<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, 1998
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, 1998 was 1,000 shares.
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FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements
Consolidated Balance Sheets - Assets
June 30, 1998 and December 31, 1997 4
Consolidated Balance Sheets - Liabilities and Stockholder's
Equity
June 30, 1998 and December 31, 1997 5
Consolidated Statements of Income
Six Month Periods ended June 30, 1998 and
June 30, 1997 6
Consolidated Statements of Comprehensive Income
Six Month Periods ended June 30, 1998 and
June 30, 1997 7
Consolidated Statements of Income
Three Month Periods ended June 30, 1998 and
June 30, 1997 8
Consolidated Statements of Comprehensive Income
Three Month Periods ended June 30, 1998 and
June 30, 1997 9
Consolidated Statement of Stockholder's Equity
Six Month Period ended June 30, 1998 10
Consolidated Statement of Stockholder's Equity
Six Month Period ended June 30, 1997 11
Consolidated Statements of Cash Flows
Six Month Periods ended June 30, 1998 and
June 30, 1997 12
Notes to Interim Financial Statements 13
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
PART II. OTHER INFORMATION 26
SIGNATURES 27
<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,
1998 1997
------------- ------------
<S> <C> <C>
Current assets, excluding insurance subsidiaries:
Cash and cash equivalents $ 307,845 $ 506,273
Marketable securities, at market value 98,285 78,147
Accrued interest 44,046 43,849
Accounts receivable, principally from the P&C Group 68,557 34,804
Notes receivable - affiliate 137,000 137,000
Deferred taxes 28,986 28,925
Prepaid expenses and other 13,897 13,725
------------- ------------
Total current assets 698,616 842,723
------------- ------------
Investments, excluding insurance subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $645,281 and $482,355) 650,097 488,245
Mortgage loans on real estate 218 240
Common stocks available-for-sale, at market value
(cost: $338,100 and $322,741) 443,332 388,966
Certificates in surplus of Exchanges 684,380 684,380
Real estate, at cost (net of accumulated depreciation:
$26,024 and $29,212) 59,463 63,512
Joint ventures, at equity 1,814 4,825
------------- ------------
1,839,304 1,630,168
------------- ------------
Other assets, excluding insurance subsidiaries:
Notes receivable - affiliate 270,000 270,000
Goodwill (net of accumulated amortization:
$570,418 and $540,396) 1,831,337 1,861,359
Attorney-in-fact contracts (net of accumulated amortization:
$405,896 and $384,534) 1,303,147 1,324,509
Securities lending collateral 50,556 49,908
Other assets 299,708 297,602
------------- ------------
3,754,748 3,803,378
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $272,449 and $242,392) 434,845 450,880
------------- ------------
Investments of insurance subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $3,732,132 and $3,408,426) 3,871,394 3,555,148
Mortgage loans on real estate 77,109 89,903
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $1,153 and $1,153) 1,272 1,227
Common stocks available-for-sale, at market value
(cost: $0 and $0) 0 120
Policy loans 175,952 165,894
Real estate, at cost (net of accumulated depreciation:
$20,650 and $19,306) 68,439 69,265
Joint ventures, at equity 9,306 9,515
Other investments, at market value (cost: $8.227 and $3,450) 9,466 3,299
------------- ------------
4,212,938 3,894,371
------------- ------------
Other assets of insurance subsidiaries:
Cash and cash equivalents 143,451 9,980
Marketable securities, at market value 8,199 50,069
Reinsurance premiums receivable - P&C Group 143,136 0
Accrued investment income 56,375 52,017
Deferred taxes 1,337 0
Deferred policy acquisition costs and value of life business
acquired 802,021 798,725
Securities lending collateral 484,846 544,580
Other assets 26,768 40,542
------------- ------------
1,666,133 1,495,913
------------- ------------
Total assets $ 12,606,584 $ 12,117,433
============= ============
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,
1998 1997
------------- ------------
<S> <C> <C>
Current liabilities, excluding insurance subsidiaries:
Notes and accounts payable:
P&C Group $ 1,759 $ 2,478
Other 28,817 28,204
Accrued liabilities:
Profit sharing 25,813 51,067
Income taxes 73,335 82,279
Other 7,243 12,245
------------ ------------
Total current liabilities 136,967 176,273
------------ ------------
Other liabilities, excluding insurance subsidiaries:
Real estate mortgages payable 26 92
Non-current deferred taxes 641,128 643,910
Securities lending liability 50,556 49,908
Other 136,376 131,056
------------ ------------
828,086 824,966
------------ ------------
Liabilities of insurance subsidiaries:
Policy liabilities:
Future policy benefits 3,086,265 3,010,162
Claims 25,684 22,156
Other policyholder funds 58,408 60,072
Provision for non-life losses and loss adjustment expenses 102,715 0
Income taxes (including deferred taxes: $149,153 and $153,006) 155,257 148,868
Reinsurance payable - P&C Group 152,030 0
Unearned investment income 1,034 1,016
Securities lending liability 484,846 544,580
Other liabilities 53,888 47,766
------------ ------------
4,120,127 3,834,620
------------ ------------
Total liabilities 5,085,180 4,835,859
------------ ------------
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, 1998 and
December 31, 1997--1,000 shares 1 1
Additional capital 5,212,618 5,212,618
Accumulated other comprehensive income (net of deferred
