(1) Includes a gain of $6.3 million on the partial reduction of the Company's extended earnings liability during the year ended December 31, 1998, which was the result of modifications made to the agreements with the Company's agents and agency managers that relieved the Company of the primary obligation to make extended earnings payments. Includes the effect of retroactively including Excess Interest and Spreads in the Company's calculation of its estimate of profits on participating life insurance business allocable to stockholders, which resulted in a decrease in total losses, benefits, expenses and other during 2000. (2) Extraordinary item for $1.5 million was recorded during 1996 for demutualization expenses related to Farm Family Casualty's conversion from a mutual company to a stockholder owned company. (3) Operating income excludes realized investment gains (losses), nonrecurring items, and the related taxes thereon. (4) Includes the allocation of 3,000,000 shares to eligible policyholders on July 26, 1996 pursuant to Farm Family Casualty's conversion from a mutual company to a stockholder owned company. (5) Includes the operations of Farm Family Life since its acquisition on April 6, 1999. Farm Family Holdings issued 856,871 shares of common stock and 163,214 shares of voting preferred stock in connection with the acquisition. (6) In 1999, these ratios include nine months of operations of United Farm Family. United Farm Family is in start-up mode as a direct writer in Pennsylvania and Maryland. Excluding United Farm Family, the 2000 and 1999 ratios would have been as follows: GAAP loss and loss adjustment expense ratio - 76.9% and 73.8%, GAAP underwriting expense ratio - 23.2% and 24.3%, GAAP combined ratio - 100.1% and 98.1% and statutory combined ratio - 100.1% and 98.5%, respectively. (7) Statutory data is derived from the annual statements of the Company's insurance subsidiaries, prepared in accordance with statutory accounting practices.
Under the terms of a definitive merger agreement announced on October 31, 2000, American National Insurance Company ("American National") will acquire Farm Family Holdings at a price of $44 per share for Farm Family Holdings' common stock and $35.72 per share for Farm Family's Series A Preferred Stock in cash. The consideration to be paid to the holders of the Series A Preferred Stock will also include any accrued and unpaid dividends thereon to the closing date.
Consolidated operating income for the year ended December 31, 2000 was $19.4 million compared to $19.1 million for the same period in 1999. On a diluted per share basis, consolidated operating income for the year ended December 31, 2000 was $3.18 compared to $3.22 for the same period in 1999.
For the years ended December 31, 2000, 1999, and 1998, 36%, 35%, and 35%, respectively, of the property and casualty insurance segment's direct written premiums were derived from policies written in New York and 24%, 27%, and 28%, respectively, were derived from policies written in New Jersey. For these periods, no other state accounted for more than 10.0% of direct written premiums. In addition, for the years ended December 31, 2000 and 1999, 45% and 46%, respectively, of the life insurance segement's collected life insurance premiums were derived from policies written in New York and 13% for each year were derived from policies written in New Jersey. As a result of the concentration of our business in the states of New York and New Jersey, and more generally, in the Northeastern United States, the 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.
The fair value of our fixed maturity portfolio is sensitive to changes in interest rates. We estimate that if interest rates were to increase by 100 basis points from their December 31, 2000 levels, our fixed maturity portfolio would decline in fair value by approximately $51.3 million.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which will replace the current Accounting Practices and Procedures Manual as the NAIC's primary guidance on statutory accounting. Statutory accounting is a comprehensive basis of accounting based on prescribed accounting practices, which include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. The Codification provides guidance for certain areas where statutory accounting has been silent and changes current statutory accounting in some areas. The NAIC has established January 1, 2001 as the effective date of the Codification. However, individual states retain the right to adopt Codification in whole or in part. In our state of domicile, the New York State Insurance Department has adopted the Codification, with modifications to conform to provisions in New York statute which conflict with particular points in the Codification rules. The impact of adopting Codification will be reported as an adjustment to the statutory surplus of our insurance subsidiaries on the effective date. We estimate the adoption of the Codification will increase the statutory surplus of our insurance subsidiaries by approximately $5.5 million in the aggregate. We expect that statutory surplus after adoption will continue to be in excess of the regulatory risk-based capital requirements.
This section should be read in conjunction with the Consolidated Financial Statements and related Notes which include information for our operating segments.
The Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Premium revenue for property and casualty insurance increased $12.2 million, or 6.5%, to $201.1 million in 2000 from $188.9 million in 1999. The increase was primarily attributable to an increase of $13.3 million in premium revenue from our direct writings. This increase in premium revenue was partially offset by an increase of $1.1 million in revenue ceded to our reinsurers.
