plans) in which an employer grants shares of its stock or other equity instruments to employees. Statement 123 permits a company to choose either the fair value or the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), for its stock-based compensation plans. The Company has elected to account for its stock compensation plan using the intrinsic value based method as prescribed by APB 25.
Property-Liability Insurance Accounting:
Premiums are deferred and earned on a pro rata basis over the terms of the respective policies. Amounts paid for ceded reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to premium. Premiums receivable are reduced for an allowance for doubtful accounts.
Policy acquisition costs that vary with and are primarily related to the production of business have been deferred. Deferred acquisition costs primarily consist of agents' compensation, premium taxes, and certain other underwriting expenses. Such deferred acquisition costs are amortized as premium revenue is recognized. Deferred acquisition costs are limited to their estimated realizable value, which gives effect to the premium to be earned, related investment income, and losses and loss adjustment expenses expected to be incurred as the premium is earned.
Reserves for losses and loss adjustment expenses represent estimates of the ultimate amounts necessary to settle reported losses and a provision for incurred but not reported claims of insured losses. The reserve estimates are based on known facts and circumstances, including the Company's experience with similar cases and historical trends involving reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions and public attitudes. The reserves for losses and loss adjustment expenses include case basis estimates of reported losses, estimates of incurred but not reported losses based upon prior experience adjusted for current trends, and estimates of losses to be paid under assumed reinsurance contracts. Estimated amounts of recoverable salvage and subrogation are deducted from the reserves for losses and loss adjustment expenses. The establishment of appropriate reserves, as well as related amounts recoverable under reinsurance contracts is an inherently uncertain process. Reserve estimates are regularly reviewed and updated, using the most current information available. Any resulting adjustments, which may be material, are reflected in current operations (see Note 8).
Net Income Per Share:
The following table for the years ended December 31, 1998, 1997 and 1996 presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
The weighted average number of shares of common stock in 1996 gives effect to the allocation of 3,000,000 shares of common stock to eligible policyholders on July 26, 1996 pursuant to Farm Family Casualty's conversion from a mutual company to a stockholder owned company.
New Accounting Pronouncements:
Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Comprehensive Income," ("Statement 130") which established standards for the reporting and disclosure of comprehensive income and its components and reclassifications of prior period financial statements to conform to this reporting standard. The adoption of Statement 130 resulted in revised and additional disclosures, but had no effect on the result of operations or the financial position of the Company.
Effective January 1, 1998, the Company also adopted Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information," ("Statement 131"). Statement 131 specifies the presentation and disclosure of operating segment information reporting in the annual and interim reports issued to shareholders. Statement 131 requires that segment information of earlier years be restated to conform to the new standard. The adoption of Statement 131 did not result in additional disclosures for the Company, because the Company currently operates within one business segment.
2. Prior Period Adjustments
Previously, the Company accounted for its extended earnings program pursuant to Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies". The prior period adjustments within the Company's consolidated financial statements relates to the Company's retroactive adoption effective January 1, 1994 of Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Post-employment Benefits" ("Statement 112") to account for the Company's extended earnings program with its agents and agency managers (collectively referred to hereafter as "agents"). Pursuant to agreements between the Company and its agents, subject to certain conditions including length of service, confidentiality, and non-competition, certain agents are eligible to receive monthly extended earnings payments for a period of up to eight years subsequent to the termination of their association with the Company. Historically, such payments have been funded by deductions from the commissions earned by successor agents who have assumed the right to service the books of business previously serviced by eligible former agents subsequent to the termination of the former agent's association with the Company.
The Company has restated certain amounts within its consolidated financial statements as of and for the years ended December 31, 1997 and 1996. The following table presents the restated and previously reported amounts:
Additionally, the consolidated statement of stockholders' equity reflects a decrease in the Company's retained earnings of $4,779,000 as of January 1, 1996.
During the third quarter of 1998, the Company modified the agreements with its agents to include revised eligibility conditions for its extended earnings program. As a result, a significant portion of the Statement 112 liability was reduced during the third quarter of 1998 (see Note 13).
