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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 33-94670-01
FARMERS GROUP, INC.
Incorporated in Nevada I.R.S. Employer Identification No.
4680 Wilshire Boulevard 95-0725935
Los Angeles, California 90010
(323) 932-3200
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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8.45% Cumulative Quarterly Income New York Stock Exchange
Preferred Securities, Series A (QUIPS)
(liquidation preference $25 per share)*
8.25% Cumulative Quarterly Income New York Stock Exchange
Preferred Securities, Series B (QUIPS)
(liquidation preference $25 per share)*
*Issued by Farmers Group Capital (Series A) and Farmers Group Capital II
(Series B) and the payments of trust distributions and payments on
liquidation or redemption are guaranteed under certain circumstances by
Farmers Group, Inc., the owner of 100% of the common securities issued by
Farmers Group Capital and Farmers Group Capital II, Delaware statutory
business trusts.
Securities registered pursuant to Section 12(g) of the Act: None.
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Registrant's Common Stock outstanding on December 31, 1999 was 1,000 shares.
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FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
------
PART I
ITEM 1. Business 4
ITEM 2. Properties 11
ITEM 3. Legal Proceedings 11
ITEM 4. Submission of Matters to a Vote of Security Holders 12
PART II
ITEM 5. Market for Farmers Group, Inc.'s Common Equity and
Related Stockholders Matters 12
ITEM 6. Selected Financial Data 12
ITEM 7. Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
ITEM 7a. Quantitative and Qualitative Disclosures about Market
Risks 21
ITEM 8. Financial Statements and Supplementary Data 22
ITEM 9. Changes in and Disagreements with Accountants on 61
Accounting and Financial Disclosures
PART III
ITEM 10. Directors and Executive Officers of Farmers Group, Inc. 61
ITEM 11. Executive Compensation 64
ITEM 12. Security Ownership of Certain Beneficial Owners 67
and Management
ITEM 13. Certain Relationships and Related Transactions 68
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports 69
on Form 8-K
SIGNATURES 71
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DOCUMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements of the Company,
including the notes thereto, appearing elsewhere in this document. Unless
the context requires otherwise, (i) references to the Company are to Farmers
Group, Inc. ("FGI") and its subsidiaries, (ii) references to the P&C Group are
to Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance
Exchange (each an "Exchange" and collectively, the "Exchanges"), their
respective subsidiaries and Farmers Texas County Mutual Insurance Company
("FTCM"), (iii) references to Farmers Life are to Farmers New World Life
Insurance Company, (iv) references to the Life Insurance Subsidiaries are to
Farmers Life, The Ohio State Life Insurance Company ("OSL") and Investors
Guaranty Life Insurance Company ("IGL") and (v) references to the Insurance
Subsidiaries are to Farmers Life and Farmers Reinsurance Company ("Farmers
Re") in 1999 and 1998, to Farmers Life, OSL, IGL and Farmers Re in 1997 and
to Farmers Life, OSL and IGL in 1996 and 1995. Unless otherwise indicated,
financial information, operating statistics and ratios applicable to the
Company and the Insurance Subsidiaries set forth in this document are based on
generally accepted accounting principles ("GAAP") and the same information
with regard to the P&C Group is based on statutory accounting practices
("SAP"). Unless otherwise specified, the financial information for the P&C
Group is on a statutory combined basis. Any reference to the "Subsidiary
Trusts" is to Farmers Group Capital and Farmers Group Capital II, consolidated
wholly owned subsidiaries of Farmers Group, Inc.. Any reference to "Note"
is to the Notes to Consolidated Financial Statements included in Item 8 of
this Report.
PART I
ITEM 1. Business
The Company
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. As of December 31, 1999, the Company had total
assets of $12.8 billion, stockholders' equity of $7.1 billion and for the
period ended December 31, 1999, the Company had consolidated operating
revenues of $3.3 billion. As of December 31, 1999, the Insurance
Subsidiaries had total assets of $6.5 billion, combined SAP capital and
surplus (including asset valuation reserve) of $1.6 billion, life
policies-in-force of 1.2 million and for the period ended December 31,
1999, the Insurance Subsidiaries had combined SAP life premiums and
deposits received of $0.6 billion and non-life reinsurance premiums of $1.0
billion. The financial results and assets and liabilities of the P&C Group
are not reflected in the consolidated financial statements of the Company.
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 market 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.
Operating Segments
Financial information by operating segment can be found in Note Y.
Following are descriptions of the Company's operating segments.
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Provision of Management Services to the P&C Group; and Other. The P&C
Group is owned by the policyholders of the Exchanges and FTCM. Accordingly,
the Company has no ownership interest in the P&C Group. The policyholders
each appoint the Company as the exclusive attorney-in-fact ("AIF") to provide
management services to the P&C Group. For such services, the Company earns
management fees based primarily on the gross premiums earned by the P&C Group.
Consequently, the Company is not directly affected by the underwriting results
of the P&C Group. This is in contrast to a typical property and casualty
insurance holding company which depends on dividends from owned and operated
subsidiaries which are subject to fluctuations in underwriting results. The
management fees comprise a major part of the Company's revenue and, as a
result, the Company's ongoing financial performance depends on the volume of
business written by, and the business efficiency and financial strength of,
the P&C Group.
As AIF of the P&C Group, the Company selects risks, prepares and mails
policy forms and invoices, collects premiums and performs certain other
administrative and managerial functions. The P&C Group is responsible for
its own claims functions, including the settlement and payment of claims and
claims adjustment expenses. The P&C Group is also responsible for the payment
of commissions, bonuses for agents and district managers, and its premium and
income taxes.
