<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 September 30, 1997
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
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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 September 30, 1997 was 1,000 shares.
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FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements
Consolidated Balance Sheets - Assets
September 30, 1997 and December 31, 1996 4
Consolidated Balance Sheets - Liabilities and Stockholder's
Equity
September 30, 1997 and December 31, 1996 5
Consolidated Statements of Income
Nine Month Periods ended September 30, 1997 and
September 30, 1996 6
Consolidated Statements of Income
Three Month Periods ended September 30, 1997 and
September 30, 1996 7
Consolidated Statement of Stockholder's Equity
Nine Month Period ended September 30, 1997 8
Consolidated Statement of Stockholder's Equity
Nine Month Period ended September 30, 1996 9
Consolidated Statements of Cash Flows
Nine Month Periods ended September 30, 1997 and
September 30, 1996 10
Notes to Interim Financial Statements 11
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
PART II. OTHER INFORMATION 25
SIGNATURES 26
<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>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Current assets, excluding life insurance subsidiary:
Cash and cash equivalents $ 585,803 $ 412,018
Marketable securities, at market value 90,810 118,253
Accrued interest 34,931 39,148
Accounts receivable, principally from the exchanges 20,438 28,641
Notes receivable - affiliate 0 135,000
Deferred taxes 25,926 35,003
Prepaid expenses and other 9,200 23,985
------------- ------------
Total current assets 767,108 792,048
------------- ------------
Investments, excluding life insurance subsidiary:
Fixed maturities available-for-sale, at market value
(cost: $419,769 and $182,474) 425,815 184,829
Non-redeemable preferred stocks available-for-sale,
at market value (cost: $0 and $18) 0 20
Common stocks available-for-sale, at market value
(cost: $307,860 and $250,421) 384,235 307,821
Certificates in surplus of exchanges 684,380 684,380
Real estate, at cost (net of accumulated depreciation:
$19,750 and $16,944) 48,719 45,358
Joint ventures, at equity 8,116 10,366
------------- ------------
1,551,265 1,232,774
------------- ------------
Other assets, excluding life insurance subsidiary:
Notes receivable - affiliate 407,000 272,000
Goodwill (net of accumulated amortization:
$525,385 and $480,352) 1,876,370 1,921,403
Attorney-in-fact contracts (net of accumulated amortization:
$373,852 and $341,808) 1,335,191 1,367,235
Other assets 346,875 357,104
------------- ------------
3,965,436 3,917,742
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $231,376 and $202,085) 476,554 447,636
------------- ------------
Investments of life insurance subsidiary:
Fixed maturities available-for-sale, at market value
(cost: $3,319,497 and $3,764,192) 3,439,272 3,854,126
Mortgage loans on real estate 101,309 122,635
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $1,153 and $7,007) 1,250 6,308
Common stocks available-for-sale, at market value
(cost: $0 and $84,532) 0 103,887
Policy loans 160,843 187,285
Real estate, at cost (net of accumulated depreciation:
$12,568 and $16,824) 72,268 61,715
Joint ventures, at equity 10,999 11,971
------------- ------------
3,785,941 4,347,927
------------- ------------
Other assets of life insurance subsidiary:
Cash and cash equivalents 24,724 87,310
Accrued investment income 51,296 53,063
Deferred policy acquisition costs and value of life business
acquired 803,117 1,001,044
Securities lending collateral 553,223 221,216
Other assets 39,758 31,451
Assets held in Separate Account 822,273 796,616
------------- ------------
2,294,391 2,190,700
------------- ------------
Total assets $ 12,840,695 $ 12,928,827
============= ============
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>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Current liabilities, excluding life insurance subsidiary:
Notes and accounts payable:
Exchanges $ 3,781 $ 8,234
Other 25,061 21,004
Accrued liabilities:
Profit sharing 38,842 52,690
Income taxes 61,315 29,831
Other 9,711 18,474
------------ ------------
Total current liabilities 138,710 130,233
------------ ------------
Other liabilities, excluding life insurance subsidiary:
Real estate mortgages payable 157 217
Non-current deferred taxes 666,237 675,900
Other 211,412 251,315
------------ ------------
877,806 927,432
------------ ------------
Liabilities of life insurance subsidiary:
Policy liabilities:
Future policy benefits 2,956,196 3,474,862
Claims 24,772 32,732
Policyholder dividends 0 13,358
Other policyholder funds 60,769 70,816
Income taxes (including deferred taxes: $155,310 and $195,188) 148,836 194,222
Unearned investment income 1,058 2,302
Other liabilities 49,420 61,207
Securities lending liability 553,223 221,216
Liabilities related to Separate Account 822,273 796,616
------------ ------------
4,616,547 4,867,331
------------ ------------
Total liabilities 5,633,063 5,924,996
------------ ------------
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 September 30, 1997 and
December 31, 1996--1,000 shares 1 1
Additional capital 5,212,618 5,212,618
Unrealized gains (net of deferred taxes of $57,973
and $49,781) 107,549 92,104
Retained earnings 1,387,464 1,199,108
------------ ------------
Total stockholder's equity 6,707,632 6,503,831
------------ ------------
Total liabilities and stockholder's equity $ 12,840,695 $ 12,928,827
============ ============
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>
Nine month period
ended September 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 1,504,332 $ 1,515,789
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 981,107 $ 935,970
----------- -----------
Salaries and employee benefits 250,877 254,948
