ITEM 1. BUSINESS
Overview of Operations and Marketing Strategy
The following discussion includes the operations of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly-owned subsidiaries (collectively referred to as the "Company" or "we"). The primary subsidiaries of Farm Family Holdings are Farm Family Casualty Insurance Company ("Farm Family Casualty") and Farm Family Life Insurance Company ("Farm Family Life").
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family Mutual") converted from a mutual property and casualty insurance company to a stockholder-owned property and casualty insurance company and became a wholly-owned subsidiary of Farm Family Holdings pursuant to a plan of Reorganization and Conversion (the "Plan"). In addition, Farm Family Mutual was renamed Farm Family Casualty Insurance Company. As part of the Plan, Farm Family Mutual policyholders received approximately 2,237,000 shares of Farm Family Holding's common stock and $11,735,000 in cash in exchange for their membership interest in Farm Family Mutual.
On July 23, 1996, Farm Family Holdings made an initial public offering of its common stock at a price of $16.00 per share. Farm Family Holdings received net proceeds of $41,453,000 for approximately 2,786,000 shares sold in the initial public offering. In addition, Farm Family Holdings received $3,427,000 for approximately 214,000 shares purchased by policyholders of Farm Family Mutual in a subscription offering. In addition, pursuant to the Plan, holders of Farm Family Mutual debt could elect to exchange their debt instruments for shares of common stock or cash. As a result, there were 17,000 common shares and $1,107,000 in cash exchanged for debt with an outstanding principal amount of $1,371,000.
On April 6, 1999, Farm Family Holdings acquired all of the outstanding capital stock of Farm Family Life. Farm Family Holdings' aggregate purchase price was approximately $38.3 million, including direct acquisition costs. The purchase price consisted of approximately $30.6 million of Farm Family Holdings' common stock ($31.5 million less certain expenses paid by Farm Family Life), approximately $5.8 million stated value of 6-1/8% voting preferred stock ($6 million less certain expenses paid by Farm Family Life) and approximately $1.9 million in direct acquisition costs. Under the terms of the Option Purchase Agreement, the price used to determine the number of shares of common and voting preferred stock issued in the acquisition was fixed at $35.72 per share. Farm Family Holdings issued 856,871 shares of common stock and 163,214 shares of voting preferred stock to the Selling Stockholders. After the acquisition, Farm Family Holdings' total number of common shares outstanding increased to 6,110,684. As a result of the acquisition, Farm Family Life became a wholly-owned subsidiary of Farm Family Holdings. Accordingly, the financial results of Farm Family Life and Farm Family Life's wholly-owned property and casualty subsidiary, United Farm Family Insurance Company ("United Farm Family"), are included in our consolidated financial statements effective April 6, 1999.
Farm Family Casualty and United Farm Family are specialized insurance companies that provide property and casualty insurance coverages to farms, agribusiness, and other generally related businesses and residents of rural and suburban communities. Farm Family Casualty provides insurance to members of the state Farm Bureau(R) organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states (collectively the "Farm Bureaus"). Membership in a state Farm Bureau organization is a prerequisite for voluntary insurance coverage with Farm Family Casualty, except for our employees. United Farm Family provides similar property and casualty insurance products in Pennsylvania and Maryland. Membership in a state Farm Bureau organization is not a prerequisite for purchasing insurance coverage from United Farm Family. United Farm Family began operations in these states during 1998.
Farm Family Life provides life insurance, annuity, and accident and health insurance coverages principally to members of the state Farm Bureau organizations in the same states as Farm Family Casualty and United Farm Family. Membership in a state Farm Bureau organization is not a prerequisite for purchasing insurance coverage from Farm Family Life.
Farm Family Casualty, Farm Family Life and United Farm Family share the same agency force, certain employees and office facilities. Most administrative and operating expenses are allocated between the companies pursuant to expense sharing and service agreements.
We market our insurance products through more than 290 agents and field managers who are primarily located in the rural and suburban communities we serve. We believe that our distinctive focus on meeting the specialized insurance needs of rural and suburban communities has provided us with the knowledge and experience to adapt to changes in the demographics of our markets and in the nature of agricultural related businesses.
In addition to insuring those engaged in agricultural pursuits such as dairy, vegetable and fruit farming, we insure a wide range of other businesses related to agriculture, such as distributors of agricultural products, horse breeding and training facilities, landscapers, nurseries, florists, wineries and growers of specialty products. We also offer businessowners products for certain retail and contractor businesses and for owners of apartment and office buildings, as well as a homeowners product.
Our principal strategy is to focus on meeting the specialized insurance needs of the rural and suburban communities in which we currently operate. We offer personal and commercial automobile products, and also property and liability products. Our flagship product, the Special Farm Package, is a flexible policy that can be adapted to meet the needs of a variety of agricultural and agricultural related businesses.
We also emphasize cross-selling opportunities within our distribution system. In addition to the property and casualty products, the acquisition of Farm Family Life added life insurance, annuities, and accident and health products to our product portfolio. Also, through Farm Family Financial Services, Inc. and its affiliation with a national broker-dealer, our agents and policyholders have access to mutual funds, variable annuity policies and other related products.
We seek to leverage our local reputation, agency force, knowledge and experience to expand our product offerings to a wider variety of customers in the rural and suburban communities in which we currently operate. In addition, we continue to seek to facilitate and expedite sales, underwriting and policy administration functions through the use of computer networking communications with the home office.
Relationship with Farm Bureaus
Farm Family Casualty and Farm Family Life were established through the efforts of certain Farm Bureaus to provide property and casualty and life insurance for Farm Bureau members in the Northeast. These Farm Bureaus are affiliated with the American Farm Bureau Federation, the nation's largest general farm organization with over 4.9 million families, which has traditionally sought to advance the interests of the agricultural community. The majority of our directors are directors or executive officers of Farm Bureau organizations in the Northeast.
