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, 1996, 1995, 1994 and 1993 and the consolidated balance sheet data as of December 31, 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 statement of income data for the year ended December 31, 1992 and the consolidated balance sheet data as of December 31, 1993 and 1992 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
Farm Family Casualty Farm Family Casualty 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. Farm Family Casualty 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 the state Farm Bureau organizations is a prerequisite for voluntary insurance coverage (except for employees of the Company and its affiliates)..
Operating Environment The operating results of companies in the property and casualty insurance industry have historically been subject to fluctuations due to competition, economic conditions, weather and various other factors. Factors affecting the results of operations of the property and casualty insurance industry include price competition and aggressive marketing which historically have resulted in higher combined loss and expense ratios. 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. Because of the nature of the property and casualty insurance industry, it is difficult to predict future trends in the industry's overall profitability.
For the years ended December 31, 1996, 1995, and 1994, 38.6%, 39.1% and 38.5%, respectively, of the Company's direct written premiums were derived from policies written in New York and 22.6%, 20.8%, and 19.6%, 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 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.
Products 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, 1996, 24.5% of the Company's total direct premiums written were derived from the Special Farm Package product.
The Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
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 $18.0 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.
Losses and Loss Adjustment Expenses Losses and loss adjustment expenses increased $11.8 million, or 14.2%, to $95.0 million for the year ended December 31, 1996 from $83.2 million in 1995. The increase in losses and loss adjustment expenses was primarily attributable to the overall growth in the Company's business, as well as the frequency of weather related losses in the Northeastern United States during the three months ended March 31, 1996. Loss and loss adjustment expenses were 72.6% of premium revenue in 1996 compared to 71.1% of premium revenue in 1995. Losses and loss adjustment expenses believed to be weather related aggregated $10.6 million in 1996 compared to $5.2 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.
The Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Net Realized Investment Gains Net realized investment gains were $0.9 million for the year ended December 31, 1995 compared to $1.3 million in 1994.
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 loss adjustment expense 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 loss adjustment expense ratio 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 weather related aggregated $5.2 million in 1995 compared to $7.9 million in 1994. To a much lesser extent, the decrease in the loss and loss adjustment expense ratio on assumed reinsurance also contributed to the decrease in the Company's overall loss and loss adjustment expense ratio during 1995.
Underwriting Expenses Underwriting expenses increased $6.1 million, or 21%, to $34.9 million for the year ended December 31, 1995 from $28.8 million for the same period in 1994. For the year ended December 31, 1995, underwriting expenses were 29.8% of premium revenue compared to 28.4% in 1994. A reduction in 1994 of $2.2 million in amounts accrued for the Company's share of the deficit of the New Jersey Market Transition Facility had a favorable impact on the Company's underwriting expense ratio in that year. Without taking into account the effect of this reduction, underwriting expenses in 1994 would have been 30.5% of premium revenue
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 adjustment expenses. The 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 1996, the Company continued to reduce its holdings of non-investment grade fixed maturities to improve the overall quality of its investment portfolio. The aggregate carrying value of fixed maturity securities rated as non-investment grade by the NAIC was reduced to $6.9 million, or 3.2% of its fixed maturity portfolio, at December 31, 1996 from $10.8 million, or 5.6% of its 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, 1996. 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. Approximately 4% 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, 1996 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, 1996, the aggregate market value of the Company's fixed maturity investments exceeded the aggregate amortized cost of such investments by $5.1 million. 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
Net cash provided by operating activities was $12.1 million, $16.4 million, and $8.6 million during the years ended December 31, 1996, 1995, and 1994, respectively. The decrease in cash provided by operating activities in 1996 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 compared to 1995. The increase in net cash provided by operating activities in 1995 was primarily attributable to the increase in net income and a decrease in payments for losses and loss adjustment expenses during 1995 compared to 1994.
Net cash used in investing activities was $30.3 million, $18.5 million, and $7.7 million during the years ended December 31, 1996, 1995, and 1994, respectively. 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 Capital Contribution from the Company's parent. 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.
Net cash provided by financing activities for the year ended December 31, 1996 of $20.0 million was the result of a Capital Contribution from the Company's parent on July 26, 1996.
The Company purchases reinsurance in part to mitigate the impact of large or unusual losses and loss expenses on its liquidity. As a condition of writing business in certain states, the Company participates in a number of mandatory pools and the Company may be required to pay assessments to the extent such pools require the funding of deficits in the future.