taxes: of $71,998 and $61,193) 133,667 113,549
Retained earnings 1,675,118 1,455,406
------------ ------------
Total stockholder's equity 7,021,404 6,781,574
------------ ------------
Total liabilities and stockholder's equity $ 12,606,584 $ 12,117,433
============ ============
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,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 1,512,359 $ 1,010,310
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 671,912 $ 649,538
Operating expenses 369,420 363,604
----------- ----------
Operating income 302,492 285,934
Net investment income 76,974 70,403
Net realized gains 18,529 40,703
Gain on sale of subsidiaries 0 16,536
Dividends on preferred securities of subsidiary trusts (21,035) (21,035)
----------- ----------
Income before provision for taxes 376,960 392,541
Provision for income taxes 151,126 175,974
----------- ----------
Management services income 225,834 216,567
----------- ----------
Insurance subsidiaries:
Life premiums 84,232 83,881
Non-life reinsurance premiums 500,000 0
Life policy charges 103,055 115,521
Investment income, net of expenses 146,549 152,765
Net realized gains 6,611 8,605
----------- -----------
Total revenues 840,447 360,772
----------- -----------
Non-life losses and loss adjustment expenses 330,746 0
Life policyholders' benefits and charges 149,103 156,758
Non-life reinsurance commissions 156,754 0
General operating expenses 74,929 93,820
----------- -----------
Total operating expenses 711,532 250,578
----------- -----------
Income before provision for taxes 128,915 110,194
Provision for income taxes 46,237 36,611
----------- -----------
Insurance subsidiaries income 82,678 73,583
----------- -----------
Consolidated net income $ 308,512 $ 290,150
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 7
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six month period
ended June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Consolidated net income $ 308,512 $ 290,150
=========== ===========
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) on securities:
Unrealized holding gains arising during the period,
net of tax of $12,706 $ 23,647 $
Less: reclassification adjustment for gains
included in net income, net of tax of ($1,759) (3,266)
----------- -----------
Net unrealized holding gains/(losses) on securities,
net of tax of $10,947 and ($14,504) 20,381 (22,255)
Change in effect of unrealized gains/(losses) on other
insurance accounts, net of tax of ($142) and
$2,048 (263) 3,803
----------- -----------
Other comprehensive income 20,118 (18,452)
----------- -----------
Comprehensive income $ 328,630 $ 271,698
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 8
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three month period
ended June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 759,211 $ 495,364
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 336,373 $ 328,686
Operating expenses 185,771 183,215
----------- ----------
Operating income 150,602 145,471
Net investment income 37,174 36,148
Net realized gains 8,716 10,268
Gain on sale of subsidiaries 0 16,536
Dividends on preferred securities of subsidiary trusts (10,517) (10,517)
----------- ----------
Income before provision for taxes 185,975 197,906
Provision for income taxes 74,300 79,282
----------- ----------
Management services income 111,675 118,624
----------- ----------
Insurance subsidiaries:
Life premiums 43,140 38,922
Non-life reinsurance premiums 250,000 0
Life policy charges 51,636 52,334
Investment income, net of expenses 75,051 71,709
Net realized gains 3,011 3,713
----------- -----------
Total revenues 422,838 166,678
----------- -----------
Non-life losses and loss adjustment expenses 154,123 0
Life policyholders' benefits and charges 76,477 72,555
Non-life reinsurance commissions 89,627 0
General operating expenses 37,901 39,288
----------- -----------
Total operating expenses 358,128 111,843
----------- -----------
Income before provision for taxes 64,710 54,835
Provision for income taxes 22,585 18,346
----------- -----------
Insurance subsidiaries income 42,125 36,489
----------- -----------
Consolidated net income $ 153,800 $ 155,113
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 9
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three month period
ended June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Consolidated net income $ 153,800 $ 155,113
=========== ===========
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) on securities:
Unrealized holding gains arising during the period,
net of tax of $356 $ 684 $
Less: reclassification adjustment for gains
included in net income, net of tax of ($2,531) (4,700)
----------- -----------
Net unrealized holding gains/(losses) on securities,
net of tax of ($2,175) and $25,212 (4,016) 51,457
Change in effect of unrealized gains/(losses) on other
insurance accounts, net of tax of $553 and
($6,920) 1,027 (12,853)
----------- -----------
Other comprehensive income (2,989) 38,604
----------- -----------
Comprehensive income $ 150,811 $ 193,717
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 10
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the six month period ended June 30, 1998
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Other Total
Common Additional Comprehensive Retained Stockholder's
Stock Capital Income Earnings Equity
-------- ----------- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 1 $ 5,212,618 $ 113,549 $1,455,406 $ 6,781,574