The $13.3 million increase in premium revenue from our direct writings was primarily attributable to an increase of $11.1 million, or 7.0%, in earned premiums from our 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) and an increase of $2.2 million, or 7.0%, in earned premiums from other products.
Net investment income increased $17.1 million to $75.7 million in 2000 from $58.6 million in 1999.
Net realized investment losses were $3.9 million in 2000 compared to $2.0 million in 1999. Of the total $3.9 million in net realized investment losses in 2000, $3.4 million were in the life insurance segment and the remaining $0.5 million were in the property and casualty segment. During 2000, we sold several bonds from the life insurance segment investment portfolio at losses. In addition, we also recorded write downs for other-than-temporary impairments on two bonds for approximately $1.3 million in the life insurance segment and $0.3 million in the property and casualty segment. During 1999, we sold several bonds from the life insurance segment investment portfolio at losses and recorded a write down of approximately $0.5 million as an other-than-temporary impairment on a bond held in the life insurance segment investment portfolio, which represents the majority of the realized investment losses for 1999.
Losses and loss adjustment expenses on property and casualty insurance increased $16.3 million, or 11.5%, to $157.8 million in 2000 from $141.5 million in 1999. Losses and loss adjustment expenses were 78.5% of premium revenue in 2000 compared to 74.9% of premium revenue in 1999. The increase in the loss and loss adjustment expense ratio was primarily attributable to an increase in the severity of losses incurred on certain of our businessowners, umbrella, and commercial automobile (bodily injury coverage) policies and property losses on two of our voluntary assumed reinsurance contracts during 2000 compared to the same period in 1999.
Other operating costs and expenses increased $6.3 million to $26.7 million in 2000 from $20.4 million in 1999. The increase was primarily due to the inclusion of other operating costs and expenses for Farm Family Life subsequent to April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm Family Life. The 2000 amounts include twelve months of expenses for Farm Family Life. In addition, the 2000 amounts include $1.4 million relating to the pending merger with American National. Property and casualty insurance underwriting expenses (including amortization expenses) were 23.8% of premium revenue in 2000 compared to 24.6% in 1999.
Participating policyholders' interest of $(8.5) million reduced losses, benefits and expenses in 2000, compared to participating policyholders' interest of $9.7 million which increased losses, benefits and expenses in 1999. The 2000 amount includes $19.0 million, which reduced losses, benefits and expenses, representing the pre-tax effect of retroactively including Excess Interest and Spreads in our calculation of the estimate of profits on participating life insurance business allocable to stockholders for periods through December 31, 1999, as discussed in Note 2 to the accompanying Consolidated Financial Statements.
The Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Premium revenue increased to $216.7 million in 1999 from $181.7 million in 1998. The increase was attributable to an increase of $7.2 million in property and casualty insurance premium revenue and $27.8 million from the addition of life insurance segment premium revenue.
Premium revenue for property and casualty insurance increased $7.2 million, to $188.9 million in 1999 from $181.7 in 1998. The increase in property and casualty premium revenue for the year ended December 31, 1999 was attributable to an increase of $7.2 million in premium revenue derived from Farm Family Casualty's direct writings, an increase of $1.0 million in premium revenue assumed by Farm Family Casualty and premium revenue of $1.0 million from United Farm Family. These increases were partially offset by an increase of $2.0 million in premium revenue ceded to Farm Family Casualty's reinsurers. We ceded $2.0 million in premium revenue in 1999, compared to $3.5 million in 1998, pursuant to our aggregate stop loss reinsurance program.
Property and casualty net written premiums increased $2.9 million, or 1.5%, to $191.7 million in 1999 compared to $188.8 million in 1998. The increase in property and casualty net written premiums for the year ended December 31, 1999 was attributable to an increase of $5.4 million, or 3.0%, in direct writings by Farm Family Casualty (excluding assigned risk automobile business premiums), an increase of $0.9 million in Farm Family Casualty's assigned risk automobile business premiums, and the inclusion of United Farm Family's net written premium of $1.4 million. These increases were partially offset by an increase of $4.0 million in premiums ceded to reinsurers and a decrease of $0.8 million in premiums assumed by Farm Family Casualty. Excluding premiums from personal automobile business in the state of New Jersey and premiums from assigned risk automobile business, Farm Family Casualty's direct writings increased $9.4 million or 6.1% in 1999 compared to 1998. The reduction in personal automobile business in New Jersey was primarily attributable to the New Jersey legislation mandating a rate roll back for personal automobile business in New Jersey, effective March 22, 1999. Geographically, the increase in Farm Family Casualty's direct writings came from all ten states in which it writes property and casualty insurance. In addition, direct writings of all of Farm Family Casualty's primary products, except personal automobile, increased during 1999. Excluding personal automobile business premiums written in New Jersey, Farm Family Casualty's direct written premiums from personal automobile policies increased by 5.3% or $2.0 million in 1999 compared to 1998.
