<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 March 31, 1999
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)
(323) 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 March 31, 1999 was 1,000 shares.
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FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1999
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements
Consolidated Balance Sheets - Assets
March 31, 1999 and December 31, 1998 4
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity
March 31, 1999 and December 31, 1998 5
Consolidated Statements of Income
Three Month Periods ended March 31, 1999 and
March 31, 1998 6
Consolidated Statements of Comprehensive Income
Three Month Periods ended March 31, 1999 and
March 31, 1998 7
Consolidated Statement of Stockholders' Equity
Three Month Period ended March 31, 1999 8
Consolidated Statement of Stockholder's Equity
Three Month Period ended March 31, 1998 9
Consolidated Statements of Cash Flows
Three Month Periods ended March 31, 1999 and
March 31, 1998 10
Notes to Interim Financial Statements 11
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks 21
PART II. OTHER INFORMATION 21
SIGNATURES 22
<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>
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Current assets, excluding Insurance Subsidiaries:
Cash and cash equivalents $ 315,718 $ 253,828
Marketable securities, at market value 74,612 53,536
Accrued interest 16,252 32,542
Accounts receivable, principally from the P&C Group 52,668 35,271
Deferred taxes 28,504 27,044
Prepaid expenses and other 27,779 22,126
------------- ------------
Total current assets 515,533 424,347
------------- ------------
Investments, excluding Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $577,219 and $597,262) 586,143 608,539
Mortgage loans on real estate 184 196
Common stocks available-for-sale, at market value
(cost: $281,325 and $278,107) 350,673 354,465
Certificates of contribution of the P&C Group 34,380 34,380
Real estate, at cost (net of accumulated depreciation:
$39,263 and $32,363) 70,090 62,820
Joint ventures, at equity 840 840
------------- ------------
1,042,310 1,061,240
------------- ------------
Other assets, excluding Insurance Subsidiaries:
Notes receivable - affiliate 1,057,000 1,057,000
Goodwill (net of accumulated amortization:
$615,451 and $600,440) 1,786,304 1,801,315
Attorney-in-fact contracts (net of accumulated amortization:
$437,941 and $427,260) 1,271,102 1,281,783
Other assets 245,110 258,912
------------- ------------
4,359,516 4,399,010
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $297,694 and $293,425) 413,120 402,061
------------- ------------
Investments of Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $4,333,994 and $4,178,305) 4,427,502 4,356,066
Mortgage loans on real estate 44,031 52,879
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $1,153 and $1,153) 1,233 1,270
Common stocks available-for-sale, at market value
(cost: $98,326 and $98,399) 106,960 106,095
Surplus note of the P&C Group 119,000 119,000
Policy loans 189,134 185,211
Real estate, at cost (net of accumulated depreciation:
$28,923 and $28,366) 56,161 59,047
Joint ventures, at equity 8,608 8,456
S&P 500 call options, at fair value (cost: $12,364 and $11,305) 17,662 14,817
------------- ------------
4,970,291 4,902,841
------------- ------------
Other assets of Insurance Subsidiaries:
Cash and cash equivalents 73,656 73,724
Reinsurance premiums receivable - P&C Group 55,523 80,124
Accrued investment income 66,619 59,910
Deferred policy acquisition costs and value of life business
acquired 824,107 801,690
Securities lending collateral 461,987 461,801
Other assets 27,081 19,856
------------- ------------
1,508,973 1,497,105
------------- ------------
Total assets $ 12,809,743 $ 12,686,604
============= ============
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 STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Current liabilities, excluding Insurance Subsidiaries:
Notes and accounts payable:
P&C Group $ 82 $ 137
Other 57,771 28,420
Accrued liabilities:
Profit sharing 12,465 50,404
Income taxes 128,002 69,906
Other 19,154 30,724
------------ ------------
Total current liabilities 217,474 179,591
------------ ------------
Other liabilities, excluding Insurance Subsidiaries:
Real estate mortgages payable 25 25
Non-current deferred taxes 595,904 601,047
Other 140,769 136,135
------------ ------------
736,698 737,207
------------ ------------
Liabilities of Insurance Subsidiaries:
Policy liabilities:
Future policy benefits 3,237,922 3,184,248
Claims 32,416 26,177
Policyholder dividends 1 1
Other policyholder funds 57,328 57,357
Provision for non-life losses and loss adjustment expenses 95,425 105,944
Income taxes (including deferred taxes: $137,065 and $164,729) 166,359 168,618
Unearned investment income 1,003 971
Reinsurance payable - P&C Group 186,631 167,709
Securities lending liability 461,987 461,801
Other liabilities 69,770 62,573
------------ ------------
4,308,842 4,235,399
------------ ------------
Total liabilities 5,263,014 5,152,197
------------ ------------
Commitments and contingencies
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 500,000 500,000
------------ ------------
Stockholders' Equity:
Class A common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 1999 and
December 31, 1998 - 500 shares 0.5 0.5
Class B common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 1999 and
December 31, 1998 - 500 shares 0.5 0.5
Additional capital 5,212,618 5,212,618
Accumulated other comprehensive income (net of deferred
taxes: $54,126 and $77,897) 100,519 144,742
Retained earnings 1,733,591 1,677,046
------------ ------------
Total stockholders' equity 7,046,729 7,034,407
------------ ------------
Total liabilities and stockholders' equity $ 12,809,743 $12,686,604
============ ============
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>
Three month period
ended March 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 802,153 $ 753,148
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 365,778 $ 335,539
----------- ----------
Operating expenses 196,761 183,649
Merger related expenses 244 0
----------- ----------
Total expenses 197,005 183,649
----------- ----------
Operating income 168,773 151,890
Net investment income 28,762 39,800
Net realized gains/(losses) (233) 9,813
Dividends on preferred securities of subsidiary trusts (10,518) (10,518)
----------- ----------
Income before provision for taxes 186,784 190,985
Provision for income taxes 76,778 76,826
----------- ----------
Management services income 110,006 114,159
----------- ----------
Insurance Subsidiaries:
Life premiums 47,810 41,092
Non-life reinsurance premiums 250,000 250,000
Life policy charges 52,056 51,419
Investment income, net of expenses 81,241 71,498
Net realized gains 5,268 3,600
----------- -----------
Total revenues 436,375 417,609
----------- -----------
Non-life losses and loss adjustment expenses 167,916 176,623
Life policyholders' benefits and charges 86,233 72,626
Non-life reinsurance commissions 75,843 67,127
General operating expenses 38,991 37,028
----------- -----------
Total operating expenses 368,983 353,404
----------- -----------
Income before provision for taxes 67,392 64,205
Provision for income taxes 22,353 23,652
----------- -----------
Insurance Subsidiaries income 45,039 40,553
----------- -----------
Consolidated net income $ 155,045 $ 154,712
=========== ===========
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>
Three month period
ended March 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Consolidated net income $ 155,045 $ 154,712
----------- -----------
Other comprehensive income/(loss), net of tax:
Unrealized holding gains/(losses) on securities:
Unrealized holding gains/(losses) arising during the
period, net of tax of ($32,397) and $12,350 $ (60,244) $ 22,963
Less: reclassification adjustment for losses
included in net income, net of tax of $481 and $772 894 1,434
----------- -----------
Net unrealized holding gains/(losses) on securities,
net of tax of ($31,916) and $13,122 (59,350) 24,397
Change in effect of unrealized gains/(losses) on other
insurance accounts, net of tax of $8,145 and
($695) 15,127 (1,290)
----------- -----------
Other comprehensive income/(loss) (44,223) 23,107
----------- -----------
Comprehensive income $ 110,822 $ 177,819
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 8
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three month period ended March 31, 1999
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Other Total
Common Additional Comprehensive Retained Stockholders'
Stock Capital Income Earnings Equity
-------- ----------- ----------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 1 $ 5,212,618 $ 144,742 $1,677,046 $ 7,034,407
Net income 155,045 155,045
Unrealized holding losses
arising during the period,
net of tax of ($32,397) (60,244) (60,244)
Reclassification adjustment
for losses included in net
income, net of tax of $481 894 894
Change in effect of unrealized
gains on other insurance
accounts, net of tax of $8,145 15,127 15,127
Cash dividends paid (98,500) (98,500)
-------- ----------- ---------------- ---------- -------------
Balance, March 31, 1999 $ 1 $ 5,212,618 $ 100,519 $1,733,591 $ 7,046,729
======== =========== ================ ========== =============
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 three month period ended March 31, 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 154,712 154,712
Unrealized holding gains
arising during the period,
net of tax of $12,350 22,963 22,963
Reclassification adjustment
for losses included in net
income, net of tax of $772 1,434 1,434
Change in effect of unrealized
losses on other insurance
accounts, net of tax of ($695) (1,290) (1,290)
Cash dividends paid (88,800) (88,800)
-------- ------------ --------------- ---------- ------------
Balance, March 31, 1998 $ 1 $ 5,212,618 $ 136,656 $1,521,318 $ 6,870,593
======== ============ =============== ========== ============
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>
Three month period
ended March 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Consolidated net income $ 155,045 $ 154,712
Non-cash and operating activities adjustments:
Depreciation and amortization 39,900 46,774
Amortization of deferred policy acquisition costs and
value of life business acquired 23,731 21,560
Policy acquisition costs deferred (22,876) (23,039)
Life insurance policy liabilities 15,883 6,126
