<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------------------------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
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 September 30, 2000 was 1,000 shares.
<PAGE> 2
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 3
FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements
Consolidated Balance Sheets - Assets
September 30, 2000 and December 31, 1999 4
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity
September 30, 2000 and December 31, 1999 5
Consolidated Statements of Income
Nine Month Periods ended September 30, 2000 and
September 30, 1999 6
Consolidated Statements of Comprehensive Income
Nine Month Periods ended September 30, 2000 and
September 30, 1999 7
Consolidated Statements of Income
Three Month Periods ended September 30, 2000 and
September 30, 1999 8
Consolidated Statements of Comprehensive Income
Three Month Periods ended September 30, 2000 and
September 30, 1999 9
Consolidated Statement of Stockholders' Equity
Nine Month Period ended September 30, 2000 10
Consolidated Statement of Stockholders' Equity
Nine Month Period ended September 30, 1999 11
Consolidated Statements of Cash Flows
Nine Month Periods ended September 30, 2000 and
September 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 26
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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Current assets, excluding Insurance Subsidiaries:
Cash and cash equivalents $ 823,556 $ 217,466
Marketable securities, at market value 10,671 66,558
Accrued interest 36,388 30,825
Accounts receivable, principally from the P&C Group 53,334 44,021
Note receivable - affiliate 207,000 200,000
Deferred taxes 36,998 36,895
Prepaid expenses and other 18,603 21,950
------------- ------------
Total current assets 1,186,550 617,715
------------- ------------
Investments, excluding Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $76,498 and $516,001) 75,506 511,708
Mortgage loans on real estate 106 146
Common stocks available-for-sale, at market value
(cost: $260,728 and $299,251) 250,462 334,212
Certificates of contribution and surplus notes of the P&C Group 184,830 23,330
Real estate, at cost (net of accumulated depreciation:
$25,463 and $23,505) 70,260 49,459
Joint ventures, at equity 3,341 840
------------- ------------
584,505 919,695
------------- ------------
Other assets, excluding Insurance Subsidiaries:
Notes receivable - affiliates 925,000 1,107,000
Goodwill (net of accumulated amortization:
$705,517 and $660,484) 1,696,238 1,741,271
Attorney-in-fact contracts (net of accumulated amortization:
$502,030 and $469,986) 1,207,013 1,239,057
Securities lending collateral 4,900 4,150
Other assets 241,586 244,088
------------- ------------
4,074,737 4,335,566
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $353,611 and $324,902) 435,930 422,311
------------- ------------
Investments of Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $4,324,024 and $4,514,104) 4,231,498 4,376,320
Mortgage loans on real estate 32,569 35,834
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $11,128 and $1,153) 11,239 1,158
Common stocks available-for-sale, at market value
(cost: $263,110 and $188,851) 258,261 212,274
Certificates of contribution and surplus notes of the P&C Group 502,500 119,000
Policy loans 214,496 201,687
Real estate, at cost (net of accumulated depreciation:
$28,852 and $27,292) 88,350 66,672
Joint ventures, at equity 5,070 6,662
S&P 500 call options, at fair value (cost: $27,278 and $19,521) 34,177 32,718
Other investments 4,279 0
------------- ------------
5,382,439 5,052,325
------------- ------------
Other assets of Insurance Subsidiaries:
Cash and cash equivalents 33,849 96,034
Marketable securities, at market value 9,995 0
Reinsurance premiums receivable - P&C Group 131,286 86,245
Accounts receivable 47,680 18,187
Accrued investment income 68,221 61,040
Deferred policy acquisition costs and value of life business
acquired 860,697 879,625
Securities lending collateral 302,231 303,379
Other assets 9,671 4,163
Assets held in Separate Account 2,275 0
------------- ------------
1,465,905 1,448,673
------------- ------------
Total assets $ 13,130,066 $ 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>
September 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 466 303
Other 55,345 55,730
Accrued liabilities:
Profit sharing 44,494 51,621
Income taxes 119,462 77,173
Other 7,885 10,109
------------ ------------
Total current liabilities 1,302,652 194,936
------------ ------------
Other liabilities, excluding Insurance Subsidiaries:
Real estate mortgages payable 19 21
Non-current deferred taxes 558,001 579,902
Securities lending liability 4,900 4,150
Other 123,909 136,487
------------ ------------
686,829 720,560
------------ ------------
Liabilities of Insurance Subsidiaries:
Policy liabilities:
Future policy benefits 3,519,706 3,412,452
Claims 42,956 28,396
Policyholders dividends 3 1
Other policyholders funds 119,184 83,478
Death benefits payable 41,511 45,423
Provision for non-life losses and loss adjustment expenses 98,904 106,444
Income taxes (including deferred taxes: $96,373 and $88,723) 106,625 98,880
Unearned investment income 940 936
Reinsurance payable - P&C Group 171,874 166,716
Proceeds due brokers 26,198 0
Securities lending liability 302,231 303,379
Other liabilities 35,030 35,445
Liabilities related to Separate Account 2,275 0
------------ ------------
4,467,437 4,281,550
------------ ------------
Total liabilities 6,456,918 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 September 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 September 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: ($31,004) and ($18,307)) (57,578) (33,999)
Retained earnings 1,018,107 1,920,619
------------ ------------