Net income 308,512 308,512
Unrealized holding gains
arising during the period,
net of tax of $12,706 23,647 23,647
Reclassification adjustment
for gains included in net
income, net of tax of ($1,759) (3,266) (3,266)
Change in effect of unrealized
losses on other insurance
accounts, net of tax of ($142) (263) (263)
Cash dividends paid (88,800) (88,800)
-------- ----------- ---------------- ------------ ------------
Balance, June 30, 1998 $ 1 $ 5,212,618 $ 133,667 $1,675,118 $ 7,021,404
======== =========== ================ ============ ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 11
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the six month period ended June 30, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Other Total
Common Additional Comprehensive Retained Stockholder's
Stock Capital Income 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 290,150 290,150
Change in other comprehensive
income, net of tax of
($12,456) (18,452) (18,452)
Cash dividends paid (168,600) (168,600)
-------- ------------ ----------------- ------------ ------------
Balance, June 30, 1997 $ 1 $ 5,212,618 $ 73,652 $ 1,320,658 $ 6,606,929
======== ============ ================= ============ ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 12
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six month period
ended June 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Consolidated net income $ 308,512 $ 290,150
Non-cash and operating activities adjustments:
Depreciation and amortization 93,915 85,104
Amortization of deferred policy acquisition costs and
value of life business acquired 43,868 55,481
Policy acquisition costs deferred (47,569) (53,216)
Life insurance policy liabilities 12,321 9,115
Provision for non-life losses and loss adjustment expenses 102,715 0
Universal life type contracts:
Deposits received 149,211 147,646
Withdrawals (119,934) (116,037)
Interest credited 33,210 30,335
Equity in earnings of joint ventures (888) (1,760)
Gain on sales of assets (24,880) (49,972)
Gain on sale of subsidiaries 0 (16,536)
Changes in assets and liabilities:
Current assets and liabilities (52,101) (8,316)
Non-current assets and liabilities 15,558 (64,708)
Other, net (14,131) (12,023)
---------- -----------
Net cash provided by operating activities 499,807 295,263
---------- -----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (881,627) (947,134)
Purchases of properties (28,260) (57,241)
Proceeds from sales and maturities of investments
available-for-sale 419,250 576,788
Proceeds from sales of properties 10,723 12,719
Proceeds from sale of subsidiaries 0 335,408
Mortgage loan collections 12,043 10,149
Increase in policy loans (10,058) (7,993)
Other, net (1,128) (3,946)
---------- -----------
Net cash used in investing activities (479,057) (81,250)
---------- -----------
Cash Flows from Financing Activities:
Dividends paid to stockholder (88,800) (168,600)
Annuity contracts:
Deposits received 76,388 64,935
Withdrawals (114,140) (80,920)
Interest credited 40,911 39,628
Payment of long-term notes payable (66) (60)
---------- -----------
Net cash used in financing activities (85,707) (145,017)
---------- -----------
Increase/(decrease) in cash and cash equivalents (64,957) 68,996
Cash and cash equivalents - at beginning of year 516,253 499,328
---------- -----------
Cash and cash equivalents - at end of period $ 451,296 $ 568,324
========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 13
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.
("FGI") and its subsidiaries (together, the "Company") as of June 30, 1998,
the related consolidated statements of income, comprehensive income,
stockholder's equity and cash flows for the six month periods ended June 30,
1998 and June 30, 1997, and the consolidated statements of income and
comprehensive income for the three month periods ended June 30, 1998 and June
30, 1997, 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 GAAP for complete
financial statements and should be read in conjunction with the consolidated
balance sheets of the Company as of December 31, 1997 and 1996, 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, 1997.
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
1998 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.
The Company is attorney-in-fact ("AIF") 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 AIF, FGI, or its subsidiaries,
as applicable, provides management services to the Exchanges, their respective
subsidiaries and Farmers Texas County Mutual Insurance Company (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 life insurance subsidiaries: Farmers New World
Life Insurance Company ("Farmers Life"), The Ohio State Life Insurance Company
("OSL") and Investors Guaranty Life Insurance Company ("IGL"). On April 15,
1997, FGI sold OSL and IGL to Great Southern Life Insurance Company, a
subsidiary of Americo Life, Inc.. The contribution to net income of these
subsidiaries in 1997 was $5,507,000, and the combined net assets of these
subsidiaries as of April 15, 1997 was $317,625,000.
In December 1997, Farmers Reinsurance Company ("Farmers Re"), a property
and casualty insurance subsidiary of FGI, was formed and licensed to conduct
business. In January 1998, Farmers Re entered into a quota share reinsurance
treaty with Farmers Insurance
<PAGE> 14
Exchange under which it reinsures a percentage of the auto physical damage
business written by the P&C Group.