3. Plan of Reorganization and Conversion
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family Mutual") converted from a mutual property and casualty insurance company to a stockholder owned property and casualty insurance company and changed its name to Farm Family Casualty Insurance Company. The conversion was made pursuant to a Plan of Reorganization and Conversion ("the Plan"). As part of the Plan, Farm Family Holdings was formed and the policyholders received approximately 2,237,000 shares of Farm Family Holdings common stock and $11,735,000 in cash in exchange for their membership interests in Farm Family Mutual.
On July 23, 1996, Farm Family Holdings made an initial public offering of its common stock at a price of $16 per share. Farm Family Holdings received net proceeds of $41,453,000 for 2,786,000 shares sold in the initial public offering. In addition, Farm Family Holdings received net proceeds of $3,427,000 for approximately 214,000 shares purchased by policyholders of Farm Family Mutual in a subscription offering.
As part of the Plan, holders of Farm Family Mutual debt (see Note 9) could elect to exchange their debt instruments for shares of stock or cash. As a result, there were 17,000 shares and $1,107,000 in cash exchanged for debt with an outstanding principal amount of $1,371,000 plus accrued interest thereon.
4. Investments
The amortized cost, fair value and gross unrealized gains and losses of available for sale securities and held to maturity securities at December 31, 1998 and 1997 are as follows:
The table below presents the amortized cost and fair value of fixed maturities at December 31, 1998, by contractual maturity. Actual maturities may differ from contractual maturities as a result of prepayments.
Unrealized investment gains and losses on fixed maturities classified as available for sale and equity securities included in stockholders' equity as accumulated other comprehensive income at December 31, 1998 are as follows:
The change in unrealized appreciation (depreciation) of investments included in stockholders' equity as accumulated other comprehensive income for the years ended December 31, 1998, 1997 and 1996 were as follows:
The components of net investment income for the years ended December 31, 1998, 1997 and 1996 are as follows:
A summary of realized investment gains (losses), net, for the years ended December 31, 1998, 1997 and 1996 is as follows:
5. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at December 31, 1998 and 1997. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The table excludes cash and cash equivalents, premiums receivable, receivables from affiliates, accrued investment income and other assets, and accrued expenses and other liabilities, all of which had fair values approximating carrying values. As a number of the Company's significant assets (including deferred acquisition costs, and deferred income taxes) and liabilities (including reserves for losses and loss adjustment expenses) are not considered financial instruments, the disclosures that follow do not reflect the fair value of the Company as a whole.
The following methods and assumptions were used in estimating the fair value disclosures for the financial instruments:
Fixed maturities and equity securities -- The fair value is based upon quoted market prices where available or from independent pricing services.
Mortgage loans -- The fair value is based on discounted cash flows using discount rates at which similar loans would be made to borrowers with similar characteristics.
Debt -- The fair value is based on discounted cash flows using current borrowing rates for similar debt arrangements.
Fair values for the Company's off-balance-sheet instruments (letters of credit and guarantees) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties' credit standing. The fair value of the Company's off-balance-sheet instruments at December 31, 1998 is not considered to be material.
6. Reinsurance
The Company assumes and cedes insurance to participate in the reinsurance market, geographically diversify its exposure to catastrophic losses, limit maximum losses and minimize exposure on large risks (see Note 13). Reinsurance contracts do not relieve the Company from its obligations to policyholders as the primary insurer. The Company evaluates the financial condition of its reinsurers and monitors concentrations of risk arising from similar geographic regions, activities and economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Amounts recoverable are regularly evaluated by the Company and an allowance for uncollectible reinsurance is provided when collection is in doubt. At December 31, 1998 and 1997, the Company determined it was not necessary to provide an allowance for uncollectible reinsurance.
Prior to 1998, the Company's reinsurance program included reinsurance agreements with its affiliate, United Farm Family (see Note 11). The Company terminated its reinsurance agreements with United Farm Family, effective December 31, 1997. As a result, the Company's retention per claim increased from $100,000 to $300,000 in 1998.