Total stockholders' equity 6,173,148 7,099,239
------------ ------------
Total liabilities and stockholders' equity $ 13,130,066 $ 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>
Nine month period
ended September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 2,560,580 $ 2,439,878
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 1,179,798 $ 1,116,267
----------- ----------
Operating expenses 665,826 609,794
Merger related expenses 0 244
----------- ----------
Total expenses 665,826 610,038
----------- ----------
Operating income 513,972 506,229
Net investment income 100,408 84,915
Net realized gains 52,943 62,672
Dividends on preferred securities of subsidiary trusts (31,553) (31,553)
----------- ----------
Income before provision for taxes 635,770 622,263
Provision for income taxes 259,718 255,808
----------- ----------
Management services income 376,052 366,455
----------- ----------
Insurance Subsidiaries:
Life and annuity premiums 168,013 155,440
Non-life reinsurance premiums 750,000 750,000
Life policy charges 161,090 157,731
Net investment income 262,590 247,525
Net realized gains 39,089 12,915
----------- -----------
Total revenues 1,380,782 1,323,611
----------- -----------
Non-life losses and loss adjustment expenses 515,362 494,769
Life policyholders' benefits and charges 283,274 258,615
Non-life reinsurance commissions 215,903 236,490
General operating expenses 124,775 122,425
----------- -----------
Total operating expenses 1,139,314 1,112,299
----------- -----------
Income before provision for taxes 241,468 211,312
Provision for income taxes 83,007 71,178
----------- -----------
Insurance Subsidiaries income 158,461 140,134
----------- -----------
Consolidated net income $ 534,513 $ 506,589
=========== ===========
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>
Nine month period
ended September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Consolidated net income $ 534,513 $ 506,589
----------- -----------
Other comprehensive loss, net of tax:
Net unrealized holding losses on securities,
net of tax of ($8,569) and ($113,742) (15,912) (211,309)
Change in effect of unrealized gains/(losses) on other
insurance accounts, net of tax of ($4,128) and $22,188 (7,667) 41,206
----------- -----------
Other comprehensive loss (23,579) (170,103)
----------- -----------
Comprehensive income $ 510,934 $ 336,486
=========== ===========
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 September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 880,005 $ 813,141
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 407,681 $ 375,177
----------- -----------
Operating expenses 231,607 207,551
Merger related expenses 0 0
----------- -----------
Total expenses 231,607 207,551
----------- -----------
Operating income 176,074 167,626
Net investment income 33,892 27,546
Net realized gains 16,215 28,833
Dividends on preferred securities of subsidiary trusts (10,518) (10,518)
----------- -----------
Income before provision for taxes 215,663 213,487
Provision for income taxes 88,664 89,145
----------- -----------
Management services income 126,999 124,342
----------- -----------
Insurance Subsidiaries:
Life and annuity premiums 59,743 51,536
Non-life reinsurance premiums 250,000 250,000
Life policy charges 53,293 52,919
Net investment income 89,833 83,191
Net realized gains 19,455 318
----------- -----------
Total revenues 472,324 437,964
----------- -----------
Non-life losses and loss adjustment expenses 186,399 166,098
Life policyholders' benefits and charges 98,176 84,558
Non-life reinsurance commissions 57,350 77,652
General operating expenses 40,662 42,282
----------- -----------
Total operating expenses 382,587 370,590
----------- -----------
Income before provision for taxes 89,737 67,374
Provision for income taxes 31,022 22,818
----------- -----------
Insurance Subsidiaries income 58,715 44,556
----------- -----------
Consolidated net income $ 185,714 $ 168,898
=========== ===========
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 September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Consolidated net income $ 185,714 $ 168,898
----------- -----------
Other comprehensive income/(loss), net of tax:
Net unrealized holding gains/(losses) on securities,
net of tax of $13,135 and ($43,699) 24,396 (81,152)
Change in effect of unrealized gains/(losses) on other
insurance accounts, net of tax of ($4,231) and
$5,357 (7,858) 9,948
----------- -----------
Other comprehensive income/(loss) 16,538 (71,204)
----------- -----------
Comprehensive income $ 202,252 $ 97,694
=========== ===========
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 nine month period ended September 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 534,513 534,513
Net unrealized holding losses on
securities, net of tax of
($8,569) (15,912) (15,912)
Change in effect of unrealized
losses on other insurance
accounts, net of tax of
($4,128) (7,667) (7,667)
Cash dividends declared and/or
paid (1,437,025) (1,437,025)
-------- ----------- ---------------- ------------ ------------
Balance, September 30, 2000 $ 1 $ 5,212,618 $ (57,578) $ 1,018,107 $ 6,173,148
======== =========== ================ ============ ============
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 nine month period ended September 30, 1999
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Other Total
Common Additional Comprehensive Retained Stockholders'
Stock Capital Income/(Loss) 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 506,589 506,589
Net unrealized holding losses
on securities, net of tax
of ($113,742) (211,309) (211,309)
Change in effect of unrealized
gains on other insurance
accounts, net of tax of
$22,188 41,206 41,206
Cash dividends paid (315,200) (315,200)
-------- ----------- ---------------- ------------ ------------