As a result of the foregoing, references to the "Insurance Subsidiaries"
within the 1998 consolidated financial statements are to Farmers Life and
Farmers Re, whereas, references to the "Insurance Subsidiaries" within the
1997 consolidated statements of income and comprehensive income and
consolidated statement of cash flows are to Farmers Life, OSL and IGL.
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.
On December 22, 1997, a definitive agreement was reached to merge B.A.T
Industries' Financial Services Businesses ("BAFS") and FGI with Zurich
Insurance Company ("Zurich"). In June 1998, the merger was approved by the
shareholders of B.A.T and Zurich. Completion of this merger is subject to
regulatory consents and tax clearances and is expected to be finalized in late
1998. Under the agreement, the businesses of Zurich, BAFS and FGI will be
transferred to Zurich Financial Services, a new Swiss company with headquarters
in Zurich.
In February 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". This Statement, effective for financial statements
issued for periods ending after December 15, 1997, established 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 1998, the Company adopted SFAS No. 129, "Disclosure of Information
about Capital Structure". This Statement, effective for financial statements
issued for periods ending after December 15, 1997, established standards for
disclosing information about an entity's capital structure. This Statement
eliminated 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 adoption of
this Statement did not have a material impact on the Company's consolidated
financial statements.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". This Statement, effective for fiscal periods beginning after
December 15, 1997, established standards for reporting and displaying
comprehensive income and its components. This Statement mandated 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. As a result of adopting
this Statement, the components of comprehensive income are now stated in the
consolidated statements of comprehensive income. The adoption of this
Statement did not have a material impact on the Company's consolidated
financial statements.
<PAGE> 15
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, established standards for reporting information about
operating segments in annual financial statements and required the reporting
of selected information about operating segments in interim financial reports
issued to shareholders. It also established standards for related disclosures
about products and services, geographic areas, and major customers. This
Statement superseded SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise", and amended SFAS No. 94, "Consolidation of All Majority-
Owned Subsidiaries". As this Statement need not be applied to the interim
financial statements in the initial year of its application, the Company will
adopt SFAS No. 131 beginning with its December 31, 1998 annual financial
statements. The Company does not expect the adoption of this Statement to have
a material impact on its consolidated financial statements.
In February 1998, the FASB released SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This Statement, effective
for financial statements of public and nonpublic enterprises issued for fiscal
years beginning after December 15, 1997, standardized the disclosure
requirements relating to pension and other postretirement benefit plans. It
addressed disclosure only and, as such, did not change the requirements for
measurement or recognition of such plans. This Statement superceded the
disclosure requirements set forth in SFAS No. 87, "Employers' Accounting for
Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits", and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
The Company does not expect the adoption of this Statement to have a material
impact on its consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This SOP, effective
for financial statements issued for periods beginning after December 15, 1998,
applies to all nongovernmental entities and establishes the rules for
capitalizing or expensing internally used software. The Company is currently
reviewing its existing procedures for capitalizing or expensing internally
used software and is still assessing the impact that the adoption of this
Statement will have on its consolidated financial statements.
In June 1998, the FASB released SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement, effective for financial
statements of public and nonpublic entities issued for fiscal years beginning
after June 15, 1999, established accounting and reporting standards for
derivative instruments (including certain derivative instruments embedded in
other contracts) and for hedging activities. SFAS No. 133 required that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This Statement amended SFAS No. 52, "Foreign Currency Translation", and SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments". It
superseded SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 105,
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk", and SFAS
No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments". The Company does not expect the adoption of this
Statement to have a material impact on its consolidated financial statements.
<PAGE> 16
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 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 June 30, 1998 and 1997, a total of 20,000,000 shares of QUIPS were
outstanding.
D. Management fees
As AIF, the Company, or its subsidiaries, as applicable, provides
management services to the P&C Group and receives management fees for the
services rendered. As a result, the Company received management fees from the
P&C Group of $628,834,000 and $608,281,000 for the six month periods ended
June 30, 1998 and June 30, 1997, respectively.
<PAGE> 17
E. Related parties
As of June 30, 1998, 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:
$137,000,000 in October 1998, $135,000,000 in October 1999, and $135,000,000
in October 2000. Interest on these notes is paid semi-annually at coupon
rates of 5.35%, 6.68%, and 6.33%, respectively. On October 7, 1997, a four
year $135,000,000 note with an interest rate of 5.10% matured and the
$135,000,000 note maturing in October 2000 was subsequently issued at an
interest rate of 6.33%. Income earned on the notes outstanding for the six
month periods ended June 30, 1998 and June 30,1997 was $12,447,000 and
$11,617,000, respectively.
