<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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 33-94670-01
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FARMERS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
95-0725935
(IRS Employer Identification No.)
4680 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices)(Zip Code)
(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 June 30, 2000 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, 2000
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements
Consolidated Balance Sheets - Assets
June 30, 2000 and December 31, 1999 4
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity
June 30, 2000 and December 31, 1999 5
Consolidated Statements of Income
Six Month Periods ended June 30, 2000 and
June 30, 1999 6
Consolidated Statements of Comprehensive Income
Six Month Periods ended June 30, 2000 and
June 30, 1999 7
Consolidated Statements of Income
Three Month Periods ended June 30, 2000 and
June 30, 1999 8
Consolidated Statements of Comprehensive Income
Three Month Periods ended June 30, 2000 and
June 30, 1999 9
Consolidated Statement of Stockholders' Equity
Six Month Period ended June 30, 2000 10
Consolidated Statement of Stockholders' Equity
Six Month Period ended June 30, 1999 11
Consolidated Statements of Cash Flows
Six Month Periods ended June 30, 2000 and
June 30, 1999 12
Notes to Interim Financial Statements 13
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks 25
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,
2000 1999
------------- ------------
<S> <C> <C>
Current assets, excluding Insurance Subsidiaries:
Cash and cash equivalents $ 212,757 $ 217,466
Marketable securities, at market value 29,224 66,558
Accrued interest 25,783 30,825
Accounts receivable, principally from the P&C Group 24,519 44,021
Note receivable - affiliate 25,000 200,000
Deferred taxes 39,046 36,895
Prepaid expenses and other 22,774 21,950
------------- ------------
Total current assets 379,103 617,715
------------- ------------
Investments, excluding Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $355,872 and $516,001) 349,659 511,708
Mortgage loans on real estate 120 146
Common stocks available-for-sale, at market value
(cost: $340,564 and $299,251) 335,122 334,212
Certificates of contribution and surplus notes of the P&C Group 272,330 23,330
Real estate, at cost (net of accumulated depreciation:
$24,745 and $23,505) 70,884 49,459
Joint ventures, at equity 3,341 840
------------- ------------
1,031,456 919,695
------------- ------------
Other assets, excluding Insurance Subsidiaries:
Notes receivable - affiliates 1,107,000 1,107,000
Goodwill (net of accumulated amortization:
$690,506 and $660,484) 1,711,249 1,741,271
Attorney-in-fact contracts (net of accumulated amortization:
$491,348 and $469,986) 1,217,695 1,239,057
Securities lending collateral 2,940 4,150
Other assets 235,968 244,088
------------- ------------
4,274,852 4,335,566
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $343,418 and $324,902) 436,005 422,311
------------- ------------
Investments of Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $4,408,114 and $4,514,104) 4,270,104 4,376,320
Mortgage loans on real estate 33,136 35,834
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $1,153 and $1,153) 1,091 1,158
Common stocks available-for-sale, at market value
(cost: $246,437 and $188,851) 249,994 212,274
Certificates of contribution and surplus note of the P&C Group 415,000 119,000
Policy loans 210,642 201,687
Real estate, at cost (net of accumulated depreciation:
$28,447 and $27,292) 65,324 66,672
Joint ventures, at equity 5,255 6,662
S&P 500 call options, at fair value (cost: $25,403 and $19,521) 36,589 32,718
Other investments 3,269 0
------------- ------------
5,290,404 5,052,325
------------- ------------
Other assets of Insurance Subsidiaries:
Cash and cash equivalents 43,168 96,034
Reinsurance premiums receivable - P&C Group 25,981 86,245
Accrued investment income 68,517 61,040
Deferred policy acquisition costs and value of life business
acquired 874,047 879,625
Securities lending collateral 340,787 303,379
Other assets 32,239 22,350
Assets held in Separate Account 129 0
------------- ------------
1,384,868 1,448,673
------------- ------------
Total assets $ 12,796,688 $ 12,796,285
============= ============
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>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Current liabilities, excluding Insurance Subsidiaries:
Notes and accounts payable:
Dividends payable $ 1,075,000 $ 0
P&C Group 413 303
Other 39,387 55,730
Accrued liabilities:
Profit sharing 30,089 51,621
Income taxes 114,899 77,173
Other 5,861 10,109
------------ ------------
Total current liabilities 1,265,649 194,936
------------ ------------
Other liabilities, excluding Insurance Subsidiaries:
Real estate mortgages payable 19 21
Non-current deferred taxes 562,713 579,902
Securities lending liability 2,940 4,150
Other 125,617 136,487
------------ ------------
691,289 720,560
------------ ------------
Liabilities of Insurance Subsidiaries:
Policy liabilities:
Future policy benefits 3,473,562 3,412,452
Claims 33,472 28,396
Policyholder dividends 2 1
Other policyholders funds 106,806 83,478
Provision for non-life losses and loss adjustment expenses 83,497 106,444
Income taxes (including deferred taxes: $85,365 and $88,723) 91,152 98,880
Unearned investment income 953 936
Reinsurance payable - P&C Group 163,822 166,716
Securities lending liability 340,787 303,379
Other liabilities 74,672 80,868
Liabilities related to Separate Account 129 0
------------ ------------
4,368,854 4,281,550
------------ ------------
Total liabilities 6,325,792 5,197,046
------------ ------------
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 June 30, 2000 and
December 31, 1999 - 500 shares 0.5 0.5