The Company is entitled to receive a management fee of up to 20% (25% in
the case of Fire Insurance Exchange) of the gross premiums earned by the P&C
Group. In order to enable the P&C Group to maintain appropriate capital and
surplus while offering competitive insurance rates, the Company has
historically charged a lower management fee than permitted. The Company has
been able to do this while maintaining appropriate profit margins through
enhanced operating efficiencies that encompass the use of economies of scale,
the use of technology and the standardization of procedures. The range of
fees has varied by line of business over time and from year to year. During
the past five years, aggregate management fees averaged between 12% and 13%
of gross premiums earned by the P&C Group. The P&C Group has reported a
growing volume of premiums which has generated a corresponding rise in
management fee income to the Company. Gross premiums earned by the P&C Group
were $10.8 billion, $10.3 billion and $10.1 billion for 1999, 1998 and 1997,
respectively, giving rise to management fee revenues to the Company of $1.40
billion, $1.27 billion and $1.24 billion, respectively, for the same years.
The P&C Group markets personal auto, homeowners, selected commercial and
specialty insurance products. For the year ended December 31, 1999,
approximately 65.5% of net premiums earned was from auto insurance policies,
23.5% was from homeowner policies and the remainder was primarily from
commercial policies. As of December 31, 1999, the P&C Group had total assets
of $15.6 billion, surplus as regards policyholders of $4.6 billion,
policies-in-force of 16.1 million and for the year ended December 31, 1999,
had gross premiums earned of $10.8 billion.
The Company, through its wholly owned subsidiary Prematic Service
Corporation ("Prematic"), enables individuals and businesses purchasing
insurance from one or more members of the P&C Group and Farmers Life to
combine all premiums due into a single payment. In practice, Prematic
combines amounts due from a single insured associated with auto, fire,
commercial, specialty and life policies into a single amount and then bills
the insured on a periodic basis for all policies-in-force. For this service,
Prematic collected service fees totaling $75.6 million in 1999 and generated
net income of $21.8 million for the year. The Company has certain other
nonmaterial subsidiaries, the results of which are included in the Company's
consolidated results.
Life Insurance. On April 15, 1997, the Company sold two of its life
insurance subsidiaries, OSL and IGL, to Great Southern Life Insurance Company,
a subsidiary of Americo Life, Inc.. These subsidiaries contributed $5,502,000
to net income in 1997.
The Company's remaining life insurance subsidiary, Farmers Life, markets
a broad line of individual life insurance products, including universal life,
term life and whole life insurance and annuity products, predominantly
flexible premium deferred annuities. In 1999, Farmers Life entered the
structured settlement market and also
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made substantial progress towards entering the variable universal life and
annuities market. Farmers Life is scheduled to introduce these variable
products in early 2000.
As of December 31, 1999, Farmers Life provided insurance to nearly 1.2
million people and managed approximately $1.7 billion of annuity funds.
Farmers Life's investment philosophy emphasizes long-term fundamental value
in the selection of the investment mix for its portfolio. As of December 31,
1999, approximately 86.7% of Farmers Life's portfolio was invested in fixed
income securities and cash and 4.6% in equity securities and owned real
estate. As of December 31, 1999, approximately 93.3% of Farmers Life's fixed
income securities were rated investment grade. Farmers Life's ratio of SAP
capital and surplus (including asset valuation reserve) to total assets as
of December 31, 1999 was 22.2%, well over the industry average of
approximately 12.3% as of September 30, 1999, as published in the Statistical
Bulletin issued by the American Council of Life Insurance.
Farmers Reinsurance Company. Farmers Re is a wholly owned subsidiary of
the Company. On January 1, 1998, Farmers Re entered into an auto physical
damage reinsurance agreement with the P&C Group. This agreement provided for
monthly premiums of $83.3 million and recoveries of a quota share percentage
of ultimate net losses sustained by the P&C Group in its auto physical damage
lines of business. This agreement also provided 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.
Under this quota share reinsurance agreement, Farmers Re assumed $1,000.0
million of premiums in both 1999 and 1998. Total losses and loss adjustment
expenses paid by Farmers Re were $554.8 million in 1999 and $549.2 million in
1998, while total reinsurance commissions paid were $313.7 million in 1999 and
$319.9 million in 1998. In March 1999, Farmers Re and the P&C Group commuted
$105.9 million of losses and loss adjustment expenses associated with the 1998
accident year. As a result, in May 1999, Farmers Re paid the P&C Group $105.9
million of losses and loss adjustment expenses and $8.2 million of accrued
interest in settlement of this commutation.
Employees
As of December 31, 1999, the Company had 6,929 employees.
Business Environment
Strategic Objectives. The Company's strategic objective is to assist
the Farmers Insurance Group of Companies( in providing world-class personal
insurance and a full range of financial services solutions to individuals,
families and small businesses, thereby earning them the reputation of being
first choice in protecting and building people's assets within their chosen
markets. The Company intends to achieve this objective by (i) maintaining its
long-standing tradition of providing high-quality customer service,
(ii) expanding the Company's portfolio of value-added products and services,
(iii) cross-selling insurance products and services to the P&C Group's
nearly 8.5 million existing households, (iv) investing in technology to
improve the efficiency and quality of service, (v) capitalizing on the strong
brand name recognition of Farmers Insurance Group of Companies in their 41
state operating territory and (vi) forming strategic alliances to capitalize
on the distribution capabilities of the agency force.