F. 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
Insurance Insurance
Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash and cash equivalents -- December 31, 1996 $ 412,018 $ 87,310 $ 499,328
Activity through June 1997 68,996
------------
Cash and cash equivalents -- June 30, 1997 545,482 22,842 $ 568,324
============
Cash and cash equivalents -- December 31, 1997 506,273 9,980 $ 516,253
Activity through June 1998 (64,957)
------------
Cash and cash equivalents -- June 30, 1998 307,845 143,451 $ 451,296
============
</TABLE>
Cash payments for interest were $2,092,000 and $1,073,000 for the six
month periods ended June 30, 1998 and June 30, 1997, respectively, while the
cash payment for dividends to the holders of the Company's QUIPS was
$21,035,000 for each of the six month periods ended June 30, 1998 and June 30,
1997. Cash payments for income taxes were $209,181,000 and $229,309,000 for
the six month periods ended June 30, 1998 and June 30, 1997, respectively.
For the six month period ended June 30, 1997, net cash proceeds from the
sale of OSL and IGL amounted to $335,408,000 and were primarily in
consideration for the following:
Investments $ 823,666,000
Deferred policy acquisition costs and value of life 181,196,000
business acquired
Life insurance policy liabilities (690,426,000)
<PAGE> 18
G. Subsequent events
On July 10, 1998, the Company received $650,000,000 from the Exchanges in
repayment of the outstanding certificates of contribution previously issued by
the Exchanges to the Company. As of June 30, 1998, the Company held
$684,380,000 of such certificates of contribution. In addition to the
$650,000,000 repayment, the Company also received $25,647,000 of accrued
interest. (For additional information, refer to the Form 8-K filed on July
17, 1998.)
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's principal activities are providing management services to
the property and casualty insurance companies, underwriting life insurance and
annuity products, and providing reinsurance coverage to the P&C Group.
Revenues and expenses relating to these principal business activities are
reflected in the Company's Consolidated Financial Statements prepared in
accordance with GAAP, which differs from statutory accounting practices
("SAP"), which Farmers Life and Farmers Re are required to use for
regulatory reporting purposes.
The Company underwrites life insurance and annuity products through
Farmers Life. Revenues attributable to traditional life insurance products,
such as whole life or term life 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 June 30, 1998 Compared to Three Months Ended June 30, 1997
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $328.7 million for
the three months ended June 30, 1997 to $336.4 million for the three months
ended June 30, 1998, an increase of $7.7 million, or 2.3%. 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 $2,515.7
million in the second quarter of 1997 to $2,562.0 million in the second
quarter of 1998 due primarily to higher premiums earned in the Auto and Fire
lines of business.
<PAGE> 19
Operating Expenses. Operating expenses as a percentage of operating
revenues decreased from 55.7% in the second quarter of 1997 to 55.2% in
the second quarter of 1998, a decrease of 0.5%. Although operating
expenses increased by 1.4% between years, this was significantly less than
the 4.0% increase in policies-in-force and the 2.3% increase in operating
revenues.
Salaries and Employee Benefits. Salaries and employee benefits
decreased from $83.7 million for the three months ended June 30, 1997 to
$83.6 million for the three months ended June 30, 1998, a decrease of
$0.1 million, or 0.1%.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $23.1 million for the three months ended June 30, 1997 to
$26.4 million for the three months ended June 30, 1998, an increase of
$3.3 million, or 14.3%. 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 AIF 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, 1998 and June
30, 1997.
General and Administrative Expenses. General and administrative
expenses decreased from $50.7 million for the three months ended June 30,
1997 to $50.1 million for the three months ended June 30, 1998, a
decrease of $0.6 million, or 1.2%.
Net Investment Income. Net investment income increased from $36.1
million for the three months ended June 30, 1997 to $37.2 million for the
three months ended June 30, 1998 due to a larger invested asset base.
Net Realized Gains. Net realized gains decreased from $10.3 million for
the three months ended June 30, 1997 to $8.7 million for the three months
ended June 30, 1998 due to the fact that significant gains were realized in
1997 in connection with restructuring the equities portfolio.
Gain on Sale of Subsidiaries. The gain on the April 15, 1997 sale of
OSL and IGL as of June 30, 1997 was $16.5 million.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend
expense related to the $500.0 million of QUIPS issued in 1995 was $10.5
million for the three months ended June 30, 1998 and June 30, 1997.
Provision for Income Taxes. Provision for income taxes decreased from
$79.3 million for the three months ended June 30, 1997 to $74.3 million for
the three months ended June 30, 1998, a decrease of $5.0 million, or 6.3%.
This decrease was due to the fact that $6.3 million of additional taxes were
recorded in the second quarter of 1997 related to the sale of OSL and IGL.
<PAGE> 20
Management Services Income. As a result of the foregoing, management
services income decreased from $118.6 million for the three months ended June
30, 1997 to $111.7 million for the three months ended June 30, 1998, a
decrease of $6.9 million, or 5.8%.