Class B common stock, $1 par value per share; authorized, issued
and outstanding: as of June 30, 2000 and
December 31, 1999 - 500 shares 0.5 0.5
Additional capital 5,212,618 5,212,618
Accumulated other comprehensive loss (net of deferred
taxes: ($39,908) and ($18,307)) (74,116) (33,999)
Retained earnings 832,393 1,920,619
------------ ------------
Total stockholders' equity 5,970,896 7,099,239
------------ ------------
Total liabilities and stockholders' equity $ 12,796,688 $ 12,796,285
============ ============
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,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 1,680,575 $ 1,626,737
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 772,117 $ 741,090
----------- ----------
Operating expenses 434,219 402,243
Merger related expenses 0 244
----------- ----------
Total expenses 434,219 402,487
----------- ----------
Operating income 337,898 338,603
Net investment income 66,516 57,369
Net realized gains 36,728 33,839
Dividends on preferred securities of subsidiary trusts (21,035) (21,035)
----------- ----------
Income before provision for taxes 420,107 408,776
Provision for income taxes 171,054 166,663
----------- ----------
Management services income 249,053 242,113
----------- ----------
Insurance Subsidiaries:
Life and annuity premiums 108,270 103,904
Non-life reinsurance premiums 500,000 500,000
Life policy charges 107,797 104,812
Net investment income 172,757 164,334
Net realized gains 19,634 12,597
----------- -----------
Total revenues 908,458 885,647
----------- -----------
Non-life losses and loss adjustment expenses 328,963 328,671
Life policyholders' benefits and charges 185,098 174,057
Non-life reinsurance commissions 158,553 158,838
General operating expenses 84,113 80,143
----------- -----------
Total operating expenses 756,727 741,709
----------- -----------
Income before provision for taxes 151,731 143,938
Provision for income taxes 51,985 48,360
----------- -----------
Insurance Subsidiaries income 99,746 95,578
----------- -----------
Consolidated net income $ 348,799 $ 337,691
=========== ===========
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,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Consolidated net income $ 348,799 $ 337,691
----------- -----------
Other comprehensive loss, net of tax:
Net unrealized holding losses on securities,
net of tax of ($21,704) and ($70,043) (40,308) (130,157)
Change in effect of unrealized gains on other
insurance accounts, net of tax of $103 and $16,831 191 31,258
----------- -----------
Other comprehensive loss (40,117) (98,899)
----------- -----------
Comprehensive income $ 308,682 $ 238,792
=========== ===========
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,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 855,443 $ 824,584
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 396,785 $ 375,312
----------- ----------
Operating expenses 227,598 205,482
Merger related expenses 0 0
----------- ----------
Total expenses 227,598 205,482
----------- ----------
Operating income 169,187 169,830
Net investment income 32,566 28,607
Net realized gains 18,963 34,072
Dividends on preferred securities of subsidiary trusts (10,517) (10,517)
----------- ----------
Income before provision for taxes 210,199 221,992
Provision for income taxes 85,015 89,885
----------- ----------
Management services income 125,184 132,107
----------- ----------
Insurance Subsidiaries:
Life and annuity premiums 56,343 56,094
Non-life reinsurance premiums 250,000 250,000
Life policy charges 54,058 52,756
Net investment income 86,940 83,093
Net realized gains 11,317 7,329
----------- -----------
Total revenues 458,658 449,272
----------- -----------
Non-life losses and loss adjustment expenses 164,537 160,755
Life policyholders' benefits and charges 95,320 87,824
Non-life reinsurance commissions 79,212 82,995
General operating expenses 41,162 41,152
----------- -----------
Total operating expenses 380,231 372,726
----------- -----------
Income before provision for taxes 78,427 76,546
Provision for income taxes 26,894 26,007
----------- -----------
Insurance Subsidiaries income 51,533 50,539
----------- -----------
Consolidated net income $ 176,717 $ 182,646
=========== ===========
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,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Consolidated net income $ 176,717 $ 182,646
----------- -----------
Other comprehensive loss, net of tax:
Net unrealized holding losses on securities,
net of tax of ($19,885) and ($38,127) (36,930) (70,807)
Change in effect of unrealized gains on other
insurance accounts, net of tax of $1,082 and
$8,686 2,009 16,131
----------- -----------
Other comprehensive loss (34,921) (54,676)
----------- -----------
Comprehensive income $ 141,796 $ 127,970
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 10
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six month period ended June 30, 2000
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Other Total
Common Additional Comprehensive Retained Stockholders'
Stock Capital Loss Earnings Equity
-------- ----------- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $ 1 $ 5,212,618 $ (33,999) $ 1,920,619 $ 7,099,239
Net income 348,799 348,799
Net unrealized holding losses on
securities, net of tax of
($21,704) (40,308) (40,308)
Change in effect of unrealized
gains on other insurance
accounts, net of tax of $103 191 191
Cash dividends declared and/or
paid (1,437,025) (1,437,025)
-------- ----------- ---------------- ------------ ------------
Balance, June 30, 2000 $ 1 $ 5,212,618 $ (74,116) $ 832,393 $ 5,970,896
======== =========== ================ ============ ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 11
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six month period ended June 30, 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 337,691 337,691
