<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------------------------
Commission File Number 33-94670-01
-------------------------------------
FARMERS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
95-0725935
(IRS Employer Identification No.)
4680 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices)(Zip Code)
(213) 932-3200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Registrant's Common Stock outstanding on June 30, 1996 was 1,000 shares.
<PAGE> 2
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 3
FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1996
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements
Consolidated Balance Sheets - Assets
June 30, 1996 and December 31, 1995 4
Consolidated Balance Sheets - Liabilities and Stockholder's Equity
June 30, 1996 and December 31, 1995 5
Consolidated Statements of Income
Six Month Period ended June 30, 1996 and June 30, 1995 6
Consolidated Statements of Income
Three Month Period ended June 30, 1996 and June 30, 1995 7
Consolidated Statement of Stockholder's Equity
Six Month Period ended June 30, 1996 8
Consolidated Statement of Stockholder's Equity
Six Month Period ended June 30, 1995 9
Consolidated Statements of Cash Flows
Six Month Period ended June 30, 1996 and June 30, 1995 10
Notes to Interim Financial Statements 11
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
PART II. OTHER INFORMATION 28
SIGNATURES 29
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Current assets, excluding life subsidiaries:
Cash and cash equivalents $ 686,787 $ 763,212
Marketable securities, at market value 112,266 94,138
Accrued interest 31,710 33,297
Accounts receivable, principally from affiliates 18,990 16,270
Notes receivable - affiliate 135,000 135,000
Deferred taxes 21,773 18,935
Prepaid expenses and other 9,843 12,551
------------- ------------
Total current assets 1,016,369 1,073,403
------------- ------------
Investments, excluding life subsidiaries:
Fixed maturities available for sale, at market value
(cost: $264,942 and $304,863) 268,036 311,594
Certificates in surplus of exchanges 649,380 484,380
Real estate, at cost (net of accumulated depreciation:
$15,352 and $14,843) 49,381 49,809
Joint ventures, at equity 11,849 12,459
------------- ------------
978,646 858,242
------------- ------------
Other assets, excluding life subsidiaries:
Notes receivable - affiliate 207,600 207,600
Goodwill (net of accumulated amortization: $450,330 and $420,308) 1,951,425 1,981,447
Attorney-in-fact contracts (net of accumulated amortization:
$320,444 and $299,082) 1,388,599 1,409,961
Other assets 319,166 314,423
------------- ------------
3,866,790 3,913,431
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $141,415 and $139,591) 343,510 340,438
------------- ------------
Investments of life subsidiaries:
Fixed maturities available for sale, at market value
(cost: $3,630,901 and $3,342,199) 3,642,584 3,506,572
Mortgage loans on real estate 136,610 148,852
Non-redeemable preferred stocks available for sale, at market
value (cost: $19,769 and $34,127) 16,300 36,305
Common stocks available for sale, at market value
(cost: $295,612 and $271,599) 353,479 333,661
Policy loans 176,294 165,265
Real estate, at cost (net of accumulated depreciation:
$17,253 and $16,240) 66,259 69,379
Joint ventures, at equity 10,110 13,267
------------- ------------
4,401,636 4,273,301
------------- ------------
Other assets of life subsidiaries:
Cash and cash equivalents 40,024 149,794
Accrued investment income 55,540 51,377
Deferred policy acquisition costs and value of life business
acquired 1,015,492 964,861
Notes receivable - affiliate 64,400 64,400
Other assets 270,887 226,603
Assets held in separate account 737,716 714,794
------------- ------------
2,184,059 2,171,829
------------- ------------
Total assets $ 12,791,010 $ 12,630,644
============= ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 5
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Current liabilities, excluding life subsidiaries:
Notes and accounts payable:
Affiliates $ 19,271 $ 1,748
Other 222,815 228,797
Accrued liabilities:
Profit sharing 27,129 51,274
Income taxes (5,238) 556
Other 35,767 24,821
------------ ------------
Total current liabilities 299,744 307,196
------------ ------------
Other liabilities, excluding life subsidiaries:
Real estate mortgages payable 277 333
Non-current deferred taxes 666,831 674,578
Other 114,538 109,432
------------ ------------
781,646 784,343
------------ ------------
Liabilities of life subsidiaries:
Policy liabilities:
Future policy benefits 3,351,451 3,213,562
Claims 30,225 32,192
Policyholder dividends 13,433 13,594
Other policyholder funds 71,738 73,568
Income taxes (including deferred taxes: $207,218 and $248,717) 205,277 249,349
Unearned investment income 2,176 2,221
Other liabilities 272,996 246,177
Liabilities related to separate account 737,716 714,794
------------ ------------
4,685,012 4,545,457
------------ ------------
Total liabilities 5,766,402 5,636,996
------------ ------------
Commitments and contingencies
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 500,000 500,000
------------ ------------
Stockholder's Equity:
Common stock, $1 par value per share; authorized, issued
and outstanding: as of June 30, 1996 and
December 31, 1995--1,000 shares 1 1
Additional capital 5,212,618 5,212,618
Unrealized gains (net of deferred taxes of $23,851
and $67,545) 43,883 124,962
Retained earnings 1,268,106 1,156,067
------------ ------------
Total stockholder's equity 6,524,608 6,493,648
------------ ------------
Total liabilities and stockholder's equity $ 12,791,010 $ 12,630,644
============ ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 6
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six month period
ended June 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 998,785 $ 925,941
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 618,262 $ 582,613
----------- -----------
Salaries and employee benefits 171,572 174,341
Buildings and equipment expenses 27,871 28,769
Amortization of AIF contracts and goodwill 51,384 51,384
General and administrative expenses 97,860 94,149
----------- ----------
Total operating expenses 348,687 348,643
----------- ----------
Operating income 269,575 233,970
Net investment income 55,875 34,823
Dividends on preferred securities of subsidiary trusts (21,035) 0
----------- ----------
Income before provision for taxes 304,415 268,793
Provision for income taxes 123,130 109,367
----------- ----------
Management services income 181,285 159,426
----------- ----------
Life subsidiaries:
Premiums 83,738 77,905
Policy charges 118,810 107,646
Investment income, net of expenses 156,268 144,207
Net realized gains 21,707 13,570
----------- -----------
Total revenues 380,523 343,328
----------- -----------
Policy benefits 73,440 70,716
Increase in liability for future policy benefits 5,548 4,152
Interest credited to policyholders 82,647 74,559
Amortization of deferred policy acquisition costs and
value of life business acquired 56,274 53,630
Commissions 10,599 9,618
General and administrative expenses 30,824 29,857
----------- -----------
Total operating expenses 259,332 242,532
----------- -----------
Income before provision for taxes 121,191 100,796
Provision for income taxes 40,487 33,575
----------- -----------
Life subsidiaries income 80,704 67,221
----------- -----------
Consolidated net income $ 261,989 $ 226,647
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 7
