Farm Family Holdings, Inc. Business Information, Profile, and History

Company Perspectives:

Over the years, Farm Family has earned a solid reputation, with an established tradition of trust. Farm Family agents are insurance professionals who recognize that personal service is the key to meeting individual and business concerns.

History of Farm Family Holdings, Inc.

Farm Family Holdings, Inc. is a holding company that was formed in 1996 as part of a plan to convert Farm Family Mutual Insurance Company from a mutual property and casualty insurance company to a stockholder-owned company. Headquartered in Glenmount, New York, the principal subsidiaries of Farm Family (Farm Family Casualty Insurance Company and Farm Family Life) were sponsored originally by the Farm Bureau organizations of several northeastern states in the 1950s. Farm Family continues to maintain close ties to the Farm Bureau organizations. It pays an annual $15 fee per Farm Bureau member for the right to utilize Farm Bureau membership lists in ten of the 12 states in which the company operates and the authority to use the Farm Bureau names and service marks in connection with the marketing of the company's insurance products. Farm Family and the New York Farm Bureau also share office space, and the chairman of the board of directors of Farm Family Holdings, Clark W. Hinsdale III, is also the president and a director of the Vermont Farm Bureau. A majority of Farm Family directors are directors or executive officers of Farm Bureau organizations. Membership in a Farm Bureau organization is a prerequisite for purchasing coverage with Farm Family Casualty, but membership generally can be sought by anyone with an 'interest' in agriculture.

Farm Bureau Movement Origins in the Early 1900s

The history of Farm Family Holdings is very much a part of the Farm Bureau movement and the dozens of insurance companies created by the state organizations that today generate some $6.5 billion in annual revenues. The first county farm bureau was established in 1911 in the Binghamton, New York Chamber of Commerce to sponsor an extension agent from the U.S. Department of Agriculture. The tag 'bureau' soon was applied to state farming organizations. By 1919, 500 members representing state farm bureaus (or representing states that were in the process of organizing) gathered in Chicago to form a national organization that would become the American Farm Bureau Federation (AFBF). More commonly, the organization became known as the Farm Bureau.

From its inception, the Farm Bureau faced the question of what was to be its focus: education or commerce. According to Orville Menton Kile in his book The Farm Bureau Through Three Decades, 'Those who favored active business operations wanted heavy fees and a big budget; the advocates of the purely educational type of organization not only felt that a big fund was not needed, but that its existence would be a constant temptation to embark upon commercial pursuits.'

One of the earliest commercial ventures pursued by individual state farm bureaus was auto insurance, as a 'service to member' operation. The pioneer in this field was the founder of State Farm Insurance, George Mecherle of Bloomington, Illinois. He created a mutual insurance company for rural and small town drivers who in the early 1920s were paying higher premiums even though they had fewer accidents than drivers in more urban areas. By linking insurance rates to risk levels, Mecherle was able to offer significantly lower premiums than his competitors. He also signed agreements with state farm bureaus, which would receive a fee for each of their members who purchased policies. Some state farm bureaus took Mercherle's lead and formed their own mutual auto insurance companies: Ohio in 1926, Illinois in 1927, and New Hampshire in 1928. Not only did insurance generate revenue for the farm bureaus, it acted as an inducement for membership.

In the words of an early Farm Bureau insurance executive, Murray Lincoln, quoted in Dollar Harvest, 'When we first started our insurance company, it never dawned on me that we would ever insure anyone but farmers. But once we started insuring farmers other than Farm Bureau members, we found that we simply could not keep out the barber in the small town, the grocer, the gas-station attendant, the shopkeeper, or any other type of small businessman. Finally, as our company grew, we had to throw out the window the concept of restricting our insurance only to farmers.' Expanding in a similar manner, state Farm Bureaus began sponsoring insurance companies that also sold fire, casualty, and life insurance policies.