Net unrealized holding losses
on securities, net of tax
of ($70,043) (130,157) (130,157)
Change in effect of unrealized
gains on other insurance
accounts, net of tax of
$16,831 31,258 31,258
Cash dividends paid (197,000) (197,000)
-------- ----------- ---------------- ------------ ------------
Balance, June 30, 1999 $ 1 $ 5,212,618 $ 45,843 $ 1,817,737 $ 7,076,199
======== =========== ================ ============ ============
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,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Consolidated net income $ 348,799 $ 337,691
Non-cash and operating activities adjustments:
Depreciation and amortization 81,970 80,341
Amortization of deferred policy acquisition costs and
value of life business acquired 56,951 25,905
Policy acquisition costs deferred (51,079) (24,547)
Life insurance policy liabilities 61,015 29,218
Provision for non-life losses and loss adjustment expenses (22,947) (3,365)
Universal life type contracts:
Deposits received 152,014 150,750
Withdrawals (134,439) (126,217)
Interest credited 37,135 35,552
Equity in earnings of joint ventures 10,163 (4,303)
Gains on sales of assets (56,781) (46,712)
Changes in assets and liabilities:
Current assets and liabilities 58,878 20,165
Non-current assets and liabilities (32,965) (43,654)
Other, net (557) 2,519
---------- -----------
Net cash provided by operating activities 508,157 433,343
---------- -----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (581,954) (1,044,658)
Purchases of properties (51,747) (23,321)
Purchase of note receivable - affiliate 0 (190,000)
Purchase of surplus notes of the P&C Group (175,000) 0
Purchase of certificates of contribution of the P&C Group (370,000) 0
Proceeds from sales and maturities of investments
available-for-sale 830,039 708,709
Proceeds from sales of properties 4,412 9,053
Proceeds from redemption of notes receivable - affiliate 175,000 0
Proceeds from redemption of certificate of contribution
of the P&C Group 0 11,050
Mortgage loan collections 2,724 14,266
Increase in policy loans (8,955) (7,877)
Other, net (2,014) (877)
---------- -----------
Net cash used in investing activities (177,495) (523,655)
---------- -----------
Cash Flows from Financing Activities:
Dividends paid to stockholders (362,025) (197,000)
Annuity contracts:
Deposits received 80,448 87,396
Withdrawals (145,065) (102,236)
Interest credited 38,407 47,003
Payment of long-term notes payable (2) (2)
---------- -----------
Net cash used in financing activities (388,237) (164,839)
---------- -----------
Decrease in cash and cash equivalents (57,575) (255,151)
Cash and cash equivalents - at beginning of year 313,500 327,552
---------- -----------
Cash and cash equivalents - at end of period $ 255,925 $ 72,401
========== ===========
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, 2000, the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the six month periods ended June 30, 2000 and June
30, 1999, and the consolidated statements of income and comprehensive income
for the three month periods ended June 30, 2000 and June 30, 1999, 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, 1999 and 1998, 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, 1999.
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
2000 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. On March 7, 2000, the Exchanges
acquired Foremost Corporation of America and its subsidiaries ("Foremost"),
a prominent writer of insurance for manufactured homes, recreational vehicles
and other specialty lines. Each policyholder of the Exchanges appoints the
Company as the exclusive AIF to provide management services to the Exchanges,
For such services, the Company earns management fees based on a percentage of
gross premiums earned by the Exchanges, their respective subsidiaries, Farmers
Texas County Mutual Insurance Company, Foremost County Mutual Insurance
Company and Foremost Lloyds of Texas (collectively the "P&C Group"). The P&C
Group is owned by the policyholders of the Exchanges, Farmers Texas County
Mutual Insurance Company and Foremost County Mutual Insurance Company as well
as the underwriters of Foremost Lloyds of Texas. 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 structured settlement
and annuity products, predominately flexible premium deferred annuities.
Additionally, in March 2000, Farmers Life entered the variable universal life
and annuities market. These products and services are sold directly by agents
of the P&C Group and Farmers Life.
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, which will remain in effect until terminated
by either party, 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.
<PAGE> 14
On March 31, 2000, Farmers Re and the P&C Group commuted $106,444,000 of
losses and loss adjustment expenses associated with the 1999 accident year.
As a result, on May 15, 2000, Farmers Re paid the P&C Group $106,444,000 of
losses and loss adjustment expenses and $8,966,000 of accrued interest in
settlement of this commutation.
References to the "Insurance Subsidiaries" within the consolidated
financial statements are to Farmers Life and Farmers Re.
In December 1988, B.A.T Industries p.l.c. ("B.A.T"), acquired 100%
ownership of the Company 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 September 1998, B.A.T's Financial Services Businesses, which included
the Company, were merged with Zurich Insurance Company ("ZIC"). The
businesses of ZIC and B.A.T's Financial Services Businesses were transferred
to Zurich Financial Services ("Zurich"), 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 Zurich 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 Zurich as
a pooling of interests and, therefore, no purchase accounting adjustments were
made to the Company's assets and liabilities.