Buildings and equipment expenses 70,812 64,622
Amortization of AIF contracts and goodwill 77,077 77,077
General and administrative expenses 151,352 130,159
----------- ----------
Total operating expenses 550,118 526,806
----------- ----------
Operating income 430,989 409,164
Net investment income 110,018 82,681
Net realized gains 56,609 2,337
Gain on sale of subsidiaries 16,536 0
Dividends on preferred securities of subsidiary trusts (31,553) (31,553)
----------- ----------
Income before provision for taxes 582,599 462,629
Provision for income taxes 252,835 187,408
----------- ----------
Management services income 329,764 275,221
----------- ----------
Life subsidiaries:
Premiums 122,270 125,089
Policy charges 166,026 179,951
Investment income, net of expenses 222,064 235,905
Net realized gains 12,865 38,874
----------- -----------
Total revenues 523,225 579,819
----------- -----------
Policy benefits 95,320 110,227
Increase in liability for future policy benefits 10,370 8,127
Interest credited to policyholders 117,938 125,759
Amortization of deferred policy acquisition costs and
value of life business acquired 80,759 85,029
Commissions 13,628 15,636
General and administrative expenses 38,641 46,723
----------- -----------
Total operating expenses 356,656 391,501
----------- -----------
Income before provision for taxes 166,569 188,318
Provision for income taxes 55,077 62,963
----------- -----------
Life subsidiaries income 111,492 125,355
----------- -----------
Consolidated net income $ 441,256 $ 400,576
=========== ===========
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 September 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 494,022 $ 517,004
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 331,569 $ 317,708
----------- -----------
Salaries and employee benefits 83,895 83,376
Buildings and equipment expenses 25,374 22,660
Amortization of AIF contracts and goodwill 25,693 25,693
General and administrative expenses 51,552 46,390
----------- ----------
Total operating expenses 186,514 178,119
----------- ----------
Operating income 145,055 139,589
Net investment income 39,615 28,392
Net realized gains 15,906 751
Gain on sale of subsidiaries 0 0
Dividends on preferred securities of subsidiary trusts (10,518) (10,518)
----------- ----------
Income before provision for taxes 190,058 158,214
Provision for income taxes 76,861 64,278
----------- ----------
Management services income 113,197 93,936
----------- ----------
Life subsidiaries:
Premiums 38,389 41,351
Policy charges 50,505 61,141
Investment income, net of expenses 69,299 79,637
Net realized gains 4,260 17,167
----------- -----------
Total revenues 162,453 199,296
----------- -----------
Policy benefits 25,643 36,787
Increase in liability for future policy benefits 4,123 2,579
Interest credited to policyholders 37,104 43,112
Amortization of deferred policy acquisition costs and
value of life business acquired 25,278 28,755
Commissions 3,522 5,037
General and administrative expenses 10,066 15,899
----------- -----------
Total operating expenses 105,736 132,169
----------- -----------
Income before provision for taxes 56,717 67,127
Provision for income taxes 18,808 22,476
----------- -----------
Life subsidiaries income 37,909 44,651
----------- -----------
Consolidated net income $ 151,106 $ 138,587
=========== ===========
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 nine month period ended September 30, 1997
(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, 1996 $ 1 $ 5,212,618 $ 92,104 $1,199,108 $ 6,503,831
Net income 441,256 441,256
Change in net unrealized
gains/(losses) on
investments net
of tax of $8,192 15,445 15,445
Cash dividends paid (252,900) (252,900)
-------- ----------- ------------- ---------- ------------
Balance, September 30, 1997 $ 1 $ 5,212,618 $ 107,549 $1,387,464 $ 6,707,632
======== =========== ============= ========== ============
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 nine month period ended September 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 400,576 400,576
Change in net unrealized
gains/(losses) on
investments net
of tax of ($40,459) (75,038) (75,038)
Cash dividends paid (224,925) (224,925)
-------- ------------ ------------- ---------- ------------
Balance, September 30, 1996 $ 1 $ 5,212,618 $ 49,924 $1,331,718 $ 6,594,261
======== ============ ============= ========== ============
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>
Nine month period
ended September 30,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Consolidated net income $ 441,256 $ 400,576
Non-cash and operating activities adjustments:
Depreciation and amortization 130,322 103,293
Amortization of deferred policy acquisition costs and
value of life business acquired 80,759 85,029
Policy acquisition costs deferred (74,472) (97,288)
Life insurance policy liabilities 140,395 192,985
Equity in earnings of joint ventures 2,844 991
Gain on sales of assets (70,505) (42,678)
Gain on sale of subsidiaries (16,536) 0
Changes in assets and liabilities:
Current assets and liabilities 25,420 6,062
Non-current assets and liabilities (112,874) (72,638)
Other, net (9,228) (22,069)
---------- -----------
Net cash provided by operating activities 537,381 554,263
---------- -----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (1,287,080) (928,001)
Purchases of properties (56,984) (33,223)
Purchase of surplus certificates of the exchanges 0 (300,000)
Proceeds from sales and maturities of investments
available-for-sale 815,164 666,075
Proceeds from sales of properties 12,243 17,457
Proceeds from surplus certificates of the exchanges 0 200,000
Proceeds from sale of subsidiaries 335,408 0
Mortgage loan collections 21,465 16,920
Increase in policy loans (12,785) (15,696)
Other, net (653) 5,138
---------- -----------
Net cash used in investing activities (173,222) (371,330)