Net investment income for the property and casualty insurance segment increased $1.8 million, or 9.9% to $20.4 million in 1999 from $18.6 million in 1998. The taxable equivalent yield on the property and casualty insurance segment's investment portfolio was 6.8% and 7.0% for 1999 and 1998, respectively. The increase in net investment income for the property and casualty insurance segment was primarily the result of an increase in the average cash and invested assets (at amortized cost) of $30.5 million, or 10.9%, for Farm Family Casualty and the inclusion of United Farm Family, which accounted for $1.2 million of the increase in investment income and an additional $26.9 million in average cash and invested assets (at amortized cost). The overall increase in cash and invested assets was greater than the overall increase in net investment income in 1999 primarily as a result of an increase in the investment in tax-exempt fixed maturity securities. The investment income from the property and casualty insurance segment's tax-exempt securities increased to $4.3 million in 1999 from $2.7 million in 1998. United Farm Family's investment income from tax-exempt securities was not material in 1999.
Net investment income for the life insurance segment was $37.7 million in 1999, which represents net investment income for Farm Family Life since its acquisition by Farm Family Holdings on April 6, 1999. The yield on the life insurance segment's investment portfolio was 6.5% for that period.
Net realized investment losses were $2.0 million in 1999 compared to a net realized gain of $0.5 million in 1998. During 1999, we sold several bonds from the life insurance investment portfolio at losses and recorded a write down of approximately $0.5 million as an other-than-temporary impairment on a bond held in the life insurance segment investment portfolio, which represents the majority of the realized investment losses.
Losses related to our direct writings believed to be weather related aggregated $11.1 million in 1999 compared to $11.7 million in 1998.
Other operating costs and expenses increased $8.0 million to $20.4 million in 1999 from $12.4 million in 1998. The increase was primarily due to the inclusion of Farm Family Life's other operating costs and expenses of $9.3 million in 1999 partially offset by a decrease in property and casualty underwriting expenses of $0.7 million and the elimination of rental income of $0.7 million paid by Farm Family Casualty to Farm Family Life in 1999. This amount was not eliminated in 1998 since the operations of Farm Family Life were not consolidated with the Company's until its acquisition on April 6, 1999. For 1999, property and casualty insurance underwriting expenses (including amortization expenses) were 24.6% of premium revenue compared to 25.2% in 1998. The decrease in underwriting expenses as a percent of premium revenue was primarily attributable to a greater relative increase in the Company's premium revenue than in the level of overhead expenses, as well as the continuation of a company-wide expense management program, partially offset by the inclusion of the costs and expenses for United Farm Family since its acquisition by Farm Family Holdings. Excluding United Farm Family, property and casualty underwriting expenses (including amortization expenses) were 24.3% of premium revenue in 1999 compared to 25.2% for the same period in 1998.
Federal income tax expense decreased $0.8 million to $7.4 million in 1999 from $8.2 million in 1998. Federal income tax expense was 28.3% of income before federal income tax expense and preferred stock dividends in 1999 compared to 30.7% in 1998. The reduction is primarily due to an increased proportion of interest income from tax-exempt securities.
Our primary sources of cash flow are premiums, investment income, principal from maturing investments, and proceeds from sales of invested assets. The property and casualty insurance and life insurance segments typically generate positive cash flows from operations as a result of premiums being received in advance of the related claim and benefit payments. In addition to the need for cash flow to meet operating expenses, the liquidity requirements of the property and casualty insurance segment relate primarily to the payment of losses and loss adjustment expenses and the liquidity requirements of the life insurance segment relate primarily to the payment of benefits under life insurance, annuity, and accident and health policies. The liquidity requirements of the property and casualty insurance and life insurance segments can vary because of the uncertainties regarding the settlement dates for liabilities for unpaid claims and the potential for large losses, either individually or in the aggregate. In addition, Farm Family Holdings pays dividends on its Series A Preferred Stock and may repurchase shares of its common stock.