Year 2000 Project. In 1995, the Company initiated a Year 2000 project
in order to prepare for the information processing challenges presented by
the approach of the new millennium. This project encompassed all major areas
of the Company's operations, including internal and vendor mainframe
applications, mainframe systems software, third party interfaces,
non-mainframe systems software, forms, facilities and equipment. The Year
2000 issue has not presented any significant disruptions to the operations of
the Company or the P&C Group.
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Additional information relating to this Year 2000 project can be found in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this Report.
Marketing and Distribution. The P&C Group and Farmers Life operate using
common trade names and logos, including Farmers Insurance Group of Companies(,
Farmers Insurance Group( and Farmers(, and distribute their respective
insurance products in 29 states (primarily in western and midwestern states)
through a common network of direct writing agents and district managers. As
of December 31, 1999, this network consisted of 14,722 direct writing agents
and 494 district managers, each of whom is an independent contractor. The
size, efficiency and scope of this agency force have made it a major factor
in the Company's growth. Each agent is required to first submit business to
the insurers in the Farmers Insurance Group of Companies within the classes
and lines of business written by such insurers. To the extent that such
insurers decline such business or do not underwrite it, the agents may offer
the business to other insurers.
Farmers' agents direct their marketing efforts toward family accounts
and small businesses. They leverage these relationships using an extensive
portfolio of products to increase the number of policies per household or
account. The P&C Group's existing relationships with nearly 8.5 million
households provide a potential opportunity for future growth in
policies-in-force and life insurance sales. Higher retention rates and
profitability are expected to be achieved on business written with households
having multiple policies.
Farmers maintains its brand name recognition throughout its operating
territory through television, radio and print advertising on both a national
and local basis. To further assist the agency force in marketing Farmers'
products, they are provided access to the Farmers Agency Information
Management System which enables the agent to deliver high-quality consumer
focused service at the point of sale. Furthermore, Farmers' formalized
policyholder recontact program, the "Farmers Friendly Review(", builds
customer loyalty and provides a vehicle for enhanced policy retention and
future internal growth through the cross-selling of property and casualty
and life products.
As part of the merger with ZIC, Zurich Personal Insurance employees,
based in Baltimore, Maryland, assisted FGI and the P&C Group in expanding
their operations into twelve new eastern states in 1999. These Zurich
Personal Insurance employees also helped the P&C Group expand into new
specialty lines of business, such as recreational products, thereby increasing
the range of products available to meet the P&C Group's customers' needs.
Effective January 1, 2000, these Zurich Personal Insurance employees became
employees of either the Company or the P&C Group. The distribution of Farmers
products in these new eastern states was accomplished through a network of 483
independent agents, many of whom have established books of business.
Competition. Property and casualty insurance is a very competitive
industry with approximately 3,000 insurers operating in the United States.
Many property and casualty insurers with a small all-lines national market
share have a significant market share within a single state or a specialty
market. The P&C Group competes in its selected markets through brand name
recognition of the Farmers Insurance Group of Companies, customer service,
product features, financial strength, price and the agency force.
There is substantial competition among insurance companies seeking
customers for the types of products sold by Farmers Life. Approximately 1,600
life insurance companies in the United States offer products similar to those
offered by Farmers Life, and many use similar marketing techniques. Farmers
Life competes on the basis of customer service, product features, financial
strength and price. Many of the products offered by Farmers Life contain
significant cash accumulation features; therefore, these products compete with
product offerings of banks, mutual funds and other financial institutions as
well.
Regulatory and Related Matters. The Insurance Subsidiaries and the P&C
Group are subject to extensive state regulatory oversight in the jurisdictions
in which they do business. The Company and the P&C Group constitute an
insurance holding company system as defined by the insurance laws and
regulations of various jurisdictions. As such, certain transactions between
an insurance company and any other member company of the
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system, including investments in subsidiaries and distributions by an
insurance company to its shareholders, are subject to regulation and oversight
by the state of domicile of the applicable insurance company. Insurers having
insufficient statutory capital and surplus are subject to varying degrees of
regulatory action depending on the level of capital inadequacy. As of
December 31, 1999, neither the P&C Group nor the Insurance Subsidiaries were
subject to such regulatory actions. Most of Farmers Life's and the P&C
Group's business is subject to regulation with respect to policy rates and
related matters. In addition, assessments are levied against Farmers Life and
the P&C Group as a result of participation in various types of mandatory state
guaranty associations. Existing federal laws and regulations affect the
taxation of life insurance products and insurance companies.
Investments
During the years ended December 31, 1999, 1998 and 1997, the Insurance
Subsidiaries had pretax net investment income and realized investment
gains/(losses) of $360.4 million, $292.6 million, and $306.4 million,
respectively, and the Company other than the Insurance Subsidiaries
(collectively, the "Noninsurance investment portfolio") had pretax net
investment income and realized investment gains of $192.7 million, $197.5
million and $217.6 million, respectively. As of December 31, 1999, the book
value of the Insurance Subsidiaries investment portfolio was approximately
$5.1 billion and the book value of the Noninsurance investment portfolio was
approximately $2.5 billion. The Board of Directors of the Company is
responsible for developing investment policies and the Investment Committee,
which is comprised of 10 officers of the Company who are appointed by the
Board of Directors, is responsible for administering such policies. During
1998, Scudder Kemper Investments, Inc. took over management of the Insurance
Subsidiaries investment portfolio and the Noninsurance investment portfolio
in accordance with these policies. Prior to that, the Company's investment
department managed these portfolios.