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three month period
ended June 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 494,700 $ 465,896
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 311,677 $ 292,226
----------- -----------
Salaries and employee benefits 84,336 86,259
Buildings and equipment expenses 14,180 14,210
Amortization of AIF contracts and goodwill 25,692 25,692
General and administrative expenses 47,149 47,126
----------- ----------
Total operating expenses 171,357 173,287
----------- ----------
Operating income 140,320 118,939
Net investment income 28,153 17,289
Dividends on preferred securities of subsidiary trusts (10,517) 0
----------- ----------
Income before provision for taxes 157,956 136,228
Provision for income taxes 63,680 55,625
----------- ----------
Management services income 94,276 80,603
----------- ----------
Life subsidiaries:
Premiums 41,212 39,842
Policy charges 60,090 54,285
Investment income, net of expenses 79,651 73,871
Net realized gains 2,070 5,672
----------- -----------
Total revenues 183,023 173,670
----------- -----------
Policy benefits 36,040 35,565
Increase in liability for future policy benefits 2,442 2,747
Interest credited to policyholders 41,858 38,164
Amortization of deferred policy acquisition costs and
value of life business acquired 28,482 27,225
Commissions 5,354 5,193
General and administrative expenses 15,774 15,037
----------- -----------
Total operating expenses 129,950 123,931
----------- -----------
Income before provision for taxes 53,073 49,739
Provision for income taxes 17,619 16,551
----------- -----------
Life subsidiaries income 35,454 33,188
----------- -----------
Consolidated net income $ 129,730 $ 113,791
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 8
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the six month period ended June 30, 1996
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized Total
Common Additional Gains/(Losses) Retained Stockholder's
Stock Capital On Investments Earnings Equity
-------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 1 $ 5,212,618 $ 124,962 $1,156,067 $ 6,493,648
Net income 261,989 261,989
Change in net unrealized
gains/(losses) on
investments net
of tax of ($43,694) (81,079) (81,079)
Cash dividends paid (149,950) (149,950)
-------- ----------- ------------- ---------- ------------
Balance, June 30, 1996 $ 1 $ 5,212,618 $ 43,883 $1,268,106 $ 6,524,608
======== =========== ============= ========== ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 9
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the six month period ended June 30, 1995
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized Total
Common Additional Gains/(Losses) Retained Stockholder's
Stock Capital On Investments Earnings Equity
-------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 1 $ 5,212,618 $ (35,146) $ 970,537 $ 6,148,010
Net income 226,647 226,647
Change in net unrealized
gains/(losses) on
investments net
of tax of $48,894 90,784 90,784
Cash dividends paid (142,600) (142,600)
-------- ------------ ------------- ---------- ------------
Balance, June 30, 1995 $ 1 $ 5,212,618 $ 55,638 $1,054,584 $ 6,322,841
======== ============ ============= ========== ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 10
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six month period
ended June 30,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Consolidated net income $ 261,989 $ 226,647
Non-cash and operating activities adjustments:
Depreciation and amortization 69,039 68,307
Amortization of deferred policy acquisition costs and
value of life business acquired 56,274 53,630
Policy acquisition costs deferred (66,195) (67,355)
Life insurance policy liabilities 133,931 173,183
Equity in earnings of joint ventures 820 (53)
Gain on sales of assets (24,111) (14,971)
Changes in assets and liabilities:
Current assets and liabilities 12,186 259,740
Non-current assets and liabilities (54,140) (84,869)
Other, net (6,109) (8,127)
---------- -----------
Net cash provided by operating activities 383,684 606,132
---------- -----------
Cash Flows from Investing Activities:
Purchases of investments available for sale (579,077) (326,811)
Purchases of investments held to maturity 0 (74,580)
Purchases of properties (24,239) (24,028)
Purchase of surplus certificates of the Exchanges (165,000) (250,000)
Proceeds from sales and maturities of investments
available for sale 320,653 168,808
Proceeds from calls and maturities of investments
held to maturity 0 30,762
Proceeds from sales of properties 11,901 8,543
Mortgage loan collections 11,548 8,132
Other, net 4,750 15,433
---------- -----------
Net cash used in investing activities (419,464) (443,741)
---------- -----------
Cash Flows from Financing Activities:
Dividends paid to stockholder (149,950) (142,600)
Payment of real estate mortgages payable (56) (61)
Issuance cost of cumulative quarterly income
preferred securities (409) 0
---------- -----------
Net cash used in financing activities (150,415) (142,661)
---------- -----------
Increase/(decrease) in cash and cash equivalents (186,195) 19,730
Cash and cash equivalents - at beginning of year 913,006 539,361
---------- -----------
Cash and cash equivalents - at end of period $ 726,811 $ 559,091
========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 11
FARMERS GROUP, INC.
AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
A. Basis of presentation and summary of significant accounting policies
The accompanying consolidated balance sheet of Farmers Group, Inc. and
subsidiaries (the "Company") as of June 30, 1996, the related consolidated
statements of income, stockholder's equity and cash flows for the six month
periods ended June 30, 1996 and June 30, 1995, and the consolidated statements
of income for the three months ended June 30, 1996 and June 30, 1995, have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim periods and are unaudited. However, in management's
opinion, the consolidated financial statements include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of results for such interim periods. These statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read
in conjunction with the consolidated balance sheets of the Company as of
December 31, 1995 and 1994, and the related consolidated statements of income,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1995.
Interim results are not necessarily indicative of results for the
full year. All material inter-company transactions have been eliminated.
Certain amounts applicable to prior years have been reclassified to conform
with the 1996 presentation.
The preparation of the Company's financial statements in conformity
with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
In December 1988, BATUS Inc. ("BATUS"), a subsidiary of B.A.T
Industries p.l.c. ("B.A.T"), acquired 100% ownership of the Company for
$5,212,619,000 in cash, including related expenses, through its wholly owned
subsidiary BATUS Financial Services. Immediately thereafter, BATUS Financial
Services was merged into Farmers Group, Inc.. The acquisition was accounted
for as a purchase and, accordingly, the acquired assets and liabilities were
recorded in the Company's consolidated balance sheets based on their estimated
fair values at December 31, 1988. In January 1990, ownership of the Company
was ultimately transferred to South Western Nominees Limited, a subsidiary of
B.A.T.
