Corporate Profile The following discussion and analysis of financial condition and results of operations includes the operations of Farm Family Casualty Insurance Company ("Farm Family Casualty") and Farm Family Casualty's wholly owned subsidiary, Rural Agency and Brokerage, Inc. (collectively referred to as the "Company"). Farm Family Casualty is a wholly owned subsidiary of Farm Family Holdings, Inc. The operations of the Company are also closely related with those of its affiliates, Farm Family Life Insurance Company and Farm Family Life Insurance Company's wholly owned subsidiary, United Farm Family Insurance Company.
The Company concentrates on its primary products: personal and commercial auto, the Special Farm Package its businessowners, and homeowners 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 the fourth quarter of 1996, the Company announced the implementation of a voluntary early retirement program and other changes to the Company's benefit plans as part of its continuous expense management program. The Company recorded a nonrecurring charge, net of an income tax benefit of $405,000, of $752,000 for the Company's share of the costs of this voluntary early retirement program. Eligibility for the program was based on age and years of service. In addition, effective January 1, 1997, the Company froze benefits available through its defined benefit plan and enhanced its defined contribution plan. As a result, the Company's contributions to the defined contribution plan will vary to a greater extent based upon the Company's profitability than the contributions previously required to fund its defined benefit plan. The Board of Directors also approved an annual incentive plan for officers.
Premiums Premium revenue increased $13.9 million or 11.8%, during the year ended December 31, 1996 to $130.8 million from $116.9 million in 1995. The increase in premium revenue in 1996 resulted from an increase of $11.1 million in earned premiums on additional business directly written by the Company (principally in New York and New Jersey) and an increase of $2.4 million in earned premiums retained by the Company and not ceded to reinsurers, in addition to an increase of $0.4 million in earned premiums assumed. The $11.1 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $9.9 million, or 9.2%, in earned premiums from the Company's primary products (personal and commercial automobile products other than assigned risk business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package) and to an increase of $0.7 million in earned premiums on workers' compensation business. The number of policies in force related to the Company's primary products increased by 8.6% to approximately 114,000 in 1996 from approximately 105,000 in 1995 and the average premium earned for each such policy increased by 0.6% in 1996. The $2.4 million increase in earned premiums retained by the Company was primarily the result of a change in the terms of certain of the Company's reinsurance agreements pursuant to which the earned premiums ceded by the Company were reduced.
Underwriting Expenses Underwriting expenses increased $2.7 million, or 7.7%, to $37.6 million for the year ended December 31, 1996 from $34.9 million for the same period in 1995. For the year ended December 31, 1996, underwriting expenses were 28.7% of premium revenue compared to 29.8% in 1995. 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.
Federal Income Tax Expense Federal income tax expense decreased $1.2 million to $3.8 million in 1996 from $5.0 million in 1995. Federal income tax expense was 30.4% of income before federal income taxes in 1996 compared to 34.2% in 1995. The decrease in the Company's effective federal income tax rate was primarily attributable to an increase in tax exempt interest income in 1996.
Income Before Extraordinary Item Income before extraordinary item decreased $1.0 million to $8.6 million in 1996 from $9.6 million in 1995 primarily as a result of the foregoing factors.
Premiums Premium revenue increased $15.5 million or 15.2%, during the year ended December 31, 1995 to $116.9 million from $101.5 million in 1994. The increase in premium revenue in 1995 resulted from an increase of $14.3 million in earned premiums on additional business directly written by the Company (principally in New York and New Jersey) and an increase of $2.3 million in earned premiums retained by the Company and not ceded to reinsurers, which were partially offset by a decrease of $1.1 million in earned premiums assumed. The $14.3 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $10.8 million, or 11.1%, in earned premiums from the Company's primary products (personal and commercial automobile products other than assigned risk business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package) and to an increase of $1.8 million in earned premiums on assigned risk business. The number of policies in force related to the Company's primary products increased by 8.4% to approximately 105,000 in 1995 from approximately 97,000 in 1994 and the average premium earned for each such policy increased by 2.5% in 1995. The $2.3 million increase in earned premiums retained by the Company was primarily the result of a change in the terms of certain of the Company's reinsurance agreements pursuant to which both the amount of earned premiums ceded by the Company and the ceding commissions received by the Company were reduced. The $1.1 million decrease in earned premiums assumed was attributable to a reduction in premiums assumed from mandatory pools as a result of the depopulation of such pools.
Net Investment Income Net investment income increased $1.1 million or 8.6% to $14.3 million for the year ended December 31, 1995 from $13.2 million in 1994. The increase in net investment income was primarily the result of an increase in cash and invested assets (at amortized cost) of approximately $17.2 million, or 9.6%. The return realized on the Company's cash and invested assets was 7.6% in 1995 and 1994.
Federal Income Tax Expense Federal income tax expense increased $3.6 million to $5.0 million in 1995 from $ 1.4 million in 1994. Federal income tax expense was 34.2% of income before federal income tax expense in 1995 compared to 29.1% in 1994. The increase in the Company's effective federal income tax rate was primarily attributable to the increase in income before federal income tax expense, certain expenses related to the demutualization of Farm Family Mutual, and reductions in tax exempt interest income in 1995.
Net Income Net income increased $6.1 million to $9.6 million in 1995 from $3.5 million in 1994 primarily as a result of the foregoing factors.
The Company has in place an unsecured line of credit with Key Bank of New York under which it may borrow up to $2.0 million. At December 31, 1996, no amount was outstanding on the line of credit which has an annual interest rate equal to the bank's prime rate. In addition, the Company had notes payable outstanding consisting of $0.3 million of debentures and $1.0 million of subordinated surplus certificates (collectively "the Surplus Notes"). The Surplus Notes bear interest at the rate of 8% per annum, have no maturity date, and principal and interest are repayable only with the approval of the Insurance Department of the State of New York.