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 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. Subsequently, in June 1999, the
FASB released SFAS No. 137, "Deferral of the Effective Date of FASB Statement
No. 133", which deferred the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. Finally, in June 2000, the FASB released
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities". This Statement amends the accounting and reporting
standards of SFAS No. 133 for the following items: normal purchases and normal
sales exception, interest rate risk, recognized foreign-currency-denominated
debt instruments and intercompany derivatives. This Statement also amends
SFAS No. 133 for certain provisions related to the implementation guidance
arising from the Derivatives Implementation Group process. SFAS
No. 133, No. 137 and No. 138 will be effective for financial statements issued
by the Company for periods ending after December 31, 2000. The Company does
not expect the adoption of these Statements 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> 15
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, 2000 and 1999, a total of 20,000,000 shares of QUIPS were
outstanding.
D. Management fees
As AIF, the Company, or its subsidiaries, as applicable, provides certain
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 $726,386,000 and $697,691,000 for the six month periods ended
June 30, 2000 and June 30, 1999, respectively.
E. Related parties
As of June 30, 2000, the Company held a $250,000,000 note receivable from
Orange Stone (Delaware) Holdings Limited ("OSDH"), a subsidiary of Zurich,
formerly known as Old Stone (Delaware) Holdings Limited. The Company loaned
$250,000,000 to OSDH on December 15, 1999 and, in return, received a
medium-term note with a 7.50% fixed interest rate that matures on December 15,
2004. Interest on this note is paid semi-annually and, through June 30, 2000,
income earned on this note totaled $9,375,000.
In addition, as of June 30, 2000, the Company held $882,000,000 of notes
receivable from Zurich (UKISA) Limited, formerly known as British American
Financial Services (UK and International), Ltd. ("UKISA"), a subsidiary of
Zurich. The Company purchased $1,057,000,000 of notes from UKISA on
September 3, 1998. Subsequently, on March 1, 2000, Eagle Star Life Assurance
Company Limited ("Eagle Star"), also an affiliate of Zurich, assigned
$175,000,000 of matured surplus notes of the P&C Group to the Company and,
in return, the Company reduced the outstanding balance of the notes receivable
from UKISA by $175,000,000. The remaining notes receivable from UKISA are
fixed rate medium-term notes with maturity dates as follows: $25,000,000 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 June 30, 2000 and June 30, 1999 was $26,543,000 and $29,717,000,
respectively.
<PAGE> 16
F. Certificates of contribution and surplus notes of the P&C Group
On March 7, 2000, to help fund the Exchanges' acquisition of Foremost,
the Company purchased $370,000,000 of certificates of contribution of the
P&C Group bearing interest at 7.85% annually. As of June 30, 2000, the
Company continued to hold $23,330,000 of miscellaneous other certificates
of contribution of the P&C Group, which bear interest at various rates,
and a $119,000,000 surplus note of the P&C Group, which bears interest at
6.10% annually.
Additionally, on March 1, 2000, in connection with the assignment of the
$175,000,000 of matured surplus notes of the P&C Group from Eagle Star (see
Note E), the P&C Group issued new surplus notes of $175,000,000 to the
Company. These notes bear interest at 8.50% annually and mature in March
2005.
Conditions governing repayment of these amounts are outlined in the
certificates of contribution and the surplus notes. 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 state insurance regulatory department.
G. Supplemental cash flow information
For financial statement purposes, the Company considers all investments
with original maturities of 90 days or less as cash equivalents. Following is
a reconciliation of the 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, 1998 $ 253,828 $ 73,724 $ 327,552
Activity through June 1999 (255,151)
-----------
Cash and cash equivalents -- June 30, 1999 44,045 28,356 $ 72,401
===========
Cash and cash equivalents -- December 31, 1999 $ 217,466 $ 96,034 $ 313,500
Activity through June 2000 (57,575)
-----------
Cash and cash equivalents -- June 30, 2000 212,757 43,168 $ 255,925
===========
</TABLE>
Cash payments for interest were $1,678,000 and $1,528,000 for the six
month periods ended June 30, 2000 and June 30, 1999, 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, 2000 and June 30,
1999. Cash payments for income taxes were $190,935,000 and $212,582,000 for
the six month periods ended June 30, 2000 and June 30, 1999, respectively.
On March 7, 2000, the Company purchased $370,000,000 of certificates of
contribution of the P&C Group to help fund the Exchanges' acquisition of
Foremost (see Note F).
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.
As AIF, the management services segment is primarily responsible for
providing management services to the P&C Group. Management fees earned from
the P&C Group totaled $726,386,000 and $697,691,000 for the six
<PAGE> 17
month periods ended June 30, 2000 and June 30, 1999, respectively.
The life insurance segment provides individual life insurance products,
including universal life, term life and whole life insurance and structured
settlement and annuity products, as well as variable universal life and
annuity products. Finally, the reinsurance segment provides reinsurance
coverage to a percentage of the auto physical damage business written by
the P&C Group.
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 1988 (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 these
adjustments.
The Company accounts for intersegment transactions as if they were between
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 six month periods ended June 30, 2000 and June 30,
1999.
