The Company currently leases space for its home office in Glenmont, New York from the Life Company. The lease provides for the Company to pay the Life Company an annual rental of approximately $629,216. The lease expires on December 31, 1998. See "Related Party Transactions".
The following table sets forth certain consolidated financial data for the Company and its subsidiaries prior to the Reorganization. The consolidated statement of income data set forth below for the years ended December 31, 1993, 1994 and 1995 and the consolidated balance sheet data as of December 31, 1994 and 1995 are derived from the consolidated financial statements of the Company appearing elsewhere herein, which have been audited by Coopers & Lybrand L.L.P., independent auditors, whose report thereon appears elsewhere herein. The consolidated statement of income data for the years ended December 31, 1991 and 1992 and the consolidated balance sheet data as of December 31, 1991, 1992 and 1993 are derived from the unaudited consolidated financial statements of the Company. The Company believes that such unaudited financial data fairly reflect the consolidated results of operations and the consolidated financial condition of the Company for such periods. This data should be read in conjunction with the Consolidated Financial Statements, and notes thereto and other financial information, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
Losses and Expenses: 	Losses and loss adjustment expenses	 	74.3 		72.1 		73.2	 	82.7	 	83.2 	Underwriting expenses		 23.7	 	24.0	 	26.8		 28.8	 34.9 	Interest and other expense		 0.3	 	0.3	 	0.3 		0.3	 	0.3 			Total losses and expenses 		98.3 		96.4 		100.3 		111.8 		118.4
Loss and Loss Adjustment Expense Ratio(3) 	87.1%	 	80.2%	 	75.7%	 	81.5%	 	71.1% 	Underwriting Expense Ratio(4) 		27.8% 		26.6% 		27.7% 		 28.4%	 	29.8% Combined Ratio(5)		 114.9%	 	106.8%	 	103.4%	 	109.9%		100.9% Ratio of annual statutory written premiums to	statutory surplus(6)	 	2.75x		 2.73x		 2.52x 		2.46x 		2.16x _______________
(1)	Primarily represents service fee income on the Company's property and casualty insurance business. (2)	Due to the adoption by the Company on December 31, 1993 of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," total investments and policyholders' equity were adjusted to reflect changes in market value, which resulted in an increase of $6.8 million, a reduction of $11.1 million and an increase of $11.7 million as of December 31, 1993, 1994 and 1995, respectively. (3)	Calculated by dividing losses and loss adjustment expenses by premiums. (4)	Calculated by dividing underwriting expenses by premiums. (5)	The sum of the Loss and Loss Adjustment Expense Ratio and the Underwriting Expense Ratio. (6)	Calculated by dividing statutory net written premiums for the period by statutory surplus at the end of the period.
The Company 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. The Company provides property and casualty insurance coverages to members of the state Farm Bureau organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states. In addition, the Company's wholly owned subsidiary, Rural Agency and Brokerage, Inc. places insurance coverages not underwritten by the Company for the Company's policyholders. The operations of the Company are also closely related with those of its affiliates, the Life Company and the Life Company's wholly owned subsidiary, United.
The Company's premium revenue is a function of changes in average premiums per policy and the growth in the number of policies. Premium rates are regulated by the state insurance departments in the states in which the Company operates. See "Business -- Regulation."
Membership in the state Farm Bureau organizations is a prerequisite for voluntary insurance coverage (except for employees of the Company and its affiliates). Associate Farm Bureau memberships are generally available to persons not engaged in agricultural businesses.
The operating results of companies in the property and casualty insurance industry have historically been subject to fluctuations due to competition, economic conditions, and various other factors. Factors affecting the results of operations of the property and casualty industry include price competition and aggressive marketing which historically have resulted in higher combined loss and expense ratios. Because of the nature of the property and casualty industry, it is difficult to predict future trends in the industry's overall combined losses and profitability.
The Special Farm Package is a flexible, multi-line package of insurance coverage which the Company regards as its "flagship" product. For the year ended December 31, 1995, twenty five percent of the Company's total direct premiums written were derived from the Special Farm Package product. The Company concentrates on the Special Farm Package and its other established major product lines and, increasingly, on its businessowners and homeowners products. 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 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.