Farm Family Casualty and Farm Family Life are parties to Membership List Purchase Agreements with each of the state Farm Bureaus in ten of the twelve states in which we operate. Pursuant to the Membership List Purchase Agreements, the Farm Bureaus provide us with the right to utilize their membership lists in connection with the marketing of our insurance products and the financial services and products of financial institutions and authorize us to use the Farm Bureau names and service marks in connection with the marketing of our insurance products. In exchange for these rights, we pay to each of the Farm Bureaus an annual fee of $15.00 per Farm Bureau member. The Membership List Purchase Agreements are for six years and expire on December 31, 2001. For the years ended December 31, 1999, 1998 and 1997, we incurred expense of $1,227,000, $660,000, and $600,000, respectively, pursuant to the Membership List Purchase Agreements. The 1999 amount includes Farm Family Life's expense of $526,000 for the Membership List Purchase Agreements, since its acquisition effective April 6, 1999.
Industry Segments
Our operations consist of two operating segments: property and casualty insurance, which is sold through Farm Family Casualty and United Farm Family, and life insurance which is sold through Farm Family Life. The property and casualty segment accounted for 87% of the 1999 consolidated premium revenue and 90% of the 1999 consolidated operating income. Prior to the acquisition of Farm Family Life, we did not market life insurance products. Information regarding the last three years' revenues, operating profits, and identifiable assets for each of the operating segments is contained in Note 18 of the Notes to Consolidated Financial Statements appearing on pages 26 to 46 of our Annual Report, incorporated herein by reference and included as part of Exhibit 13 to this Form 10-K.
Property and Casualty Insurance Business
Products
Our property and casualty insurance segment includes activities related to the Special Farm Package, a flexible multi-line package of insurance coverages, and other insurance products covering, personal and commercial automobiles, businessowners and homeowners.
We offer a variety of property and casualty insurance products primarily designed to meet the unique insurance needs of our agricultural clients and the general insurance needs of the rural and suburban communities in which we write business. Many policyholders have more than one policy with us.
The following table sets forth, by product, the direct written premiums for property and casualty insurance business, including assigned risk business, for the following years:
*Includes $4.8, $3.9, and $6.3 million of assigned risk automobile premiums for personal automobile business and $0.3, $0.3, and $0.7 million of premiums for assigned risk commercial automobile business for each of the years ended December 31, 1999, 1998, and 1997, respectively.
Personal Automobile - Our personal automobile policy provides us with more premium than any of our other products. Our industry standard personal automobile policy is generally marketed in conjunction with our other products, such as the Special Farm Package, the businessowners policy or the homeowners policy.
Special Farm Package - The Special Farm Package, is a flexible, multi-line package of insurance coverages we regard as our "flagship" product. As a result of its flexible features, this product can be adapted to meet the needs of a variety of agricultural and related businesses. The Special Farm Package policy combines personal, farm and business property and liability insurance for agribusiness, as well as owners of other agricultural related businesses, such as horse breeding and training facilities, nurseries, wineries and greenhouses.
Commercial Automobile - Commercial automobile is primarily used for commercial automobiles utilized in conjunction with agricultural and related businesses.
Workers' Compensation - We generally do not seek to market or write our workers' compensation policy apart from a Special Farm Package or a businessowners policy.
Businessowners - Our businessowners product (based on the industry standard policy form) is designed to meet the needs of small businesses within our rural and suburban markets. This product is marketed to two distinct groups: (i) "mercantile businessowners" with property based risks, including apartment and office building owners and small to medium-sized retail businesses, such as florists and farm markets and (ii) small, established artisan contractors principally serving the agricultural community.
Special Home Package and Homeowners - Our homeowners policy is a standard multi-peril policy for the rural and suburban homeowner. Increasingly, the homeowners policy is being sold to provide coverage for the insured's principal residence, while the Special Home Package is used to insure rural-based, tenant occupied residences. Like the Special Farm Package, the Special Home Package combines personal and commercial property and liability coverages, and contains flexible features, which also allow it to be adapted to meet the needs of a variety of customers.
Umbrella Liability - We write commercial and personal excess liability policies covering business, farm and personal liabilities of our policyholders in excess of amounts covered under Special Farm Package, homeowners, businessowners and automobile policies. Such policies are available with limits of $1.0 million to $5.0 million. We do not generally seek to market our excess liability policies unless we also write an underlying liability policy.
Commercial General Liability - We write a standard commercial general liability policy which is generally marketed in connection with the Special Farm Package, or other property insurance coverage. The commercial general liability policy is generally not written apart from these other policies. We typically write the policy for unique business situations, such as horse breeding and training facilities and certain landscaper risks, which do not meet the criteria for liability coverage under a businessowners or Special Farm Package policy. The policy insures businesses against third party liability from accidents occurring on their premises or arising out of their operations or products. Most of our products liability line is written as part of the commercial general liability product.
Country Estate - In October 1997, we began marketing the Country Estate program, a specialized version of the Special Farm Package. The program covers rural residents where agricultural exposures are present, but agribusiness is not the main source of income for the household.
Pollution - We write a small number of pollution liability policies covering specified farm risks on a "claims-made" basis. The policy insures against losses incurred from third party liability, including bodily injury and property damages, and from pollution incidents, such as those caused from pesticides, fertilizers, herbicides and manure piles. An "extended reporting period" option is available under certain circumstances which allows for claim reporting after the policy expiration.
The following table sets forth our direct written premiums by state for property and casualty insurance:
Underwriting
We seek to underwrite our commercial and personal insurance risks by evaluating loss experience and underwriting profitability with consistently applied standards. We maintain information on many aspects of our business, which is routinely reviewed by our staff of underwriters in relationship to product line profitability. Our underwriters generally specialize by agency territory, or line of business. Specific information is monitored with regard to individual insureds, which is used to assist us in making decisions about policy renewals or modifications.
We concentrate on our established major product lines (personal and commercial auto, Special Farm Package, businessowners and homeowners policies). We generally do not pursue the development of products with risk profiles with which we are not familiar, nor do we, typically, actively market our automobile, workers' compensation or general liability policies except to policyholders who may also purchase our Special Farm Package, businessowners or homeowners products. We typically seek to sell multiple products to a household to enhance persistency and profitability. We believe our extensive knowledge of local markets within our service territory is a key element in our underwriting process.
Claims
Claims on insurance policies written by us are usually investigated and settled by one of our claim adjusters or claim managers. Our claim adjusters are strategically located in our service territory in eight offices. Our claim philosophy emphasizes timely investigation, evaluation and settlement of claims, while maintaining adequate reserves and controlling claim adjustment expenses. Our claim philosophy is designed to support our marketing efforts by providing agents and policyholders with prompt service.