---------- -----------
Cash Flows from Financing Activities:
Dividends paid to stockholder (252,900) (224,925)
Payment of long-term notes payable 0 (200,000)
Payment of real estate mortgages payable (60) (56)
Issuance cost of cumulative quarterly income preferred
securities 0 (438)
----------- -----------
Net cash used in financing activities (252,960) (425,419)
----------- -----------
Increase/(decrease) in cash and cash equivalents 111,199 (242,486)
Cash and cash equivalents - at beginning of year 499,328 913,006
---------- -----------
Cash and cash equivalents - at end of period $ 610,527 $ 670,520
========== ===========
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 September 30, 1997, the related consolidated
statements of income, stockholder's equity and cash flows for the nine month
periods ended September 30, 1997 and September 30, 1996, and the consolidated
statements of income for the three months ended September 30, 1997 and
September 30, 1996, 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, 1996 and 1995, 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, 1996.
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
1997 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 as well as 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
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.
Prior to April 15, 1997, the Company's life insurance operations were
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"). On April 15, 1997, upon receipt
of regulatory approval, the Company sold The Ohio State Life Insurance Company
("OSL") and Investors Guaranty Life Insurance Company ("IGL") to Great Southern
Life Insurance Company, a subsidiary of Americo Life, Inc.. The sale of these
subsidiaries resulted in an estimated $16,536,000 gain and is reported on the
"Gain on sale of subsidiaries" line of the income statement. In addition, taxes
associated with the sale increased current year tax expense by an estimated
$27,291,000 and are reflected on the "Provision for income taxes" line. Both
of these amounts are reflected in the "Management services to property and
casualty insurance companies; and other" section of the Company's consolidated
income statement for the nine month period ended September 30, 1997. The
decision to sell these subsidiaries was part of the Company's strategic plan
to focus its life insurance efforts on the growth of Farmers New World Life
Insurance Company ("FNWL"), by far its largest insurance company. FNWL markets
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. These products and services are sold
directly by the Exchanges' agents.
In 1997, the Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This Statement establishes accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on a consistent application of a financial-components
approach that focuses on the issue of control. This Statement was amended by
SFAS No. 127, "The Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125", which delays for one year the effective date of the
provisions that apply to certain transactions. These transactions include
repurchase agreements, dollar-rolls, securities lending, secured borrowings
and collateral. The adoption of these Statements did not have a material
impact on the Company's consolidated financial statements.
In February 1997, the FASB released SFAS No. 128, "Earnings per Share".
This Statement, effective for financial statements issued for periods ending
after December 15, 1997, establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock. The Company does not have any publicly held common
stock and, therefore, is not subject to the requirements of this Statement.
In February 1997, the FASB released SFAS No. 129, "Disclosure of
Information about Capital Structure". This Statement, effective for financial
statements issued for periods ending after December 15, 1997, establishes
standards for disclosing information about an entity's capital structure.
This statement eliminates the exemption of nonpublic entities from certain
disclosure requirements of Accounting Principles Board Opinion No. 15,
"Earnings Per Share", as provided by SFAS No. 21, "Suspension of the Reporting
of Earnings per Share and Segment Information by Nonpublic Enterprises". The
Company does not expect the adoption of this Statement to have a significant
impact on its consolidated financial statements.
<PAGE> 13
In June 1997, the FASB released SFAS No. 130, "Reporting Comprehensive
Income". This Statement, effective for fiscal periods beginning after
December 15, 1997, establishes standards for reporting and displaying
comprehensive income and its components. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement with
the same prominence as other financial statements. The Company does not
expect the adoption of this Statement to have a material impact on its
consolidated financial statements.
In June 1997, the FASB released SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". This Statement, effective for
financial statements of public enterprises issued for periods beginning after
December 15, 1997, establishes standards for reporting information about
operating segments in annual financial statements and requires the reporting
of selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
Statement supersedes FASB Statement No. 14, "Financial Reporting for Segments
of a Business Enterprise" and amends FASB Statement No. 94, "Consolidation of
All Majority-Owned Subsidiaries". The Company does not expect the adoption of
this Statement to have a significant impact 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. 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
<PAGE> 14
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 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 September 30, 1997 and 1996, a total of 20,000,000 shares of QUIPS
were outstanding.