The Company is attorney-in-fact for three inter-insurance exchanges:
Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance
Exchange (collectively, the "Exchanges"), which operate in the property and
casualty insurance industry. As attorney-in-fact, Farmers Group, Inc.,
or its subsidiaries, as applicable, manages the affairs of the Exchanges,
their respective subsidiaries and Farmers Texas County Mutual Insurance
Company
<PAGE> 12
(collectively, the "P&C Group") and receives compensation based on
a percentage of earned premiums.
The Company's life insurance operations are conducted by three wholly
owned subsidiaries, Farmers New World Life Insurance Company, The Ohio State
Life Insurance Company and Investors Guaranty Life Insurance Company (the
"Life Subsidiaries"). They market a broad line of individual life insurance
products, including universal life, term life and whole life insurance, and
annuity products, predominately flexible premium deferred annuities.
In 1996, the Company adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of". This Statement, effective for fiscal years beginning
after December 15, 1995, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
Statement did not have a material impact on the Company's consolidated
financial statements.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". This Statement, effective for fiscal years beginning after
December 15, 1995, establishes accounting and disclosure requirements using a
fair value based method of accounting for stock-based employee compensation
plans. Under SFAS No. 123, the Company may either adopt the new fair value
based accounting method or continue to apply the intrinsic value based method
and provide pro forma disclosures of net income and earnings per share as if
the accounting provisions of SFAS No. 123 had been adopted. The Company
adopted only the disclosure requirements of SFAS No. 123; therefore, the
adoption of this Statement had no effect on its consolidated financial
statements.
B. Material contingencies
The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery and
development, and some seek punitive as well as compensatory damages. In the
opinion of management, the Company has not engaged in any conduct which should
warrant the award of any material punitive or compensatory damages. The
Company intends to vigorously defend its position in each case, and management
believes that, while it is not possible to predict the outcome of such matters
with absolute certainty, ultimate disposition of these proceedings should not
have a material adverse effect on the Company's consolidated results of
operations or financial position.
C. Investments
The Company follows the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". This Statement addresses
the accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
As of June 30, 1996 and Decenber 31, 1995, the Company has classified all
<PAGE> 13
investments in equity and debt securities as available for sale under SFAS
No. 115. These investments are reported at fair value, with unrealized gains
and losses, net of taxes, excluded from earnings and reported as a component
of stockholder's equity.
On November 15, 1995, the FASB issued a special report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities", in which they discussed a "fresh start"
transition provision that allowed reporting entities to reassess their
securities holdings that were classified pursuant to the provisions in
SFAS No. 115. As a result of this "fresh start", the Company decided to
reclassify all of its debt securities originally classified as held to
maturity under SFAS No. 115 to available for sale as of December 31, 1995.
In compliance with a Securities and Exchange Commission ("SEC") staff
announcement, the Company has recorded certain entries to the Deferred Policy
Acquisition Costs ("DAC") asset and Value of Life Business Acquired in
connection with SFAS No. 115. The SEC requires that companies record entries
to those assets and liabilities that would have been adjusted had the
unrealized investment gains or losses from securities classified as available
for sale actually been realized, with corresponding credits or charges
reported directly to stockholder's equity.
The sources of investment income on securities owned by the Company
(excluding the Life Subsidiaries) for the three month and the six month
periods ended June 30 are:
<TABLE>
<CAPTION>
Three month period Six month period
ended June 30, ended June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Related parties:
Interest income $ 15,034 $ 9,782 $ 29,969 $ 19,551
---------- ---------- ---------- ----------
Total related parties 15,034 9,782 29,969 19,551
---------- ---------- ---------- ----------
Non-related parties:
Interest income --
fixed income securities 11,040 5,878 22,397 11,894
Dividend income 1,341 1,076 2,616 2,366
Interest income --
short-term instruments 3,083 2,970 5,750 6,374
Realized investment gains, net 917 535 1,726 779
Investment expenses (4,125) (4,125) (8,250) (8,250)
Other 863 1,173 1,667 2,109
---------- ---------- ---------- ----------
Total non-related parties 13,119 7,507 25,906 15,272
---------- ---------- ---------- ----------
Total investment income $ 28,153 $ 17,289 $ 55,875 $ 34,823
by component ========== ========== ========== ==========
</TABLE>
<PAGE> 14
The sources of investment income on securities owned by the Life
Subsidiaries for the three month and the six month periods ended June 30 are:
<TABLE>
<CAPTION>
Three month period Six month period
ended June 30, ended June 30,
--------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Fixed income securities $ 65,089 $ 59,196 $ 124,633 $ 115,800
Equity securities 7,066 6.967 13,996 13,546
Mortgage loans 3,706 4,122 7,527 8,677
B.A.T Capital Corporation notes 841 936 2,468 2,387
Owned real estate 2,584 2,662 5,144 5,291
Policy loans 2,985 2,524 5,888 5,104
Short-term instruments 635 998 2,222 1,648
Other 47 541 1,267 (75)
Investment expenses (3,302) (4,075) (6,877) (8,171)
---------- ---------- ----------- ----------
Total investment income by component $ 79,651 $ 73,871 $ 156,268 $ 144,207
========== ========== =========== ==========
</TABLE>
Realized gains and losses on sales, redemptions and writedowns of
investments owned by the Company (excluding the Life Subsidiaries) are
determined based on either the cost of the individual securities or the
amortized cost of real estate. Net realized investment gains or losses
for the three month and the six month periods ended June 30 are:
<TABLE>
<CAPTION>
Three month period Six month period
ended June 30, ended June 30,
--------------------------- ----------------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Bonds $ 17 $ 24 $ 410 $ 26
Redeemable preferred stocks (93) 3 (72) 14
Investment real estate 993 508 1,388 739
---------- --------- ----------- ----------
Net realized investment gains $ 917 $ 535 $ 1,726 $ 779
========== ========= ========== ==========
</TABLE>
Realized gains and losses on sales, redemptions and writedowns of
investments owned by the Life Subsidiaries are determined based on
either the cost of the individual securities or the amortized cost of
real estate. Net realized investment gains or losses for the three month