Effective September 20, 2000, New York State Insurance Law was amended to permit domestic stock life insurers to distribute shareholder dividends up to a certain threshold amount without the prior approval of the Department. Previously, the payment of shareholder dividends by Farm Family Life was subject to prior approval of the Department. The maximum amount of shareholder dividends that could be paid by Farm Family Life without the prior approval of the Department during 2001 is approximately $6.1 million. During 2000, Farm Family Life declared and paid dividends of $1.0 million to Farm Family Holdings with the prior approval of the Department.
At December 31, 2000, our cash and invested assets, at amortized cost, were $1.1 billion, a $18.3 million increase from 1999. During 2000, we continued to invest primarily in investment grade fixed maturities to maintain the overall quality of our investment portfolio. We also increased investments in commercial mortgage loans in the life insurance segment to further diversify and increase the yield of the investment portfolio in this segment. The market value of fixed maturity investments is subject to fluctuations directly attributable to prevailing rates of interest as well as other factors.
Fixed maturity securities, at amortized cost, rated as investment grade by the National Association of Insurance Commissioners were $997.9 million, or 98% of the fixed maturity portfolio, at December 31, 2000 compared to $968.2 million, or 96% of the fixed maturity portfolio, at December 31, 1999.
In January 2000, we replaced our existing lines of credit with a revolving credit agreement with three banks. The credit agreement, which expires during January 2003, provides for uncollateralized borrowings of up to $30.0 million at the lending banks' prime rate or LIBOR plus 0.8%. On each anniversary date, the committed amount may decrease by $10.0 million, unless otherwise extended by mutual agreement. Effective January 2001, the committed amount decreased to $20.0 million. The terms of the credit agreement contain, among other provisions, requirements for maintaining minimum levels of surplus, net worth and debt service coverage. We have not utilized our credit facilities in 2000, 1999 or 1998. Pursuant to the merger agreement with American National, Farm Family Holdings may not borrow against the line of credit prior to the closing of the merger with American National, without the prior consent of American National. Upon the closing of the merger, the revolving credit agreement will be terminated. See Notes 3 and 20 to the Consolidated Financial Statements for further details regarding the merger.
Net cash used in investing activities was $28.1 million, $36.1 million, and $29.0 million during the years ended December 31, 2000, 1999, and 1998, respectively. The $8.0 million decrease in net cash used in investing activities in 2000 compared to 1999 was primarily due to a decrease in investment purchases partially offset by a decrease in investment collections. The $7.1 million increase in net cash used in investing activities in 1999 compared to 1998 was primarily due to $10.4 million in cash used in investing activities of the life insurance segment.
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include the accounts of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiaries (collectively referred to as the "Company"). 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 April 6, 1999, Farm Family Holdings acquired Farm Family Life and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family"). Farm Family Holdings acquired all of the outstanding capital stock of Farm Family Life for an aggregate purchase price of approximately $38.3 million, including direct acquisition costs. All significant intercompany balances and transactions have been eliminated.
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.
Fixed maturities include primarily bonds, redeemable preferred stocks, asset-backed securities and mortgage-backed securities. Investments in fixed maturities which the Company has both the ability and positive intent to hold to maturity are classified as held to maturity and carried at amortized cost. Investments classified as held to maturity on the Company's consolidated balance sheets consist primarily of private placements. Fixed maturities which may be sold prior to their contractual maturity are classified as available for sale and are carried at fair value on the Company's consolidated balance sheets. The difference between amortized cost and fair value of fixed maturities classified as available for sale, net of deferred income taxes, is reflected as a component of stockholders' equity.
Equity securities include common stocks which are carried at fair value. The difference between cost and fair value of equity securities, less deferred income taxes, is reflected as a component of stockholders' equity.
Mortgage loans are carried at their outstanding principal balance. At December 31, 2000, no mortgage loans were considered uncollectible.
The carrying values of all investments are reviewed on an ongoing basis. If this review indicates a decline in fair value below cost is other than temporary, the Company's carrying value in the investment is reduced to its estimated realizable value and a specific write-down is taken. Such write-downs are included in realized investment gains (losses), net.
Certain costs of writing life insurance and annuity business, which vary with and are primarily related to the production of new business, have been deferred to the extent that such costs are deemed recoverable from future premiums, and have been reported as deferred acquisition costs. Such costs include commissions, certain costs of policy issuance and underwriting, and certain variable agency expenses. Future investment income is considered in determining the recoverability of deferred acquisition costs.