D. Management fees
As attorney-in-fact, the Company, or its subsidiaries, as applicable,
manages the affairs of the P&C Group and receives management fees for the
services rendered to the Exchanges. As a result, the Company received
management fees from the Exchanges of $918,587,000 and $877,988,000 for the
nine month periods ended September 30, 1997 and September 30, 1996,
respectively.
E. Related parties
As of September 30, 1997, 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.
These notes are fixed rate medium-term notes with maturity dates as
follows: $135,000,000 in October 1997 (see Note H), $137,000,000 in October
1998, and $135,000,000 in October 1999. Interest on these notes is paid
semi-annually at coupon rates of 5.10%, 5.35%, and 6.68%, respectively.
On October 7, 1996, a three year $135,000,000 note with an interest rate of
4.76% matured and the $135,000,000 note maturing in October 1999 was
subsequently received with an interest rate of 6.68%. Income earned on the
notes outstanding as of September 30, 1997 and September 30, 1996, was
$17,424,000 and $15,480,000, respectively.
<PAGE> 15
F. Sale of life insurance subsidiaries
On April 15, 1997, upon receipt of regulatory approval, the Company sold
OSL and IGL to Great Southern Life Insurance Company, a subsidiary of Americo
Life, Inc.. The contribution to net income of these subsidiaries for the nine
month period ended September 30, 1997 was $5,507,000. The combined net assets
of these subsidiaries as of April 15, 1997 was $317,625,000. The sale of these
subsidiaries resulted in an estimated $16,536,000 gain and was recorded on the
"Gain on sale of subsidiaries" line of the income statement. In addition,
taxes associated with the sale increased current year tax expense by an
estimated $27,291,000 and are reflected on the "Provision for income taxes"
line. Both of these amounts are reflected in the "Management services to
property and casualty insurance companies; and other" section of the Company's
consolidated income statement for the nine month period ended September 30,
1997.
G. 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 Insurance Insurance
Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash and cash equivalents -- December 31, 1995 $ 763,212 $ 149,794 $ 913,006
Activity through September 1996 (242,486)
---------
Cash and cash equivalents -- September 30, 1996 588,655 81,865 $ 670,520
=========
Cash and cash equivalents -- December 31, 1996 412,018 87,310 $ 499,328
Activity through September 1997 111,199
---------
Cash and cash equivalents -- September 30, 1997 585,803 24,724 $ 610,527
=========
</TABLE>
Cash payments for interest were $2,961,000 and $16,750,000 for the nine
month periods ended September 30, 1997 and September 30, 1996, respectively,
while the cash payment for dividends to the holders of the Company's QUIPS was
$31,553,000 for both nine month periods ended September 30, 1997 and September
30, 1996. Cash payments for income taxes were $314,475,000 and $297,423,000
for the nine month periods ended September 30, 1997 and September 30, 1996,
respectively.
Net cash proceeds from the sale of OSL and IGL amounted to an estimated
$335,408,000 and were primarily in consideration for the following:
Investments $ 808,208,000
Deferred policy acquisition costs and value of 182,472,000
life business acquired
Life insurance policy liabilities (690,426,000)
<PAGE> 16
H. Subsequent events
On October 7, 1997, the $135,000,000 of notes receivable from B.A.T
Capital Corporation (see Note E) matured and new notes were subsequently
received. The new notes receivable are fixed rate medium-term notes which pay
interest semi-annually at a coupon rate of 6.33% and have a maturity date of
October 2000.
On October 16, 1997, B.A.T and Zurich Insurance Company ("Zurich") reached
an agreement in principle to merge B.A.T Industries' Financial Services
Businesses ("BAFS") with Zurich. The businesses of Zurich and BAFS, which
include Farmers Group, Inc., will be transferred to a new Swiss company, Zurich
Financial Services Group. The merger is subject to the execution of a
definitive agreement. Completion will be subject to regulatory consents, tax
clearance and other external approvals, as well as approval by shareholders of
B.A.T and Zurich, and is expected to be achieved in the third quarter of 1998.
<PAGE> 17
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 management
fees primarily 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 its insurance subsidiaries are required to use for regulatory
reporting purposes.
The Company underwrites life insurance and annuity products through its
life insurance subsidiary, FNWL. 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 Deferred Policy Acquisition Costs ("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 September 30, 1997 Compared to Three Months Ended September
30, 1996
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $317.7 million for
the three months ended September 30, 1996 to $331.6 million for the three
months ended September 30, 1997, an increase of $13.9 million, or 4.4%.