Claim settlement authority levels are established for each adjuster and claim manager based upon the employee's ability and level of experience. Claims are reported directly to our central claim processing unit located in the home office or to a field claim office. Specialized units exist at the home office for no-fault automobile, subrogation and large, litigated and certain other claims. We also have a special investigative unit to investigate suspected insurance fraud, including arson. The claims department is responsible for reviewing all claims, obtaining necessary documentation, estimating the loss reserves and resolving the claims.
Claims for New York private passenger assigned risk business are handled by an outside claim adjusting firm that specializes in this line of business. An outside adjusting firm that specializes in workers compensation claims handles claims on our workers compensation policies issued on or after January 1, 1999.
Reinsurance
Reinsurance Ceded:
Prior to January 1, 1998, the largest net per risk exposure retained by us on any one individual property or casualty risk was $100,000 and United Farm Family covered property and casualty risks in excess of $100,000 on an excess of loss basis up to $300,000 per risk. Effective January 1, 1998, the largest net per risk exposure retained by us on any one individual property or casualty risk is $300,000. Per risk property losses in excess of $300,000 up to $4 million are reinsured on an excess of loss basis by unaffiliated reinsurers. Casualty losses per risk in excess of $300,000 up to $1 million (which is generally the maximum limit of liability written on our casualty insurance policies, other than workers' compensation and umbrella liability policies) are covered on an excess of loss basis by unaffiliated reinsurers. Clash coverage, which provides coverage for a single event that results in multiple casualty losses to our insureds, is provided by unaffiliated reinsurers and covers casualty losses, including workers' compensation, in excess of $1 million up to $15 million. In addition, workers' compensation claims, on a per occurrence basis with a $600,000 per person limit, in excess of $3 million up to $20 million are separately reinsured on an excess of loss basis by unaffiliated reinsurers. Prior to January 1, 1998, we reinsured 95% of our umbrella liability losses (including a 5% quota share participation by United Farm Family) under $1 million per loss on a quota share basis and 100% of our umbrella liability losses in excess of $1 million up to $5 million per loss with unaffiliated reinsurers. Effective January 1, 1998, umbrella losses per occurrence in excess of $300,000 up to $2 million are covered on an excess of loss basis with unaffiliated reinsurers. In addition, we reinsure 100% of our umbrella liability losses in excess of $2 million up to $5 million per loss with unaffiliated reinsurers. Facultative reinsurance coverage is obtained for property policies written for limits in excess of $4 million per risk, casualty risks in excess of $1 million, and umbrella policies written for limits in excess of $5 million.
We terminated certain reinsurance agreements with United Farm Family effective December 31, 1997. However, United Farm Family retains liability for covered losses arising from occurrences prior to the termination date.
Our property catastrophe reinsurance is placed with unaffiliated reinsurers and provides for recovery of 95% of the losses over $3 million up to a maximum of $51 million per occurrence. We retain the first $3 million of losses per occurrence under our property catastrophe program.
We also have aggregate stop loss reinsurance covering net losses incurred in excess of 66% of our net earned premiums, up to a maximum of $12.5 million per accident year, for accident years 1998 and 1999. Aggregate stop loss reinsurance covers our direct written and assumed reinsurance business, net of inuring reinsurance ceded. This coverage is provided by unaffiliated reinsurers and covers each accident year separately.
The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of operations or financial condition. As of December 31, 1999, more than 95% of our reinsurance program was provided by reinsurers which were rated "A-" (Excellent) or above by A.M. Best Company, Inc. ("A.M. Best").
Reinsurance Assumed:
We assume voluntary reinsurance primarily covering property, property catastrophe and casualty risks generally located outside of the Northeast. We believe that, among other benefits, our assumed reinsurance arrangements enhance our geographic spread of risk. We also assumed an insignificant amount of property and casualty reinsurance covering substandard automobile policies from United Farm Family through December 31, 1997. For the years ended December 31, 1999 and 1998, we earned premiums of $12.6 million and $11.2 million, respectively, under various voluntary proportional and non-proportional reinsurance agreements. In addition, we have a retrocessional reinsurance program covering our assumed business, which is placed with unaffiliated reinsurers and provides for recovery of 95% of losses over $1 million up to a maximum of $6 million per occurrence.
Loss and Loss Adjustment Expense ("LAE") Reserves
Our reserves for losses are an estimate of the unpaid amount, as of December 31, of the losses incurred in both the current year and all prior years. The LAE reserve is an estimate of the unpaid expenses required to settle losses incurred in both the current year and all prior years. We are required to maintain reserves for payment of estimated losses and LAE for both reported claims and claims which have been incurred but not yet reported. We regularly update our reserve estimates as new facts become known and further events occur which may impact the resolution of unsettled claims. Therefore, the ultimate liability incurred may differ materially from current reserve estimates.
Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made. Although reserves for losses and loss adjustment expenses may not be paid for many years, such reserves are not discounted except for certain lifetime workers' compensation indemnity reserves where the reserves are discounted at 3.5%.
The following table provides a reconciliation of beginning and ending loss and LAE reserve balances for each of the years in the three-year period ended December 31, 1999.
Analysis of Loss and Loss Adjustment Expense Development
The following table reflects the development of losses and loss adjustment expenses for the periods indicated at the end of that year and each subsequent year. Each calendar year-end reserve includes the estimated unpaid liabilities for losses and loss adjustment expenses for that accident year and for all prior accident years. The data presented under the caption "Cumulative Amount of Reserves Paid Through" shows the cumulative amounts paid related to the reserve as of the end of each subsequent year. The data presented under the caption "Reserves, Net, Reestimated as of" shows the original recorded reserve as adjusted as of the end of each subsequent year to reflect the cumulative amounts paid and all other facts and circumstances discovered during each such year. The line "Cumulative Redundancy (Deficiency)" reflects the difference between the latest reestimated reserve amount and the reserve amount as originally established.
The amounts in the following table include the effects of all changes in amounts of prior periods. For example, if a loss determined in 1998 to be $150,000 was first reserved in 1995 at $100,000, the $50,000 deficiency (actual loss minus original estimate) would be included in the cumulative deficiency in each of the years 1995 through 1998 shown below. This table presents development data by calendar year and does not relate the data to the year in which the accident actually occurred. Conditions and trends that have affected the development of these reserves in the past may not necessarily recur in the future.