Since 1987, the Company has implemented a standard environmental and pollution exclusion in some of its commercial liability and property policies, including its Special Farm Package product. However, the Special Farm Package contains a limited coverage endorsement for above-ground environmental and pollution liabilities. The industry standard personal and commercial automobile and homeowners policies do not contain an exclusion from environmental and pollution risks. The Company also writes a small number of claims made pollution liability policies. The Company has had no material claims and is not aware of any material threatened claims, arising from environmental and pollution related liabilities with respect to policies written either prior to or since 1987.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased $0.5 million, or 0.6%, to $83.2 million for the year ended December 31, 1995 from $82.7 million in 1994. The increase in losses and loss adjustment expenses was primarily attributable to the overall growth in the Company's business and was significantly offset by a reduction in the loss and LAE ratio. Loss and loss adjustment expenses were 71.1% of premium revenue in 1995 compared to 81.5% of premium revenue in 1994. The decrease in the loss and LAE ratio in 1995 was primarily attributable to improved loss ratios on the Company's personal and commercial automobile lines and to a decline in the frequency and severity of weather related property losses in 1995 as compared with 1994. Losses and loss adjustment expenses believed to be storm and weather related aggregated $5.2 million in 1995 compared to $7.9 million in 1994. To a much lesser extent, a decrease in the loss and LAE ratio on assumed reinsurance also contributed to the decrease in the Company's overall loss and LAE ratio during 1995.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Premiums. Premium revenue increased $4.8 million, or 5.0%, during the year ended December 31, 1994 to $101.5 million from $96.7 million in 1993. The increase in premium revenue in 1994 resulted from an increase of $8.5 million in earned premiums on additional business directly written by the Company, which was offset by a decrease of $2.0 million in earned premiums assumed from mandatory pools as a result of the depopulation of such pools and by an increase of $1.7 million in earned premiums ceded to reinsurers (related to the increase in direct written premiums). The $8.5 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $8.4 million, or 9.4%, in earned premiums from the sale of the Company's primary products. The number of policies in force related to the Company's primary products increased by 8.5% to approximately 97,000 in 1994 and the average premium earned for each such policy increased by 1.0% in 1994.
Net Investment Income. Net investment income decreased $0.6 million, or 4.8%, to $13.2 million for the year ended December 31, 1994 from $13.8 million in 1993. The decrease in net investment income was primarily the result of losses of $0.5 million (primarily related to certain limited partnership investments) recognized by the Company during 1994. The return realized on cash and invested assets (at amortized cost) declined to 7.5% in 1994 from 8.4% in 1993, the effect of which was offset in part by an increase in cash and invested assets of $10.6 million or 6.3%.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased $9.5 million, or 12.9%, to $82.7 million for the year ended December 31, 1994 from $73.2 million in 1993, primarily as a result of the overall growth in the Company's business and an increase in the loss and LAE ratio. The loss and LAE ratio increased to 81.5% in 1994 from 75.7% in 1993. The increase in the loss and LAE ratio was primarily attributable to an increase in property losses as a result of wind and ice storms in the Northeast during 1994. Losses and loss adjustment expenses believed to be storm and weather related aggregated $7.9 million in 1994 compared to $4.6 million in 1993.
Underwriting Expenses. Underwriting expenses increased $2.0 million, or 7.3%, to $28.8 million for the year ended December 31, 1994 from $26.8 million in 1993. For the year ended December 31, 1994, underwriting expenses were 28.4% of premium revenue compared to 27.7% in 1993. The increase in the Company's underwriting expense ratio in 1994 was primarily attributable to a change in the Company's casualty reinsurance agreement with United and, to a lesser extent, increases in certain overhead expenses related to the overall increase in the Company's business, which was offset in part by the $2.2 million reduction in 1994 in amounts accrued for the Company's share of the deficit of the New Jersey Market Transition Facility.
Net Income. Net income decreased $ 4.1 million to $3.5 million in 1994 from $7.6 million in 1993 primarily as a result of the foregoing factors.
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 settlement expenses. The short- and long-term 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.
During 1995, the Company reduced its holdings of non-investment grade fixed maturities to improve the overall quality of its investment portfolio and in response to recommendations by A.M. Best. The aggregate carrying value of fixed maturity securities rated as non-investment grade by the NAIC was reduced from $17.3 million, or 10.8% of its fixed maturity portfolio, at December 31, 1994 to $10.8 million, or 5.6% of it fixed maturity portfolio, at December 31, 1995. High yield corporate bonds constituted most of the non-investment grade securities held by the Company as of December 31, 1995. As a result of the reduction in holdings of certain non-investment grade securities, the Company anticipates that future investment yields may be lower than they otherwise would be. Less than 1.0% of the Company's investment portfolio consists of investments in mortgage-backed securities. The mortgage-backed securities held by the Company as of December 31, 1995 were primarily U.S. Government and U.S. Government Agency backed 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 characteristic. 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, 1995, the aggregate market value of the Company's fixed maturity investments exceeded the aggregate amortized cost of such investments by $10.2 million. As of December 31, 1994, the aggregate amortized cost of the Company's fixed maturities exceeded the aggregate market value of such investments by $8.1 million.
Net cash used in investing activities was $18.5 million, $7.7 million, and $7.2 million during the years ended December 31, 1995, 1994 and 1993, respectively. The increase in net cash used in investing activities in 1995 resulted from the net increase in cash available from the Company's operations during 1995 and a corresponding increase in investments in short-term investments and fixed maturities.