Affiliation with the Farm Bureau proved to be a powerful selling tool. According to Dollar Harvest, 'When a Farm Bureau insurance agent knocks on the door in many areas of the country, he immediately has the respectability of the organization working for him. If the man or woman who answers the door is not a member himself, perhaps his father was, or maybe his son is active in a 4-H club which meets in the Farm Bureau building. In any case, the image is not the same as that presented by other insurance companies, and image is all-important in the sale of insurance.' Because so many county agricultural agents also sold Farm Bureau memberships and Farm Bureau products, the private state Farm Bureau organizations gained quasi-governmental status. Many people even assumed that the Farm Bureau was in fact a government agency. Across the country, Farm Bureau insurance companies flourished. The Ohio Farm Bureau Mutual Automobile Insurance Company founded in 1926 would, 30 years later, elect to drop 'Farm Bureau' and coin a new corporate name to expand into states that already had Farm Bureau insurance companies. The name chosen was Nationwide Insurance.

Launching the Farm Family Insurance Companies in 1953

In 1953 the Farm Bureaus of seven northeastern states sponsored the creation of the Farm Family Life Insurance Company. Then on April 21, 1955, with the help of AFBF, the Farm Bureaus of New York, New Jersey, Delaware, West Virginia, Connecticut, Rhode Island, Vermont, New Hampshire, Massachusetts, and Maine sponsored what would become the lead entity of the Farm Family Insurance Companies: Farm Family Mutual Insurance Company, incorporated under the laws of the state of New York. On November 16, 1956, Farm Family Mutual began business, working together with Farm Family Life and sharing office facilities with the New York Farm Bureau in Glenmount, New York. In 1988 Farm Family Life created a subsidiary, United Farm Family Insurance Company, to serve as a reinsurer for Farm Family Mutual.

The reputation of the Farm Bureau and its network of businesses was tarnished in 1967 when ranking New York Congressman Joe Resnick, chairman of a subcommittee of the House Agriculture Committee, began to question the practices of the Farm Bureau. After his House colleagues refused to look further into the Farm Bureau, Resnick held his own public hearings across the country. After his death, his aide Samuel R. Berger, who would become National Security Adviser to President Clinton, compiled the information for publication in Dollar Harvest. Berger charged, 'The Farm Bureau is far more than simply an organization of farmers, as it so often claims. The nation's biggest farm organization has been quietly but systematically amassing one of the largest business networks in America. ... The Farm Bureau empire now spans the economy: from insurance to oil, from fertilizer to finance companies, from mutual funds to shopping centers. ... The Farm Bureau claims it is in business simply to provide `services to its members.' But the Farm Bureau business activities now clearly dominate the organization. ... Over the years the farmer has increasingly become customer, not constituent to the Farm Bureau.' In short, Berger claimed, 'The Farm Bureau has become a giant, self-serving bureaucracy,' and 'Membership has become little more than a device through which Farm Bureau products are sold.'

Despite the unwelcome notoriety, the Farm Bureau and its affiliated businesses, such as the Farm Family insurance companies, continued to prosper. The largest line of business for Farm Family was auto insurance, comprising about 40 percent of the group's total. The company's 'flagship product,' and second largest line, would become its 'Special Farm Package `10',' which combined personal, farm, and business property and liability insurance for farm owners and other agricultural related businesses. In 1983 Farm Family Life entered the flexible premium/benefit market with its Family Universal Life Policy. United Farm Family expanded beyond reinsurance to engage in limited, direct underwriting operations in 1993.

In November 1995, the Farm Family Insurance Companies reached a turning point when the chief executive officer of the group, Philip P. Weber, announced that Farm Family Mutual would convert from a mutual property and casualty insurer into a stockholder-owned company. Although the company had been growing, to reach the next level Farm Family Mutual contended that it needed access to additional capital that was difficult for a mutual to raise. To accomplish the demutualization plan, a holding company was formed, Farm Family Holdings, Inc. Policyholders, who legally were the owners of Farm Family Mutual, then would receive shares of common stock in the holding company, pending a review by the New York State Insurance Department and approval from policyholders. Farm Family Holdings then planned to make a public offering of its stock. What would happen to Farm Family Life and United Farm Family was not addressed at the time, but at a later date Weber indicated that he hoped to eventually bring the sister companies into the fold.