Information regarding the Company's reportable operating segments follows:
<TABLE>
<CAPTION>
Six month period ended June 30, 2000
---------------------------------------------------------------------------------------------------------
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 $ 772,117 $ 389,850 (a) $ 519,067 (a) $1,681,034 $ 0 $ (459) $ (459) $1,680,575
Investment
income 66,826 163,251 15,413 245,490 (310) (459) (769) 244,721
Investment
expenses 0 (5,448) 0 (5,448) 0 0 0 (5,448)
Net realized
gains 36,728 15,980 3,654 56,362 0 0 0 56,362
Dividends
on preferred
securities of
subsidiary
trusts (21,035) 0 0 (21,035) 0 0 0 (21,035)
Income before
provision for
taxes 473,991 124,548 31,443 629,982 (53,884) (4,260) (58,144) 571,838
Provision for
income taxes 180,199 44,121 9,707 234,027 (9,145) (1,843) (10,988) 223,039
Depreciation and 28,084 54,726 0 82,810 52,131 (b) 3,980 (c) 56,111 138,921
amortization
-----------------------
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains/(losses).
(b) Amount includes PGAAP adjustments associated with the amortization of the
AIF contracts ($21.4 million) and goodwill ($30.0 million).
(c) Amount includes PGAAP adjustments associated with the amortization of the
Value of Life Business Acquired ("VOLBA") asset and the reversal of
amortization associated with the pre-1988 deferred policy acquisition
costs ("DAC") asset.
<PAGE> 18
<TABLE>
<CAPTION>
Six month period ended June 30, 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 $ 741,090 $ 372,318 (a) $ 514,144 (a) $1,627,552 $ 0 $ (815) $ (815) $1,626,737
Investment
income 58,090 157,224 13,305 228,619 (721) (492) (1,213) 227,406
Investment
expenses 0 (5,703) 0 (5,703) 0 0 0 (5,703)
Net realized
gains/(losses) 33,839 12,081 839 46,759 0 (323) (323) 46,436
Dividends
on preferred
securities of
subsidiary
trusts (21,035) 0 0 (21,035) 0 0 0 (21,035)
Income before
provision for
taxes 463,058 143,007 26,527 632,592 (54,282) (25,596) (79,878) 552,714
Provision for
income taxes 175,959 50,213 7,432 233,604 (9,296) (9,285) (18,581) 215,023
Depreciation and 26,071 2,592 (b) 0 28,663 52,590 (c) 24,993 (d) 77,583 106,246
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 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 ($21.4 million) and goodwill ($30.0 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 $21.3
million, increasing expense, due to unfavorable persistency experience on
the pre-1988 business.
I. Separate Accounts
The assets and liabilities held in Separate Accounts as of June 30, 2000
relate to the variable universal life and annuity products offered by Farmers
Life. The assets supporting these products are legally segregated and
available only to settle Separate Account contract obligations. Deposits
received are reported as Separate Account liabilities.
J. Dividends payable
On June 30, 2000, the Company declared a $1,075,000,000 cash dividend
payable to Allied Zurich Holdings Limited on or before December 31, 2000.
This dividend does not affect the surplus of Farmers Life or Farmers Re
and is in addition to the normal dividend paid to the Company's stockholders.
<PAGE> 19
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.
Farmers Life, a wholly owned subsidiary of the Company, underwrites life
insurance, structured settlement and annuity products as well as variable
universal life 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. Revenues attributable to
structured settlement products consist of investment income on assets allocated
to support the policyholder benefits schedule and expenses consist of interest
credited to policyholders on policy 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,
which will remain in effect until terminated by either party, 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 June 30, 2000 Compared to Three Months Ended June 30, 1999
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $375.3 million for
the three months ended June 30, 1999 to $396.8 million for the three months
ended June 30, 2000, an increase of $21.5 million, or 5.7%. Operating
revenues primarily consist of management fees paid to the Company as a
percentage of gross premiums earned by the P&C Group. Such premiums increased
from $2,708.5 million in the second quarter of 1999 to $2,851.5 million in the
second quarter of 2000 due primarily to $115.5 million of premiums earned as a
result of business assumed from Foremost.
Operating Expenses.
Salaries and Employee Benefits. Salaries and employee benefits
increased from $91.9 million for the three months ended June 30, 1999 to
$104.0 million for the three months ended June 30, 2000, an increase of
$12.1 million, or 13.2%, due primarily to $12.4 million of expenses
incurred in the second quarter of 2000 in connection with providing
management services to the business assumed from Foremost.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $22.9 million for the three months ended June 30, 1999 to
$27.5 million for the three months ended June 30, 2000, an increase of
$4.6 million, or 20.1%, due primarily to $3.1 million of expenses incurred
in connection with providing management services to the business assumed
from Foremost.
<PAGE> 20
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, 2000 and June 30,
1999.
General and Administrative Expenses. General and administrative
expenses increased from $65.0 million for the three months ended June 30,
1999 to $70.5 million for the three months ended June 30, 2000, an increase
of $5.5 million, or 8.5%. This increase was a result of expenses incurred
in connection with providing management services to the business assumed
from Foremost as well as a $2.8 million increase in expenses related to a
project to implement a new financial accounting and reporting system for
the Company and the P&C Group. Partially offsetting these increases in
expense between periods were $1.6 million of Year 2000 project expenses
incurred in the second quarter of 1999. No similar expenses were incurred
through June 2000.
Net Investment Income. Net investment income increased from $28.6 million
for the three months ended June 30, 1999 to $32.6 million for the three months
ended June 30, 2000, an increase of $4.0 million, or 14.0%, due to higher
investment yields offset in part by a decrease in the average invested asset
base.