Balance, September 30, 1999 $ 1 $ 5,212,618 $ (25,361) $ 1,868,435 $ 7,055,693
======== =========== ================ ============ ============
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>
Nine month period
ended September 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Consolidated net income $ 534,513 $ 506,589
Non-cash and operating activities adjustments:
Depreciation and amortization 123,659 120,956
Amortization of deferred policy acquisition costs and
value of life business acquired 83,771 78,198
Policy acquisition costs deferred (76,637) (73,122)
Life insurance policy liabilities 104,467 63,455
Provision for non-life losses and loss adjustment expenses (7,540) (3,851)
Universal life type contracts:
Deposits received 227,083 226,359
Withdrawals (199,290) (189,591)
Interest credited 56,252 53,167
Equity in earnings of joint ventures 738 1,214
Gains on sales of assets (92,746) (76,278)
Changes in assets and liabilities:
Current assets and liabilities 7,140 (34,702)
Non-current assets and liabilities (79,967) (38,481)
Other, net 13,197 815
---------- -----------
Net cash provided by operating activities 694,640 634,728
---------- -----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (815,894) (1,621,967)
Purchases of properties (88,676) (35,253)
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 1,521,491 1,282,914
Proceeds from sales of properties 7,882 24,259
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 3,305 17,081
Increase in policy loans (12,809) (11,591)
Other, net (3,015) (1,187)
---------- -----------
Net cash provided by/(used in) investing activities 242,284 (524,694)
---------- -----------
Cash Flows from Financing Activities:
Dividends paid to stockholders (362,025) (315,200)
Annuity contracts:
Deposits received 111,284 121,572
Withdrawals (195,928) (149,600)
Interest credited 53,652 63,706
Payment of long-term notes payable (2) (2)
---------- -----------
Net cash used in financing activities (393,019) (279,524)
---------- -----------
Increase/(decrease) in cash and cash equivalents 543,905 (169,490)
Cash and cash equivalents - at beginning of year 313,500 327,552
---------- -----------
Cash and cash equivalents - at end of period $ 857,405 $ 158,062
========== ===========
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 September 30, 2000, the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the nine month periods ended September 30, 2000 and
September 30, 1999, and the consolidated statements of income and comprehensive
income for the three month periods ended September 30, 2000 and September 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, the financial services businesses of B.A.T, which
included the Company, were merged with Zurich Insurance Company ("ZIC"). The
businesses of ZIC and the financial services businesses of B.A.T 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.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement revises accounting standards for securitizations and other transfers
of financial assets and collateral. SFAS No. 140 replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", and rescinds SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125". This Statement, which is
required to be applied prospectively with certain exceptions, is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Additionally, this Statement is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company does not expect the adoption of this Statement
to have a material impact on its consolidated financial statements.
<PAGE> 15
B. Material contingencies
The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery and
development, and some seek punitive as well as compensatory damages. In the
opinion of management, the Company has not engaged in any conduct which should
warrant the award of any material punitive or compensatory damages. The
Company intends to vigorously defend its position in each case, and management
believes that, while it is not possible to predict the outcome of such matters
with absolute certainty, ultimate disposition of these proceedings should not
have a material adverse effect on the Company's consolidated results of
operations or financial position.
C. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures
In 1995, Farmers Group Capital and Farmers Group Capital II (the
"Subsidiary Trusts"), consolidated wholly owned subsidiaries of Farmers Group,
Inc., issued $410 million of 8.45% Cumulative Quarterly Income Preferred
Securities ("QUIPS"), Series A and $90 million of 8.25% QUIPS, Series B,
respectively. In connection with the Subsidiary Trusts' issuance of the QUIPS
and the related purchase by Farmers Group, Inc. of all of the Subsidiary
Trusts' Common Securities ("Common Securities"), Farmers Group, Inc. issued to
Farmers Group Capital $422,680,399 principal amount of its 8.45% Junior
Subordinated Debentures, Series A due on December 31, 2025, (the "Junior
Subordinated Debentures, Series A") and issued to Farmers Group Capital II
$92,783,505 principal amount of its 8.25% Junior Subordinated Debentures,
Series B due on December 31, 2025 (the "Junior Subordinated Debentures,
Series B" and, together with the Junior Subordinated Debentures, Series A, the
"Junior Subordinated Debentures"). The sole assets of Farmers Group Capital
are the Junior Subordinated Debentures, Series A. The sole assets of Farmers
Group Capital II are the Junior Subordinated Debentures, Series B. In
addition, these arrangements are governed by various agreements between Farmers
Group, Inc. and the Subsidiary Trusts (the Guarantee Agreements, the Trust
Agreements, the Expense Agreements, the Indentures and the Junior Subordinated
Debentures) which considered together constitute a full and unconditional
guarantee by Farmers Group, Inc. of the Subsidiary Trusts' obligations under
the Preferred Securities.