The effects of reinsurance on premiums written and earned, and losses and loss adjustment expenses incurred, for the years ended December 31, 1998, 1997 and 1996 were as follows:
7. Income Taxes
The components of the deferred income tax assets and liabilities at December 31, 1998 and 1997 are as follows:
There was no valuation allowance for deferred income tax assets as of December 31, 1998 or 1997. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. Management primarily considered the existence of taxable income in the carry back period in making this assessment and believes the benefits of the deductible differences recognized as of December 31, 1998 and 1997 will ultimately be realized.
The components of income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 are as follows:
The Company paid income taxes of $6,732,000, $9,962,000, and $4,592,000 in 1998, 1997 and 1996 respectively.
A reconciliation of the differences between the Company's effective tax rates and the United States federal income tax rates for the years ended December 31, 1998, 1997 and 1996 is as follows:
8. Reserves for Losses and Loss Adjustment Expenses
As described in Note 1, the Company establishes reserves for losses and loss adjustment expenses on reported and incurred but not reported claims of insured losses. The establishment of appropriate reserves for losses and loss adjustment expenses is an inherently uncertain process and the ultimate cost may vary materially from the recorded amounts. Reserve estimates are regularly reviewed and updated, using the most current information. Any resulting adjustments, which may be material, are reflected in current operations.
The following table provides a reconciliation of beginning and ending liability balances for reserves for losses and loss adjustment expenses for the years ended December 31, 1998, 1997 and 1996.
The Company does not discount reserves for losses and loss adjustment expenses except for certain lifetime workers' compensation indemnity reserves it assumes from mandatory pools. The amount of such discounted reserves was $3,337,000 (net of a discount of $1,243,000), $3,986,000 (net of a discount of $1,229,000), and $4,184,000 (net of a discount of $1,185,000) for December 31, 1998, 1997 and 1996, respectively.
9. Debt
At December 31, 1998, the Company had no outstanding debt. On April 1, 1998 the Company redeemed all of its outstanding debt, consisting of $293,000 of debentures and $975,000 of subordinated surplus certificates, plus accrued interest of $127,000. The debentures and subordinated surplus certificates paid interest at the rate of 8% per annum, had no maturity date, and principal and interest were repayable only with the approval of the Insurance Department of the State of New York. No single holder held more than 5% of the outstanding debentures or subordinated surplus certificates at the time of redemption. The Company paid interest of $127,000 $104,000 and $279,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had available lines of credit with two banks for $12,000,000 at an annual interest rate equal to the lending bank's prime rate. There were no amounts outstanding on these lines of credit at December 31, 1998.
10. Benefits Plans
Pension and Other Postretirement Benefit Plans:
The Company and Farm Family Life sponsor a qualified noncontributory defined benefit pension plan covering substantially all of the Company's and Farm Family Life's full time employees hired prior to January 1, 1997. Effective January 1, 1997, the Company and Farm Family Life froze benefits available through the defined benefit plan. In addition, the Company implemented a voluntary early retirement program in the fourth quarter of 1996 (see Note 15). The Company and Farm Family Life also provide life insurance benefits through a postretirement benefit plan for retired employees meeting certain age and length of service requirements. These benefits are shown as "Other Benefits" in the tables below. Benefits under the postretirement benefit plan are provided by a group term life insurance policy issued by Farm Family Life.
The change in benefit obligation for the plans for the years ended December 31, 1998, 1997 and 1996 is as follows:
The change in plan assets for the years ended December 31, 1998, 1997 and 1996 is as follows:
Pension plan assets include an unallocated group annuity contract issued by Farm Family Life. The fair value of the contract was $870,000, $1,486,000 and $4,032,000 at December 31, 1998, 1997, and 1996, respectively.
The components of the plans' accrued benefit cost as of December 31, 1998, 1997 and 1996 are as follows:
Weighted-average assumptions as of December 31, 1998, 1997 and 1996 are as follows:
The rate of compensation increase assumptions are zero for 1998 and 1997, because benefits under the pension plan were frozen as of January 1, 1997.