Provision for non-life losses and loss adjustment expenses (10,519) 100,622
Universal life type contracts:
Deposits received 75,279 74,932
Withdrawals (61,821) (60,003)
Interest credited 17,690 16,359
Equity in earnings of joint ventures (2,210) (581)
Gain on sales of assets (4,922) (13,025)
Changes in assets and liabilities:
Current assets and liabilities 99,466 (86,371)
Non-current assets and liabilities (12,356) 20,205
Other, net (5,832) (10,348)
---------- -----------
Net cash provided by operating activities 306,458 247,923
---------- -----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (471,084) (432,169)
Purchases of properties (7,403) (14,367)
Proceeds from sales and maturities of investments
available-for-sale 311,893 178,499
Proceeds from sales of properties 2,664 6,371
Mortgage loan collections 9,032 3,801
Increase in policy loans (3,923) (4,859)
Other, net (170) 12,994
----------- ------------
Net cash used in investing activities (158,991) (249,730)
----------- ------------
Cash Flows from Financing Activities:
Dividends paid to stockholders (98,500) (88,800)
Annuity contracts:
Deposits received 36,783 29,758
Withdrawals (45,819) (53,598)
Interest credited 21,891 21,344
---------- -----------
Net cash used in financing activities (85,645) (91,296)
---------- -----------
Increase/(decrease) in cash and cash equivalents 61,822 (93,103)
Cash and cash equivalents - at beginning of year 327,552 516,253
---------- -----------
Cash and cash equivalents - at end of period $ 389,374 $ 423,150
========== ===========
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. ("FGI")
and its subsidiaries (together, the "Company") as of March 31, 1999, the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the three month periods ended March 31, 1999 and
March 31, 1998, 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, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998.
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
1999 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 the 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 certain 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 gross premiums earned. The P&C Group is owned by the policyholders of the
Exchanges and Farmers Texas County Mutual. Accordingly, the Company has no
ownership interest in the P&C Group.
Farmers New World Life Insurance Company ("Farmers Life"), a Washington
based insurance company, is a wholly owned subsidiary of the Company. Farmers
Life 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 P&C Group's agents.
Farmers Reinsurance Company ("Farmers Re"), a wholly owned subsidiary of
the Company, reinsures a percentage of the auto physical damage business
written by the P&C Group. Under a quota share reinsurance treaty, Farmers Re
assumes monthly premiums of $83,333,000 and a quota share percentage of
ultimate net losses sustained by the P&C Group in its auto physical damage
lines of business. This treaty also provides for the P&C Group to receive a
provisional ceding commission of 20% of premiums with additional experience
commissions that depend on loss experience. This experience commission
arrangement limits Farmers Re's potential underwriting gain on the assumed
business to 2.5% of premiums assumed.
On March 31, 1999, Farmers Re and the P&C Group commuted $105,944,000
of losses and loss adjustment expenses associated with the 1998 accident
year. As a result, on May 15, 1999, Farmers Re will pay the P&C Group
$105,944,000 of losses and loss adjustment expenses and $8,205,000 of accrued
interest in settlement of this commutation.
<PAGE> 12
References to the "Insurance Subsidiaries" within the consolidated
financial statements are to Farmers Life and Farmers Re.
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.
In September 1998, B.A.T's Financial Services Businesses, which included
the Company, were merged with Zurich Insurance Company ("Zurich"). The
businesses of Zurich and B.A.T's Financial Services Businesses were
transferred to Zurich Financial Services ("ZFS"), a new Swiss company with
headquarters in Zurich. As a result, each two shares of the Company's prior
outstanding stock were recapitalized into one share of Class A Common Stock,
par value $1.00 per share ("Ordinary Shares"), and one share of Class B Common
Stock, par value $1.00 per share ("Income Shares"). Under the merger
agreement, all Ordinary Shares became wholly owned by ZFS and all Income
Shares became wholly owned by Allied Zurich Holdings Limited, an affiliated
company created during the restructuring of B.A.T. This merger was accounted
for by ZFS as a pooling of interests and, therefore, no purchase accounting
adjustments were made to the Company's assets and liabilities.
In 1999, the Company adopted Statement of Position ("SOP") No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". This SOP applies to all nongovernmental entities and
establishes the rules for capitalizing or expensing internally developed
software.
In 1999, the Company adopted SOP No. 98-5, "Reporting on the Costs of
Start Up Activities". This SOP addresses the recording of costs associated
with a one-time activity, such as opening a new facility, introducing a new
product or service, conducting business in a new territory or conducting
business with a new class of customer.