Net Realized Gains. Net realized gains decreased $15.1 million, from $34.1
million for the three months ended June 30, 1999 to $19.0 million for the three
months ended June 30, 2000, due primarily to a decrease in gains recognized on
sales of common stock in the second quarter of 2000. These common stock gains
were realized within the context of FGI's overall equity investment strategy.
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, 2000 and June 30, 1999.
Provision for Income Taxes. Provision for income taxes decreased from
$89.9 million for the three months ended June 30, 1999 to $85.0 million for the
three months ended June 30, 2000, a decrease of $4.9 million, or 5.5%, due
mainly to a decrease in pretax income between periods.
Management Services Income. As a result of the foregoing, management
services income decreased from $132.1 million for the three months ended June
30, 1999 to $125.2 million for the three months ended June 30, 2000, a decrease
of $6.9 million, or 5.2%.
Insurance Subsidiaries
Farmers Re
Under the quota share reinsurance treaty, Farmers Re assumed $250.0 million
of premiums in each of the three month periods ended June 30, 2000 and June 30,
1999. Losses and loss adjustment expenses incurred under this treaty were
$164.5 million for the three months ended June 30, 2000 and $160.8 million for
the three months ended June 30, 1999 and non-life reinsurance commissions were
$79.2 million for the three months ended June 30, 2000 and $83.0 million for
the three months ended June 30, 1999. Income before taxes increased $2.2
million from $12.9 million for the three months ended June 30, 1999 to $15.1
million for the three months ended June 30, 2000 due primarily to increased
investment income and realized capital gains. For the three month periods
ended June 30, 2000 and June 30, 1999, Farmers Re's contribution to net income
was $10.5 million and $9.1 million, respectively.
<PAGE> 21
Farmers Life
Total Revenues. Total revenues increased from $192.5 million for the three
months ended June 30, 1999 to $199.7 million for the three months ended June
30, 2000, an increase of $7.2 million, or 3.7%.
Life and Annuity Premiums. Life and annuity premiums increased $0.2
million for the three months ended June 30, 2000, or 0.4%, over the three
months ended June 30, 1999. Excluding the impact of co-insurance activity
related to the Farmers Premier 10 and 20 year products for the three months
ended June 30, 2000, premiums increased $6.0 million, or 10.7%, between
periods. This growth in premiums is due to an increase in the volume of
traditional policies in-force as well as an increase in the number of
structured settlements issued in the second quarter 2000.
Life Policy Charges. Life policy charges increased $1.3 million for
the three months ended June 30, 2000, or 2.5%, over the three months ended
June 30, 1999, reflecting growth in universal life-type insurance
in-force.
Net Investment Income. Net investment income increased $2.8 million
for the three months ended June 30, 2000, or 3.6%, over the three months
ended June 30, 1999. The increase was due to higher bond interest income
resulting from growth in mean invested assets.
Net Realized Gains. Net realized gains increased by $2.9 million,
from $7.3 million for the three months ended June 30, 1999 to $10.2 million
for the three months ended June 30, 2000. This increase was due to higher
gains realized on stock sales.
Total Operating Expenses. Total operating expenses increased from $128.9
million for the three months ended June 30, 1999 to $136.4 million for the
three months ended June 30, 2000, an increase of $7.5 million, or 5.8%.
Life Policyholders' Benefits and Charges. Life policyholders' benefits
expense and charges increased from $87.8 million for the three months ended
June 30, 1999 to $95.3 million for the three months ended June 30, 2000, an
increase of $7.5 million, or 8.5%.
Policy Benefits. Policy benefits, which consist primarily of death
and surrender benefits on life products, increased $4.4 million for the
three months ended June 30, 2000, to $36.6 million, due to higher
mortality experience in the current period.
Increase in Liability for Future Benefits. Increase in liability
for future benefits expense increased from $16.4 million for the three
months ended June 30, 1999 to $18.4 million for the three months ended
June 30, 2000. This increase was primarily attributable to higher
sales volumes related to structured settlements and growth in the
volume of traditional life insurance in-force.
Interest Credited to Policyholders. Interest credited to
policyholders, which represents the amount credited to policyholder
funds on deposit under universal life-type contracts and deferred
annuities, increased from $39.2 million for the three months ended
June 30, 1999 to $40.3 million for the three months ended June 30,
2000, or 2.8%, reflecting growth in the universal life fund balance.
General Operating Expenses. General operating expenses were $41.1
million in each of the three month periods ended June 30, 2000 and June
30, 1999.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense increased from $26.2 million for the three months
ended June 30, 1999 to $27.3 million for the three months ended June
30, 2000, due to differences in the mix of business.
<PAGE> 22
Net Commissions. Net commissions decreased from $4.7 million for
the three months ended June 30, 1999 to $1.1 million for the three
months ended June 30, 2000, due to higher co-insurance activity.
General and Administrative Expenses. General and administrative
expenses increased from $10.2 million for the three months ended June
30, 1999 to $12.7 million, or 24.5%, for the three months ended June
30, 2000. This increase was primarily due to licensing fees related to
the issuance of the variable annuity products and Farmers Life's
products in new states in 2000.
Provision for Income Taxes. Provision for income taxes increased $0.1
million from $22.2 million for the three months ended June 30, 1999 to $22.3
million for the three months ended June 30, 2000.