The following table sets forth the development of loss and loss adjustment expenses reserves for the ten-year period ended December 31, 1999:
Prior to 1990, we had a history of cumulative deficiencies in reserving for losses and LAE. These deficiencies were primarily caused by the underestimation of reserves for workers' compensation, automobile and other liability claims. In 1991, we reviewed and revised our process for estimating reserves for losses and LAE, and in recent years we have generally experienced overall redundancies. The redundancies at December 31, 1999 of $11.3 million, $10.3 million and $7.2 million for the December 31, 1996, 1997 and 1998 reserves, respectively, were primarily attributable to favorable development of IBNR and case reserves for commercial multiple peril, commercial automobile, automobile physical damage, and workers' compensation claims.
Our statutory reserves for unpaid losses and LAE are equal to the liability amounts in the table, net of reinsurance recoverable.
We believe that our reserves at December 31, 1999 are adequate. Conditions and trends that have historically affected our claims may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future deficiencies or redundancies based on the results set forth above. Future adjustments to loss reserves and LAE that are unanticipated by us could have a material adverse impact on our financial condition and results of operations.
Life Insurance Business
Our life insurance operations are conducted through Farm Family Life, which was acquired on April 6, 1999. Our results of operations for periods prior to April 6, 1999 do not include the results of Farm Family Life. However, comparative information for 1999, 1998 and 1997 for premium and other operational information have been provided for Farm Family Life for informational purposes only.
Products
The life insurance segment includes the sale of individual whole life, term and universal life products, single and flexible premium deferred annuity products, single premium immediate annuity products and disability income insurance products through Farm Family Life.
Individual life insurance, annuities and disability income products accounted for 98% of the life insurance segment's statutory direct collected premiums for the period April 6, 1999 through December 31, 1999. Group sales of life insurance, annuities and accident and health insurance comprise the remaining 2% of statutory direct collected premiums.
Life Insurance Products:
The first year statutory direct premiums for life insurance products for 1999, 1998 and 1997 are summarized in the following table:
Whole Life Insurance Products - Whole life insurance is designed to provide benefits for the life of the insured. It is generally designed to provide level premiums and a level death benefit and requires payments in excess of mortality charges in early years to offset increasing mortality costs in later years. Under the terms of the contract, policyholders have a right to participate in the surplus of Farm Family Life to the extent determined by the Board of Directors, through annual participating policyholder dividends.
Term Life Products - Our term insurance provides life insurance protection for a specified time period. Term insurance is mortality-based and generally has no accumulation values. We can choose to change the premium scales at any time; however, the scales can not exceed the guaranteed rates.
Universal Life Products - Universal life provides benefits for the life of the insured. Interest is credited to the cash value of the policy at rates periodically set by us. We also market a last survivor universal life product designed especially for the estate planning market. There is no set premium scale for our flexible universal life policies except premium contributions cannot exceed Internal Revenue Code limitations. Our Single Premium Life policy requires a one-time premium payable at issue.
Annuity Products:
We offer single premium fixed annuities and flexible premium annuities. Single premium fixed annuities feature a single premium paid when the contract is issued. Flexible premium annuities allow for flexibility, within certain parameters, in the payment of periodic annuity premiums.
During June 1999, we marketed a single premium deferred annuity at a special rate ("special annuity"). We received $55.1 million in premiums from sales of the special annuity. The total amount received included $50.4 million of money from other annuity policies held with us that did not have surrender protection which were exchanged for special annuity policies that have seven-year surrender protection.
Disability Income Insurance Products:
Our disability income policies provide payment of benefits in the event of a disabling accident or illness. Disability benefits reimburse the insured for a specified dollar amount payable over a specific time period or for the duration of the disability. Disability is generally defined as the inability of the policyholder to perform one's occupation for the first two years after disability, and inability to pursue any occupation thereafter. One of our products provides extended-care benefits beyond age 65. Since the majority of the policies are issued on a "guaranteed renewable" basis, we may change the premium scale at any time based on claim costs incurred, subject to regulatory approval.
The following table sets forth information regarding life insurance and annuities for each of the periods presented. Statutory-basis premiums are used in lieu of GAAP-basis premiums because they provide a consistent measure across varying product types, in contrast to GAAP which provides different revenue recognition rules for different classes of long-duration contacts as defined by the requirements of FASB No. 60, "Accounting and Reporting by Insurance Enterprises", FASB No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments", and SOP 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises".
(1) The 1999 amount includes $55.1 million from the special annuity program during June, as previously discussed.
For 1999 and 1998, approximately 45.8% and 43.1%, respectively, of the life insurance segment's statutory direct life insurance premiums were in New York and 13.3% and 12.6%, respectively, were written in New Jersey.
Interest Crediting
Interest crediting rates for universal life type contracts and investment contracts are determined by the Board of Directors and are based on each product's target interest rate spread and competitive market conditions. For annuity products, the interest crediting rate is determined by the Board of Directors and generally varies monthly based on an established market rate or our investment portfolio rate, subject to a contractual minimum rate. Interest rates credited on universal life contracts for 1999, 1998 and 1997 range from 5.8% to 7.0%. Interest rates credited on annuity contracts range from 4.0% to 8.3% for the same period.
Underwriting
We have adopted and follow detailed, uniform underwriting practices and procedures designed to assess risks before issuing coverage to qualified applicants. Our underwriters review each applicant's written application, which is prepared under the supervision of the selling agent, and any required medical records. We employ blood and urine testing to provide additional information on applications over $100,000 face amount. Based on the results of these tests, we may adjust the mortality charge or decline coverage completely. Any nicotine use by a life insurance applicant within the preceding year results in a higher mortality charge.
Reinsurance
We purchase reinsurance for our life insurance and accident and health lines of business to mitigate the impact of potential large or unusual claims on our liquidity and operating results. Our life insurance reinsurance program provides for coverage for individual life insurance claims greater than $400,000 and $250,000 on our last survivor universal life product. In addition, 50% of term insurance business is ceded to an unaffiliated reinsurer.