In 1998, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("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, establishes accounting and reporting standards
for derivative instruments (including certain derivative instruments embedded
in other contracts) and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at market
value. This Statement amends SFAS No. 52, "Foreign Currency Translation" and
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments". It
supersedes 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.
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.
<PAGE> 13
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 $410,000,000 of 8.45% Cumulative Quarterly Income Preferred
Securities ("QUIPS"), Series A and $90,000,000 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 March 31, 1999 and 1998, 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 $343,617,000 and $314,287,000 for the three month periods
ended March 31, 1999 and March 31, 1998, respectively.
E. Related parties
As of March 31, 1999, the Company held $1,057,000,000 of notes receivable
from British American Financial Services (UK and International), Ltd.
("BAFS"), a subsidiary of ZFS. The Company purchased notes from BAFS on
September 3, 1998, using proceeds received in settlement of $407,000,000 of
B.A.T Capital Corporation notes and proceeds received from the redemption of
$650,000,000 of certificates of contribution of the P&C Group. The
$1,057,000,000 notes receivable are fixed rate medium-term notes with maturity
dates as follows: $200,000,000 in September 2000, $207,000,000 in September
2001, $200,000,000 in September 2002, $200,000,000 in September 2003 and
$250,000,000 in September 2004. Interest on these notes is paid semi-annually
at coupon rates of 5.44%, 5.48%, 5.67%, 5.71% and 5.78%, respectively. Income
earned on these notes through March 31, 1999 was $14,858,400.
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:
<PAGE> 14
<TABLE>
<CAPTION>
Excluding
Insurance Insurance
Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash and cash equivalents -- December 31, 1997 $ 506,273 $ 9,980 $ 516,253
Activity through March 1998 (93,103)
---------
Cash and cash equivalents -- March 31, 1998 268,935 154,215 $ 423,150
=========
Cash and cash equivalents -- December 31, 1998 253,828 73,724 $ 327,552
Activity through March 1999 61,822
---------
Cash and cash equivalents -- March 31, 1999 315,718 73,656 $ 389,374
=========
</TABLE>
Cash payments for interest were $1,415,000 and $1,345,000 for the three
month periods ended March 31, 1999 and March 31, 1998, respectively, while
cash payments for dividends to the holders of the Company's QUIPS were
$10,518,000 for each of the three month periods ended March 31, 1999 and
March 31, 1998. Cash payments for income taxes were $22,395,000 and
$46,794,000 for the three month periods ended March 31, 1999 and March 31,
1998, respectively.
G. Certificates of contribution and surplus note of the P&C Group
In September 1998, Farmers Life purchased a $119,000,000 surplus note of
the P&C Group which bears interest at 6.10% annually. In addition, the
Company has from time to time made surplus contributions to the P&C Group and,
in return, has received certificates of contribution of the P&C Group which
bear interest at various rates. As of March 31, 1999, the Company held
certificates of contribution of the P&C Group totaling $34,380,000.
Conditions governing repayment of these amounts are outlined in the
certificates of contribution and the surplus note. Generally, repayment may
be made only when the surplus balance of the issuer reaches a certain
specified level, and then only after approval is granted by the issuer's
governing Board and the appropriate Department of Insurance.
H. Operating segments
The Company's principal activities are the provision of management
services to the P&C Group and the ownership and operation of the life and
reinsurance subsidiaries. These activities are managed separately as each
offers a unique set of services. As a result, the Company is comprised of the
following three reportable operating segments as defined in SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information": the
management services segment, the life insurance segment and the reinsurance
segment.
The basis of accounting used by the Company's management in evaluating
segment performance and determining how resources should be allocated is
referred to as the Company's GAAP historical basis, which excludes the effects
of the purchase accounting ("PGAAP") adjustments related to the acquisition of
the Company by B.A.T in December 1998 (See Note A). This differs from the
basis used in preparing the Company's financial statements included in the SEC
Form 10-K and 10-Q reports, which incorporates the effects of the PGAAP
adjustments.
The Company accounts for intersegment transactions as if they were to
third parties and, as such, records the transactions at current market
prices. There were no intersegment revenues among the Company's three
reportable operating segments for the three month periods ended March 31,
1999 and March 31, 1998.