Under certain circumstances, the Junior Subordinated Debentures may be
distributed to holders of the QUIPS and holders of the Common Securities in
liquidation of the Subsidiary Trusts. The QUIPS are subject to mandatory
redemption upon repayment of the Junior Subordinated Debentures at maturity,
or upon their earlier redemption, at a redemption price of $25 per Preferred
Security, plus accrued and unpaid distributions thereon to the date fixed for
redemption. As of September 27, 2000, Farmers Group, Inc. has the option to
redeem, in whole or part, the Junior Subordinated Debentures.
As of September 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 $1,108,411,000 and $1,050,507,000 for the nine month periods ended
September 30, 2000 and September 30, 1999, respectively.
E. Related parties
As of September 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 September 30,
2000, income earned on this note totaled $14,063,000.
<PAGE> 16
In addition, as of September 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. Additionally, on September 3, 2000, $25,000,000 of
the notes receivable from UKISA, bearing interest at a coupon rate of 5.44%
with an original maturity date of September 3, 2000, were renewed for
medium-term notes with a 6.80% fixed interest rate maturing in September 2002.
The remaining notes receivable from UKISA are fixed rate medium-term notes with
maturity dates and coupon rates as follows: $207,000,000 in September 2001 at
5.48%, $200,000,000 in September 2002 at 5.67%, $200,000,000 in September 2003
at 5.71% and $250,000,000 in September 2004 at 5.78%. Interest on the UKISA
notes is paid semi-annually and for the nine month periods ended September 30,
2000 and September 30, 1999 totaled $39,048,000 and $44,575,000, respectively.
F. Certificates of contribution and surplus notes of the P&C Group
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.
Additionally, 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 September 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.
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 September 1999 (169,490)
-----------
Cash and cash equivalents -- September 30, 1999 100,705 57,357 $ 158,062
===========
Cash and cash equivalents -- December 31, 1999 $ 217,466 $ 96,034 $ 313,500
Activity through September 2000 543,905
-----------
Cash and cash equivalents -- September 30, 2000 823,556 33,849 $ 857,405
===========
</TABLE>
Cash payments for interest were $1,726,000 and $1,543,000 for the nine
month periods ended September 30, 2000 and September 30, 1999, respectively,
while the cash payment for dividends to the holders of the Company's QUIPS was
$31,553,000 for each of the nine month periods ended September 30, 2000 and
September 30, 1999. Cash payments for income taxes were $302,345,000 and
$325,884,000 for the nine month periods ended September 30, 2000 and September
30, 1999, respectively.
<PAGE> 17
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 insurance 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 $1,108,411,000 and $1,050,507,000 for the nine month
periods ended September 30, 2000 and September 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) and intersegment
adjustments. 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 to third
parties and, as such, records the transactions at current market prices. As of
September 30, 1999, the Company held intersegment loans among its three
reportable operating segments. The profit and loss effects of these loans are
reflected in the table below for the nine month period ended September 30, 1999.
There were no intersegment revenues among the Company's three reportable
operating segments for the nine month period ended September 30, 2000.
Information regarding the Company's reportable operating segments follows:
<TABLE>
<CAPTION>
Nine month period ended September 30, 2000
------------------------------------------------------------------------------------------------------------------
GAAP historical basis PGAAP adjustments Consolidated
------------------------------------------------------ ---------------------------------------------
Management Life Management Life PGAAP
services insurance Reinsurance Total services insurance Reinsurance Total basis
------------------------------------------------------ --------------------------------------------- ------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,179,798 $ 603,474 (a) $ 777,996 (a) $2,561,268 $ 0 $ (688) $ 0 $ (688) $2,560,580
Investment
income 105,017 249,075 32,103 386,195 (465) (688) 0 (1,153) 385,042
Investment
expenses (4,144) (9,099) (8,801) (22,044) 0 0 0 0 (22,044)
Net realized
gains 52,943 34,395 4,694 92,032 0 0 0 0 92,032
Dividends
on preferred
securities of
subsidiary
trusts (31,553) 0 0 (31,553) 0 0 0 0 (31,553)
Income before
provision for
taxes 716,566 201,488 46,537 964,591 (80,796) (6,557) 0 (87,353) 877,238
Provision for
income taxes 273,424 71,334 14,475 359,233 (13,706) (2,802) 0 (16,508) 342,725
Depreciation and
amortization 42,703 80,393 0 123,096 78,197 (b) 6,137 (c) 0 84,334 207,430
-----------------------
</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 ($32.0 million) and goodwill ($45.0 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>
Nine month period ended September 30, 1999
------------------------------------------------------------------------------------------------------------------
GAAP historical basis PGAAP and intersegment adjustments Consolidated
------------------------------------------------------ ---------------------------------------------
Management Life Management Life PGAAP