and the six month periods ended June 30 are:
<TABLE>
<CAPTION>
Three month period Six month period
ended June 30, ended June 30,
-------------------------- ---------------------------
1996 1995 1996 1995
--------- --------- --------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Bonds $ (289) $ (112) $ (58) $ 1,137
Redeemable preferred stocks (167) (128) (173) (130)
Non-redeemable preferred stocks 363 247 754 491
Common stocks 2,728 5,972 22,916 12,682
Investment real estate (565) (334) (1,034) (608)
Other 0 27 (698) (2)
--------- --------- --------- ----------
Net realized investment gains $ 2,070 $ 5,672 $ 21,707 $ 13,570
========= ========= ========= ==========
</TABLE>
<PAGE> 15
Gross unrealized gains or losses of the Life Subsidiaries
pertaining to non-redeemable preferred stocks and common stocks stated
at quoted market values as of June 30, 1996 and December 31, 1995 are:
<TABLE>
<CAPTION>
Gains Losses Net
1996 ----------- ----------- ----------
- ---- (Amounts in thousands)
<S> <C> <C> <C>
Non-redeemable preferred stocks $ 1,657 $ (5,126) $ (3,469)
Common stocks 68,975 (11,108) 57,867
---------- ----------- ----------
$ 70,632 $ (16,234) 54,398
========== ===========
Less deferred federal income taxes 19,039
----------
$ 35,359
==========
1995
- ----
Non-redeemable preferred stocks $ 4,138 $ (1,960) $ 2,178
Common stocks 81,243 (19,181) 62,062
---------- ----------- ----------
$ 85,381 $ (21,141) 64,240
========== ===========
Less deferred federal income taxes 22,484
----------
$ 41,756
==========
</TABLE>
The amortized cost, gross unrealized gains and losses, and
estimated market values of investments in debt securities, including
bonds and redeemable preferred stocks, owned by the Company (excluding
the Life Subsidiaries) are as follows:
<TABLE>
<CAPTION>
As of June 30, 1996
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Debt Securities Available for Sale,
including Marketable Securities
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 55 $ 2 $ 0 $ 57
Obligations of states and political
subdivisions 290,023 2,939 (197) 292,765
Corporate securities 20,020 18 0 20,038
Other debt securities 67,110 1,208 (876) 67,442
--------- ---------- ---------- ---------
Total $ 377,208 $ 4,167 $ (1,073) $ 380,302
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1995
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Debt Securities Available for Sale,
including Marketable Securities
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 55 $ 5 $ 0 $ 60
Obligations of states and political
subdivisions 304,652 4,439 (27) 309,064
Corporate securities 20,020 0 (20) 20,000
Other debt securities 74,274 2,760 (426) 76,608
--------- ---------- ---------- ---------
Total $ 399,001 $ 7,204 $ (473) $ 405,732
========= ========== ========== =========
</TABLE>
<PAGE> 16
The amortized cost, gross unrealized gains and losses, and
estimated market values of investments in debt securities, including
bonds and redeemable preferred stocks, owned by the Life Subsidiaries
are as follows:
<TABLE>
<CAPTION>
As of June 30, 1996
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Debt Securities Available for Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 311,457 $ 7,309 $ (5,059) $ 313,707
Obligations of states and political
subdivisions 346,151 5,686 (8,760) 343,077
Debt securities issued by foreign governments 79,026 8,146 (192) 86,980
Corporate securities 896,189 29,826 (15,655) 910,360
Mortgage-backed securities 1,761,486 31,920 (40,306) 1,753,100
Other debt securities 236,592 4,609 (5,841) 235,360
---------- ---------- ---------- ----------
Total $3,630,901 $ 87,496 $ (75,813) $3,642,584
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1995
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Debt Securities Available for Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 302,556 $ 19,083 $ (185) $ 321,454
Obligations of states and political
subdivisions 311,482 16,066 (737) 326,811
Debt securities issued by foreign governments 75,708 4,641 (2,778) 77,571
Corporate securities 849,734 57,467 (5,076) 902,125
Mortgage-backed securities 1,558,198 70,134 (5,826) 1,622,506
Other debt securities 244,521 14,018 (2,434) 256,105
---------- ---------- ---------- ----------
Total $3,342,199 $ 181,409 $ (17,036) $3,506,572
========== ========== ========== ==========
</TABLE>
Proceeds received by the Company from sales and maturities of securities
available for sale were $320,653,000 and $168,808,000 for the six months
ended June 30, 1996 and June 30, 1995, respectively. Gross gains of
$5,881,000 and $8,326,000 and gross losses of $3,322,000 and $2,090,000 were
realized on sales and writedowns for the three months ended June 30, 1996 and
June 30, 1995, respectively. Gross gains of $29,725,000 and $17,044,000 and
gross losses of $5,948,000 and $2,594,000 were realized on sales and
writedowns for the six months ended June 30, 1996 and June 30, 1995,
respectively.
<PAGE> 17
The change in the net unrealized gains or losses of the Company
(excluding the Life Subsidiaries) for the periods ended June 30, 1996
and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(Amounts in thousands)
<S> <C> <C>
Fixed maturities $ (3,637) $ 10,152
Equity securities 0 0
</TABLE>
The change in the net unrealized gains or losses of the Life Subsidiaries
for the periods ended June 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(Amounts in thousands)
<S> <C> <C>
Fixed maturities $ (152,690) $ 345,802
Equity securities (9,842) 34,235
</TABLE>
D. Security Lending Arrangement
The Life Subsidiaries have security lending agreements with a financial
institution. The agreements in effect as of June 30, 1996 authorize the
institution to lend securities held in the Life Subsidiaries' portfolios
to a list of authorized borrowers. Concurrent with delivery of the securities,
the borrower provides the Life Subsidiaries with cash collateral equal to at
least 102% of the market value of domestic securities and 105% of the market
value of other securities subject to the "loan".
The securities are marked-to-market on a daily basis and the collateral
is increased or decreased on the next business day. The collateral is
invested in highly liquid, fixed income assets with a maturity of less than
one year. The collateral under these agreements was $220,846,000 and
$195,377,000 as of June 30, 1996 and December 31, 1995, respectively, and
was recorded in both Other Assets and Other Liabilities of Life Subsidiaries.
For the three month and the six month periods ended June 30, 1996 and 1995,
income earned from the security lending arrangement was allocated 60% to the
Life Subsidiaries and 40% to the financial institution. Income earned by the
Life Subsidiaries was $109,000 and $70,000 for the three months ended
June 30, 1996 and 1995, respectively, and $205,000 and $109,000 for the six
months ended June 30, 1996 and 1995, respectively.
<PAGE> 18
E. Supplemental cash flow information
For financial statement purposes, the Company considers all investments
with original maturities of 90 days or less as cash equivalents. Following
is a reconciliation of the individual balance sheet cash and cash
equivalent totals to the consolidated cash flow total.