<PAGE> 15
Information regarding the Company's reportable operating segments follows:
<TABLE>
<CAPTION>
Three month period ended March 31, 1999
---------------------------------------------------------------------------------------------------------
GAAP historical basis PGAAP adjustments Consolidated
------------------------------------------------------ -------------------------------------
Management Life Management Life PGAAP
services insurance Reinsurance Total services insurance Total basis
------------------------------------------------------ ------------------------------------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 365,778 $ 179,219 (a) $ 257,402 (a) $ 802,399 $ 0 $ (246) $ (246) $ 802,153
Investment
income 29,123 77,880 6,528 113,531 (361) (246) (607) 112,924
Investment
expenses 0 (2,921) 0 (2,921) 0 0 0 (2,921)
Net realized
gains/(losses) (233) 4,394 874 5,035 0 0 0 5,035
Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0 0 0 (10,518)
Income before
provision for
taxes 213,925 77,215 13,591 304,731 (27,141) (23,414) (50,555) 254,176
Provision for
income taxes 81,426 27,086 3,639 112,151 (4,648) (8,372) (13,020) 99,131
Depreciation and
amortization 12,748 1,314 (b) 0 14,062 26,295 (c) 23,274 (d) 49,569 63,631
- -----------------------
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains/(losses).
(b) Amount includes the historical basis amortization associated with the DAC
asset which included a $23.3 million adjustment, reducing expense, due to
favorable persistency experience on the fixed universal life business.
(c) Amount includes PGAAP adjustments associated with the amortization of the
AIF contracts ($10.7 million) and goodwill ($15.0 million).
(d) Amount includes PGAAP adjustments associated with the amortization of the
VOLBA asset and the reversal of amortization associated with the pre-1988
DAC asset. Included in this amount are adjustments totaling $23.1 million,
increasing expense, due to unfavorable persistency experience on the pre-
1988 business.
<TABLE>
<CAPTION>
Three month period ended March 31, 1998
---------------------------------------------------------------------------------------------------------
GAAP historical basis PGAAP adjustments Consolidated
------------------------------------------------------ -------------------------------------
Management Life Management Life PGAAP
services insurance Reinsurance Total services insurance Total basis
------------------------------------------------------ ------------------------------------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 335,539 $ 166,819 (a) $ 250,738 (a) $ 753,096 $ 0 $ 52 $ 52 $ 753,148
Investment
income 40,063 73,916 697 114,676 (263) 52 (211) 114,465
Investment
expenses 0 (3,167) 0 (3,167) 0 0 0 (3,167)
Net realized
gains 11,815 3,559 41 15,415 (2,002) 0 (2,002) 13,413
Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0 0 0 (10,518)
Income before
provision for
taxes 220,086 56,714 6,946 283,746 (29,101) 545 (28,556) 255,190
Provision for
income taxes 82,213 21,095 2,431 105,739 (5,387) 126 (5,261) 100,478
Depreciation and 19,631 22,770 (b) 0 42,401 26,253 (c) (320) (d) 25,933 68,334
amortization
- -----------------------
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains/(losses).
(b) Amount includes the historical basis amortization associated with the DAC
asset.
(c) Amount includes PGAAP adjustments associated with the amortization of the
AIF contracts ($10.7 million) and goodwill ($15.0 million).
(d) Amount includes PGAAP adjustments associated with the amortization of the
VOLBA asset and the reversal of amortization associated with the pre-1988
DAC asset.
<PAGE> 16
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's principal activities are the provision of management
services to the P&C Group and the ownership and operation of the Insurance
Subsidiaries. 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 the Insurance Subsidiaries are required to use for
regulatory reporting purposes.
Effective January 1, 1999, the P&C Group began assuming all personal
lines business written by Zurich's subsidiary, Maryland Casualty Company
("MCC"). The Company provides management services in respect of this business
and, as with its services to the other P&C Group entities, receives
compensation based on a percentage of gross premiums earned.
Farmers Life, a wholly owned subsidiary of the Company, underwrites life
insurance and annuity products. 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 DAC) so
that profits are generally recognized over the same period as revenue income.
Revenues attributable to universal life 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 universal life and annuity policies include
interest credited to policyholders on policy balances as well as benefit claims
incurred in excess of policy account balances.
Farmers Re, a wholly owned subsidiary of the Company, reinsures a
percentage of the auto physical damage business written by the P&C Group.