Farmers Life Income. As a result of the foregoing, Farmers Life income
decreased from $41.4 million for the three months ended June 30, 1999 to
$41.0 million for the three months ended June 30, 2000, a decrease of $0.4
million, or 1.0%.
Consolidated Net Income
Consolidated net income of the Company decreased from $182.6 million for
the three months ended June 30, 1999 to $176.7 million for the three months
ended June 30, 2000, a decrease of $5.9 million, or 3.2%.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $741.1 million for
the six months ended June 30, 1999 to $772.1 million for the six months ended
June 30, 2000, an increase of $31.0 million, or 4.2%. This growth reflects
higher gross premiums earned by the P&C Group, which increased from $5,387.0
million in the first six months of 1999 to $5,586.1 million in the first six
months of 2000 due primarily to $153.7 million of premiums earned as a result
of business assumed from Foremost. Also contributing to the increase in
management fees between periods was growth within the Fire and Commercial books
of business.
Operating Expenses.
Salaries and Employee Benefits. Salaries and employee benefits
increased from $181.8 million for the six months ended June 30, 1999 to
$200.8 million for the six months ended June 30, 2000, an increase of $19.0
million, or 10.5%, due primarily to $16.6 million of expenses incurred in
connection with providing management services to the business assumed from
Foremost.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $47.2 million for the six months ended June 30, 1999 to
$50.2 million for the six months ended June 30, 2000, an increase of $3.0
million, or 6.4%, due to expenses incurred in connection with providing
management services to the business assumed from Foremost. This increase
in expense was partially offset by savings generated by renegotiated lease
contracts.
Amortization of Attorney-In-Fact Contracts and Goodwill. Amortization
expense was $51.4 million in each of the six month periods ended June 30,
2000 and June 30, 1999.
General and Administrative Expenses. General and administrative
expenses increased from $121.9 million for the six months ended June 30,
1999 to $131.7 million for the six months ended June 30, 2000, an increase
of $9.8 million, or 8.0%. This increase was a result of expenses incurred
in connection with providing management services to the business assumed
from Foremost as well as a $7.5 million increase in expenses
<PAGE> 23
related to a project to implement a new financial accounting and reporting
system for the Company and the P&C Group. Partially offsetting these
increases in expense between periods were $3.0 million of Year 2000 project
expenses incurred through June 1999. No similar expenses were incurred
through June 2000.
Merger Related Expenses. Expenses incurred by the Company as a result of
the merger between B.A.T's Financial Services Businesses and ZIC amounted to
$0.2 million in the six month period ended June 30, 1999.
Net Investment Income. Net investment income increased from $57.4 million
for the six months ended June 30, 1999 to $66.5 million for the six months
ended June 30, 2000, an increase of $9.1 million, or 15.9%, due to higher
investment yields offset in part by a decrease in the average invested asset
base.
Net Realized Gains. Net realized gains increased $2.9 million, from $33.8
million for the six months ended June 30, 1999 to $36.7 million for the six
months ended June 30, 2000, due primarily to common stock gains realized within
the context of FGI's overall equity investment strategy.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense
was $21.0 million in each of the six month periods ended June 30, 2000 and
June 30, 1999.
Provision for Income Taxes. Provision for income taxes increased from
$166.7 million for the six months ended June 30, 1999 to $171.1 million for
the six months ended June 30, 2000, an increase of $4.4 million, or 2.6%, due
mainly to an increase in pretax income between periods.
Management Services Income. As a result of the foregoing, management
services income increased from $242.1 million for the six months ended June
30, 1999 to $249.1 million for the six months ended June 30, 2000, an increase
of $7.0 million, or 2.9%.
Insurance Subsidiaries
Farmers Re
Under the quota share reinsurance treaty, Farmers Re assumed $500.0
million of premiums in each of the six month periods ended June 30, 2000 and
June 30, 1999. Losses and loss adjustment expenses incurred under this treaty
were $329.0 million for the six months ended June 30, 2000 and $328.7 million
for the six months ended June 30, 1999 and non-life reinsurance commissions
were $158.6 million for the six months ended June 30, 2000 and $158.8 million
for the six months ended June 30, 1999. Income before taxes increased
$4.9 million from $26.5 million for the six months ended June 30, 1999 to
$31.4 million for the six months ended June 30, 2000 due primarily to
increased investment income and realized capital gains. For the six month
periods ended June 30, 2000 and June 30, 1999, Farmers Re's contribution to
net income was $21.7 million and $19.1 million, respectively.
Farmers Life
Total Revenues. Total revenues increased from $371.5 million for the six
months ended June 30, 1999 to $389.4 million for the six months ended June 30,
2000, an increase of $17.9 million, or 4.8%.
Life and Annuity Premiums. Life and annuity premiums increased $4.4
million for the six months ended June 30, 2000, or 4.2%, over the six
months ended June 30, 1999. Excluding the impact of co-insurance activity
for the six months ended June 30, 2000, premiums increased $16.2 million,
or 15.6%, between periods. This growth in premiums is due to a 15.9%
increase in the volume of traditional life insurance in-force as well as
an increase in the number of structured settlements issued in the six
months ended June 30, 2000.
Life Policy Charges. Life policy charges increased $3.0 million for
the six months ended June 30, 2000, or 2.8%, over the six months ended June
30, 1999, reflecting a 1.7% growth in universal life-type insurance
in-force.