The investment philosophy for both the Insurance Subsidiaries investment
portfolio and the Noninsurance investment portfolio emphasizes long-term
fundamental value in the selection of the investment mix. For the Insurance
Subsidiaries, the assets backing the Farmers Life interest sensitive
investment portfolio are internally segregated along product lines in order
to closely match the funding assets with the underlying liabilities to
policyholders. The asset/liability matching system is the basis by which
credited interest rates are determined. In the Noninsurance investment
portfolio, excluding certificates of contribution of the P&C Group and notes
from affiliates, relatively short maturities are maintained for capital
preservation purposes and to ensure liquidity.
The Insurance Subsidiaries investment portfolio and the Noninsurance
investment portfolio are both comprised of a broad range of assets, including
corporate fixed income securities, mortgage-backed securities, taxable and
tax-exempt government securities, preferred stock, common stock, owned real
estate, mortgage loans and short-term instruments. The Insurance Subsidiaries
investment portfolio also includes policy loans and Standard & Poor's 500
Composite Stock Price Index ("S&P 500") call options. Approximately 42.1% of
the Noninsurance investment portfolio consists of notes issued by British
American Financial Services (UK and International), Ltd. ("BAFS"), a
subsidiary of Zurich, and 10.0% consists of a note issued by Old Stone
(Delaware) Holdings Limited ("OSDH"), also a subsidiary of Zurich.
Approximately 2.3% of the Insurance Subsidiaries investment portfolio consists
of a surplus note of the P&C Group. See Item 13 and Notes F and S.
Approximately 94.0% of the fixed income securities in the Insurance
Subsidiaries investment portfolio are rated investment grade and approximately
95.5% of the fixed income securities in the Noninsurance investment portfolio
are rated investment grade. Approximately 61.2% of the mortgage-backed
securities in the Insurance Subsidiaries investment portfolio are guaranteed
by the Government National Mortgage Association ("GNMA"), Federal Housing
Authority ("FHA"), Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Corporation ("FHLMC"), and approximately 86.6% of the
remaining 38.8% are rated "AAA". Approximately 15.4% of the mortgage-backed
securities in the Noninsurance investment portfolio are guaranteed by GNMA,
FHA, FNMA or FHLMC, and the remaining 84.6% are rated "AAA".
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The following table sets forth the book value of each portfolio, by asset
category, as of December 31, 1999 and 1998.
Book Value of Invested Assets
(Amounts in millions)
<TABLE>
<CAPTION>
As of December 31,
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1999 1998
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Book Value % Book Value %
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<S> <C> <C> <C> <C>
Insurance Subsidiaries
Fixed income securities $ 4,376.3 85.0 % $ 4,356.1 87.5 %
Mortgage loans 35.9 0.7 52.9 1.1
Equity securities 213.4 4.2 107.4 2.1
Owned real estate 66.7 1.3 59.0 1.2
Cash and cash equivalents 96.0 1.9 73.7 1.5
Surplus note of the P&C Group 119.0 2.3 119.0 2.4
Policy loans 201.7 3.9 185.2 3.7
S&P 500 call options 32.7 0.6 14.8 0.3
Other 6.7 0.1 8.5 0.2
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Total $ 5,148.4 100.0 % $ 4,976.6 100.0 %
========= ======= ========== ==========
Noninsurance
Fixed income securities $ 578.3 23.0 % $ 662.1 27.3 %
Mortgage loans 0.1 0.0 0.2 0.0
Equity securities 334.2 13.3 354.5 14.6
Owned real estate 49.5 2.0 62.8 2.6
Cash and cash equivalents 217.5 8.7 253.8 10.5
Certificates of contribution of
the P&C Group 23.3 0.9 34.4 1.4
BAFS notes 1,057.0 42.1 1,057.0 43.6
OSDH note 250.0 10.0 0.0 0.0
Other 0.8 0.0 0.8 0.0
--------- ------- ---------- ----------
Total $ 2,510.7 100.0 % $ 2,425.6 100.0 %
========= ======= ========== ==========
</TABLE>
Investment Accounting Policies. The Company follows the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". This Statement
addresses the accounting and reporting for investments in equity securities
that have readily determinable market values and for all investments in debt
securities. As of December 31, 1999 and 1998, the Company classified all
investments in equity and debt securities as available-for-sale under SFAS No.
115, with the exception of $59.7 million in 1999 and $53.0 million in 1998
which relate to a grantor trust and are classified as trading securities under
SFAS No. 115. The available-for-sale investments are reported on the balance
sheet at market value, with unrealized gains and losses, net of tax, excluded
from earnings and reported as a component of stockholders' equity. The
trading investments are reported on the "Other assets" line of the
consolidated balance sheet at market value with both realized and unrealized
gains and losses included in earnings, net of tax, in the year in which they
occur.
In compliance with a Securities and Exchange Commission ("SEC") staff
announcement, the Company has recorded certain entries to the Deferred Policy
Acquisition Costs ("DAC") and Value of Life Business Acquired ("VOLBA") line
of the consolidated balance sheet in connection with SFAS No. 115. The SEC
requires that companies record entries to those assets and liabilities that
would have been adjusted had the unrealized investment gains or losses from
securities classified as available-for-sale actually been realized, with
corresponding credits or charges reported directly to stockholders' equity.