Farm Family faced some opposition to its conversion plans during the only public hearing held in April 1996. Whereas Weber testified that the conversion would provide immediate benefits to policyholders, those opposed to the plan complained that the policyholders' meeting was scheduled during planting season and also expressed concerns that the best interests of policyholders might conflict with the best interests of stock owners. The Center for Insurance Research, a consumer watchdog group, sent a letter to state regulators claiming that Farm Family's management would profit personally from the conversion. Nevertheless, on May 1, New York State Superintendent of Insurance Edward J. Muhl approved the demutualization plan, stating that it was fair and equitable and in the best interests of policyholders.

Demutualization and 1996 Creation of Farm Family Holdings

A special meeting for policyholders of Farm Family Mutual was scheduled for June 17, 1996, to vote on the plan. It passed with 93 percent of the policyholders approving demutualization, with some 22,000 policyholders voting either in person or by proxy. Farm Family officials characterized the support as 'overwhelming,' and critics maintained that '7 percent against indicates a degree of policyholder cynicism.' As part of the conversion, Farm Family Mutual changed its name to Farm Family Casualty Insurance Company and became a subsidiary of Farm Family Holdings.

In the midst of turbulent stock market conditions, Farm Family Holdings made a public offering of its stock in July 1996 and fell short of the expectations it expressed in papers filed with the Securities and Exchange Commission. Hoping to raise $54.3 million at $22 per share, the company actually raised $39.4 million at $16 per share. Trading on the New York Stock Exchange, however, Farm Family stock began to rise steadily in price.

In December 1996 Farm Family initiated moves to reduce expenses and make the company more competitive in the insurance marketplace. It offered early retirement to more than 60 employees, a plan that after an outlay of $600,000 would save the company as much as $225,000 a year. The company also changed retirement benefits to tie them closer to the company's profitability. Furthermore, Farm Family announced that it was looking into offering mutual funds and related financial products.

Almost 15 percent of Farm Family shares was sold in February 1997 to two of the country's largest investment companies: Franklin Resources of San Mateo, California (eight percent), and Fidelity Management and Research Co. of Boston (6.36 percent). A spokesman with the Center for Insurance Research was quick to suggest that, as predicted, policyholders were losing control of their company. By the time Farm Family held its first annual meeting since converting from mutual to stock ownership, another large block of shares, 6.67 percent of the total, was sold to Gotham Partners L.P. and an affiliate. Other large holders of Farm Family stock included Crabbe Huson Small Cap Fund and the Crabbe Huson Group Inc. of Portland, Oregon, with 7.4 percent, and W.R. Berkley Corp. of Connecticut, with 5.18 percent. During this time, the price of Farm Family stock climbed from its initial $16 per share to almost $23 per share.

At the annual meeting a stock option plan for employees was approved, with executives allowed to buy 215,000 shares at no less than 85 percent of the stock's fair market price, in order to create financial incentives for management (officers and directors held less than 12,000 shares in the company). Weber alone would receive an option on 75,000 shares. The stock option plan for other employees did not include discounts. In addition, papers filed in connection with the meeting indicated that Weber's base salary increased by 18.75 percent over the previous year and that the directors awarded him a $114,000 bonus in connection with the initial public stock offering.

By October 1997 the price of Farm Family stock had risen to a 52-week high of $30.75. In December the company announced a tentative agreement to purchase Farm Family Life and its subsidiary United Farm Family for $37.5 million, pending approval from stockholders and members of several Farm Bureaus that were stockholders of Farm Family Life. It would be another 18 months before the transaction was finalized and all the Farm Family insurance companies could be brought together under the publicly traded holding company.

Farm Family reported 1997 profits of $18.9 million on revenues of $173.7 million, a significant improvement over 1996 when the company reported a $6.9 million profit on $146.9 million. In the proxy statement released before its April 1998 annual meeting, it was revealed that four investors now owned 28 percent of the company's stock, with the largest block, nearly ten percent, held by the FMR Corp. of Boston. The filing also indicated that Weber's total compensation was up 28 percent over the previous year, increasing from $403,090 in 1996 to $518,815 in 1997.