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 $2,407.5 million in the third quarter of 1996 to $2,537.8
million in the third quarter of 1997 due primarily to policy growth in Personal
Lines business as a result of stricter enforcement of the California mandatory
auto insurance law and the P&C Group's re-entry into the California homeowners'
market. Partially offsetting these increases is the fact that, in recognition
of expense savings realized as a result of improved operating efficiencies,the
Company waived an additional 0.43% from the Farmers Preferred Auto Management
fee rate that was in effect during the three month period ended September 30,
1996. This rate waiver resulted in management fees being $6.3 million lower
than what such fees would have been using the third quarter 1996 rates.
<PAGE> 18
Total Operating Expenses.
Salaries and Employee Benefits. Salaries and employee benefits
increased from $83.4 million for the three months ended September 30,
1996 to $83.9 million for the three months ended September 30, 1997, an
increase of just $0.5 million, or 0.6%.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $22.7 million for the three months ended September 30, 1996
to $25.4 million for the three months ended September 30, 1997, an
increase of $2.7 million, or 12.0%. This increase was primarily due to
higher amortization expense associated with information technology systems
software.
Amortization of Attorney-In-Fact Contracts and Goodwill. Purchase
accounting entries related to the acquisition of the Company by B.A.T. 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
September 30, 1997 and September 30, 1996.
General and Administrative Expenses. General and administrative
expenses increased from $46.4 million for the three months ended September
30, 1996 to $51.5 million for the three months ended September 30, 1997,
an increase of $5.1 million, or 11.0%. This increase was largely
attributable to increased levels of business activity as well as $1.3
million of costs associated with the modification of existing computer
program logic to accommodate years 2000 and beyond.
Net Investment Income. Net investment income increased from $28.4
million for the three months ended September 30, 1996 to $39.6 million for the
three months ended September 30, 1997 primarily due to higher yield rates in
1997, a larger invested asset base as a result of the net cash generated by
the sale of OSL and IGL and the common stock received as part of a dividend
FNWL paid to Farmers Group, Inc. in December 1996.
Net Realized Gains. Net realized gains increased from $0.8 million for
the three months ended September 30, 1996 to $15.9 million for the three months
ended September 30, 1997 due substantially to gains realized from sales of
equities formerly held by FNWL.
Provision for Income Taxes. Provision for income taxes increased from
$64.3 million for the three months ended September 30, 1996 to $76.9 million
for the three months ended September 30, 1997, an increase of $12.6 million, or
19.6%. This increase was attributable to the increase in pretax income.
Management Services Income. As a result of the foregoing, management
services income increased from $93.9 million for the three months ended
September 30, 1996 to $113.2 million for the three months ended September 30,
1997, an increase of $19.3 million, or 20.6%.
<PAGE> 19
Life Subsidiaries
On April 15, 1997, OSL and IGL were sold to Great Southern Life
Insurance Company, a subsidiary of Americo Life, Inc.. As a result, there was
no contribution to net income from OSL and IGL for the three months ended
September 30, 1997, compared to a $4.9 million contribution to net income from
OSL and IGL for the three months ended September 30, 1996. The following
commentary addresses the results of the Company's remaining life subsidiary,
FNWL.
Total Revenues. Total revenues increased from $160.8 million for the
three months ended September 30, 1996 to $162.4 million for the three months
ended September 30, 1997, an increase of $1.6 million, or 1.0%.
Premiums. Premiums increased $4.8 million for the three months ended
September 30, 1997, or 14.3%, over the three months ended September 30,
1996. This increase was due to growth in renewal and first year business,
coupled with an increase in annuity premiums. The increase in renewal
premiums was attributable to growth in traditional life insurance in-force
due in part to an increase in average policy size reulting from sales of
the Premier Whole Life product. The higher first year premiums were due
primarily to growth in sales of the Premier Whole Life product. The
growth in annuity premiums was due to an increase in the number of
annuities entering the payment phase in the three months ended September
30, 1997.
Policy Charges. Policy charges increased $2.9 million for the three
months ended September 30, 1997, or 6.1%, over the three months ended
September 30, 1996, reflecting a 4.8% growth in universal life-type
insurance in-force.
Investment Income. Net investment income increased $4.3 million for
the three months ended September 30, 1997, or 6.6%, over the three months
ended September 30, 1996 due to higher bond interest income resulting
primarily from an increase in bond investments.
Net Realized Gains. Net realized gains decreased $10.4 million,
from $14.7 million for the three months ended September 30, 1996 to $4.3
million for the three months ended September 30, 1997. This decrease was
attributable to the absence of common stock gains in 1997 due to the fact
that FNWL's common stock portfolio was transferred to Farmers Group, Inc.
in December 1996 as part of the dividend.
Total Operating Expenses. Total operating expenses increased from $100.8
million for the three months ended September 30, 1996 to $105.6 million for the
three months ended September 30, 1997, an increase of $4.8 million, or 4.8%.