Insurance Subsidiaries
In December 1997, Farmers Re, a property and casualty insurance subsidiary
of FGI, was formed and licensed to conduct business. In January 1998, Farmers
Re entered into a quota share reinsurance treaty with Farmers Insurance
Exchange under which it reinsures a percentage of the auto physical damage
business written by the P&C Group. As a result, for the three month period
ended June 30, 1998, Farmers Re assumed $250.0 million of premiums, incurred
$154.1 million of non-life losses and loss adjustment expenses and incurred
$89.6 million of non-life reinsurance commissions. For the three months ended
June 30, 1998, Farmers Re contributed $9.3 million to income before taxes and
$6.0 million to net income.
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 or IGL for the three months ended June 30,
1998, compared to a $0.7 million contribution to net income from OSL and IGL
for the three months ended June 30, 1997.
The following commentary addresses the results of the Company's remaining
life insurance subsidiary, Farmers Life.
Total Revenues. Total revenues increased from $160.6 million for the three
months ended June 30, 1997 to $169.7 million for the three months ended June
30, 1998, an increase of $9.1 million, or 5.7%.
Life Premiums. Premiums increased $5.5 million for the three months
ended June 30, 1998, or 14.6%, over the three months ended June 30, 1997.
This increase was due to growth in the average volume of insurance in-
force which was driven by sales of the Premier Whole Life ("PWL") and
Farmers Premier 20 Year Term ("FP20") products, coupled with an increase
in the number of annuities entering the payment phase ("AIP").
Life Policy Charges. Policy charges increased $1.6 million for the
three months ended June 30, 1998, or 3.2%, over the three months ended
June 30, 1997, reflecting growth in the average volume of universal life-
type insurance in-force.
Investment Income. Net investment income increased $2.8 million for
the three months ended June 30, 1998, or 4.0%, over the three months
ended June 30, 1997. This increase was due to higher bond interest
income earned on a higher invested asset base resulting from growth in
the universal life mean fund balance.
Net Realized Gains. Net realized gains decreased $0.8 million, from
$3.7 million for the three months ended June 30, 1997 to $2.9 million for
the three months ended June 30, 1998. This decrease was due to lower
gains realized on bond and preferred stock sales in 1998.
Total Operating Expenses. Total operating expenses increased from $106.6
million for the three months ended June 30, 1997 to $114.3 million for the
three months ended June 30, 1998, an increase of $7.7 million, or 7.2%.
<PAGE> 21
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges increased from $69.7 million for the three
months ended June 30, 1997 to $76.5 million for the three months ended
June 30, 1998, an increase of $6.8 million, or 9.8%.
Policy benefits. Policy benefits, which consist primarily of
death and surrender benefits on life products, increased $3.1
million over June 30, 1997 to $33.4 million, due to growth in the
volume of life insurance in-force and to an increase in death
benefits per thousand of volume of insurance in-force.
Increase in liability for future benefits. Increase in
liability for future benefits expense increased from $3.1 million
for the three months ended June 30, 1997 to $5.6 million for the
three months ended June 30, 1998. This increase was primarily
attributable to sales of the PWL, AIP and the new Farmers Premier
product series, especially the FP20 product introduced in October
1997.
Interest credited to policyholders. Interest credited to
policyholders, which represents the amount credited under universal
life-type contracts and deferred annuities to policyholder funds on
deposit, increased from $36.3 million for the three months ended
June 30, 1997 to $37.5 million for the three months ended June 30,
1998, or 3.3%, reflecting growth in the universal life mean fund
balance.
General Operating Expenses. General operating expenses increased
from $36.9 million for the three months ended June 30, 1997 to $37.8
million for the three months ended June 30, 1998, an increase of $0.9
million, or 2.4%.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense increased from $21.7 million for the three
months ended June 30, 1997 to $22.3 million for the three months
ended June 30, 1998. This increase resulted from lower
terminations of traditional life products.
Commissions. Commissions increased from $4.6 million for the
three months ended June 30, 1997 to $4.7 million for the three
months ended June 30, 1998, or $0.1 million.
General and Administrative Expenses. General and administrative
expenses increased from $10.6 million for the three months ended
June 30, 1997 to $10.8 million for the three months ended June 30,
1998, or 1.9%. This increase resulted mainly from increased premium
taxes.
Provision for Income Taxes. Provision for income taxes increased from
$18.1 million for the three months ended June 30, 1997 to $19.3 million for
the three months ended June 30, 1998, an increase of $1.2 million due to an
increase in pretax operating income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
increased from $35.9 million for the three months ended June 30, 1997 to $36.1
million for the three months ended June 30, 1998, an increase of $0.2 million,
or 0.6%.