On January 1, 1998, the reinsurance agreement between Farm Family Casualty and United Farm Family was terminated. United Farm Family then expanded its direct underwriting operations, selling the product portfolio of Farm Family Casualty in Maryland and Pennsylvania, increasing Farm Family's reach from ten states to 12. It was not until April 1999 that the acquisition of Farm Family Life and United Farm Family was finalized.

In February 1999, Farm Family reported that 1998 earnings were up 6.7 percent over the previous year. It also continued cost-cutting measures, including the reduction of its extended earnings program for sales agents. Although the price of its stock dropped almost four percent during the first few months of 1999, it made a dramatic gain, almost 11 percent, when in July it was announced that Farm Family would be added to the Russell 2000 Index of small-capitalization of stocks.

Profits declined slightly in 1999 compared with 1998, due to a one-time accounting change. Excluding that increase, Farm Family's operating income increased by 34 percent over the previous year. In April 2000, Farm Family held its annual meeting, and shareholders elected a new director to the company's board: Edward J. Muhl, the former New York State Superintendent of Insurance, who four years earlier had approved Farm Family's plan to demutualize.

Also in April 2000, charges against the Farm Bureau resurfaced on the CBS television show '60 Minutes.' The implication of the story was that Farm Bureau-affiliated insurance companies conflicted with the Farm Bureau's tax-exempt status and that the group was more concerned about the plight of large agribusinesses than with family farms. In addition, Defenders of Wildlife, an environmental group founded in 1947 that was bitterly opposed to some of the policy positions of the Farm Bureau, issued a white paper called 'Amber Waves of Gain,' intended to be an update of Dollar Harvest. The report was especially critical of Farm Bureau-affiliated insurance companies such as Farm Family: 'In many states, the nonprofit farm bureaus also own all or most of the stock of the insurance companies. And those stocks pay dividends to the state organizations. The farm bureaus also benefit from using insurance customers to inflate their membership members, since everyone who buys a policy must join the bureau. The insurance companies also benefit from the alliances. ... state farm bureaus have lobbied hard for limits on medical malpractice damage awards. And AFBF is pushing for privatization of Social Security, which could bring a profit windfall to insurance company and financial investment firm ventures. Relating any of those issues to agriculture is a far stretch, but they certainly affect the Farm Bureau's bottom line.'

In November 2000, Farm Family and American National Insurance Co. announced a merger, pending approval from the state Insurance Department and Farm Family shareholders. The $280 million transaction would make Farm Family a subsidiary of the larger Texas-based American National, allowing it to offer its agricultural insurance products in 46 states. Weber, who would serve as CEO of the American National subsidiary, said, 'It's a tremendous, tremendous opportunity for an organization like us.' He assured Farm Family customers that they would continue to work with the same agents and, as a result of the merger, also could expect a wider variety of products. Also as a result of the merger, according to SEC filings, Weber would received a $2.8 million cash payment for unexercised Farm Family stock options and, 18 months after the merger, would be in line to receive a $1.8 million retention payment. Concerning the proposed merger, the chairman of Farm Family's board, Clark W. Hinsdale III, commented, 'We didn't need to do this for any pressing reason, other than where we need to go in the future.'

Principal Subsidiaries: Farm Family Casualty Insurance Company; Farm Family Life Insurance Company; Farm Family Financial Services, Inc.; Rural Agency and Brokerage, Inc.

Principal Competitors: State Farm Insurance Companies; Merchants Group Inc.; Erie Indemnity Co.; Allstate Corporation.

Chronology

• Key Dates:

• 1919: Farm Bureau is established as a national organization.
• 1926: Ohio State Farm Bureau begins selling insurance.
• 1953: Northeastern Farm Bureaus establish Farm Family Life Insurance.
• 1955: Farm Family Mutual Insurance Company is established.
• 1988: United Farm Family is created as a subsidiary of Farm Family Life.
• 1996: Farm Family Mutual converts to stock ownership and becomes a subsidiary under newly created Farm Family Holdings, Inc.
• 1999: Farm Family Life and United Farm Family are purchased by Farm Family Holdings.
• 2000: Agreement is reached to sell Farm Family Holdings to American National Insurance Department.