Policyholders' Benefits. Policyholders' benefits expense increased
from $65.0 million for the three months ended September 30, 1996 to $66.8
million for the three months ended September 30, 1997, an increase of $1.8
million, or 2.8%. Policy benefits, which consist primarily of death and
surrender benefits on life products, decreased $1.7 million from September
30, 1996 to $25.6 million, due to favorable claims experienced in 1997.
Increase in liability for future benefits expense increased from $2.6
million for the three months ended September 30, 1996 to $4.1 million for
the three months ended September 30, 1997 due to
<PAGE> 20
fewer terminations on older whole life business carrying higher reserves
and the effect of Premium Whole Life sales. Interest credited to
policyholders, which represents the amount credited under universal
life-type contracts and deferred annuities for policyholder funds on
deposit, increased from $35.1 million for the three months ended September
30, 1996 to $37.1 million for the three months ended September 30, 1997,
reflecting growth in universal life-type insurance in-force and an
increase in annuity funds on deposit.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense increased from $21.5 million for the three months
ended September 30, 1996 to $25.6 million for the three months ended
September 30, 1997, or 19.1%. This increase reflects the continued growth
in universal life-type and traditional business in-force.
Commissions. Commissions decreased from $4.5 million for the three
months ended September 30, 1996 to $3.5 million for the three months
ended September 30, 1997.
General and Administrative Expenses. General and administrative
expenses decreased from $9.8 million for the three months ended September
30, 1996 to $9.7 million for the three months ended September 30, 1997.
Provision for Income Taxes. Provision for income taxes decreased from
$20.2 million for the three months ended September 30, 1996 to $18.8 million
for the three months ended September 30, 1997, a decrease of $1.4 million,
due to a decrease in pretax operating income resulting from reduced net
realized gains.
Life Subsidiary Income. As a result of the foregoing, FNWL's income
decreased from $39.8 million for the three months ended September 30, 1996 to
$38.0 million for the three months ended September 30, 1997, a decrease of $1.8
million, or 4.5%.
Consolidated Net Income
Consolidated net income of the Company increased from $138.6 million for
the three months ended September 30, 1996 to $151.1 million for the three
months ended September 30, 1997, an increase of $12.5 million, or 9.0%.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $936.0 million
for the nine months ended September 30, 1996 to $981.1 million for the nine
months ended September 30, 1997, an increase of $45.1 million, or 4.8%.
This growth reflects higher gross premiums earned by the P&C Group which
increased from $7,091.4 million in the first nine months of 1996 to $7,520.9
million in the first nine months of 1997 due primarily to policy growth in
Personal Lines business. Partially offsetting these increases was the rate
waiver in the Farmers Preferred Auto Management fee which resulted in a $19.0
million reduction in management fees in 1997 from what such fees would have
been using 1996 rates.
<PAGE> 21
Total Operating Expenses. Total operating expenses as a percentage of
operating revenues decreased from 56.3% for the nine months ended September
30, 1996 to 56.1% for the nine months ended September 30, 1997, due primarily
to lower labor costs (salaries and employee benefits) as the Company continued
to benefit from staffing efficiencies and the use of information technology.
Salaries and Employee Benefits. Salaries and employee benefits
decreased from $254.9 million for the nine months ended September 30,
1996 to $250.9 million for the nine months ended September 30, 1997,
a decrease of $4.0 million, or 1.6%, primarily due to a reduction
in employee complement.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $64.6 million for the nine months ended September 30, 1996
to $70.8 million for the nine months ended September 30, 1997, an
increase of $6.2 million, or 9.6%. This increase was primarily due to
higher amortization expense associated with information technology systems
software.
Amortization of Attorney-In-Fact Contracts and Goodwill. Purchase
accounting entries related to the acquisition of the Company by B.A.T
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 $77.1 million in each of the nine month periods ended
September 30, 1997 and September 30, 1996.
General and Administrative Expenses. General and administrative
expenses increased from $130.2 million for the nine months ended
September 30, 1996 to $151.3 million for the nine months ended September
30, 1997, an increase of $21.1 million, or 16.2%. This increase was
primarily due to higher advertising expenses (due to the fact that the
the 1997 media advertising campaign began in January, whereas, the 1996
campaign did not begin until August) and higher expenses attributable to
increased business levels. Also contributing to the increase
in expense was $3.6 million of costs associated with the modification
of existing computer program logic to accommodate years 2000 and beyond.
Net Investment Income. Net investment income increased from $82.7 million
for the nine months ended September 30, 1996 to $110.0 million for the nine
months ended September 30, 1997 primarily due to higher yield rates in 1997
and a larger invested asset base as a result of the net cash generated by the
sale of OSL and IGL and the common stock received as part of the dividend FNWL
paid to Farmers Group, Inc. in December 1996.
Net Realized Gains. Net realized gains increased from $2.3 million for
the nine months ended September 30, 1996 to $56.7 million for the nine months
ended September 30, 1997 due primarily to gains realized from restructuring
the Company's equity portfolio.