<TABLE>
<CAPTION>
Excluding
Life Life
Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash and cash equivalents -- December 31, 1994 $ 415,064 $ 124,297 $ 539,361
Activity through June 1995 19,730
---------
Cash and cash equivalents -- June 30, 1995 449,685 109,406 $ 559,091
=========
Cash and cash equivalents -- December 31, 1995 763,212 149,794 $ 913,006
Activity through June 1996 (186,195)
---------
Cash and cash equivalents -- June 30, 1996 686,787 40,024 $ 726,811
=========
</TABLE>
Cash payments for interest were $8,568,000 and $8,703,000, while cash
payments for income taxes were $196,552,000 and $178,092,000, for the six
month periods ended June 30, 1996 and June 30, 1995, respectively.
F. Related parties
The Company received management fees from the Exchanges of $292,374,000
and $273,808,000 for the three months ended June 30, 1996 and June 30, 1995,
respectively, and $580,002,000 and $546,149,000 for the six months ended
June 30, 1996 and June 30, 1995, respectively.
As of June 30, 1996, the Company had $407,000,000 in notes receivable
related to loans made to B.A.T Capital Corporation, a subsidiary of B.A.T
Industries. These notes are fixed rate medium-term notes with maturity dates
as follows: $135,000,000 in October 1996, $135,000,000 in October 1997, and
$137,000,000 in October 1998. Interest on these notes is paid semi-annually
at coupon rates of 4.76%, 5.10% and 5.35%, respectively. Income earned on
these notes was $5,160,000 for the three months ended June 30, 1996 and
June 30, 1995, and was $10,320,000 and $10,376,000 for the six months ended
June 30, 1996 and June 30, 1995, respectively.
As of June 30, 1996, the Company had revolving credit agreements with
certain financial institutions and had an aggregate borrowing facility of
$600,000,000, of which $500,000,000 was available for five years. The
proceeds of the $600,000,000 borrowing facility were available to the Company
for general corporate purposes, including loans to the Exchanges. Facility
fees were payable on $100,000,000 of the aggregate borrowing facility in the
amount of 10 basis points per annum and were payable on $500,000,000 of the
aggregate borrowing facility in the amount of 9 basis points per annum and
were reimbursable to the Company by the Exchanges. In the case of a draw on
$100,000,000 of the aggregate borrowing facility, interest for the relevant
borrowing period was payable periodically at an annual rate equal to the
London Interbank Offered Rate ("LIBOR"), plus
<PAGE> 19
20 basis points. In the case of a draw on $500,000,000 of the aggregate
borrowing facility, the Company has the option to borrow at annual rates
equal to the prime rate, the banks' certificate of deposit rate plus 1%,
the federal funds effective rate plus 1/2 of 1% or the LIBOR rate plus
certain percentages. As of June 30, 1996, the Company did not have any
outstanding borrowings under the revolving credit agreements. Facility
fees were $91,000 for the three month period ended June 30, 1996 and
$269,000 for the six month period ended June 30, 1996, These facility
fees were reimbursed by the Exchanges. The revolving credit agreements
expire as follows: $100,000,000 in July 1996 and $500,000,000 in April 2001.
As of June 30, 1995, the Company had revolving credit agreements with
certain financial institutions and had an aggregate borrowing facility of
$500,000,000. The proceeds of the facility were available to the Company
for general corporate purposes, including loans to the Exchanges. Facility
fees were payable on the aggregate borrowing facility in the amount of 10
basis points per annum and were reimbursable to the Company by the Exchanges.
In the case of a draw on the facility, interest for the relevant borrowing
period was payable periodically at an annual rate equal to LIBOR, plus 20
basis points. As of June 30, 1995, the Company did not have any outstanding
borrowings under the revolving credit agreements. Facility fees were $149,000
for the three month period ended June 30, 1995 and $251,000 for the six
month period ended June 30, 1995, These facility fees were reimbursed by the
Exchanges.
G. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures
In 1995, Farmers Group Capital and Farmers Group Capital II (the
"Subsidiary Trusts"), consolidated wholly owned subsidiaries of Farmers
Group, Inc., issued $410 million of 8.45% Cumulative Quarterly Income
Preferred Securities ("QUIPS"), Series A and $90 million of 8.25% QUIPS,
Series B, respectively. In connection with the Subsidiary Trusts' issuance
of the QUIPS and the related purchase by Farmers Group, Inc. of all of the
Subsidiary Trusts' Common Securities ("Common Securities"), Farmers Group, Inc.
issued to Farmers Group Capital $422,680,399 principal amount of its 8.45%
Junior Subordinated Debentures, Series A due on December 31, 2025, (the
"Junior Subordinated Debentures, Series A") and issued to Farmers Group
Capital II $92,783,505 principal amount of its 8.25% Junior Subordinated
Debentures, Series B due on December 31, 2025 (the "Junior Subordinated
Debentures, Series B" and, together with the Junior Subordinated Debentures,
Series A, the "Junior Subordinated Debentures"). The sole assets of Farmers
Group Capital are the Junior Subordinated Debentures, Series A. The sole
assets of Farmers Group Capital II are the Junior Subordinated Debentures,
Series B. In addition, these arrangements are governed by various agreements
between Farmers Group, Inc. and the Subsidiary Trusts (the Guarantee
Agreements, the Trust Agreements, the Expense Agreements, the Indentures and
the Junior Subordinated Debentures) which considered together constitute a
full and unconditional guarantee by Farmers Group, Inc. of the Subsidiary
Trusts' obligations under the Preferred Securities.
Under certain circumstances, the Junior Subordinated Debentures may be
distributed to holders of the QUIPS and holders of the Common Securities in
liquidation of the Subsidiary Trusts. The QUIPS are subject to mandatory
redemption upon repayment of the Junior Subordinated Debentures at maturity,
or upon their earlier redemption, at a redemption price of $25 per Preferred
Security, plus accrued and unpaid distributions thereon to the date fixed for
redemption. Farmers
<PAGE> 20
Group, Inc. will have the option at any time on or after September 27, 2000 to
redeem, in whole or part, the Junior Subordinated Debentures.
As of June 30, 1996, a total of 20,000,000 shares of QUIPS were
outstanding.
H. Certificates in surplus of exchanges
On June 27, 1996, the Company, as attorney-in-fact for the Exchanges,
made a surplus contribution to the Exchanges totaling $165,000,000.
In return, the Company received certificates of contribution which bear
interest at 8.95% annually.
The Company also made surplus contributions to the Exchanges in 1995 and
1986 totaling $250,000,000 and $200,000,000, respectively. In return, the
Company received certificates of contribution for those amounts which
currently bear interest annually at 8.95% for the 1995 certificate and 9.25%
for the 1986 certificate. The Company has, from time to time, made other
surplus contributions to the Exchanges totaling $34,380,000, receiving
certificates of contribution which bear interest at various rates.