Participating Business
A significant portion of our life insurance policies are written on a "participating" basis, as defined in the New York Insurance Law. A participating policy is a policy under which there is a right to participate in the divisible surplus of an insurance company. Typically, there is an expectation that a participating policy will pay a dividend to the policyholder based on the actual experience of the insurer. Favorable operating results are more likely to result in the payment of such dividends. Annual policyholder dividends are often paid in a manner that identifies divisible surplus and distributes that surplus in approximately the same proportion as the contracts are considered to have contributed to divisible surplus. Participating insurance represented 89% of the total life insurance in force at December 31, 1999 and 38% of the total statutory premiums collected for the year ended December 31, 1999. Profits earned on participating business are reserved for the payment of dividends to policyholders except for the stockholders' share of profits on participating policies, which is limited each year to the greater of 10% of the statutory profits on participating business, or fifty cents per year per thousand dollars of the face amount of participating life insurance in force other than group term insurance. In addition to the greater of 10% of the statutory profit on participating business or fifty cents per year per thousand dollars of the face amount of participating life insurance in force, earnings available to stockholders consist of earnings on non-participating business and a pro rata share of net investment income and realized investment gains (losses). The accumulated profit held by us for the benefit of participating policyholders is shown as a liability on the Consolidated Balance Sheets, under the caption, "Participating Policyholders' Interest". Policyholder dividends are paid to participating policyholders, principally holders of whole life products, based on the profitability of the products. Policyholder dividends are declared annually by the Board of Directors, and are effective on the anniversary date of the policy. At the option of the policyholder, policyholder dividends can be paid in cash, credited to renewal premiums due, left to accumulate at interest with Farm Family Life, or used to purchase additional life insurance. Policyholder dividend expense is charged against Participating Policyholders' Interest. Policyholder dividends incurred for the period April 6, 1999 through December 31, 1999 were $7.2 million.
IMSA Certification
During 1999, Farm Family Life earned the Insurance Marketplace Standards Association ("IMSA") certification and has been accepted as an IMSA member. IMSA is an independent, voluntary association created by the life insurance industry to promote high standards of ethical conduct in advertising, sales and service for individual life insurance and annuity products. These standards are specified in a set of principles and code of conduct. IMSA companies must demonstrate that they have met these standards by undergoing a self-assessment and a second assessment by an independent examiner to determine compliance with IMSA's Principles and Code. Farm Family Life is a member for three years, after which it must repeat the self and independent assessment processes to retain its membership.
Marketing
As of December 31, 1999, we marketed our products in twelve states through approximately 218 primarily career agents, 74 independent agents and 12 field managers. Many of our agents are established residents of the rural and suburban communities in which they operate and often have specific prior experience in agricultural related businesses. The majority of our agency force markets property and casualty and life insurance products. We have designed our commission program in a manner to encourage agents to produce profitable business for us.
In 1999, agent compensation for the property and casualty insurance segment was comprised entirely of commissions earned by our agents for premiums written by the agents during 1999. The commissions earned by our agents on property and casualty business are determined by applying a commission rate to the amount of the premiums written by the agent. We apply a fixed commission rate to determine commissions earned on workers compensation and umbrella business produced by our agents. For automobile business and property liability business, the commission rate varies monthly based upon the loss ratio of such business written by the agent during the previous twelve-month period.
In 1999, agent compensation for the life insurance segment was comprised entirely of commissions, office expense allowance and an annual persistency bonus. In addition, in order to assist in the development of a book of business, most new agents receive a salary during their first two years of licensing provided they meet certain minimum production requirements.
We emphasize personal contact between our agents and policyholders. We believe that recognition of our name, policyholder loyalty and policyholder satisfaction with agent and claims relationships are the principal sources of new customer referrals, cross-selling of additional insurance products and policyholder retention.
Investments
An important component of our operating results has been the return on invested assets. Our investment objective is to maximize current yield while maintaining safety of capital together with adequate liquidity for our insurance operations.
At December 31, 1999, we had cash and invested assets with an aggregate carrying value of $1.1 billion. We primarily invest in high quality fixed maturity securities and to a lesser extent, equity securities. At December 31, 1999, 88.7% of our total cash and invested assets consisted of fixed maturities, 4.2% consisted of equity securities, 2.8% consisted of policy loans, 2.5% consisted of mortgage loans, and 1.8% consisted of cash and short-term investments.
Since September 1, 1997, we have retained the services of a professional asset management firm, specializing in the management of investments for insurance companies, to supplement our internal capabilities and improve upon the management of our investments in fixed maturities. Prior to September 1, 1997, we exclusively managed our invested assets internally. We continue to internally manage our equity securities, cash and short-term investments, and mortgage loans. Our investment activities are subject to oversight by management as well as an Investment Committee of the Board of Directors.
We actively manage and monitor our exposure to credit risk. Invested assets are reviewed regularly for credit quality. Investments which have experienced payment delinquencies, adverse changes in credit ratings or deterioration in the financial condition of the borrower, or which have otherwise been identified as having potential adverse credit implications are placed on a credit watch report. On a regular basis, management and the investment committee of our Board of Directors review securities placed on the credit watch list. At December 31, 1999, we had identified 13 securities, with an aggregate carrying value of $15.9 million on the credit watch report. Only two of these securities were considered non-performing or in default. During 1999, these two securities were in default of $0.1 million in interest. In addition, our holdings of NAIC Class 3 through 6 bonds, generally considered non-investment grade, were $15.9 million or 1.6% of our fixed maturity portfolio at carrying value, at December 31, 1999. Due to uncertainties in the economic environment, it is possible that the quality of investments currently held in our investment portfolio may change.
For the year ended December 31, 1999, compared with the prior year, the amortized cost of our cash and invested assets increased $827.4 million to $1.1 billion, primarily as a result of the additional investments acquired with the acquisition of Farm Family Life.
The following table sets forth the carrying and market values of our investments as of December 31, 1999:
(1) Fixed maturities (bonds, redeemable preferred stocks and mortgage-backed securities) and equity securities in the Available for Sale Portfolio are carried at market value in our Consolidated Financial Statements. Mortgage loans, policy loans and other invested assets are carried at cost, which approximates market value. We primarily obtain market value information through our professional asset management firm. (2) Fixed maturities in the Held to Maturity Portfolio are carried at amortized cost.
Our investments in fixed maturity securities are comprised primarily of intermediate-term, investment grade securities. The table below contains additional information concerning the investment ratings of our fixed maturity investments at December 31, 1999.