services insurance Reinsurance Total services insurance Reinsurance Total basis
------------------------------------------------------ --------------------------------------------- ------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,116,267 $ 553,864 (a) $ 770,790 (a) $2,440,921 $ 0 $ (1,043) $ 0 $ (1,043) $2,439,878
Investment
income 92,524 237,137 27,455 357,116 (1,082) (720) 0 (1,802) 355,314
Investment
expenses (6,527) (8,927) (7,420) (22,874) 0 0 0 0 (22,874)
Intersegment
interest
income/
(expense) (1,572)(b) 1,130 (b) 442 (b) 0 1,572 (c) (1,130)(c) (442)(c) 0 0
Net realized
gains/(losses) 66,504 12,483 755 79,742 (3,832) (323) 0 (4,155) 75,587
Dividends
on preferred
securities of
subsidiary
trusts (31,553) 0 0 (31,553) 0 0 0 0 (31,553)
Income before
provision for
taxes 705,948 (d) 200,663 (d) 39,814 (d) 946,425 (83,685)(e) (28,723)(e) (442)(e) (112,850) 833,575
Provision for
income taxes 270,599 (f) 70,389 (f) 11,469 (f) 352,457 (14,791)(g) (10,525)(g) (155)(g) (25,471) 326,986
Depreciation and
amortization 39,593 53,824 (h) 0 93,417 78,887 (i) 26,850 (j) 0 105,737 199,154
-----------------------
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains/(losses).
(b) Amount reflects the interest income/(expense) associated with the
intersegment loans.
(c) Amount reflects the adjustment, relating to interest income/(expense)
associated with the intersegment loans, necessary to present information
on a consolidated PGAAP basis.
(d) Amount includes interest income/(expense) associated with the
intersegment loans.
(e) Amount includes the adjustment related to intersegment interest
income/(expense) (refer to (c) above).
(f) Amount includes ($0.6 million), $0.4 million and $0.2 million associated
with the tax effect of intersegment interest income/(expense) relating to
the management services segment, the life insurance segment and the
reinsurance segment, respectively.
(g) Amount includes $0.6 million, ($0.4 million) and ($0.2 million)
associated with the tax effect of adjustments for intersegment interest
income/(expense) relating to the management services segment, the life
insurance segment and the reinsurance segment, respectively.
(h) 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.
(i) Amount includes PGAAP adjustments associated with the amortization of the
AIF contracts ($32.0 million) and goodwill ($45.0 million).
(j) 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 September 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. This dividend, which was paid on
October 23,2000 (see Note K), 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.
K. Subsequent events
After the close of business on October 16, 2000, the Zurich Financial
Services Group announced that a scheme to unify its holding structure was
finalized. Under this scheme, Zurich was renamed Zurich Group Holding, and a
new group holding company Zurich Financial Services was formed. Therefore,
shares in the previous holding companies, Allied Zurich p.l.c. and Zurich
Allied AG, have been replaced by shares in Zurich Financial Services which
have a primary listing on the SWX Swiss Exchange and a secondary listing on the
London Stock Exchange. As a result of this unification scheme, the Ordinary
Shares of the Company are now wholly owned by Zurich Group Holding while the
Income Shares remain wholly owned by Allied Zurich Holdings Limited.
<PAGE> 19
On October 23, 2000, the Company assigned $580,000,000 of the notes
receivable from UKISA (see Note E) to ZIC for par value. As a result, the
Company continues to hold UKISA notes with the following principal amounts,
maturity dates and coupon rates: $207,000,000 maturing in September 2001
at a coupon rate of 5.48% and $95,000,000 maturing in September 2002,
$25,000,000 at a coupon rate of 6.80% and $70,000,000 at a coupon rate
of 5.67%.
Finally, on October 23, 2000, the $1,075,000,000 cash dividend (see Note J)
was paid to Allied Zurich Holdings Limited. The Company used the $580,000,000
of proceeds received from the assignment of the UKISA notes receivable to help
fund the payment of this dividend.
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 and
sells 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, variable
universal life and variable annuity 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 as well as
on variable products 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 September 30, 2000 Compared to Three Months Ended
September 30, 1999
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $375.2 million for
the three months ended September 30, 1999 to $407.7 million for the three
months ended September 30, 2000, an increase of $32.5 million, or 8.7%.
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 $2,704.0 million in the third quarter of 1999 to $2,889.1
million in the third quarter of 2000 due primarily to $117.5 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.
<PAGE> 20
Operating Expenses.
Salaries and Employee Benefits. Salaries and employee benefits
increased from $96.1 million for the three months ended September 30, 1999
to $105.3 million for the three months ended September 30, 2000, an
increase of $9.2 million, or 9.6%, due to $12.3 million of expenses
incurred in the third 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 $24.1 million for the three months ended September 30, 1999
to $26.0 million for the three months ended September 30, 2000, an increase
of $1.9 million, or 7.9%, due primarily to $2.6 million of 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. 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 September 30, 2000 and
September 30, 1999.