<PAGE> 10
Bonds acquired prior to the December 31, 1988 acquisition of the Company
by B.A.T were marked-to-market at the time of the acquisition and the
resulting net writedown was amortized over a period approximately equal to
the remaining time to maturity. As of December 31, 1998, this writedown was
fully amortized.
Real estate investments are accounted for on a depreciated cost basis.
Real estate acquired in foreclosure and held for sale is carried at the
lower of market value or depreciated cost less a valuation allowance.
Marketable securities are carried at market. Other investments, which
consist primarily of the BAFS notes receivable, the OSDH note receivable,
certificates of contribution of the P&C Group, a surplus note of the P&C
Group and policy loans, are carried at the unpaid principal balances.
S&P 500 call options, which are held by Farmers Life, are carried at
estimated fair value. Unrealized gains and losses resulting from changes
in the estimated fair value of the call options are recorded as an adjustment
to the interest liability credited to policyholders. In addition, realized
gains and losses from maturity or termination of the call options are offset
against the interest credited to policyholders during the period incurred.
Premiums paid on call options are amortized to net investment income over the
term of the contracts.
Fixed Income Securities. As of December 31, 1999, approximately 85.0%
of the Insurance Subsidiaries investment portfolio and 23.0% of the
Noninsurance investment portfolio were invested in fixed income securities.
These investments included taxable and tax-exempt government securities,
domestic and foreign corporate bonds, redeemable preferred stock and
mortgage-backed securities. Approximately 94.0% and 95.5% of the fixed income
securities in the Insurance Subsidiaries investment portfolio and Noninsurance
investment portfolio, respectively, were rated investment grade. The
following table sets forth the market values of the various categories of
fixed income securities included within the portfolios as of December 31,
1999.
Value of Fixed Income Securities
(Amounts in millions)
<TABLE>
<CAPTION>
Insurance Subsidiaries Noninsurance Total
---------------------- ----------------------- -----------------------
Market Market Market
Value % Value % Value %
----------- -------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed $ 2,024.3 46.3 % $ 41.4 7.2 % $ 2,065.7 41.7 %
Corporate 1,327.3 30.3 45.0 7.8 1,372.3 27.7
U.S. Government 397.9 9.1 0.2 0.0 398.1 8.0
Municipal 485.3 11.1 473.1 81.8 958.4 19.3
Foreign 76.7 1.7 0.0 0.0 76.7 1.6
Redeemable preferred stock 64.8 1.5 18.6 3.2 83.4 1.7
--------- ------- -------- ------- --------- -------
Total $ 4,376.3 100.0 % $ 578.3 100.0 % $ 4,954.6 100.0 %
========= ======= ======== ======= ========= =======
</TABLE>
Credit Ratings. The National Association of Insurance Commissioners
("NAIC") maintains a valuation system that assigns quality ratings known as
"NAIC designations" to publicly traded and privately placed fixed income
securities. The NAIC designations range from 1 to 6, with categories 1
(highest) and 2 considered investment grade and categories 3 through 6
(lowest) considered non-investment grade. As of December 31, 1999, the
Insurance Subsidiaries held $261.8 million in below investment grade bonds,
representing 5.1% of total invested assets, and the Noninsurance investment
portfolio held $22.2 million in below investment grade bonds, representing
0.9% of total invested assets.
Mortgage-backed Securities. Mortgage-backed securities ("MBS") are the
largest component of the Insurance Subsidiaries fixed income portfolio,
representing approximately 46.3% of its fixed income portfolio, as of December
31, 1999. The Noninsurance investment portfolio's MBS represented
approximately 7.2% of its fixed income portfolio as of December 31, 1999.
Approximately 61.2% of the MBS in the Insurance Subsidiaries investment
portfolio are guaranteed by various government agencies and government
sponsored entities, including the GNMA, FHA, FNMA or FHLMC, and 86.6% of the
remaining 38.8% are rated "AAA". Approximately 15.4% of the MBS in the
Noninsurance investment portfolio are guaranteed by GNMA, FHA, FNMA or FHLMC,
<PAGE> 11
and the remaining 84.6% are rated "AAA". The primary risk in holding MBS is
the cash flow uncertainty that arises from changes to prepayment speeds as
interest rates fluctuate. To reduce the uncertainties surrounding the cash
flows of MBS, the Insurance Subsidiaries investment portfolio held significant
MBS investments in collateralized mortgage obligations ("CMOs") including
$672.7 million of planned amortization classes ("PACs") and $10.2 million
of targeted amortization classes ("TACs"). These securities provide
protection by passing a substantial portion of the risk of prepayment
uncertainty to other tranches.
Mortgage Loans. As of December 31, 1999, the Insurance Subsidiaries
investment portfolio included mortgage loans with an aggregate book value of
approximately $35.9 million (net of loss provisions of $5.9 million), or 0.7%
of total invested assets, and the Noninsurance investment portfolio included
mortgage loans of $0.1 million.
All mortgage loans included in the Insurance Subsidiaries investment
portfolio are secured by first mortgages. The majority of the mortgage loan
portfolio consists of loans secured by office buildings, light industrial
properties and retail properties located primarily in unanchored shopping
centers. Exposure to potential losses from future mortgage loan foreclosures
and the operation or sale of properties acquired through foreclosures is
limited because the Insurance Subsidiaries have not issued any mortgage loans
since 1989, and the majority of the individual remaining mortgage loan
balances are less than $1.0 million.