(1) The ratings set forth in this table are based on the ratings assigned by Standard & Poor's Corporation ("S&P") or Moody's Investors Services, Inc. ("Moody's"). Securities listed as "not rated" above were not assigned a rating by S&P or Moody's. 93% of the investments included in "not rated" in the Available for Sale and Held to Maturity portfolios were rated in Class 1 or 2 by the NAIC, which is considered investment grade. (2) Fixed maturities in the Available for Sale portfolio are carried at market value in our Consolidated Financial Statements. (3) Fixed maturities in the Held to Maturity portfolio are carried at amortized cost. (4) Represents percent of market value for classification as a percent of total for each portfolio.
The average effective duration of our fixed maturity investments as of December 31, 1999 was approximately 5.7 years and their average maturity was 15.6 years. As a result, the market value of our investments may fluctuate significantly in response to changes in interest rates. In addition, we may also experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.
The maturity profile of our Available for Sale and Held to Maturity investments is included at Note 5 of the Notes to the Consolidated Financial Statements on pages 32 - 34 of our Annual Report, incorporated herein by reference in response to Item 8 hereof and included as part of Exhibit 13 to this Form 10-K.
For a discussion of the yields on our investment portfolios by operating segment, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 10 - 21 of our 1999 Annual Report, incorporated herein by reference in response to Item 7 hereof and included as part of Exhibit 13 to this Form 10-K.
Information Services
Our automated information processing capabilities are supported by centralized computer systems and a network of personal computers linking agents, claims offices and service centers with our home office data center and information services division. This network enables field employees and agents to work directly with clients in response to service questions and policy transactions. Our agents have access to a specialized client information system containing policy and claim information for each customer's portfolio to monitor policy activity. Also, personalized summaries of material events affecting each agent's policies are updated daily on the network and forwarded to agents.
We are also in the process of developing web-enabled systems to improve our service delivery to our agents and customers. These system initiatives are aimed at increasing the accessibility and usability of our primary product systems for our agents. We plan to roll out these capabilities on a product-by-product basis over the next 24 months.
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns a Best's Rating of "A" (Excellent), its third highest rating category, to Farm Family Casualty, Farm Family Life and United Farm Family. A.M. Best assigns "A" or "A-" ratings to companies, which, in its opinion, have demonstrated excellent overall performance when compared to the standards established by A.M. Best. Companies rated "A" or "A-" have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity, as well as the company's book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competency of its management and its market presence. No assurance can be given that A.M. Best will not downgrade any of the companies' current ratings in the future.
Competition
We compete in property and casualty, life insurance and financial services markets that are highly competitive. We compete with stock insurance companies, mutual insurance companies, local cooperatives, other underwriting organizations and other financial services providers. The Gramm-Leach-Bliley Act of 1999 was passed which permits mergers that combine commercial banks, insurers and securities firms under one holding company. Prior to this Act, limitations were imposed on banks to engage in securities-related business and from being affiliated with insurance companies. The passage of the Gramm-Leach-Bliley Act of 1999 may increase competition within the insurance, financial services and banking industries. In addition, we believe advances in technology and the use and acceptance of the internet have also intensified the competition we face in the markets we serve. Certain competitors have substantially greater financial, technical and operating resources than we do. Our ability to compete successfully in our principal markets is dependent upon a number of factors, many of which (including market and competitive conditions) are outside our control. The lines and types of insurance we write are subject to significant price competition. Some companies may offer insurance at lower premium rates through the use of salaried personnel or through the use of the internet to quote, process or distribute policies. In addition to price, competition in our operating segments are based on the quality of the products, quality and speed of service (including claims service), financial strength, ratings, distribution systems and technical expertise.
We also compete with other companies for qualified agents to distribute our products. Strong competition exists among insurance companies for agents with demonstrated ability to sell insurance products. We maintain strong relationships with our agents through a competitive commission structure, support services, a range of competitive products and continuing communication with management.
Seasonality
Although the insurance business generally is not seasonal, losses and loss adjustment expenses associated with property and casualty insurance tend to be higher for periods of severe or inclement weather.
Employees
As of December 31, 1999, we had 469 full time employees, of which 325 were employed in the home office. None of these employees are covered by a collective bargaining agreement, and we believe that our employee relations are good.
Effect of Regulation
General
We are regulated by government agencies in the states in which we do business. This regulation has a substantial effect on our business. For example, such regulation usually includes regulating premium rates and policy forms; setting minimum capital and surplus requirements; regulating guaranty fund assessments and residual markets; licensing companies, adjusters and agents; approving accounting methods and methods of setting statutory loss and expense reserves; setting requirements for and limiting the types and amounts of investments; establishing requirements for the filing of annual statements and other financial reports; conducting periodic statutory examinations of the affairs of insurance companies; approving proposed changes in control and limiting the amount of dividends that may be paid without prior regulatory approval.
Insurance companies are also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. These include redefining risk exposures in areas such as products liability, environmental damage and workers' compensation. Certain state insurance departments and legislatures may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Several states place restrictions on the ability of insurers to discontinue or withdraw from certain lines of insurance. Such developments may adversely affect the profitability of various lines of insurance.
Effective March 22, 1999, all insurers in New Jersey were required to reduce personal automobile rates by approximately 15% pursuant to the Automobile Insurance Cost Reduction Act of 1998 (the "Act"). Our direct premium written for New Jersey personal automobile business in 1999 was $23.2 million which was approximately 12.0% of our total direct written premium, for the year ended December 31, 1999. The Act also made coverage and other changes to the statutory requirements governing personal automobile insurance in New Jersey, which are intended to reduce losses, and loss adjustment expenses. The impact on our losses and loss adjustment expenses, if any, cannot be determined at this time.
Risk-Based Capital
State insurance departments have adopted a methodology developed by the NAIC for assessing the adequacy of statutory surplus of insurance companies. The methodology includes a risk-based capital formula that attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potential inadequately capitalized companies. Under the formula, a company determines its "risk-based capital"("RBC") by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). The risk-based capital rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" of RBC. At December 31, 1999, the RBC for each of our insurance subsidiaries exceeded a level that would trigger regulatory attention.