Gain on Sale of Subsidiaries. The estimated gain on the April 15, 1997
sale of OSL and IGL amounted to $16.5 million for the nine months ended
September 30, 1997.
<PAGE> 22
Provision for Income Taxes. Provision for income taxes increased from
$187.4 million for the nine months ended September 30, 1996 to $252.8 million
for the nine months ended September 30, 1997, an increase of $65.4 million,
or 34.9%. This increase was attributable to the increase in pretax operating
income and an estimated $27.3 million of taxes associated with
the sale of OSL and IGL.
Management Services Income. As a result of the foregoing, management
services income increased from $275.2 million for the nine months ended
September 30, 1996 to $329.8 million for the nine months ended September 30,
1997, an increase of $54.6 million, or 19.8%.
Life Subsidiaries
On April 15, 1997, OSL and IGL were sold to Great Southern Life Insurance
Company, a subsidiary of Americo Life, Inc.. OSL and IGL contributed $5.5
million to net income for the nine months ended September 30, 1997
and $13.9 million for the nine months ended September 30, 1996. The
following commentary addresses the results of the Company's remaining life
subsidiary, FNWL.
Total Revenues. Total revenues increased from $464.1 million for the nine
months ended September 30, 1996 to $477.7 million for the nine months ended
September 30, 1997, an increase of $13.6 million, or 2.9%.
Premiums. Premiums increased $11.8 million for the nine months
ended September 30, 1997, or 11.7%, over the nine months ended
September 30, 1996. This increase was due to growth in renewal and
first year business. The increase in renewal premiums was attributable
to an 11.1% growth in traditional life insurance in-force due in part to
an increase in average policy size resulting from sales of the Premier
Whole Life product. The higher first year premiums were due primarily to
growth in sales of Premier Whole Life product.
Policy Charges. Policy charges increased $10.1 million for the
nine months ended September 30, 1997, or 7.2%, over the nine months
ended September 30, 1996, reflecting a 4.8% growth in universal
life-type insurance in-force.
Investment Income. Net investment income increased $12.7 million for
the nine months ended September 30, 1997, or 6.6%, over the nine months
ended September 30, 1996 due to higher bond interest income resulting
primarily from an increase in bond investments.
Net Realized Gains. Net realized gains decreased by $21.0 million,
from $30.7 million for the nine months ended September 30, 1996 to $9.7
million for the nine months ended September 30, 1997. This decrease was
substantially due to the fact that FNWL's common stock portfolio was
transferred to Farmers Group, Inc. in December 1996 as part of the
dividend.
Total Operating Expenses. Total operating expenses increased from $296.2
million for the nine months ended September 30, 1996 to $319.2 million for the
nine months ended September 30, 1997, an increase of $23.0 million, or 7.8%.
<PAGE> 23
Policyholders' Benefits. Policyholders' benefits expense increased
from $189.9 million for the nine months ended September 30, 1996 to
$203.7 million for the nine months ended September 30, 1997, an increase
of $13.8 million, or 7.3%. Policy benefits increased $4.6 million over
September 30, 1996 to $83.4 million, due to an increase in
insurance-in-force. Increase in liability for future benefits expense
increased from $8.5 million for the nine months ended September 30, 1996
to $11.3 million for the nine months ended September 30, 1997 due to fewer
terminations on older whole life business carrying higher reserves and the
effect of Premier Whole Life sales. Interest credited to policyholders
increased from $102.6 million for the nine months ended September 30, 1996
to $109.0 million for the nine months ended September 30, 1997, or 6.2%,
reflecting a 4.8% growth in universal life-type insurance in-force and a
4.1% increase in annuity funds on deposit.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense increased from $63.1 million for the nine months
ended September 30, 1996 to $71.7 million for the nine months ended
September 30, 1997, or 13.6%. This increase reflects the continued
growth in universal life-type and traditional business.
Commissions. Commissions decreased from $13.7 million for the nine
months ended September 30, 1996 to $12.8 million for the nine months
ended September 30, 1997, or 6.6%.
General and Administrative Expenses. General and administrative
expenses increased from $29.5 million for the nine months ended
September 30, 1996 to $31.0 million for the nine months ended
September 30, 1997, or 5.1%. This increase resulted mainly from higher
salaries and benefits expenses, audit and legal fees and advertising
expenses.
Provision for Income Taxes. Provision for income taxes decreased from
$56.4 million for the nine months ended September 30, 1996 to $52.5 million
for the nine months ended September 30, 1997, a decrease of $3.9 million,
due to a decrease in pretax operating income resulting from reduced net
realized gains.
Life Subsidiary Income. As a result of the foregoing, FNWL's income
decreased from $111.5 million for the nine months ended September 30, 1996
to $106.0 million for the nine months ended September 30, 1997, a decrease
of $5.5 million, or 4.9%.
Consolidated Net Income
Consolidated net income of the Company increased from $400.6 million for
the nine months ended September 30, 1996 to $441.3 million for the nine months
ended September 30, 1997, an increase of $40.7 million, or 10.2%.