Equity Securities. In order to diversify and to limit its exposure in
any one market sector, the Company's common stock portfolio is invested in
the equities of many of the 3,000 largest United States Companies, which
represent approximately 98% of the investable United States equity market.
Owned Real Estate. As of December 31, 1999, the Insurance Subsidiaries
investment portfolio included owned real estate investments with a book value
of $66.7 million (net of loss provisions of $3.2 million), or 1.3% of total
invested assets, and the Noninsurance investment portfolio included owned real
estate investments with a book value of $49.5 million, or 2.0% of total
invested assets. The Insurance Subsidiaries real estate holdings fall into
two categories: real property assets that were acquired directly as an equity
investment and foreclosed equity real estate properties. The Noninsurance
investment portfolio owned real estate holdings were all acquired directly as
equity investments.
Problem Investments-Fixed Income Securities. As of December 31, 1999,
none of the fixed income securities held in the Insurance Subsidiaries
investment portfolio or the Noninsurance investment portfolio were classified
as "problem" or "potential problem" assets.
Problem Investments-Mortgage Loan Investments. As of December 31, 1999,
none of the mortgage loans held by the Insurance Subsidiaries investment
portfolio or the Noninsurance investment portfolio were classified as
"troubled loans".
ITEM 2. Properties
The Company owns three buildings in Los Angeles and twelve business
service centers in which its administrative operations are conducted. In
addition, the Company owns a building in the state of Washington in which the
operations of Farmers Life are conducted.
ITEM 3. 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
<PAGE> 12
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 in various governmental and administrative
proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
year ended December 31, 1999.
PART II
ITEM 5. Market for Farmers Group, Inc.'s Common Equity and Related
Stockholders Matters
N/A
ITEM 6. Selected Financial Data
The following table sets forth summary consolidated income statement
data, consolidated balance sheet data and other operating data for the periods
indicated. The following consolidated income statement data of the Company
for each of the years in the five-year period ended December 31, 1999, and the
consolidated balance sheet data of the Company as of December 31, 1999 and
each of the preceding four years ended December 31, have been derived from the
Company's audited consolidated financial statements. The following data
should be read in conjunction with the Company's Consolidated Financial
Statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
appearing elsewhere herein.
Income statement data includes the effect of amortizing the purchase
accounting entries related to B.A.T's acquisition of the Company in December
1988. Major items incorporated in the purchase price of the Company include
goodwill and the value of the AIF contracts of the P&C Group (see Note
A). The amortization of these two items, which is being taken on a
straight-line basis over forty years, reduced annual pretax income by
approximately $102.8 million in each of the years 1995 through 1999.
<PAGE> 13
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Amounts in millions)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Consolidated operating revenues $ 3,270.4 $ 3,031.2 $ 2,009.0 $ 2,013.2 $ 1,892.4
=========== =========== =========== =========== ===========
Management services to property
and casualty insurance companies;
and other:
Operating revenues $ 1,489.7 $ 1,358.2 $ 1,324.9 $ 1,245.4 $ 1,183.1
----------- ----------- ----------- ----------- -----------
Salaries and employee benefits 373.2 328.6 335.8 337.2 348.8
Buildings and equipment expenses 91.5 145.4 95.8 87.3 75.0
Amortization of AIF contracts
and goodwill 102.8 102.8 102.8 102.8 102.8
General and administrative expenses 266.3 204.1 202.6 170.3 170.5
----------- ----------- ----------- ----------- -----------
Total operating expenses 833.8 780.9 737.0 697.6 697.1
Merger related expenses(see Note E) 0.2 21.1 0.0 0.0 0.0
----------- ----------- ----------- ----------- -----------
Total expenses 834.0 802.0 737.0 697.6 697.1
----------- ----------- ----------- ----------- -----------
Operating income 655.7 556.2 587.9 547.8 486.0
Net investment income 117.5 135.1 144.2 112.8 78.0
Net realized gains 75.3 62.4 73.4 5.1 1.5
Gain on sale of subsidiaries 0.0 0.0 19.0 0.0 0.0
Dividends on preferred securities
of subsidiary trusts (42.1) (42.1) (42.1) (42.1) (10.4)
----------- ----------- ----------- ----------- -----------
Income before provision for
taxes 806.4 711.6 782.4 623.6 555.1
Provision for income taxes 325.3 290.8 332.2 275.1 224.3
----------- ----------- ----------- ----------- -----------
Management services income 481.1 420.8 450.2 348.5 330.8
----------- ----------- ----------- ----------- -----------
Insurance Subsidiaries:
Life and annuity premiums 209.7 173.9 161.1 170.4 158.8
Non-life reinsurance premiums 1,000.0 1,000.1 0.0 0.0 0.0
Life policy charges 210.6 206.4 216.6 241.7 220.6
Net investment income 335.6 307.4 293.2 317.7 298.3
Net realized gains/(losses) 24.8 (14.8) 13.2 38.0 31.6
----------- ----------- ----------- ----------- -----------
Total revenues 1,780.7 1,673.0 684.1 767.8 709.3
----------- ----------- ----------- ----------- -----------
Non-life losses and loss adjustment
expenses 661.3 655.1 0.0 0.0 0.0
Life policyholders' benefits
and charges 347.8 308.3 294.4 335.1 316.7