NAIC-IRIS Ratios
The NAIC's Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 12 ratios for the property and casualty and life insurance industries and specifies a range of "usual values" for each ratio. A ratio falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Departure from the "usual value" range on four or more ratios may lead to increased regulatory oversight from individual state insurance commissioners. None of our insurance subsidiaries had four or more ratios that varied from the "usual value" range in 1999.
Risk Factors
In addition to the normal risks of business, we are subject to significant risk factors, including but not limited to:
o the inherent uncertainty in the process of establishing property-casualty loss reserves, including reserves for the cost of pollution claims, and the fact that ultimate losses could materially exceed established loss reserves and have a material adverse effect on our results of operations and financial condition; o the potential material adverse impact on our financial condition, results of operations and cash flows of losses arising out of catastrophes; o the inability of any reinsurer to meet its obligations to us which may have a material adverse effect on our financial condition, results of operations and cash flows; o the need for our insurance company subsidiaries to maintain appropriate levels of statutory capital and surplus, particularly in light of continuing scrutiny by rating organizations and state insurance regulatory authorities, and to maintain acceptable financial strength and claims-paying ability ratings; o changes in interest rates which may cause a reduction of investment income or operating cash flow, an increase in policyholder lapses for our life insurance segment and an adverse impact on the attractiveness of certain life insurance segment products;
o the inherent uncertainty in the economic environment which may cause the quality of the investments currently held in our investment portfolio to change; o significant variations of actual experience from assumptions regarding future morbidity, persistency, lapse rates, expenses, mortality, and interest rates used in calculating reserve and liability amounts for our life insurance segment and in developing pricing and other terms of life insurance products; o the ability of our insurance company subsidiaries to maintain their current A.M. Best ratings and the fact that our business and results of operations could be materially adversely affected by a rating downgrade; o the highly competitive insurance environment including certain competitors that may have substantially greater financial, technical and operating resources than we have; o the extensive regulation and supervision to which we are subject, various regulatory initiatives that may affect us and regulatory and other legal actions involving us; o Farm Family Holdings' primary reliance, as a holding company, on dividends and other payments from its subsidiaries for funds to meet its obligations, and regulatory restrictions on its subsidiaries to pay such dividends; o the impact on our revenues and profitability from prevailing economic, regulatory, demographic and other conditions in New York, New Jersey and the other states in which we operate; o storm and weather related losses may have a material adverse impact on our results of operations, financial condition and cash flow; o the need to adjust the duration of assets in order to meet anticipated cash flow requirements of our policyholder obligations; and o the impact of the Year 2000 related issues on our business.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
With exception of historical information, the matters discussed or incorporated by reference in this Report on Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current knowledge, expectations, estimates, beliefs and assumptions. The forward-looking statements in this Form 10-K include, but are not limited to, statements concerning our exposure to interest rate and market risk, statements regarding the adequacy of the Company's capital resources, liquidity, and other financial items, statements of the plans and objectives of the Company or its management, and statements of future economic performance and assumptions underlying statements regarding the Company or its business. Readers are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those estimated, projected or predicted. The forward-looking statements in this Form 10-K are not guarantees of future performance and are subject to a number of important risks and uncertainties, many of which are outside the Company's control, that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, exposure to catastrophic loss, the frequency and severity of weather related losses, geographic concentration of loss exposure in New York, New Jersey and the Northeastern United States generally, the effect of regulatory changes governing personal automobile insurance in New Jersey and the impact thereof on the Company's direct written premium, losses and loss adjustment expenses, the risks associated with the legislative, regulatory and competitive environments in the states in which the Company currently operates, heightened competition, including specifically the intensification of competition, failure to obtain new customers or to retain existing customers, the effect of the uncertainties related to the Year 2000 issue, the Company's primary reliance, as a holding company, on dividends from its subsidiaries and the applicable regulatory restrictions on the ability of the Company's subsidiaries to pay such dividends, and conditions specific to the insurance industry, including its cyclical nature, regulatory changes and conditions, rating agency policies and practices, competitive factors, claims development and the impact thereof on loss reserves and the Company's reserving policy, the adequacy of the Company's reinsurance programs, developments in the securities markets and the impact thereof on the Company's investment portfolio, tax law changes and other risk factors listed from time to time in the Company's Securities and Exchange Commission filings. Accordingly, there can be no assurance that actual results will conform to the forward-looking statements in this Form 10-K.
There are no family relationships among any of the executive officers nor are there any arrangements or understandings between any person pursuant to which he/she was elected as an officer. All officers serve at the pleasure of the Board of Directors, but subject to the foregoing, are elected for terms of approximately one year until our next Annual Meeting.
Mr. Bettini currently serves as a Director of Ambanc Holding Co., Inc.
The Registrant or its subsidiary has employed all of the Executive Officers of the Registrant in various executive or administrative capacities for at least five years, except for the following:
Mr. Walsh has served as Executive Vice President - Finance & Treasurer of Farm Family Holdings since December 1996 and Executive Vice President - Finance & Treasurer of Farm Family Casualty and Farm Family Life since April 1997, as Executive Vice President - Finance of Farm Family Casualty and Farm Family Life from December 1996 to April 1997, and as Treasurer of Farm Family Holdings from October 1996 to December 1996. Mr. Walsh was Senior Vice President - Finance of Farm Family Casualty and Farm Family Life from March 1996 to December 1996, and was previously Director of Corporate Development for Farm Family Casualty and Farm Family Life from August 1995 to March 1996. Previously, Mr. Walsh was Vice President, Finance & Chief Financial Officer with MPW Industrial Services, Inc., Columbus, OH, from April 1994 to August 1995, Corporate Controller of NSC Corporation, Methuen, MA from July 1992 to April 1994 and Senior Manager at KPMG Peat Marwick from July 1983 to July 1992. Mr. Walsh currently serves as a Director of MPW Industrial Services Group, Inc.
ITEM 2.