Under a quota share reinsurance treaty Farmers Re assumes monthly premiums of
$83.3 million and a quota share percentage of ultimate net losses sustained by
the P&C Group in its auto physical damage lines of business. This treaty also
provides for the P&C Group to receive a provisional ceding commission of 20%
of premiums with additional experience commissions that depend on loss
experience. This experience commission arrangement limits Farmers Re's
potential underwriting gain on the assumed business to 2.5% of premiums
assumed.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $335.5 million for
the three months ended March 31, 1998 to $365.8 million for the three months
ended March 31, 1999, an increase of $30.3 million, or 9.0%. 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 $2,547.3 million in the first quarter of 1998 to $2,678.5 million in the
first quarter of 1999 due primarily to the P&C Group assuming personal lines
business from MCC. Management fees earned on this assumed business totaled
$12.4 million for the first quarter of 1999. In addition, management fees
increased approximately $6.7 million between years due to the fact that the
management fee rate was increased 0.25%. The Company is entitled to receive a
management fee of up to 20% (25% in the case of Fire Insurance Exchange) of the
gross premiums earned by the P&C Group; through March 31, 1999, the average
management fee rate was 12.1%.
<PAGE> 17
Operating Expenses. Operating expenses as a percentage of operating
revenues decreased from 54.7% in the first quarter of 1998 to 53.9% in the
first quarter of 1999, a decrease of 0.8 percentage points.
Salaries and Employee Benefits. Salaries and employee benefits
increased from $84.3 million for the three months ended March 31, 1998 to
$89.9 million for the three months ended March 31, 1999, an increase of $5.6
million, or 6.6%, due to $7.1 million of expenses incurred in connection with
providing management services to the personal lines business previously
managed by MCC.
Buildings and Equipment Expenses. Buildings and equipment expenses
decreased from $26.3 million for the three months ended March 31, 1998 to
$24.3 million for the three months ended March 31, 1999, a decrease of $2.0
million, or 7.6%. This decrease was due primarily to lower amortization
expense associated with information technology systems software offset in
part by $1.8 million of expenses incurred in connection with providing
management services to the personal lines business previously managed by MCC.
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 March 31, 1999 and March 31, 1998.
General and Administrative Expenses. General and administrative
expenses increased from $47.3 million for the three months ended March 31,
1998 to $56.9 million for the three months ended March 31, 1999, an increase
of $9.6 million, or 20.3%, due in part to $4.7 million of expenses incurred in
connection with providing management services to the personal lines business
previously managed by MCC.
Merger Related Expenses. Expenses incurred by the Company as a
result of the merger between B.A.T's Financial Services Businesses
and Zurich amounted to $0.3 million in the three month period ended March 31,
1999.
Net Investment Income. Net investment income decreased from $39.8
million for the three months ended March 31, 1998 to $28.8 million for the
three months ended March 31, 1999, a decrease of $11.0 million, or 27.6%. Of
this decrease, $6.0 million was due to the redemption of the Exchange
certificates of contribution and B.A.T notes and the subsequent issuance of
the BAFS notes at lower interest rates in 1998. The remaining decrease was due
primarily to a decrease in the invested asset base.
Net Realized Gains/(Losses). Net realized gains/(losses) decreased from
a $9.8 million gain for the three months ended March 31, 1998 to a $0.2
million loss for the three months ended March 31, 1999 due to fewer sales of
investments in the first quarter of 1999.
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 March 31, 1999 and March 31, 1998.
Provision for Income Taxes. Provision for income taxes for both the
three month periods ended March 31, 1999 and March 31, 1998 was $76.8 million.
Management Services Income. As a result of the foregoing, management
services income decreased from $114.2 million for the three months ended March
31, 1998 to $110.0 million for the three months ended March 31, 1999, a
decrease of $4.2 million, or 3.7%.
<PAGE> 18
Insurance Subsidiaries
Farmers Re
Under the quota share reinsurance treaty, Farmers Re assumed $250.0
million of premiums in both the three month periods ended March 31, 1999 and
March 31, 1998. Losses and loss adjustment expenses incurred under this
treaty were $167.9 million for the three months ended March 31, 1999 and
$176.6 million for the three months ended March 31, 1998 and non-life
reinsurance commissions were $75.8 million for the three months ended March
31, 1999 and $67.1 million for the three months ended March 31, 1998. Income
before taxes increased $6.6 million between years to $13.6 million as of March
31,1999 due to increased investment income as a result of a higher invested
asset base. Farmers Re's contribution to net income was $9.9 million through
March 31, 1999 and $4.5 million through March 31, 1998.
Farmers Life
Total Revenues. Total revenues increased from $166.9 million for the
three months ended March 31, 1998 to $179.0 million for the three months
ended March 31, 1999, an increase of $12.1 million, or 7.2%.
Life Premiums. Life premiums increased $6.7 million for the three
months ended March 31, 1999, or 16.3%, over the three months ended March 31,
1998. This increase was due to a 17.5% growth in the average volume of
traditional life insurance in-force, coupled with the Life Company entering
into the structured settlements market.
Life Policy Charges. Life policy charges increased $0.7 million for
the three months ended March 31, 1999, or 1.4%, over the three months ended
March 31, 1998, reflecting growth in universal life-type insurance in-force.