Deferred acquisition costs for universal life contracts and certain annuity contracts are amortized at a constant rate based upon the present value of estimated gross profits expected to be realized over the life of the contracts.
The Company reviews the carrying amount of deferred acquisition costs on a periodic basis.
Liabilities for future policy benefits for term life contracts are calculated using the net level premium method and assumptions as to investment yields, mortality and withdrawals. These assumptions are based on projections and past experience and include provisions for possible unfavorable deviation. These assumptions are made at the time the contract is issued.
Liabilities for future policy benefits for traditional whole life contracts are calculated using the net level premium method and assumptions as to interest and mortality. Reserve interest assumptions are level and range from 2.5% to 4.5%. The average rate of assumed investment yields used in estimating gross margins was 7.5% in 2000 and 1999. Traditional whole life is written on a participating basis with a provision for dividends to policyholders (see Participating Policyholders' Interest).
Liabilities for future policy and contract benefits on universal life-type and investment-type contracts are based on the policy account balance.
A significant portion of the life insurance segment's products is written on a "participating" basis, as defined in the New York State insurance law. Participating insurance represented 83% of the total life insurance in force at December 31, 2000 and 78% of the total statutory premiums collected for the year ended December 31, 2000.
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 to the greater of 10% of the profit on participating business, or 50 cents per thousand dollars of the face amount of participating life insurance in force. Participating policyholders' interest includes the accumulated net income from participating policies reserved for payment to such policyholders in the form of dividends (less net income allocated to stockholders as indicated above) as well as a pro rata portion of unrealized investment gains (losses), net of tax. The Board of Directors approves dividends to policyholders.
In addition to the greater of 10% of the profit on participating business or 50 cents per thousand dollars of the face amount of participating life insurance in force, earnings available to common stockholders consists of earnings on non-participating business and a pro rata share of net investment income and realized investment gains (losses).
In November 1999, the Company requested an opinion of the Insurance Department of the State of New York (the "Department") as to whether interest credited in excess of the interest guaranteed under certain participating insurance policies, annuities and dividend accumulations ("Excess Interest") and the difference between the guaranteed cost of insurance or premium and the cost of insurance or premium actually charged ("Spreads"), as well as dividends to participating policyholders, could be included in its calculation of the estimate of statutory profits on participating life insurance business allocable to stockholders. In April 2000, the Department approved the Company's request to include Excess Interest and Spreads, as well as dividends to participating policyholders, in its calculation of the estimate of statutory profits on participating life insurance business allocable to stockholders on both a prospective and retrospective basis. Accordingly, the Company's calculation of the estimate of profits on participating life insurance business allocable to stockholders has been revised to include Excess Interest and Spreads on a retrospective and prospective basis.
The Company has never paid cash dividends on shares of common stock. The Company currently intends to retain any earnings in order to develop its business and support its operations, and, as such, does not anticipate that it will pay dividends to stockholders in the foreseeable future. The declaration and payment of dividends in the future are at the discretion of the Board of Directors of the Company, are subject to certain regulatory constraints and will depend upon, among other things, the Company's results of operations, financial condition, cash requirements, future prospects and other factors.
In 2000, the FASB Emerging Issues Task Force ("EITF") reached a consensus regarding Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"). EITF 99-20 sets forth the rules for (1) recognizing interest income (including amortization of premium or discount) on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities and (2) determining when these securities must be written down to fair value because of impairment. EITF 99-20 adopts the "prospective method" for adjusting the level yield used to recognize interest income when estimates of future cash flows on the security either increase or decrease since the date of the last evaluation. The impairment provisions of EITF 99-20 generally require an other-than-temporary write down for any decrease in the estimated future cash flows from the security when the fair value of the security is less than the carrying amount. EITF 99-20 if effective for the Company in the second quarter of 2001. The adoption of EITF 99-20 will not have a material impact on the Company's financial statements.
Under the terms of the merger agreement, American National will acquire Farm Family Holdings at a price of $44 per share for Farm Family Holdings' common stock and $35.72 per share for Farm Family Holdings' Series A Preferred Stock in cash. The consideration to be paid to the holders of the Series A Preferred Stock will also include any accrued and unpaid dividends thereon to the closing date. As a result of the merger, Farm Family Holdings will become a wholly owned subsidiary of American National.