The components of net periodic pension expense (benefit) and the net periodic other benefit expense for the plans for the years ended December 31, 1998, 1997 and 1996 are as follows:
The Company's portion of net periodic pension expense (benefit), excluding the expense of the voluntary early retirement program, for the years ended December 31, 1998, 1997 and 1996 was $(12,000), $0, and $617,000, respectively. In addition, in 1996 the Company incurred expenses of $1,155,000 related to its voluntary early retirement program.
The Company's portion of net periodic other benefits expense excluding the expense of the voluntary early retirement program, for the years ended December 31, 1998, 1997 and 1996 was $85,000, $79,000 and $88,000. The Company's portion of the voluntary early retirement program expense in 1996 was $22,000.
Incentive Savings Plans: The Company sponsors incentive savings plans for the benefit of its employees. For the years ended December 31, 1998 and 1997, a portion of the contributions made by the Company were discretionary, based on the profits earned by the Company. The Company's expense associated with the plans was $875,000 $1,082,000 and $182,000 in 1998, 1997 and 1996, respectively.
Stock Compensation Plan: In 1997, the Company adopted the Omnibus Securities Plan (the "Securities Plan"), under which up to 500,000 shares of common stock are available for award. Stock options granted under the Securities Plan may be either incentive stock options ("ISO's") or non-qualified stock options ("NQSO's"). For ISO's the option price may be no less than the fair market value on the date of the grant. For NQSO's, the option price may be no less than 85% of the fair market value on the date of grant. On April 22, 1997, 215,000 NQSO's were granted. These NQSO's may be exercised no earlier than July 26, 1999 and no later than April 22, 2007. These NQSO's vest annually in equal amounts over a three year period commencing December 13, 1996 and have an exercise price of $22.56 per share, the fair market value of the stock on the date of grant. The following table summarizes the status of the Securities Plan for the years ended December 31, 1998 and 1997 and changes during the years of 1998 and 1997:
The Company has elected to follow APB 25 and related interpretations in accounting for the Securities Plan. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. If the Company had determined the compensation expense of the Securities Plan as prescribed by Statement 123, the Company's net income and earnings per share for the years ended December 31, 1998 and 1997 would have been reduced to the pro forma amounts indicated below:
The fair value of the options granted in 1997 is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted-average assumptions: dividend yield of 0.0%, expected volatility of 22.79%, risk-free interest rate of 6.78%, and an expected life of six years. At December 31, 1998, the exercise price for options outstanding is $22.56, and the weighted-average contractual life of the outstanding options is 8.3 years.
11. Related Party Transactions
The operations of the Company are closely related with those of Farm Family Life and Farm Family Life's wholly owned subsidiary, United Farm Family. The affiliated Companies operate under similar Boards of Directors and have similar senior management. The affiliated Companies share home office premises, branch office facilities, data processing equipment, certain personnel and other operational expenses. Expenses are shared based on each Company's estimated level of usage.
The gross shared expenses and the Company's share of such expenses for the years ended December 31, 1998, 1997 and 1996 is summarized below:
Farm Family Life held $813,000 of the Company's debentures in 1995. In July 1996, the Company repurchased the debentures owned by Farm Family Life for the principal amount of $813,000 plus accrued interest of $37,000. The Company incurred interest expense of $37,000 in 1996 on the debentures held by Farm Family Life.
Prior to January 1, 1998, the Company's reinsurance program included reinsurance agreements with United Farm Family. In accordance with the provisions of these reinsurance agreements, the Company recognized commission income of $63,000, and $191,000 during the years ended December 31, 1997 and 1996, respectively. Effective December 31, 1997, the Company terminated the reinsurance agreements with United Farm Family. A summary of the effect of the reinsurance agreements with United Farm Family on premiums written and earned is described in Note 6.
Receivable from affiliates represents amounts due from United Farm Family pursuant to a reinsurance agreement and amounts due from Farm Family Life and United Farm Family for shared expenses.