Investment Income. Net investment income increased $3.9 million for
the three months ended March 31, 1999, or 5.5%, over the three months ended
March 31, 1998 due to higher bond interest income as a result of a higher
invested asset base due to an 11.1% increase in the universal life fund
account.
Net Realized Gains. Net realized gains increased by $0.8 million,
from $3.6 million for the three months ended March 31, 1998 to $4.4 million
for the three months ended March 31, 1999. This increase was due to higher
gains realized on bond sales.
Total Operating Expenses. Total operating expenses increased from $109.6
million for the three months ended March 31, 1998 to $125.1 million for the
three months ended March 31, 1999, an increase of $15.5 million, or 14.1%.
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges increased from $72.6 million for the three months
ended March 31, 1998 to $86.2 million for the three months ended March 31,
1999, an increase of $13.6 million, or 18.7%.
Policy benefits. Policy benefits, which consist primarily of
death and surrender benefits on life products, increased $7.3
million for the three months ended March 31, 1999, to $38.1 million,
due to a 7.5% growth in the volume of total 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 $4.8 million
for the three months ended March 31, 1998 to $9.4 million for the
three months ended March 31, 1999. This increase was primarily
attributable to higher traditional life insurance in-force volumes
(17.5%) particularly whole life, and entering the structured
settlements market.
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 $37.1 million for the three months ended
March 31, 1998 to $38.8 million for the three months ended March 31,
1999, or 4.6%, reflecting the 11.1% growth in the universal life
fund balance.
<PAGE> 19
General Operating Expenses. General operating expenses increased
from $37.0 million for the three months ended March 31, 1998 to $38.9 million
for the three months ended March 31, 1999, an increase of $1.9 million, or
5.1%.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense increased from $21.6 million for the three
months ended March 31, 1998 to $23.8 million for the three months
ended March 31, 1999 due primarily to differences in the mix of
terminations on traditional life products.
In addition, adjustments were made to the fixed universal
product DAC asset and the Value of Life Business Acquired (VOLBA)
asset. DAC amortization expense was reduced $23.3 million due to
favorable persistency experience on the fixed universal life
business. This reduction in expense was largely offset by a $23.1
million increase in VOLBA amortization expense resulting from
unfavorable persistency experience on the pre-1988 business. The
net impact of these adjustments was a $0.2 million reduction in
amortization expense, which is reflected in the $23.8 million
mentioned above.
Commissions. Commissions decreased $0.1 million from $4.7
million for the three months ended March 31, 1998 to $4.6 million
for the three months ended March 31, 1999.
General and Administrative Expenses. General and administrative
expenses decreased from $10.7 million for the three months ended
March 31, 1998 to $10.5 million for the three months ended March 31,
1999, or 1.9%, due to lower employee benefit expenses and decreased
premium taxes.
Provision for Income Taxes. Provision for income taxes decreased from
$21.1 million for the three months ended March 31, 1998 to $18.6 million for
the three months ended March 31, 1999 due to lower pretax operating income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
decreased from $36.0 million for the three months ended March 31, 1998 to
$35.1 million for the three months ended March 31, 1999, a decrease of $0.9
million, or 2.5%.
Consolidated Net Income
Consolidated net income of the Company increased from $154.7 million for
the three months ended March 31, 1998 to $155.0 million for the three months
ended March 31, 1999, an increase of $0.3 million, or 0.2%.
Year 2000 Issue
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize "00" as the year 1900 rather than the year 2000. This could cause
many computer applications to fail completely or to create erroneous results
unless corrective measures are taken. As early as 1995, the Company's
management recognized that its information systems were at risk to produce
erroneous results due to the effect of the century rollover. Significant
efforts have been expended to gain a complete understanding of Year 2000
implications and to develop a strategy to make the Company's and the P&C
Group's systems Year 2000 compliant. The costs associated with the Year 2000
Project are being expensed as incurred. The cumulative costs through March 31,
1999 totaled $19.5 million, of which $4.1 million was allocated to the P&C
Group. Total costs of the project are expected to be approximately $23.2
million, of which approximately $5.4 million is expected to be allocated to
the P&C Group.
To remedy the Year 2000 issue, management has devised a three-phase plan:
Phase I -"Awareness and Initial Impact Assessment". This phase was
completed in May 1996. During this phase, Year 2000 "Impact Assessment" was
performed using a mainframe analysis tool to determine which areas were at
risk.
<PAGE> 20
Phase II -"Year 2000 Workpackage and Development Blueprint Project".