Conditions governing repayment of these amounts are outlined in the
certificates. Generally, repayment may be made only when the surplus balance
of the appropriate Exchange reaches a certain specified level, and then only
after approval is granted by the Exchange Board of Governors and the
California Insurance Commissioner.
I. Subsequent events
On July 1, 1996, the Company received $200,000,000 from the Exchanges
in repayment of the surplus contribution made by the Company in
1986 (see Note H). In addition, on July 17, 1996, the Company repaid the
$200,000,000 of 8.25% Notes Payable issued by the Company in July 1986.
<PAGE> 21
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is engaged in the management of property and casualty
insurance companies and the underwriting of life insurance and annuity
products. The Company does not own any property and casualty insurers, but
rather serves as the manager of the P&C Group. The Company receives a
management fee based on the gross premiums earned by the P&C Group. Revenues
and expenses relating to both of these principal business activities are
reflected in the Company's Consolidated Financial Statements prepared in
accordance with GAAP, which differs from the statutory accounting practices
("SAP"), which the Life Subsidiaries are required to use for regulatory
reporting purposes.
The Company underwrites life insurance and annuity products through its
three life insurance subsidiaries. Revenues attributable to traditional life
insurance products, such as whole life or term insurance contracts, are
classified as premiums as they become due. Future benefits are associated with
such premiums (through increases in liabilities for future policy benefits),
and prior period capitalized costs are amortized (through amortization of
DAC) so that profits are generally recognized over the same period as revenue
income. Revenues attributable to Universal Life ("UL") products consist of
policy charges for the cost of insurance, policy administration charges,
surrender charges, and investment income on assets allocated to support
policyholder account balances on deposit. Revenues for deferred annuity
products consist of surrender charges and investment income on assets
allocated to support policyholder account balances. Expenses on UL and
annuity policies include interest credited to policyholders on policy
balances as well as benefit claims incurred in excess of policy account
balances.
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $292.2 million for
the three months ended June 30, 1995 to $311.7 million for the three months
ended June 30, 1996, an increase of $19.5 million, or 6.7%. Operating revenues
primarily consist of management fees paid to the Company as a percentage of
gross premiums earned by the P&C Group. Such premiums increased from
$2,234.6 million in the second quarter of 1995 to $2,365.0 million in the
second quarter of 1996 due primarily to continued growth in Personal lines
premiums as a result of higher average premiums and an increase in the number
of policies-in-force.
Total Operating Expenses. Total operating expenses as a percentage of
operating revenues decreased from 59.3% for the three months ended
June 30, 1995 to 55.0% for the three months ended June 30, 1996, a decrease
of 4.3%. The Company continues to realize savings as a result of automation,
consolidation efforts and greater use of information technology systems.
In particular, labor costs (salaries and benefits), fell from 29.5% of
operating revenues for the three months ended June 30, 1995 to 27.1% of
operating revenues for the three months ended June 30, 1996.
<PAGE> 22
Salaries and Employee Benefits. Salaries and employee benefits
decreased from $86.3 million for the three months ended June 30, 1995 to
$84.4 million for the three months ended June 30, 1996, a decrease of $1.9
million, or 2.2%, primarily due to a reduction in employee complement.
Buildings and Equipment Expenses. Buildings and equipment expenses
remained constant at $14.2 million for the three month periods ended
June 30, 1995 and June 30, 1996. A decrease in computer mainframe related
expenses was offset by an increase in software related expenses.
Amortization of Attorney-In-Fact Contracts and Goodwill. Purchase
accounting entries related to the acquisition of the Company by B.A.T
Industries p.l.c. in December 1988 include goodwill (capitalized at
$2.4 billion) and the value of the attorney-in-fact contracts of the P&C
Group (capitalized at $1.7 billion). Amortization of these two items,
which is being taken on a straight-line basis over forty years, reduced
pretax income by approximately $25.7 million in each of the three month
periods ended June 30, 1996 and June 30, 1995.
General and Administrative Expenses. General and administrative
expenses remained constant at $47.1 million for the three month periods
ended June 30, 1995 and June 30, 1996. An increase in expense due to the
amortization of new information technology systems software was offset by
a decrease in various other operating expenses.
Net Investment Income. Net investment income increased from $17.3
million for the three months ended June 30, 1995 to $28.2 million for the
three months ended June 30, 1996 due to a larger invested asset base in
1996.
Dividends on Preferred Securities of Subsidiary Trusts. As a result of
the $500.0 million of Cumulative Quarterly Income Preferred Securities
("QUIPS") issued in 1995, dividend expense for the three months ended June
30, 1996 was $10.5 million.
Provision for Income Taxes. Provision for income taxes increased from
$55.6 million for the three months ended June 30, 1995 to $63.7 million
for the three months ended June 30, 1996, an increase of $8.1 million, or
14.6%. This increase is primarily attributable to the increase in pretax
operating income between years.
Management Services Income. As a result of the foregoing, management
services income increased from $80.6 million for the three months ended
June 30, 1995 to $94.3 million for the three months ended June 30, 1996,
an increase of $13.7 million, or 17.0%.
<PAGE> 23
Life Subsidiaries
Total Revenues. Total revenues increased from $173.7 million for the
three months ended June 30, 1995 to $183.0 million for the three months
ended June 30, 1996, an increase of $9.3 million, or 5.4%. Premiums increased
$1.3 million for the three months ended June 30, 1996, or 3.3%, over the three
months ended June 30, 1995. This increase is due to growth in renewal and
first year business. The increase in renewal premiums is attributable to
growth in traditional life insurance in-force resulting from improved
persistency and an increase in average policy size. The higher first year
premiums are due primarily to growth in Premier Whole Life ("PWL") and
Mortgage Protection Plan products. Policy charges increased $5.8 million for
the three months ended June 30, 1996, or 10.7%, over the three months ended
June 30, 1995, reflecting continued growth in universal life-type insurance
in-force. Net investment income increased $5.8 million in the three months
ended June 30, 1996, or 7.8%, over the three months ended June 30, 1995 due
largely to higher bond interest income resulting primarily from a higher
invested asset base. Net realized gains decreased by $3.6 million, from
$5.7 million in the three months ended June 30, 1995 to $2.1 million in the
three months ended June 30, 1996. This decrease is the result of lower
gains realized on common stock sales in the three months ended June 30, 1996
than in the three months ended June 30, 1995.
Total Operating Expenses. Total operating expenses increased from $123.9
million for the three months ended June 30, 1995 to $130.0 million for the
three months ended June 30, 1996, an increase of $6.1 million, or 4.9%.