General and Administrative Expenses. General and administrative
expenses increased from $61.7 million for the three months ended
September 30, 1999 to $74.6 million for the three months ended
September 30, 2000, an increase of $12.9 million, or 20.9%. This increase
was primarily a result of expenses incurred in connection with providing
management services to the business assumed from Foremost as well as a $5.8
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.
Net Investment Income. Net investment income increased from $27.5 million
for the three months ended September 30, 1999 to $33.9 million for the three
months ended September 30, 2000, an increase of $6.4 million, or 23.3%, due to
higher investment yields and an increase in the average invested asset base.
Net Realized Gains. Net realized gains decreased from $28.8 million for
the three months ended September 30, 1999 to $16.2 million for the three months
ended September 30, 2000, a decrease of $12.6 million, or 43.8%, due primarily
to a decrease in gains recognized on sales of common stock in the third quarter
of 2000.
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 September 30, 2000 and September 30, 1999.
Provision for Income Taxes. Provision for income taxes decreased from
$89.1 million for the three months ended September 30, 1999 to $88.7 million
for the three months ended September 30, 2000, a decrease of $0.4 million,
or 0.4%.
Management Services Income. As a result of the foregoing, management
services income increased from $124.3 million for the three months ended
September 30, 1999 to $127.0 million for the three months ended
September 30, 2000, an increase of $2.7 million, or 2.2%.
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 September 30, 2000 and
September 30, 1999. Losses and loss adjustment expenses incurred under this
treaty were $186.4 million for the three months ended September 30, 2000 and
$166.1 million for the three months ended September 30, 1999 and non-life
reinsurance commissions were $57.3 million for the
<PAGE> 21
three months ended September 30, 2000 and $77.7 million for the three months
ended September 30, 1999. Income before taxes increased $2.3 million from
$12.8 million for the three months ended September 30, 1999 to $15.1 million
for the three months ended September 30, 2000 due primarily to increased
investment income and realized capital gains. For the three month periods
ended September 30, 2000 and September 30, 1999, Farmers Re's contribution to
net income was $10.3 million and $9.0 million, respectively.
Farmers Life
Total Revenues. Total revenues increased from $181.3 million for the three
months ended September 30, 1999 to $213.4 million for the three months ended
September 30, 2000, an increase of $32.1 million, or 17.7%.
Life and Annuity Premiums. Life and annuity premiums increased $8.2
million for the three months ended September 30, 2000, or 15.9%, over the
three months ended September 30, 1999. 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
third quarter of 2000.
Life Policy Charges. Life policy charges increased $0.4 million for
the three months ended September 30, 2000, or 0.8%, over the three months
ended September 30, 1999, reflecting growth in universal life-type
insurance in-force.
Net Investment Income. Net investment income increased $5.5 million
for the three months ended September 30, 2000, or 7.2%, over the three
months ended September 30, 1999. The increase was primarily due to higher
interest income resulting from an increase in invested assets between
periods.
Net Realized Gains. Net realized gains increased by $18.0 million,
from $0.4 million for the three months ended September 30, 1999 to $18.4
million for the three months ended September 30, 2000 due primarily to an
increase in gains realized on stock sales.
Total Operating Expenses. Total operating expenses increased from $126.8
million for the three months ended September 30, 1999 to $138.7 million for the
three months ended September 30, 2000, an increase of $11.9 million, or 9.4%.
Life Policyholders' Benefits and Charges. Life policyholders' benefits
expense and charges increased from $84.5 million for the three months ended
September 30, 1999 to $98.1 million for the three months ended September
30, 2000, an increase of $13.6 million, or 16.1%.
Policy Benefits. Policy benefits, which consist primarily of death
and surrender benefits on life products, increased $3.7 million for the
three months ended September 30, 2000, to $36.2 million, due to higher
mortality experience in the Farmers Flexible Universal Life ("FFUL")
product line in the current period.
Increase in Liability for Future Benefits. Increase in liability
for future benefits expense increased from $12.5 million for the three
months ended September 30, 1999 to $21.4 million for the three months
ended September 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 $39.5 million for the three months ended
September 30, 1999 to $40.5 million for the three months ended
September 30, 2000, or 2.5%, reflecting growth in the universal life
fund balance.
<PAGE> 22
General Operating Expenses. General operating expenses decreased from
$42.3 million for the three months ended September 30, 1999 to $40.6
million for the three months ended September 30, 2000, a decrease of $1.7
million, or 4.0%.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense decreased from $28.2 million for the three months
ended September 30, 1999 to $26.8 million for the three months ended
September 30, 2000, due to differences in the mix of business.
Net Commissions. Net commissions expense decreased from $2.5
million for the three months ended September 30, 1999 to $1.0 million
for the three months ended September 30, 2000, due to higher
co-insurance activity.