Amortization of deferred policy
acquisition costs and value of
life business acquired 102.6 90.1 104.0 108.8 103.2
Life commissions 13.5 18.9 18.2 21.0 20.1
Non-life reinsurance commissions 313.7 319.9 0.0 0.0 0.0
General and administrative expenses 44.3 41.7 47.8 63.4 60.9
----------- ----------- ----------- ----------- -----------
Total operating expenses 1,483.2 1,434.0 464.4 528.3 500.9
----------- ----------- ----------- ----------- -----------
Income before provision for
taxes 297.5 239.0 219.7 239.5 208.4
Provision for income taxes 101.6 83.0 76.4 80.1 68.5
----------- ----------- ----------- ----------- -----------
Insurance Subsidiaries
income 195.9 156.0 143.3 159.4 139.9
----------- ----------- ----------- ----------- -----------
Consolidated net income $ 677.0 $ 576.8 $ 593.5 $ 507.9 $ 470.7
=========== =========== =========== =========== ===========
BALANCE SHEET DATA
Total investments (1) $ 7,659.1 $ 7,402.2 $ 6,576.0 $ 6,605.3 $ 6,545.7
Total assets 12,796.3 12,686.6 12,117.4 12,928.8 12,630.6
Total short term debt 0.0 0.0 0.0 0.0 200.0
Total long term debt 0.0 0.0 0.1 0.2 0.3
Company obligated mandatorily
redeemable preferred securities
of subsidiary trusts holding
solely junior subordinated
debentures ("QUIPS") 500.0 500.0 500.0 500.0 500.0
Stockholders' equity 7,099.2 7,034.4 6,781.6 6,503.8 6,493.6
OTHER OPERATING DATA (unaudited)
Ratio of debt to total
capitalization 6.6 % 6.6 % 6.9 % 7.1 % 9.7 %
Ratio of earnings to fixed
charges (2) 21.0 x 19.5 x 20.2 x 15.5 x 21.5 x
</TABLE>
- ----------------------------
(1) Includes cash and cash equivalents, marketable securities and notes
receivable-affiliates.
(2) The ratio of earnings to fixed charges has been determined by dividing
the sum of income before income taxes plus fixed charges by fixed charges.
Fixed charges consist of interest, capitalized interest, dividends paid to
QUIPS holders, amortization of QUIPS offering expenses and that portion of
rent expenses deemed to be interest.
<PAGE> 14
ITEM 7. 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 SAP, which the Insurance
Subsidiaries are required to use for regulatory reporting purposes.
Effective January 1, 1999, the P&C Group began assuming all personal
lines business written by ZIC's subsidiary, Maryland Casualty Company
("MCC"). The Company provides management services in respect of this business
and, as with its services to the P&C Group, receives compensation based on a
percentage of gross premiums earned.
The Company underwrites life insurance, annuity and structured settlement
products through Farmers Life. Revenues attributable to traditional life
insurance products, such as whole life or term life contracts, are classified
as premiums as they become due. Future benefits are associated with such
premiums (through increases in liabilities for future policy benefits), and
prior period capitalized costs are amortized (through amortization of 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.
The Company provides reinsurance coverage to the P&C Group through its
subsidiary, Farmers Re, which was formed and licensed to conduct business in
December 1997. In January 1998, Farmers Re entered into a quota share
reinsurance treaty with the P&C Group under which it reinsures a percentage of
the auto physical damage business written by the P&C Group (see Note C).
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues, which primarily consist of
management fees paid to the Company as a percentage of gross premiums earned
by the P&C Group, reached a record level of $1,489.7 million in 1999, up
$131.5 million, or 9.7%, from 1998. This growth was primarily attributable to
higher volumes of gross premiums earned by the P&C Group, which grew $474.0
million, or 4.6%, to $10,804.9 million in 1999. The increase in gross
premiums earned was driven by the P&C Group's assumption of MCC's personal
lines business as well as the expansion of operations into twelve eastern
states. Management fees earned on this assumed business totaled $50.7 million
for the year ended December 31, 1999. Also contributing to the increase in
operating revenues between years was the fact that, effective January 1999,
management fee rates on all lines of business were increased 0.25% resulting
in a $26.2 million increase in management fee revenues in 1999.
Total Expenses. Total expenses as a percentage of operating revenues
decreased from 59.0% in 1998 to 56.0% in 1999, a decrease of 3.0 percentage
points. This decrease was the result of the Company incurring $21.1 million
of merger related expenses and writing-off $46.0 million of impaired assets in
1998.
<PAGE> 15
Salaries and Employee Benefits. Salaries and employee benefits
increased from $328.6 million in 1998 to $373.2 million in 1999, an
increase of $44.6 million, or 13.6%. This increase was due in large part
to $33.2 million of expenses incurred in connection with providing
management services to the personal lines business previously managed by
MCC.
Buildings and Equipment Expenses. Buildings and equipment expenses
decreased from $145.4 million in 1998 to $91.5 million in 1999, a
decrease of $53.9 million, or 37.1%. A key driver behind this reduction
was the $43.6 million write-off of capitalized software costs that were
no longer deemed recoverable in 1998. Exclusive of this write-off,
buildings and equipment expenses were $10.3 million lower than the prior
year due to a $23.2 million decrease in information technology systems
software amortization expense in 1999, offset in part by $6.7 million of
expenses incurred in connection with providing management services to the
personal lines business previously managed by MCC.