<PAGE> 22
Consolidated Net Income
Consolidated net income of the Company decreased from $155.1 million for
the three months ended June 30, 1997 to $153.8 million for the three months
ended June 30, 1998, a decrease of $1.3 million, or 0.8%.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $649.5 million for
the six months ended June 30, 1997 to $671.9 million for the six months ended
June 30, 1998, an increase of $22.4 million, or 3.4%. This growth reflects
higher gross premiums earned by the P&C Group, which increased from $4,983.1
million in the first six months of 1997 to $5,109.3 million in the first six
month of 1998 primarily as a result of policy growth experienced within the
Auto and Fire lines of business despite increasingly competitive market
conditions.
Operating Expenses. Operating expenses as a percentage of operating
revenues decreased from 56.0% for the six months ended June 30, 1997 to 55.0%
for the six months ended June 30, 1998, a decrease of 1.0%. Although
operating expenses increased by 1.6% between years, this was significantly
less than the 4.0% increase in policies-in-force and the 3.4% increase in
operating revenues.
Salaries and Employee Benefits. Salaries and employee benefits
increased from $167.0 million for the six months ended June 30, 1997 to
$167.9 million for the six months ended June 30, 1998, an increase of $0.9
million, or 0.5%. This increase was primarily attributable to the use of
temporary outside contractors to complete and implement new technology
systems.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $45.4 million for the six months ended June 30, 1997 to
$52.7 million for the six months ended June 30, 1998, an increase of $7.3
million, or 16.1%. This increase was primarily due to higher
amortization expense associated with information technology systems
software.
Amortization of Attorney-In-Fact Contracts and Goodwill.
Amortization expense was $51.4 million in each of the six month periods
ended June 30, 1998 and June 30, 1997. These assets are being amortized
on a straight-line basis over forty years.
General and Administrative Expenses. General and administrative
expenses decreased from $99.8 million for the six months ended June 30,
1997 to $97.4 million for the six months ended June 30, 1998, a decrease
of $2.4 million, or 2.4%. This decrease was due substantially to lower
advertising expenses due to a delay in the start of the 1998 campaign
coupled with lower legal fees.
Net Investment Income. Net investment income increased from $70.4
million for the six months ended June 30, 1997 to $77.0 million for the six
months ended June 30, 1998 due substantially to a larger asset base.
<PAGE> 23
Net Realized Gains. Net realized gains decreased from $40.7 million for
the six months ended June 30, 1997 to $18.1 million for the six months ended
June 30, 1998 due to the fact that significant gains were realized in 1997 in
connection with restructuring the equities portfolio.
Gain on Sale of Subsidiaries. A $16.5 million gain related to the sale
of OSL and IGL was recognized through June 30, 1997.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend
expense was $21.0 million in each of the six month periods ended June 30, 1998
and June 30, 1997.
Provision for Income Taxes. Provision for income taxes decreased from
$176.0 million for the six months ended June 30, 1997 to $151.1 million for
the six months ended June 30, 1998, a decrease of $24.9 million, or 14.1%.
This decrease was due to the fact that $27.3 million of taxes were recorded in
1997 related to the sale of OSL and IGL.
Management Services Income. As a result of the foregoing, management
services income increased from $216.6 million for the six months ended June
30, 1997 to $225.8 million for the six months ended June 30, 1998, an increase
of $9.2 million, or 4.2%.
Insurance Subsidiaries
Through June 30, 1998, Farmers Re assumed $500.0 million of premiums,
incurred $330.7 million of non-life losses and loss adjustment expenses and
incurred $156.8 million of non-life reinsurance commissions. For the first
six months of 1998, Farmers Re contributed $16.2 million to income before
taxes and $10.6 million to net income.
As OSL and IGL were sold to Great Southern Life Insurance Company on
April 15, 1997, there was no contribution to net income from OSL or IGL for
the six months ended June 30, 1998, compared to a $5.5 million contribution to
net income for the six months ended June 30, 1997.
The following commentary addresses the results of the Company's remaining
life insurance subsidiary, Farmers Life.
Total Revenues. Total revenues increased from $315.3 million for the six
months ended June 30, 1997 to $336.6 million for the six months ended June 30,
1998, an increase of $21.3 million, or 6.8%.
Life Premiums. Premiums increased $9.5 million for the six months
ended June 30, 1998, or 12.7%, over the six months ended June 30, 1997.
This increase was due to a 14.2% growth in the average volume of
insurance in-force which was driven by sales of the PWL and FP20
products. Also contributing to the increase in premiums was an increase
in the number of annuities entering the payment phase.
Life Policy Charges. Policy charges increased $3.3 million for the
six months ended June 30, 1998, or 3.3%, over the six months ended June
30, 1997, reflecting a 3.6% growth in the average volume of universal
life-type insurance in-force.
<PAGE> 24
Investment Income. Net investment income increased $7.4 million for
the six months ended June 30, 1998, or 5.5%, over the six months ended
June 30, 1997. This increase was due to higher bond interest income
earned on a higher invested asset base resulting from a 12.4% growth in
the universal life mean fund balance.