General and Administrative Expenses. General and administrative
expenses increased 10.3% from $11.6 million for the three months ended
September 30, 1999 to $12.8 million for the three months ended
September 30, 2000. This increase was due primarily to expenses
related to entering the variable market, expanding the number of states
licensed in 2000 as well as expenses associated with the project to
implement a new financial accounting and reporting system for the
Company and the P&C group.
Provision for Income Taxes. Provision for income taxes increased $7.4
million from $18.9 million for the three months ended September 30, 1999 to
$26.3 million for the three months ended September 30, 2000.
Farmers Life Income. As a result of the foregoing, Farmers Life income
increased from $35.6 million for the three months ended September 30, 1999 to
$48.4 million for the three months ended September 30, 2000, an increase of
$12.8 million, or 36.0%.
Consolidated Net Income
Consolidated net income of the Company increased from $168.9 million for
the three months ended September 30, 1999 to $185.7 million for the three
months ended September 30, 2000, an increase of $16.8 million, or 9.9%.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $1,116.3 million for
the nine months ended September 30, 1999 to $1,179.8 million for the nine
months ended September 30, 2000, an increase of $63.5 million, or 5.7%. This
growth reflects higher gross premiums earned by the P&C Group, which increased
from $8,094.1 million in the first nine months of 1999 to $8,475.2 million in
the first nine months of 2000 due primarily to $271.2 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 $277.9 million for the nine months ended September 30, 1999
to $306.1 million for the nine months ended September 30, 2000, an increase
of $28.2 million, or 10.1%, due to $28.9 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 $71.3 million for the nine months ended September 30, 1999
to $76.2 million for the nine months ended September 30, 2000, an increase
of $4.9 million, or 6.9%, due to expenses incurred in connection with
providing management
<PAGE> 23
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 $77.1 million in each of the nine month periods ended September
30, 2000 and September 30, 1999.
General and Administrative Expenses. General and administrative
expenses increased from $183.5 million for the nine months ended September
30, 1999 to $206.3 million for the nine months ended September 30, 2000, an
increase of $22.8 million, or 12.4%. This increase was a result of expenses
incurred in connection with providing management services to the business
assumed from Foremost as well as a $13.3 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 $3.6 million of Year 2000 project
expenses incurred through September 1999. No similar expenses were
incurred through September 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 nine month period ended September 30, 1999.
Net Investment Income. Net investment income increased from $84.9 million
for the nine months ended September 30, 1999 to $100.4 million for the nine
months ended September 30, 2000, an increase of $15.5 million, or 18.3%, due to
higher investment yields and an increase in the average invested asset base.
Net Realized Gains. Net realized gains decreased from $62.7 million for
the nine months ended September 30, 1999 to $52.9 million for the nine months
ended September 30, 2000, a decrease of $9.8 million, or 15.6% due primarily to
a decrease in gains recognized on sales of common stock.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense
was $31.6 million in each of the nine month periods ended September 30, 2000
and September 30, 1999.
Provision for Income Taxes. Provision for income taxes increased from
$255.8 million for the nine months ended September 30, 1999 to $259.7 million
for the nine months ended September 30, 2000, an increase of $3.9 million, or
1.5%, due mainly to an increase in pretax income between periods.
Management Services Income. As a result of the foregoing, management
services income increased from $366.5 million for the nine months ended
September 30, 1999 to $376.1 million for the nine months ended September 30,
2000, an increase of $9.6 million, or 2.6%.
Insurance Subsidiaries
Farmers Re
Under the quota share reinsurance treaty, Farmers Re assumed $750.0 million
of premiums in each of the nine month periods ended September 30, 2000 and
September 30, 1999. Losses and loss adjustment expenses incurred under this
treaty were $515.4 million for the nine months ended September 30, 2000 and
$494.8 million for the nine months ended September 30, 1999 and non-life
reinsurance commissions were $215.9 million for the nine months ended September
30, 2000 and $236.5 million for the nine months ended September 30, 1999.
Income before taxes increased $7.1 million from $39.4 million for the nine
months ended September 30, 1999 to $46.5 million for the nine months ended
September 30, 2000 due primarily to increased investment income and realized
capital gains. For the nine month periods ended September 30, 2000 and
September 30, 1999, Farmers Re's contribution to net income was $32.0 million
and $28.0 million, respectively.
<PAGE> 24
Farmers Life
Total Revenues. Total revenues increased from $552.8 million for the nine
months ended September 30, 1999 to $602.8 million for the nine months ended
September 30, 2000, an increase of $50.0 million, or 9.0%.
Life and Annuity Premiums. Life and annuity premiums increased $12.6
million for the nine months ended September 30, 2000, or 8.1%, over the
nine months ended September 30, 1999. Excluding the impact of co-insurance
activity for the nine months ended September 30, 2000, premiums increased
$25.4 million, or 16.3%, between periods. This growth in premiums is due
to a 19.4% increase in the volume of traditional life insurance in-force as
well as an increase in the number of structured settlements issued in the
nine months ended September 30, 2000.