12. Dividends From Subsidiaries and Statutory Financial Information
Farm Family Casualty is restricted by law as to the amount of dividends it can pay without the approval of regulatory authorities. As of December 31, 1998, the maximum amount of dividends that can be paid by Farm Family Casualty without the prior approval of the New York State Insurance Department is $2,978,000.
Net income and surplus of Farm Family Casualty, as determined in accordance with statutory accounting practices are as follows:*
The National Association of Insurance Commissioners ("NAIC") requires insurance companies to calculate and report risk based capital information under a set of formulas which measure statutory capital and surplus needs based on a regulatory definition of the risks in a company's mix of products and its balance sheet. As of December 31, 1998, Farm Family Casualty's total capital exceeds the threshold level of regulatory action, as defined by the NAIC.
13. Commitments, Contingencies and Uncertainties
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 its 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 the years ended December 31, 1998, 1997 and 1996, approximately 63%, 63% and 61%, respectively, of the Company's 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 reinsurance program designed to mitigate the impact of these factors.
As a condition of its license to do business in various states, the Company is required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. The amount of future losses or assessments from residual market mechanisms cannot be predicted with certainty and could have a material adverse effect on the Company's future results of operations.
During the third quarter of 1998, the Company modified the agreements with its agents to include revised conditions under which eligible agents may receive extended earnings payments. In addition to the conditions described previously, extended earnings will be paid only if a successor agent(s) assumes the right to service the book of business of the eligible former agent and agrees to become primarily responsible for making the extended earnings payments. In the event that no successor agent(s) assumes the right to service the book of business of an eligible former agent, the Company has no obligation to make the extended earnings payments. The Company has no intention to waive this provision of its agreements with its agents. As a result, the successor agent(s), not the Company, will be the primary obligor responsible for extended earnings payments. Since the inception of the Program in 1986, the Company has always been able to identify successor agents willing to assume the rights to service such books of business. The Company will act as guarantor of the amounts payable to eligible former agents who have terminated their association with the Company by successor agents who agree to make the extended earnings payments. At December 31, 1998, the Company was guarantor of $678,000 for such payments. The Company expects to enforce the terms of the guarantee in the event of default by a successor agent. During the third quarter of 1998, when the Company's modified agreements with its agents became effective, $6,318,000 of the Company's Statement 112 liability was reduced and the Company recorded a net gain on this reduction of $4,107,000 ($6,318,000 less taxes of $2,211,000). The Company is primary liable for its remaining Statement 112 liability of $3,555,000, which is included in accrued expenses and other liabilities on the accompanying balance sheets at December 31, 1998 and represents the aggregate amount owed by the Company to eligible former agents who have terminated their association with the Company and are currently receiving extended earnings payments. The Company's remaining Statement 112 liability is being funded by deductions from the commissions earned by successor agents who have assumed the right to service the books of business previously serviced by eligible former agents who have terminated their association with the Company pursuant to agreements with such agents. Funding from successor agents is subject to the ability of the successor agents to generate sufficient commissions to satisfy the liability.
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 by or at the beginning of the year 2000. 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.
The Company is a party to Membership List Purchase Agreements with each of the state Farm Bureaus in the ten states in which it conducts business. The Membership List Purchase Agreements are for six years commencing on January 1, 1996. For the years ended December 31, 1998, 1997, and 1996, the Company paid a total of $660,000, $600,000 and $571,000, respectively, to the Farm Bureaus pursuant to the Membership List Purchase Agreements.
At December 31, 1998, the Company had $5.7 million of outstanding letters of credit. These letters of credit are issued to insurance companies that Farm Family Casualty has assumed reinsurance from and are domiciled in states where Farm Family Casualty is not licensed or authorized as a reinsurer.
14. Unaudited Interim Financial Information
15. Extraordinary Item and Non-Recurring Expenses
During 1996, the Company incurred expenses of $1,543,000 related to the demutualization of Farm Family Mutual which the Company has identified as an extraordinary item. These expenses consisted primarily of printing, postage, and legal costs.