ITEM 2. PROPERTIES
We own our home office buildings located in Glenmont, New York, consisting of three buildings containing a total of approximately 140,000 square feet of space. We believe our property and facilities are adequate and suitable for our current and anticipated future needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation in the normal course of business. Based upon information presently available, management believes that resolution of these legal actions will not have a material adverse effect on our consolidated results of operations and financial condition. However, given the uncertainties attendant to litigation, there can be no assurance that our consolidated results of operations and financial condition will not be materially adversely affected by any threatened or pending litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange. There were approximately 26,975 registered holders of our common stock on February 28, 2000. We have never paid cash dividends on shares of our common stock. We currently intend to retain any earnings in order to develop our business and support our operations, and, as such, do not anticipate that we will pay any dividends to stockholders in the foreseeable future. The declaration of dividends in the future is at the discretion of our Board of Directors, subject to certain regulatory constraints and will depend upon, among other things, our results of operations, financial condition, cash requirements, dividends from our insurance subsidiaries, future prospects and other factors.
Discussion regarding the distribution of dividends from our insurance subsidiaries is included at Note 15 of the Notes to the Consolidated Financial Statements on page 42 of our Annual Report, incorporated herein by reference in response to Item 8 hereof and included as part of Exhibit 13 to this Form 10-K.
The high and low New York Stock Exchange closing market prices for our common stock for each quarter during 1999 and 1998 were as follows:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Financial Data" on page 9 of the Annual Report is incorporated herein by reference and included as part of Exhibit 13 to this Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 10 - 21 of our 1999 Annual Report is incorporated herein by reference and included as part of Exhibit 13 to this Form 10-K.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Quantitative and Qualitative Disclosures about Market Risk under the caption "Market Sensitive Instruments and Risk Management" on page 11 of our 1999 Annual Report is incorporated herein by reference and included as part of Exhibit 13 to this Form 10-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements, including the accompanying Notes to Consolidated Financial Statements and Report of Independent Accountants, on pages 22 - 47 of our 1999 Annual Report are incorporated herein by reference and included as part of Exhibit 13 to this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with our independent auditors.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding our directors is located in the Proxy Statement under the caption "Item 1 - Election of Directors" and is incorporated herein by reference.
Information regarding our executive officers in Item 1 of Part 1 of this Report under the caption "Executive Officers of the Registrant" is incorporated herein by reference.
Information required by Item 405 of Regulation S-K of the Securities Exchange Act of 1934 located in the Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation located in the Proxy Statement under the caption "Item 1 - Election of Directors - Compensation of Directors", "Executive Compensation - Summary Compensation Table, Option/SAR Grants in Last Fiscal Year, Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values, Pension Benefits, Severance Plan, Change of Control Arrangements and Compensation Committee Interlocks and Insider Participation" is incorporated herein by reference.
ITEM 12.
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& 2 An "Index to Financial Statements and Financial Statement Schedules" has been filed as a part of this Report beginning on page S-1 hereof.
(a)3 An "Exhibit Index" has been filed as a part of this report beginning on page E-1 hereof and is incorporated herein by reference.
(b) Reports on Form 8-K:
On October 28, 1999, a Report on Form 8-K was filed regarding a press release announcing the results of our operations for the three months and the nine months ended September 30, 1999.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FARM FAMILY HOLDINGS, INC.
By: /s/ Philip P. Weber Philip P. Weber, President March 29, 2000
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, 1999
S-1
Report of Independent Accountants on Financial Statement Schedules
To the Board of Directors of Farm Family Holdings, Inc.
Our audits of the consolidated financial statements referred to in our report dated February 11, 2000, appearing in the 1999 Annual Report to Shareholders of Farm Family Holdings, Inc. and Subsidiaries (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Albany, New York February 11, 2000
S-2
Farm Family Holdings, Inc. and Subsidiaries Schedule I Summary of Investments Other Than Investments in Related Parties December 31, 1999 ($ in thousands)
S-3
Farm Family Holdings, Inc. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Company) Statements of Operations ($ in thousands)
S-4
Farm Family Holdings, Inc. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Company) Balance Sheets ($ in thousands)
S-5
Farm Family Holdings, Inc. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Company) Statements of Cash Flows ($ in thousands)
S-6
Farm Family Holdings, Inc. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Company) Notes To Condensed Financial Information
1. Basis of Presentation
The financial statements of the registrant should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Farm Family Holdings, Inc. 1999 Annual Report.
The accompanying condensed financial information includes the accounts of Farm Family Holdings, Inc. Farm Family Holdings, Inc. was incorporated on February 14, 1996.
2. Preferred Stock
Farm Family Holdings' Certificate of Incorporation authorizes the issuance of 1,000,000 shares of preferred stock with a par value of $.01, issuable in classes or series. Of the 1,000,000 shares authorized, 163,214 shares of mandatory redeemable preferred stock have been issued and outstanding and are reported in the accompanying consolidated balance sheets as mandatory redeemable preferred stock. The remaining 836,786 shares are reported in preferred stock in the stockholders' equity section. None of the remaining 836,786 shares have been issued as of December 31, 1999.
In connection with the acquisition of Farm Family Life, Farm Family Holdings issued 163,214 shares of 6 1/8% Series A preferred stock with a redemption value of $5,830,000, or $35.72 per share. Dividends on the preferred stock are payable on each January 15, April 15, July 15 and October 15 and must be fully paid or declared with funds set aside for payment before any dividend can be declared or paid on any other class of Farm Family Holdings' stock. The preferred stock must be redeemed by Farm Family Holdings on April 7, 2019 (or the next business day) and may be redeemed, at Farm Family Holdings' option, in whole or in part, on and after April 6, 2009. Farm Family Holdings has the option to pay the redemption amount in cash or by delivery of Farm Family Holdings' common stock. S-7
Farm Family Holdings, Inc. and Subsidiaries Schedule III Supplementary Insurance Information ($ in Thousands)
(1) Each of the Company's subsidiaries maintain separate investment portfolios. Therefore, net investment income attributable to each segment is readily available. S-8
Farm Family Holdings, Inc. and Subsidiaries Schedule IV Reinsurance ($ in Thousands)
Note: The Company did not have premiums and contract charges earned on life insurance or accident and health insurance prior to the acquisition of Farm Family Life, effective April 6, 1999.
S-9
Farm Family Holdings, Inc. and Subsidiaries Schedule Vl Supplemental Information Concerning Consolidated Property-Casualty Insurance Operations ($ in Thousands)
S-10
Exhibit Index
Farm Family Holdings, Inc. Form 10-K For The Year Ended December 31, 1999
* Incorporated by reference to Registration Statement No. 333-4446 ** Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31, 1996 E-3