Net Realized Gains. Net realized gains increased by $1.1 million,
from $5.4 million for the six months ended June 30, 1997 to $6.5 million
for the six months ended June 30, 1998. This increase was due to higher
gains realized on bond sales.
Total Operating Expenses. Total operating expenses increased from $213.2
million for the six months ended June 30, 1997 to $223.9 million for the six
months ended June 30, 1998, an increase of $10.7 million, or 5.0%.
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges increased from $136.8 million for the six
months ended June 30, 1997 to $149.1 million for the six months ended
June 30, 1998, an increase of $12.3 million, or 9.0%.
Policy benefits. Policy benefits increased $6.4 million over
June 30, 1997 to $64.2 million, due to a 7.0% growth in the volume
of life insurance in-force and an increase in death benefits per
thousand of volume of insurance in-force.
Increase in liability for future benefits. Increase in
liability for future benefits expense increased from $7.1 million
for the six months ended June 30, 1997 to $10.3 million for the six
months ended June 30, 1998. This increase was primarily
attributable to sales of the PWL, AIP and the new Farmers Premier
product series, especially the FP20 product introduced in October
1997.
Interest credited to policyholders. Interest credited to
policyholders increased from $71.9 million for the six months ended
June 30, 1997 to $74.6 million for the six months ended June 30,
1998, or 3.8%, reflecting the 12.4% growth in the universal life
mean fund balance.
General Operating Expenses. General operating expenses decreased
from $76.4 million for the six months ended June 30, 1997 to $74.8
million for the six months ended June 30, 1998, a decrease of $1.6
million, or 2.1%.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense decreased from $46.2 million for the six months
ended June 30, 1997 to $43.9 million for the six months ended June
30, 1998 due to higher universal life death claims experience in
1998.
Commissions. Commissions increased from $9.2 million for the
six months ended June 30, 1997 to $9.4 million for the six months
ended June 30, 1998, or $0.2 million.
General and Administrative Expenses. General and administrative
expenses increased from $21.0 million for the six months ended June
30, 1997 to $21.5 million for the six months ended June 30, 1998, or
2.4%. This increase resulted mainly from higher employee benefit
expenses and increased premium taxes.
<PAGE> 25
Provision for Income Taxes. Provision for income taxes increased from
$34.0 million for the six months ended June 30, 1997 to $40.6 million for the
six months ended June 30, 1998, an increase of $6.6 million due to an increase
in pretax operating income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
increased from $68.1 million for the six months ended June 30, 1997 to $72.1
million for the six months ended June 30, 1998, an increase of $4.0 million,
or 5.9%.
Consolidated Net Income
Consolidated net income of the Company increased from $290.2 million for
the six months ended June 30, 1997 to $308.5 million for the six months ended
June 30,1998, an increase of $18.3 million, or 6.3%.
Liquidity and Capital Resources
As of June 30, 1998 and June 30, 1997 the Company held cash and cash
equivalents of $451.3 million and $568.3 million, respectively. In addition,
as of June 30, 1998, the Company had available revolving credit facilities
enabling it to borrow up to $500.0 million in the event such a need should
arise.
Net cash provided by operating activities increased from $295.3 million
for the six months ended June 30, 1997 to $499.8 million for the six months
ended June 30, 1998, an increase of $204.5 million, or 69.3%. This increase
in cash was due substantially to a $102.7 million increase in the provision
for non-life losses and loss adjustment expenses held by Farmers Re, an $18.4
million increase in consolidated net income and a decrease in non-current
liabilities in 1997.
Net cash used in investing activities increased from $81.3 million for
the six months ended June 30, 1997 to $479.1 million for the six months ended
June 30, 1998, a decrease in cash of $397.8 million. This decrease in cash
was primarily due to the fact that in 1997 $335.0 million of proceeds was
received from the sale of OSL and IGL.
Net cash used in financing activities decreased from $145.0 million for
the six months ended June 30, 1997 to $85.7 million for the six months ended
June 30, 1998, a decrease of $59.3 million, or 40.9%. This increase in cash
is the result of a $79.8 million decrease in dividends paid to the Company's
stockholder.
<PAGE> 26
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. None.
(b) Reports on Form 8-K.
On July 17, 1998, FGI filed a report on Form 8-K
announcing the private placement of $650,000,000 of Trust
Surplus Note Securities.
<PAGE> 27
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 7, 1998 /s/ Martin D. Feinstein
---------------------------------------------
Date Martin D. Feinstein
Chairman of the Board,
President and Chief Executive Officer
August 7, 1998 /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, 1998 and the related consolidated statements of income,
comprehensive income, stockholder's equity and cash flows for the six
month period ended June 30, 1998 (unaudited) and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
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500,000
0
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</TABLE>