Policyholders' Benefits. Policyholders' benefits expense increased
from $76.5 million for the three months ended June 30, 1995 to $80.3
million for the three months ended June 30, 1996, an increase of $3.8
million, or 5.0%. Policy benefits, which consist primarily of death and
surrender benefits on life products, increased $0.4 million over
June 30, 1995 to $36.0 million. Although policy benefits have increased
as a result of a 9.8% increase in the volume of insurance in-force, death
claims have not increased at the same rate as in-force due to lower
traditional death claims per thousand. Increase in liability for future
benefits expense decreased from $2.7 million in the three months ended
June 30, 1995 to $2.4 million for the three months ended June 30, 1996.
This decrease is primarily attributable to a decrease in Annuity in
Payment ("AIP") premiums for the three months ended June 30, 1996.
Interest credited to policyholders, which represents the amount credited
under universal life-type contracts and deferred annuities for policyholder
funds on deposit, increased from $38.2 million for the three months ended
June 30, 1995 to $41.9 million for the three months ended June 30, 1996,
or 9.7%, reflecting the growth in universal life-type insurance in-force
and increased annuity funds on deposit.
Amortization of DAC and Value of Life Business Acquired. Amortization
expense increased from $27.2 million for the three months ended
June 30, 1995 to $28.5 million for the three months ended June 30, 1996,
or 4.8%. This increase reflects the continued growth in universal
life-type and traditional business for the three months ended
June 30, 1996.
Commissions. Commissions increased from $5.2 million in the three
months ended June 30, 1995 to $5.4 million for the three months ended
June 30, 1996, reflecting increased renewal premiums from UL products.
<PAGE> 24
General and Administrative Expenses. General and administrative
expenses increased from $15.0 million for the three months ended June 30,
1995 to $15.8 million for the three months ended June 30, 1996, or 5.3%.
This increase results mainly from higher salaries and benefits expense
and higher state premium taxes in 1996.
Provision for Income Taxes. Provision for income taxes increased from
$16.5 million for the three months ended June 30, 1995 to $17.6 million
for the three months ended June 30, 1996, an increase of $1.1 million.
This increase is attributable to the increase in pretax operating income.
Life Subsidiaries Income. As a result of the foregoing, Life
Subsidiaries income increased from $33.2 million for the three months ended
June 30, 1995 to $35.4 million for the three months ended June 30, 1996,
an increase of $2.2 million, or 6.6%.
Consolidated Net Income
Consolidated net income of the Company increased from $113.8 million
for the three months ended June 30, 1995 to $129.7 million for the three
months ended June 30, 1996, an increase of $15.9 million, or 14.0%.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $582.6 million for
the six months ended June 30, 1995 to $618.3 million for the six months ended
June 30, 1996, an increase of $35.7 million, or 6.1%. This growth reflects
higher gross premiums earned by the P&C Group, which increased from $4,445.8
million in the first six months of 1995 to $4,683.9 million in the first six
months of 1996 due primarily to continued growth in Personal lines premiums
as a result of higher average premiums and an increase in the number of
policies-in-force.
Total Operating Expenses. Total operating expenses as a percentage of
operating revenues decreased from 59.8% for the six months ended June 30, 1995
to 56.4% for the six months ended June 30, 1996, a decrease of 3.4%. Through
greater use of information technology systems, consolidation efforts and
automation, the Company has continued to control its labor costs, reducing
salaries and benefits from 29.9% of operating revenues for the six months
ended June 30, 1995 to 27.8% of operating revenues for the six months ended
June 30, 1996.
Salaries and Employee Benefits. Salaries and employee benefits
decreased from $174.3 million for the six months ended June 30, 1995 to
$171.6 million for the six months ended June 30, 1996, a decrease of $2.7
million, or 1.5%, primarily due to a reduction in employee complement.
Buildings and Equipment Expenses. Buildings and equipment expenses
decreased from $28.8 million for the six months ended June 30, 1995 to
$27.9 million for the six months ended June 30, 1996, a decrease of $0.9
million, or 3.1%. This decrease is
<PAGE> 25
attributable to a decrease in computer mainframe related expenses offset
in part by an increase in software related expense.
Amortization of Attorney-In-Fact Contracts and Goodwill. Amortization
expense was $51.4 million in each of the six month periods ended June 30,
1996 and June 30, 1995. These assets are being amortized on a straight-
line basis over forty years.
General and Administrative Expenses. General and administrative
expenses increased from $94.1 million for the six months ended June 30,
1995 to $97.9 million for the six months ended June 30, 1996, an increase
of $3.8 million, or 4.0%. This increase is primarily due to the
amortization of new information technology systems software and to
increased levels of business activity.
Net Investment Income. Net investment income increased from $34.8 million
for the six months ended June 30, 1995 to $55.9 million for the six months
ended June 30, 1996 due to a larger invested asset base in 1996.
Dividends on Preferred Securities of Subsidiary Trusts. As a result of
the $500.0 million of QUIPS issued in 1995, dividend expense for the six
months ended June 30, 1996 was $21.0 million.
Provision for Income Taxes. Provision for income taxes increased from
$109.4 million for the six months ended June 30, 1995 to $123.1 million for
the six months ended June 30, 1996, an increase of $13.7 million, or 12.5%.
This increase is primarily attributable to the increase in pretax operating
income between years.
Management Services Income. As a result of the foregoing, management
services income increased from $159.4 million for the six months ended
June 30, 1995 to $181.3 million for the six months ended June 30, 1996, an
increase of $21.9 million, or 13.7%.
Life Subsidiaries
Total Revenues. Total revenues increased from $343.3 million for the six
months ended June 30, 1995 to $380.5 million for the six months ended
June 30, 1996, an increase of $37.2 million, or 10.8%. Premiums increased
$5.8 million for the six months ended June 30, 1996, or 7.4%, over the six
months ended June 30, 1995. This increase is due to growth in renewal and
first year business, as well as premiums generated from annuities entering the
payment phase. The increase in renewal premiums is attributable to a 7.2%
growth in traditional life insurance in-force resulting from improved
persistency and an increase in average policy size. The higher first year
premiums are due primarily to growth in PWL and Mortgage Protection Plan
products. Policy charges increased $11.2 million for the six months ended
June 30, 1996, or 10.4%, over the six months ended June 30, 1995, reflecting
continued growth in universal life-type insurance in-force. Net investment
income increased $12.1 million for the six months ended June 30, 1996, or
8.4%, over the six months ended June 30, 1995 due largely to higher bond
interest income resulting primarily from a higher invested asset base. Net
realized gains increased by $8.1 million, from $13.6 million for the six
months ended June 30, 1995 to $21.7 million for the six months ended
June 30, 1996, due
<PAGE> 26
primarily to gains realized on common stock in the first three months of 1996
as a result of favorable market conditions.