This phase was completed in November 1996 and consisted of creating a
comprehensive master plan which included establishing and prioritizing
clusters (groups of similar computer programs) and agreeing upon a definition
of what would be acceptable Year 2000 compliance. In addition, a timeframe
was established for the conversion, compliance testing and the implementation
of Year 2000 compliant programs into production.
Phase III -"Year 2000 Conversion and Implementation". The Company is
currently in the process of converting, implementing and testing these Year
2000 conversion programs. Management expects this phase to be completed by
mid-1999.
In addition, the Company has evaluated its relationships with third
parties with which the Company has a direct and material relationship to
determine whether they are Year 2000 compliant. The Company has sent out
questionnaires and warranty requests to all third party vendors and is
currently in the process of performing compliance testing with all vendors to
validate the vendors' claims regarding Year 2000 compliance. Management
anticipates that by mid-1999, compliance testing related to third party
relationships will be completed. However, it is not possible to state with
certainty that the operations of third parties will not be materially impacted
in turn by other parties with whom they themselves have a relationship.
The Year 2000 issue may not only affect the Company's information
technology ("IT") systems but also its non-IT systems. The Company has
assessed the readiness of its non-IT systems and believes that in the event
of an interruption of these systems, contingency plans have been established
such that no major disruptions will occur.
Preliminary drafts of the Company's Year 2000 contingency plans have been
completed. These plans are being reviewed and updated as more information
becomes available. In the event that the Company's vendors do not expect to
be Year 2000 compliant, the Company's contingency plans may include replacing
such vendors. The operations of the Company and the P&C Group are such that
in the event all electronic communications are down, the Company and the P&C
Group could continue to operate until an alternative communication source is
acquired.
Liquidity and Capital Resources
As of March 31, 1999 and March 31, 1998 the Company held cash and cash
equivalents of $389.4 million and $423.2 million, respectively. In addition,
as of March 31, 1999, 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 $247.9 million
for the three months ended March 31, 1998 to $306.5 million for the three
months ended March 31, 1999, resulting in an increase of $58.6 million, or
23.6%. This increase in cash was due to a $185.8 million increase as a result
of changes in current assets and liabilities, $135.0 million of which was due
to changes in premiums receivable from Farmers Re and $24.8 million
of which relates to an increase in accounts payable. Partially offsetting
these increases in cash was a $10.5 million decrease in the provision for
non-life losses and loss adjustment expenses in 1999 versus a $100.6 million
increase in the reserve in 1998.
Net cash used in investing activities decreased from $249.7 million for
the three months ended March 31, 1998 to $159.0 million for the three months
ended March 31, 1999, resulting in an increase in cash of $90.7 million. This
increase in cash was due primarily to a $133.4 million increase in proceeds
from sales and maturities of investments available-for-sale offset in part by
a $38.9 million increase in purchases of investments available-for-sale.
Net cash used in financing activities decreased from $91.3 million for
the three months ended March 31, 1998 to $85.6 million for the three months
ended March 31, 1999, resulting in an increase in cash of $5.7 million, or
6.2%, due primarily to higher cash flows from annuity contracts in 1999.
This increase in cash was offset in part by a $9.7 million increase in
dividends paid to stockholders.
<PAGE> 21
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
The market risks associated with the Company's investment portfolios have
not changed materially from those disclosed at year-end 1998.
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
21. Subsidiaries of FGI
(b) Reports on Form 8-K. None
<PAGE> 22
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)
May 11, 1999 /s/ Martin D. Feinstein
---------------------------------------------
Date Martin D. Feinstein
Chairman of the Board,
President and Chief Executive Officer
May 11, 1999 /s/ Gerald E. Faulwell
---------------------------------------------
Date Gerald E. Faulwell
Senior Vice President and
Chief Financial Officer
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 Value Added, Inc., a Nevada corporation
- - Farmers Reinsurance Company, a California 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.
<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
March 31, 1999 and the related consolidated statements of income,
comprehensive income, stockholders' equity and cash flows for the three
month period ended March 31, 1999 (unaudited) and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 389,374
<SECURITIES> 74,612
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 711,331
<PP&E> 710,814
<DEPRECIATION> 297,694
<TOTAL-ASSETS> 12,809,743
<CURRENT-LIABILITIES> 500,533
<BONDS> 0
500,000
0
<COMMON> 1
<OTHER-SE> 7,046,728
<TOTAL-LIABILITY-AND-EQUITY> 12,809,743
<SALES> 0
<TOTAL-REVENUES> 802,153
<CGS> 0
<TOTAL-COSTS> 537,459
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,518
<INCOME-PRETAX> 254,176
<INCOME-TAX> 99,131
<INCOME-CONTINUING> 155,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 155,045
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