Liquidity and Capital Resources
As of September 30, 1997 and September 30, 1996, the Company held cash
and cash equivalents of $610.5 million and $670.5 million, respectively.
In addition, as of September 30, 1997, the Company had available revolving
credit facilities enabling it to borrow up to $500.0 million in the event
such a need should arise.
<PAGE> 24
Net cash provided by operating activities decreased $16.9 million, or
3.0%, to $537.4 million for the nine months ended September 30,
1997. Although cash generated by operations increased, this was
offset by a reduction in cash generated by new life business as a result of the
sale of OSL and IGL in 1997.
Net cash used in investing activities decreased $198.1 million, or 53.4%,
to $173.2 million for the nine months ended September 30, 1997. This increase
in cash resulted primarily from a net increase in proceeds from the sales of
investments (which included the proceeds from the sale of OSL and IGL). In
addition, cash increased due to the net purchase of $100.0 million of surplus
certificates of the Exchanges in 1996 ($300.0 million of purchases less $200.0
million of redemptions).
Net cash used in financing activities decreased from $425.4 million for
the nine months ended September 30, 1996 to $253.0 million for the nine months
ended September 30, 1997, or 40.5%. This increase in cash is the result of
the repayment of $200.0 million of 8.25% Notes Payable in July 1996, offset in
part by a $28.0 million increase in dividends paid to the Company's
stockholder in 1997.
<PAGE> 25
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.
On October 16, 1997, B.A.T Industries p.l.c. ("B.A.T Industries") and
Zurich Insurance Company ("Zurich") reached an agreement in principle to
merge B.A.T Industries' Financial Services Businesses ("BAFS") with Zurich.
The businesses of Zurich and BAFS, which include Farmers Group, Inc., will
be transferred to a new Swiss company, Zurich Financial Services Group ("ZF
Group"). The formation of ZF Group will create one of the world's largest
property and casualty insurance groups, and the third largest property and
casualty group in the United States.
The merger is subject to the execution of a definitive agreement.
Completion will be subject to regulatory consents, tax clearance and other
external approvals, as well as approval by shareholders of B.A.T
Industries and Zurich, and is expected to be achieved in the third quarter
of 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
21. Subsidiaries of FGI.
(b) Reports on Form 8-K. None
<PAGE> 26
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)
November 7, 1997 /s/ Martin D. Feinstein
---------------------------------------------
Date Martin D. Feinstein
President and
Chief Executive Officer
November 7, 1997 /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
September 30, 1997 and the related consolidated statements of income,
stockholder's equity and cash flows for the nine month period ended
September 30, 1997 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 610,527
<SECURITIES> 90,810
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 843,128
<PP&E> 707,930
<DEPRECIATION> 231,376
<TOTAL-ASSETS> 12,840,695
<CURRENT-LIABILITIES> 139,768
<BONDS> 0
500,000
0
<COMMON> 1
<OTHER-SE> 6,707,631
<TOTAL-LIABILITY-AND-EQUITY> 12,840,695
<SALES> 0
<TOTAL-REVENUES> 1,504,332
<CGS> 0
<TOTAL-COSTS> 723,611
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,553
<INCOME-PRETAX> 749,168
<INCOME-TAX> 307,912
<INCOME-CONTINUING> 441,256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 441,256
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
Exhibit 21
SUBSIDIARIES OF FGI
FARMERS GROUP, INC., A NEVADA CORPORATION, DOING BUSINESS AS FARMERS
UNDERWRITERS ASSOCIATION
Truck Underwriters Association, a California corporation
Fire Underwriters Association, a California corporation
F.I.G. Holding Company, a California corporation (1)
Farmers New World Life Insurance Company, a Washington corporation
FIG Leasing Co., Inc., a California corporation (2)
Prematic Service Corporation, a California corporation (3)
Prematic Service Corporation, a Nevada corporation (4)
Farmers Group Capital, a Delaware statutory business trust
Farmers Group Capital II, a Delaware statutory business trust
Farmers Investment Research & Management, a Nevada corporation
Farmers Underwriters Association, a California corporation (inactive)
F.I.G. Travel, a California corporation (inactive)
Farmers Services Corporation, a Nevada corporation
Farmers Financial Services Corporation, a Nevada corporation
- -----------------------------------------
(1) Truck Underwriters Association and Fire Underwriters Association
own 30% and 70%, respectively, of the equity of F.I.G.
Holding Company.
(2) FGI, Truck Underwriters Association and Fire Underwriters
Association own 95.2%, 3.1% and 1.7%, respectively, of the
equity of FIG Leasing Co., Inc..
(3) FGI, Truck Underwriters Association and Fire Underwriters
Association own 38%, 53% and 9%, respectively, of the
equity of Prematic Service Corporation, a California
corporation.
(4) Prematic Service Corporation, a California corporation, owns
100% of the equity of Prematic Service Corporation, a Nevada
corporation.