See Note 12 to the Consolidated Financial Statements for information regarding effects of the adoption of the merger agreement by Farm Family Holdings' stockholders on the Company's stock compensation plan and merger-related retention payments, Note 16 to the Consolidated Financial Statements for information regarding merger termination fees and Note 20 to the Consolidated Financial Statements for subsequent events relating to the merger.
The following table for the years ended December 31, 2000, 1999 and 1998 presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
Unrealized investment gains and losses on fixed maturities classified as available for sale and equity securities included in stockholders' equity as accumulated other comprehensive income and in participating policyholders' interest at December 31, 2000 are as follows:
The amount of net investment income attributable to participating policyholders for 2000 and 1999 was approximately $36.3 million and $29.0 million, respectively. There were no participating policyholders prior to the acquisition of Farm Family Life effective April 6, 1999.
The following methods and assumptions were used in estimating the fair value disclosures for the financial instruments:
Fixed maturities, equity securities and other invested assets - The fair value is based upon quoted market prices where available or from independent pricing services.
A reconciliation of the differences between the Company's effective tax rates and the United States federal income tax rates for the years ended December 31, 2000, 1999 and 1998 is as follows:
The following table provides a reconciliation of beginning and ending liability balances for reserves for losses and loss adjustment expenses for the years ended December 31, 2000, 1999 and 1998.
The Company sponsors a qualified noncontributory defined benefit pension plan covering substantially all of the Company's full time employees hired prior to January 1, 1997. Effective January 1, 1997, Farm Family Casualty and Farm Family Life froze benefits available through the defined benefit plan. The Company also provides life insurance benefits through a postretirement benefit plan for retired employees meeting certain age and length of service requirements. These benefits are shown as "Other Benefits" in the tables below. Benefits under the postretirement benefit plan are provided by a group term life insurance policy issued by Farm Family Life.
The change in benefit obligation for the plans for the years ended December 31, 2000, 1999 and 1998 are as follows:
The change in plan assets for the years ended December 31, 2000, 1999 and 1998 are as follows:
Weighted-average assumptions as of December 31, 2000, 1999 and 1998 are as follows:
The rate of compensation increase assumptions for pension benefits are zero, because benefits under the pension plan were frozen as of January 1, 1997.
The components of net periodic pension expense (benefit) and the net periodic other benefit expense for the plans for the years ended December 31, 2000, 1999 and 1998 are as follows:
The following table summarizes the changes in stock options for years ended December 31, as follows:
The per share weighted-average fair value of the options granted in 2000 and 1999 was $12.23 and $12.24, respectively, estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted-average assumptions:
In connection with the execution of the merger agreement with American National, Farm Family Holdings entered into employment agreements providing that certain executive officers of the Company will be entitled to receive retention payments on the effective date of the merger and at the end of each of the three successive six-month periods following the effective date of the merger. The total aggregate amount of these payments is $3.9 million, with $2.6 million of this amount due at the effective time of the merger. See Notes 3 and 20 to the Consolidated Financial Statements.
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 are 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, 2000.
Net income and capital and surplus of the Company, as determined in accordance with statutory accounting practices are as follows:
(1) Net income under statutory accounting principles for 1999 includes the operations of United Farm Family for the entire year. The Company's net income under generally accepted accounting principles only includes the operations of United Farm Family since April 6, 1999 - the date it was acquired by Farm Family Holdings.
The Company is a party to litigation as a result of a $2 million investment in notes issued by FoxMeyer Corporation ("FoxMeyer"). The Company received full payment of these notes in 1996. FoxMeyer subsequently declared bankruptcy and other creditors are seeking recovery of amounts paid to the noteholders. Management is unable to estimate the amount of loss, if any, which may arise as a result of these proceedings.
The Company is party to numerous other legal actions arising in the normal course of business. Management believes that resolution of these other legal actions will not have a material adverse effect on the Company's consolidated financial condition and results of operations.
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. 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 future results of operations.
At December 31, 2000, the Company had $4.4 million of outstanding letters of credit. These letters of credit are issued to insurance companies reinsured by Farm Family Casualty and domiciled in states where Farm Family Casualty is not licensed or authorized as a reinsurer.
In accordance with the merger agreement with American National (see Notes 3 and 20 to the Consolidated Financial Statements), Farm Family Holdings will be obligated to pay a $7.5 million "break-up" fee to American National if Farm Family Holdings enters into an agreement to consummate an alternative transaction or the merger agreement is terminated under certain circumstances by Farm Family Holdings or American National.
To the Stockholders and Board of Directors of Farm Family Holdings, Inc.