The Company currently leases space for its home office in Glenmont, New York from Farm Family Life. The lease agreement provides for the Company to pay Farm Family Life an annual rental of approximately $760,000. 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 subsidiary prior to and after the reorganization pursuant to the Plan that took place during 1996. The consolidated statement of income data set forth below for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and the consolidated balance sheet data as of December 31, 1997, 1996, 1995 and 1994 are derived from the consolidated financial statements of the Company which have been audited by Coopers & Lybrand L.L.P, independent auditors. The consolidated balance sheet data as of December 31, 1993 is 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
Corporate Profile The following discussion and analysis of financial condition and results of operations includes the operations of Farm Family Casualty Insurance Company ("The Company"). The operations of the Company are also closely related with those of its affiliates, Farm Family Life Insurance Company ("Farm Family Life") and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family"). The Company is a wholly owned subsidiary of Farm Family Holdings, Inc.. ("Farm Family Holdings").
Operating Environment The Company's operating results are subject to significant fluctuations from period to period depending upon, among other factors, the frequency and severity of losses from weather related and other catastrophic events, the effect of competition and regulation on the pricing of products, changes in interest rates, general economic conditions, tax laws and the regulatory environment. As a condition of its license to do business in various states, the Company is required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. In all such states, residual market premium rates are subject to the approval of the State Insurance Department. Residual market premium rates for automobile insurance have generally been inadequate. The amount of future losses or assessments from residual market mechanisms cannot be predicted with certainty and could have a material adverse effect on the Company's results of operations.
Company's results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States, generally.
Many of the Company's existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many of these computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. Therefore, the Company must also coordinate with other entities with which it interacts to ensure these entities are also addressing the Year 2000 issue. If not successfully addressed, the Year 2000 issue could have material adverse consequences on the Company. The Company has an on-going, enterprise-wide project to address its Year 2000 issue. During 1998, the Company will perform system-wide testing to support its plan of having policy administration systems Year 2000 compliant by December 31, 1998. Year 2000 work on remaining systems will continue through 1999. In addition, the Company has contacted other entities on which it relies to process and support its business. The Company will react to their plans to achieve Year 2000 compliance and will adjust operations as required. The Company believes it will successfully address its Year 2000 issue without material adverse consequences to the Company. However, there can be no assurance that other entities with which the Company interacts will achieve Year 2000 compliance or that the failure by such entities to achieve Year 2000 compliance would not have a material adverse effect on the Company.
Products The Special Farm Package is a flexible, multi-line package of insurance coverages which the Company regards as its "flagship" product. For the year ended December 31, 1997, 22.8% of the Company's total direct written premiums were derived from the Special Farm Package product.
The Company concentrates on its primary products: personal and commercial automobile, the Special Farm Package, businessowners, Special Home Package 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 1997, the Company continued the expense management initiatives it began during 1996. The goal of the Company's expense management initiatives is to continually review its cost structure and reduce or eliminate certain expenses. Additionally, the Company seeks to tie expenses to operating results so that expenses become increasingly more variable with the Company's profitability and less fixed or volume sensitive. As a result, portions of the compensation for agents, employees and management are influenced by the Company's operating results. These programs help to align the Company's interests more directly with those of its shareholders. As a result of these initiatives, as well as an increase in the Company's premium revenue at a greater rate than its expenses, the Company's underwriting expenses as a percentage of premium revenue were reduced during 1997 to 27.1% compared to 28.7% for 1996.
The Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Net Realized Investment Gains (Losses) Net realized investment gains were $5.4 million for the year ended December 31, 1997 compared to a loss of $0.6 million in 1996. The increase in realized investment gains was primarily attributable a realized gain on the sale of a common stock investment in 1997.
Losses and Loss Adjustment Expenses Losses and loss adjustment expenses increased $8.3 million, or 8.8%, to $103.3 million for the year ended December 31, 1997 from $95.0 million in 1996. The increase in losses and loss adjustment expenses was primarily attributable to the overall growth in the Company's business. Loss and loss adjustment expenses were 69.2% of premium revenue in 1997 compared to 72.6% of premium revenue in 1996. Losses and loss adjustment expenses believed to be weather related aggregated $5.2 million in 1997 compared to $10.6 million in 1996.
Net Investment Income Net investment income increased $1.3 million or 9.1% to $15.6 million for the year ended December 31, 1996 from $14.3 million in 1995. The increase in net investment income was primarily the result of an increase in cash and invested assets (at amortized cost) of approximately $34.7 million, or 17.7%. The increase in average cash and invested assets was primarily attributable to the capital contribution of $19.9 million from Farm Family Holdings received in July 1996. The average return realized on the Company's cash and invested assets was 7.5% in 1996 and 7.6% in 1995.
Net Realized Investment Gains (Losses) Net realized investment losses were $0.6 million for the year ended December 31, 1996 compared to a gain of $0.9 million in 1995.
Net Income Net income decreased $2.5 million to $7.1 million in 1996 from $9.6 million in 1995 primarily as a result of the foregoing factors and the impact of $1.5 million of expenses related to the demutualization of the Company which the Company has identified as an extraordinary item, as well as the implementation of a voluntary early retirement program which resulted in a one time charge to
earnings of $0.8 million, net of income tax benefit of $0.4 million, in the last quarter of 1996.
Net cash used in investing activities was $31.1 million, $30.3 million, and $18.5 million during the years ended December 31, 1997, 1996, and 1995, respectively. The decrease in net cash used in investing activities in 1997 resulted primarily from an increase in investment collections from fixed maturities available for sale and proceeds from sales of equity securities. The increase in net cash used in investing activities in 1996 resulted primarily from a reduction in proceeds on the maturities and sales of fixed maturities and the investment of the net proceeds from the Company's initial public offering.
Effective December 31, 1997, the Company revised its reinsurance program. The Company's reinsurance agreement with its affiliate, United Farm Family, was terminated effective December 31, 1997. As a result, the Company's retention per claim under its current reinsurance program will increase from $100,000 to $300,000 in 1998. In addition, the Company entered into an agreement which provides reinsurance protection within certain dollar limits for losses in excess of a predetermined ratio of losses to earned premiums. This agreement covers all direct and assumed voluntary business as well as mandatory residual market mechanisms. The Company's reinsurance program is structured to partially mitigate the impact of large or unusual losses as well as the aggregation of smaller, more frequent losses on liquidity and operating results.