Farm Family 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. Membership in a state or county Farm Bureau organization is a prerequisite for insurance coverage (except for employees of the Company and its affiliates).
For the years ended December 31, 1997, 1996, and 1995, 36.5%, 38.6% and 39.1%, respectively, of the Company's direct written premiums were derived from policies written in New York and 26.3%, 22.6% and 20.8%, respectively, were derived from policies written in New Jersey. For these periods, no other state accounted for more than 10.0% of the Company's direct written premiums. As a result of the concentration of the Company's business in the states of New York and New Jersey, and more generally, in the Northeastern United States, the
Future Application of Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement No. 130 "Comprehensive Income", ("Statement 130") which establishes standards for the reporting and disclosure of comprehensive income and its components (revenues, expenses, gains and losses). Statement 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Statement 130 is effective for the fiscal years beginning after December 15, 1997. The Company will adopt Statement 130 in 1998.
Premiums Premium revenue increased $18.4 million, or 14.1%, during the year ended December 31, 1997 to $149.2 million from $130.8 million in 1996. The increase in premium revenue in 1997 resulted from an increase of $18.2 million in earned premiums on additional business directly written by the Company (principally in New Jersey and New York) and an increase of $3.7 million in earned premiums assumed by the Company, offset by an increase of $3.5 million in earned premium ceded to reinsurers. The $18.2 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $15.8 million, or 13.4%, in earned premiums from the Company's primary products (personal and commercial automobile products other than assigned risk automobile business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package), an increase of $1.0 million in earned premiums on workers' compensation business, an increase of $0.5 million in earned premium from assigned risk automobile business, and an increase of $0.9 million in earned premium from the Company's other products. Premiums earned on personal automobile policies in the state of New Jersey accounted for $6.5 million of the $18.2 million increase in earned premiums from the Company's primary products. The number of policies in force of the Company's primary products increased by 11.4% to approximately 127,000 in 1997 from approximately 114,000 in 1996 and the average premium earned for each such policy increased by 1.6% in 1997.
Net Investment Income Net investment income increased $1.8 million, or 11.7%, to $17.4 million for the year ended December 31, 1997 from $15.6 million in 1996. The increase in net investment income was primarily the result of an increase in cash and invested assets (at amortized cost) of approximately $37.9 million, or 17.6%. The increase in average cash and invested assets was primarily attributable to the investment of available operating cash flows during 1997. The return realized on the Company's cash and invested assets was 7.1% in 1997 and 7.5% in 1996.
Underwriting Expenses Underwriting expenses increased $2.8 million, or 7.5%, to $40.4 million for the year ended December 31, 1997 from $37.6 million for the same period in 1996. For the year ended December 31, 1997, underwriting expenses were 27.1% of premium revenue compared to 28.7% in 1996. The reduction in the Company's underwriting expense ratio was primarily attributable to a smaller relative increase in overhead expenses than in premium revenue for the period and the Company's continued expense management initiatives which began in 1996.
Net Income Net income increased $12.0 million to $19.1 million in 1997 from $7.1 million in 1996 primarily as a result of the foregoing factors and the impact of $1.5 million of expenses related to the demutualization of the Company which the Company has identified as an extraordinary item in 1996, as well as the implementation of a voluntary early retirement program which resulted in a one time charge to earnings of $0.8 million net of tax in the last quarter of 1996.
The Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
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.
At December 31, 1997, the Company's cash and invested assets, at amortized cost, was $265.7 million, a $37.9 million increase from 1996. The increase is primarily the result of the investment of operating cash flows. During 1997, the Company continued to invest primarily in investment grade fixed maturities to maintain the overall quality of its investment portfolio. Fixed maturity securities, at amortized cost, rated as investment grade by the National Association of Insurance Commissioners was $241.5 million, or 96.4% of its fixed maturity portfolio, at December 31, 1997 compared to $210.3 million, or 97.1% of its fixed maturity portfolio, at December 31, 1996. High yield corporate bonds constituted most of the non-investment grade securities held by the Company as of December 31, 1997 and 1996. The Company also increased its investments, at amortized cost, in tax exempt bonds from $21.6 million in 1996 to $31.7 million in 1997. The mortgage-backed securities held by the Company as of December 31, 1997 were primarily GNMA, FNMA, and Federal Home Loan Mortgage Corp. pass-through securities. The Company currently has no investments in such derivative financial instruments as futures, forward, swap, or option contracts, or other financial instruments with similar characteristics. The 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, 1997 and 1996, the aggregate market value of the Company's fixed maturity investments exceeded the aggregate amortized cost of such investments by $10.4 million and $5.2 million, respectively.
The Company has in place an unsecured line of credit with a bank under which it may borrow up to $7.0 million. At December 31, 1997, no amounts were outstanding on the line of credit which has an annual interest rate equal to the bank's prime rate. In addition, the Company's reinsurance intermediary has extended to the Company a "Rapid Recovery Facility" under which the Company, at its option, can receive cash advances of up to $7.7 million within 48 hours of experiencing a catastrophic loss. There is no interest rate associated with this facility. The Company did not utilize this facility in 1997, 1996 or 1995.
Net cash provided by operating activities was $32.9 million, $12.1 million, and $16.4 million during the years ended December 31, 1997, 1996, and 1995, respectively. The increase in net cash provided by operating activities in 1997 was primarily attributable to the increase in premiums collected, interest and dividends received, and a reduction in losses paid relative to the increase in premiums collected. The decrease in cash provided by operating activities in 1996 compared to 1995 was primarily attributable to the decrease in net income which included the impact of $1.5 million of expenses related to the demutualization of the Company which the Company has identified as an extraordinary item during 1996.
Net cash provided by financing activities for the year ended December 31, 1996 of $19.9 million was the result of a Capital Contribution from the Company's parent on July 26, 1996.