Total Operating Expenses. Total operating expenses increased from $242.5
million for the six months ended June 30, 1995 to $259.3 million for the six
months ended June 30, 1996, an increase of $16.8 million, or 6.9%.
Policyholders' Benefits. Policyholders' benefits expense increased
from $149.4 million for the six months ended June 30, 1995 to $161.6
million for the six months ended June 30, 1996, an increase of $12.2
million, or 8.2%. Policy benefits, which consist primarily of death and
surrender benefits on life products, increased $2.8 million over June 30,
1995 due largely to an increase in UL death claims resulting from an
increase in the volume of insurance in-force and higher death claims per
insurance in-force. While there has been an increase in UL claims per
insurance in-force, traditional lines have experienced a decrease in claims
per insurance in-force. Increase in liability for future benefits expense
increased from $4.2 million for the six months ended June 30, 1995 to
$5.6 million for the six months ended June 30, 1996. This increase is
primarily attributable to increases in AIP, PWL and other traditional
product premiums in the six months ended June 30, 1996. Interest credited
to policyholders, which represents the amount credited under universal
life-type contracts and deferred annuities for policyholder funds on
deposit, increased from $74.6 million for the six months ended June 30,
1995 to $82.6 million for the six months ended June 30, 1996, or 10.7%,
reflecting a 9.2% growth in universal life-type insurance in-force and
an 8.9% increase in annuity funds on deposit.
Amortization of DAC and Value of Life Business Acquired. Amortization
expense increased from $53.6 million for the six months ended June 30,
1995 to $56.3 million for the six months ended June 30, 1996, or 5.0%.
This increase reflects the continued growth in universal life-type and
traditional business for the six months ended June 30, 1996.
Commissions. Commissions increased from $9.6 million for the six
months ended June 30, 1995 to $10.6 million for the six months ended
June 30, 1996, reflecting increased renewal premiums from UL products.
General and Administrative Expenses. General and administrative
expenses increased from $29.9 million for the six months ended June 30,
1995 to $30.8 million for the six months ended June 30, 1996, or 3.0%.
This increase results mainly from higher salaries and benefits expense
and higher state premium taxes in 1996.
Provision for Income Taxes. Provision for income taxes increased from
$33.6 million for the six months ended June 30, 1995 to $40.5 million for
the six months ended June 30, 1996, an increase of $6.9 million. This
increase is attributable to the increase in pretax operating income.
Life Subsidiaries Income. As a result of the foregoing, Life Subsidiaries
income increased from $67.2 million for the six months ended June 30, 1995 to
$80.7 million for the six months ended June 30, 1996, an increase of $13.5
million, or 20.1%.
<PAGE> 27
Consolidated Net Income
Consolidated net income of the Company increased from $226.6 million
for the six months ended June 30, 1995 to $262.0 million for the six months
ended June 30, 1996, an increase of $35.4 million, or 15.6%.
Liquidity and Capital Resources
As of June 30, 1996 and June 30, 1995, the Company held cash and cash
equivalents of $726.8 million and $559.1 million, respectively. In addition,
as of June 30, 1996, the Company had available revolving credit facilities
enabling it to borrow up to $600.0 million in the event such a need should
arise.
Net cash provided by operating activities decreased from $606.1 million
for the six months ended June 30, 1995 to $383.7 million for the six months
ended June 30, 1996, a decrease of $222.4 million, or 36.7%. This decrease
is due to a decrease in accounts payable between years related to recording
the liability for the Company's purchase of $250.0 million of surplus
certificates from the Exchanges in June 1995. Although the surplus
certificates were purchased in June, the actual cash transfer did not occur
until approval was received from the California Department of Insurance in
July 1995. This decrease is offset in part by a $35.3 million increase in
consolidated net income between periods.
Net cash used in investing activities decreased from $443.7 million for
the six months ended June 30, 1995 to $419.5 million for the six months ended
June 30, 1996, a decrease of $24.2 million, or 5.5%. This decrease results
from a $124.4 million increase in security investment proceeds between periods
coupled with an $85.0 million decrease in the purchase of surplus certificates
of the Exchanges. The company has purchased $165.0 million of surplus
certificates of the Exchanges in 1996, compared to $250.0 million in 1995.
Partially offsetting the above decreases in cash used in investing activities
was a $177.9 million increase in security investment purchases.
Net cash used in financing activities increased from $142.7 million for
the six months ended June 30, 1995 to $150.4 million for the six months ended
June 30, 1996, an increase of $7.7 million, or 5.4%, due to an increase in
dividends paid to the Company's stockholder.
<PAGE> 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery
and development, and some seek punitive as well as compensatory damages.
In the opinion of management, the Company has not engaged in any conduct
which should warrant the award of any material punitive or compensatory
damages. The Company intends to vigorously defend its position in each
case, and management believes that, while it is not possible to predict
the outcome of such matters with absolute certainty, ultimate disposition
of these proceedings should not have a material adverse effect on the
Company's consolidated results of operations or financial position. In
addition, the Company is, from time to time, involved as a party to
various governmental and administrative proceedings.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K. None.
<PAGE> 29
FARMERS GROUP, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Farmers Group, Inc.
(Registrant)
August 9, 1996 /s/ Leo E. Denlea, Jr.
------------------------------------------
Date Leo E. Denlea, Jr.
Chairman of the Board
and Chief Executive Officer
August 9, 1996 /s/ Anthony L.R. Clark
------------------------------------------
Date Anthony L.R. Clark
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Farmers Group, Inc. and subsidiaries as of
June 30, 1996 and the related consolidated statements of income,
stockholder's equity and cash flows for the six month period ended
June 30, 1996 (unaudited) and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> Jun-30-1996
<CASH> 726,811
<SECURITIES> 112,266
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,111,933
<PP&E> 484,925
<DEPRECIATION> 141,415
<TOTAL-ASSETS> 12,791,010
<CURRENT-LIABILITIES> 299,744
<BONDS> 0
500,000
0
<COMMON> 1
<OTHER-SE> 6,524,607
<TOTAL-LIABILITY-AND-EQUITY> 12,791,010
<SALES> 0
<TOTAL-REVENUES> 998,785
<CGS> 0
<TOTAL-COSTS> 552,144
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,035
<INCOME-PRETAX> 425,606
<INCOME-TAX> 163,617
<INCOME-CONTINUING> 261,989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,989
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