<PAGE> 24
Net Investment Income. Net investment income increased $6.3 million
for the six months ended June 30, 2000, or 4.2%, over the six months ended
June 30, 1999. The increase was due to higher bond interest income
resulting from a 9.6% growth in mean invested assets.
Net Realized Gains. Net realized gains increased by $4.2 million,
from $11.8 million for the six months ended June 30, 1999 to $16.0 million
for the six months ended June 30, 2000. This increase was due to higher
gains realized on stock sales.
Total Operating Expenses. Total operating expenses increased from $254.1
million for the six months ended June 30, 1999 to $269.1 million for the six
months ended June 30, 2000, an increase of $15.0 million, or 5.9%.
Life Policyholders' Benefits and Charges. Life policyholders' benefits
expense and charges increased from $174.1 million for the six months ended
June 30, 1999 to $185.1 million for the six months ended June 30, 2000, an
increase of $11.0 million, or 6.3%.
Policy Benefits. Policy benefits increased $1.5 million for the
six months ended June 30, 2000 to $71.8 million, due to a 7.1% growth
in the volume of life insurance in-force.
Increase in Liability for Future Benefits. Increase in liability
for future benefits expense increased from $25.7 million for the six
months ended June 30, 1999 to $32.7 million for the six months ended
June 30, 2000. This increase was primarily attributable to higher
sales volumes related to structured settlements and the 15.9% growth in
the volume of traditional life insurance in-force.
Interest Credited to Policyholders. Interest credited to
policyholders increased from $78.1 million for the six months ended
June 30, 1999 to $80.6 million for the six months ended June 30, 2000,
or 3.2%, reflecting growth in the universal life fund balance.
General Operating Expenses. General operating expenses increased from
$80.0 million for the six months ended June 30, 1999 to $84.0 million for
the six months ended June 30, 2000, an increase of $4.0 million, or 5.0%.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense increased from $50.0 million for the six months
ended June 30, 1999 to $57.0 million for the six months ended June 30,
2000, reflecting growth in business and differences in the mix of
business.
Net Commissions. Net commissions decreased $6.7 million from $9.3
million for the six months ended June 30, 1999 to $2.6 million
for the six months ended June 30, 2000, due to higher co-insurance
activity.
General and Administrative Expenses. General and administrative
expenses increased from $20.7 million for the six months ended June 30,
1999 to $24.4 million for the six months ended June 30, 2000, or 17.9%,
due primarily to licensing fees related to the issuance of the variable
annuity products and Farmers Life's products in new states in 2000.
Provision for Income Taxes. Provision for income taxes increased from
$40.9 million for the six months ended June 30, 1999 to $42.3 million for the
six months ended June 30, 2000, due to higher pretax operating income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
increased from $76.5 million for the six months ended June 30, 1999 to $78.0
million for the six months ended June 30, 2000, an increase of $1.5 million,
or 2.0%.
<PAGE> 25
Consolidated Net Income
Consolidated net income of the Company increased from $337.7 million for
the six months ended June 30, 1999 to $348.8 million for the six months ended
June 30, 2000, an increase of $11.1 million, or 3.3%.
Liquidity and Capital Resources
As of June 30, 2000 and June 30, 1999, the Company held cash and cash
equivalents of $255.9 million and $72.4 million, respectively. In addition,
as of June 30, 2000, 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 $433.3 million
for the six months ended June 30, 1999 to $508.2 million for the six months
ended June 30, 2000, an increase of $74.9 million. This increase in cash
was due primarily to a $38.7 million increase resulting from changes in current
assets and liabilities, a $31.8 million increase in life insurance policy
liabilities and an $11.1 million increase in consolidated net income.
Net cash used in investing activities decreased from $523.7 million for
the six months ended June 30, 1999 to $177.5 million for the six months ended
June 30, 2000, an increase in cash of $346.2 million. This increase in cash
was the result of a $462.7 million decrease in purchases of investments
available-for-sale, a $190.0 million decrease resulting from the issuance of
a loan to Centre Reinsurance Holdings (Delaware II) Ltd. in June 1999 and
a $121.3 million increase in proceeds from sales and maturities of investments
available-for-sale. Partially offsetting these increases in cash were a $370.0
million decrease in cash due to the purchase of the certificates of
contribution of the P&C Group in March 2000 (see Note F) coupled with a $28.4
million increase in purchases of properties.
Net cash used in financing activities increased from $164.8 million for
the six months ended June 30, 1999 to $388.2 million for the six months ended
June 30, 2000, resulting in a decrease in cash of $223.4 million. This
decrease in cash was due primarily to a $165.0 million increase in dividends
paid to stockholders coupled with lower cash flows from annuity contracts.
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 1999.
<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.
Election of Board of Directors - Incorporated by reference to
FGI's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2000.
Item 5. Other Information. None.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits. None
(b) Reports on Form 8-K. None.
<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 10, 2000 /s/ Martin D. Feinstein
---------------------------------------------
Date Martin D. Feinstein
Chairman of the Board,
President and Chief Executive Officer
August 10, 2000 /s/ Gerald E. Faulwell
---------------------------------------------
Date Gerald E. Faulwell
Senior Vice President and
Chief Financial Officer