Pursuant to the Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions", the Company recorded a non-recurring expense of $765,000 which is net of an income tax benefit of $412,000, for the Company's share of the costs of a voluntary early retirement program offered to certain eligible employees in 1996. Eligibility for the program was based on age and years of service.
16. Acquisition of Farm Family Life
Farm Family Holdings entered into an Option Purchase Agreement with the shareholders of Farm Family Life pursuant to which Farm Family Holdings was granted an option to acquire all of the outstanding capital stock of Farm Family Life, exercisable for a two year period which commenced on July 26, 1996. On February 26, 1998, the Board of Directors of Farm Family Holdings approved the exercise of the option to acquire Farm Family Life and it's wholly owned subsidiary United Farm Family. Under the Option Purchase Agreement, Farm Family Holdings will pay an exercise price of $37.5 million to acquire Farm Family Life, consisting of $31.5 million of common stock of Farm Family Holdings, and $6 million stated value of 6-1/8% voting preferred stock of Farm Family Holdings, less certain expenses to be paid by Farm Family Life in the acquisition on behalf of the shareholders of Farm Family Life.
The Option Purchase Agreement was approved by the Company's shareholders on December 2, 1998. The closing of the acquisition was scheduled to occur on December 7, 1998, but was delayed when it was determined that in order for certain shareholders of Farm Family Life to provide unqualified opinions of counsel required by the Option Purchase Agreement as a condition to closing, such shareholders of Farm Family Life or their respective parent entities would need to obtain approval of the acquisition from their members.
As a result of this delay, the Option Purchase Agreement was amended to, among other things, fix the price used to determine the number of shares of common and preferred stock to be issued, subject to a collar mechanism, at $35.72, which was the average closing price that would have been used if the closing had occurred on December 7, 1998. Under the collar mechanism, if the price per share of the Company's common stock on the last trading day prior to the closing (the "Closing Price") is greater than $42.86 or equal to or less than $25.00, the price used to determine the number of shares of the Company's common stock to be issued in the acquisition will equal $35.72 divided by a factor. The factor will be equal to 1.2 (if the Closing Price is greater than $42.86) or 0.7 (if the Closing Price is equal to or less than $25.00) multiplied by $35.72 divided by the Closing Price. If the Closing Price is $25.00 or less, the Company will have the option to terminate the Option Purchase Agreement. In addition, the termination date for the Option Purchase Agreement has been extended to April 30, 1999.
The amendment to the Option Purchase Agreement is subject to the approval of the members of certain shareholders of Farm Family Life or their respective parent entities, and the shareholders of the Company. The Company expects to resolicit the approval of its shareholders for the revised terms of the acquisition. Under the terms of the amendment, the shareholders of Farm Family Life have agreed to reimburse the Company for half of the expenses of resolicitation, up to $200,000. The acquisition of Farm Family Life is also subject to the receipt of all required government approvals. Management expects to close the acquisition of Farm Family Life in the second quarter of 1999.
17. Future Application of Accounting Standards
In June 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, 2000, 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 does not believe that Statement 133 will have a material impact on the Company's financial statements.
Report of Independent Accountants
To the Shareholders and Board of Directors of Farm Family Holdings, Inc.
In our opinion, the accompanying consoldited balance sheets and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Farm Family Holdins, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These finacial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers, LLP Albany, New York February 10, 1999
FARM FAMILY HOLDINGS, INC. EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Subsidiaries State
Farm Family Financial Services, Inc. is a wholly owned subsidiary of Farm Family Holdings, Inc. NY
Farm Family Casualty Insurance Company ("FFCIC") is a wholly owned subsidiary of Farm Family Holdings, Inc. NY
Rural Agency and Brokerage, Inc. ("RAB") is a wholly owned subsidiary of FFCIC. NY
Rural Insurance Agency and Brokerage of Massachusetts, Inc. is a wholly owned subsidiary of RAB. MA
R.A.A.B of W. Va., Inc. is a wholly owned subsidiary of RAB. WV