Life Policy Charges. Life policy charges increased $3.4 million for
the nine months ended September 30, 2000, or 2.2%, over the nine months
ended September 30, 1999, reflecting a 1.2% growth in universal life-type
insurance in-force.
Net Investment Income. Net investment income increased $11.8 million
for the nine months ended September 30, 2000, or 5.2%, over the nine months
ended September 30, 1999. The increase was primarily due to higher
interest income resulting from an increase in invested assets between
periods.
Net Realized Gains. Net realized gains increased by $22.2 million,
from $12.2 million for the nine months ended September 30, 1999 to $34.4
million for the nine months ended September 30, 2000 due primarily to an
increase in gains realized on stock sales.
Total Operating Expenses. Total operating expenses increased from $380.8
million for the nine months ended September 30, 1999 to $407.9 million for the
nine months ended September 30, 2000, an increase of $27.1 million, or 6.7%.
Life Policyholders' Benefits and Charges. Life policyholders' benefits
expense and charges increased from $258.6 million for the nine months ended
September 30, 1999 to $283.3 million for the nine months ended September
30, 2000, an increase of $24.7 million, or 9.6%.
Policy Benefits. Policy benefits increased $5.2 million for the
nine months ended September 30, 2000 to $108.0 million, due primarily
to a 14.3% growth in mortality experience in the FFUL product line.
Increase in Liability for Future Benefits. Increase in liability
for future benefits expense increased from $38.3 million for the nine
months ended September 30, 1999 to $54.1 million for the nine months
ended September 30, 2000. This increase was primarily attributable to
higher sales volumes related to structured settlements and the 19.4%
growth in the volume of traditional life insurance in-force.
Interest Credited to Policyholders. Interest credited to
policyholders increased from $117.5 million for the nine months ended
September 30, 1999 to $121.2 million for the nine months ended
September 30, 2000, or 3.1%, reflecting growth in the universal life
fund balance.
General Operating Expenses. General operating expenses increased from
$122.2 million for the nine months ended September 30, 1999 to $124.6
million for the nine months ended September 30, 2000, an increase of $2.4
million, or 2.0%.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense increased from $78.2 million for the nine months
ended September 30, 1999 to $83.8 million for the nine months ended
September 30, 2000, reflecting growth in business and differences in
the mix of business.
<PAGE> 25
Net Commissions. Net commissions expense decreased $8.2 million
from $11.8 million for the nine months ended September 30, 1999 to $3.6
million for the nine months ended September 30, 2000, due to higher
co-insurance activity.
General and Administrative Expenses. General and administrative
expenses increased 15.5% from $32.2 million for the nine months ended
September 30, 1999 to $37.2 million for the nine months ended September
30, 2000. This increase was due primarily to expenses related to
entering the variable market, expanding the number of states licensed
in 2000 as well as expenses associated with the project to implement a
new financial accounting and reporting system for the Company and the
P&C group.
Provision for Income Taxes. Provision for income taxes increased from
$59.9 million for the nine months ended September 30, 1999 to $68.5 million for
the nine months ended September 30, 2000, due to higher pretax operating
income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
increased from $112.1 million for the nine months ended September 30, 1999 to
$126.4 million for the nine months ended September 30, 2000, an increase of
$14.3 million, or 12.8%.
Consolidated Net Income
Consolidated net income of the Company increased from $506.6 million for
the nine months ended September 30, 1999 to $534.5 million for the nine months
ended September 30, 2000, an increase of $27.9 million, or 5.5%.
Liquidity and Capital Resources
As of September 30, 2000 and September 30, 1999, the Company held cash and
cash equivalents of $857.4 million and $158.1 million, respectively. In
addition, as of September 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 $634.7 million
for the nine months ended September 30, 1999 to $694.6 million for the nine
months ended September 30, 2000, an increase of $59.9 million. This increase
in cash was due to a $41.0 million increase in life insurance policy
liabilities and a $27.9 million increase in consolidated net income.
Net cash provided by investing activities increased $767.0 million between
periods to $242.3 million for the nine months ended September 30, 2000. This
increase in cash was the result of an $806.1 million decrease in purchases of
investments available-for-sale, a $238.6 million increase in proceeds from
sales and maturities of investments available-for-sale as well as the fact that
$190 million was loaned to Centre Reinsurance Holdings (Delaware II) Ltd. in
June 1999. 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 $53.4 million increase
in purchases of properties.
Net cash used in financing activities increased from $279.5 million for
the nine months ended September 30, 1999 to $393.0 million for the nine months
ended September 30, 2000, resulting in a decrease in cash of $113.5 million.
This decrease in cash was due primarily to a $46.8 million increase in
dividends paid to stockholders coupled with lower cash flows from annuity
contracts.
<PAGE> 26
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.
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)
November 13, 2000 /s/ Martin D. Feinstein
---------------------------------------------
Date Martin D. Feinstein
Chairman of the Board,
President and Chief Executive Officer
November 13, 2000 /s/ Gerald E. Faulwell
---------------------------------------------
Date Gerald E. Faulwell
Senior Vice President and
Chief Financial Officer