Amortization of AIF Contracts and Goodwill. The purchase accounting
entries related to the acquisition of the Company by B.A.T in December
1988 include both goodwill (capitalized at $2.4 billion) and the value of
the AIF contracts of the P&C Group (capitalized at $1.7 billion). The
amortization of these two items, which is being taken on a straight-line
basis over forty years, reduced pretax income by approximately $102.8
million for both 1999 and 1998.
General and Administrative Expenses. General and administrative
expenses increased from $204.1 million in 1998 to $266.3 million in 1999,
an increase of $62.2 million, or 30.5%. This increase in expense was
primarily due to $19.1 million of expenses incurred in connection with
providing management services to the personal lines business previously
managed by MCC, $18.0 million of expenses related to a project to
implement a new financial accounting and reporting system for the Company
and the P&C Group and a $4.6 million increase in expenses resulting from
outsourcing the management of the Company's investment portfolios
beginning in July 1998. The remaining increase is primarily due to
higher business levels.
Merger Related Expenses. Expenses incurred by the Company as a
result of the merger between B.A.T's Financial Services Businesses and
ZIC decreased from $21.1 million in 1998 to $0.2 million in 1999 (see
Note E).
Net Investment Income. Net investment income decreased $17.6 million, or
13.0%, from $135.1 million in 1998 to $117.5 million in 1999. This decrease
was primarily due to the redemption of $650.0 million of certificates of
contribution of the P&C Group in July 1998, which yielded 8.95% interest, and
the subsequent purchase of $1,057.0 million of notes from BAFS, yielding 5.62%
interest.
Net Realized Gains. Net realized gains increased from $62.4 million in
1998 to $75.3 million in 1999, an increase of $12.9 million, due primarily to
gains recognized on sales of common stock. 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 $42.1 million in
both 1998 and 1999.
Provision for Income Taxes. Provision for income taxes increased from
$290.8 million in 1998 to $325.3 million in 1999, an increase of $34.5
million, or 11.9%, as a result of the increase in pretax income between years.
Management Services Income. As a result of the foregoing, management
services income increased from $420.8 million for the year ended December 31,
1998 to $481.1 million for the year ended December 31, 1999, an increase of
$60.3 million, or 14.3%. Exclusive of the merger related expenses and the
write-off of impaired assets in 1998, management services income increased
$18.4 million, or 4.0%, between years.
<PAGE> 16
Insurance Subsidiaries
Farmers Re
Under the quota share reinsurance treaty, Farmers Re assumed $1,000.0
million of premiums in each of the years ended 1999 and 1998. Losses and loss
adjustment expenses incurred under this treaty were $661.3 million in 1999 and
$655.1 million in 1998 and non-life reinsurance commissions paid were $313.7
million in 1999 and $319.9 million in 1998. Income before taxes increased
from $37.2 million in 1998 to $53.3 million in 1999, an increase of $16.1
million, or 43.3%. This increase was due primarily to increased investment
income as a result of a higher invested asset base. Farmers Re's contribution
to net income was $37.7 million and $25.4 million in 1999 and 1998,
respectively.
Farmers Life
Total Revenues. Total revenues increased from $660.6 million in 1998 to
$752.2 million in 1999, an increase of $91.6 million, or 13.9%.
Life and Annuity Premiums. Life and annuity premiums increased
$35.8 million, or 20.6%, between years. This increase was due to growth
in the volume of term and whole life insurance in-force coupled with
Farmers Life entering the structured settlement market in January 1999.
Life Policy Charges. Life policy charges increased $4.2 million in
1999, or 2.1%, over 1998, reflecting a 1.9% growth in universal life-type
insurance in-force.
Net Investment Income. Net investment income increased $13.9
million, or 4.7%, over 1998, due to higher bond interest income as a
result of a 9.7% growth in average invested assets.
Net Realized Gains/(Losses). Net realized gains/(losses) increased
$37.7 million, from a $13.5 million loss in 1998 to a $24.2 million gain
in 1999, due to higher gains realized on bond sales. The net realized
loss in 1998 reflects a $26.0 million writedown of Russian bond holdings.
Total Operating Expenses. Total operating expenses increased from $458.8
million in 1998 to $508.0 million in 1999, an increase of $49.2 million, or
10.7%.
Life Policyholders' Benefits and Charges. Life policyholders'
benefits and charges increased from $308.3 million in 1998 to $347.8
million in 1999, an increase of $39.5 million, or 12.8%.
Policy Benefits. Policy benefits, which consist primarily of
death and surrender benefits on life products, increased $3.8 million
over 1998 to $137.8 million, due to a 5.7% growth in the volume of
total life insurance in-force and an increase in death benefits per
thousand of insurance in-force.
Increase in Liability for Future Benefits. The liability for
future benefits expense increased from $23.7 million in 1998 to $52.2
million in 1999. This increase was primarily attributable to higher
volumes of traditional life insurance in-force, particularly whole
life, and the fact that Farmers Life entered the structured
settlement market in 1999.
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 $150.6 million in 1998 to $157.8 million in
1999, or 4.8%, reflecting growth in the universal life and annuity
fund balances.
<PAGE> 17
General Operating Expenses. General operating expenses increased
from $150.5 million in 1998 to $160.2 million in 1999, an increase of
$9.7 million, or 6.4%.
Amortization of DAC and VOLBA. Amortization expense increased
from $90.1 million in 1998 to $102.6 million in 1999 reflecting the
continued growth in sales and the corresponding increase in deferred
expenses.
The $102.6 million of expenses in 1999 reflects adjustments
which were made to the fixed universal product DAC asset and the
VOLBA asset during the year. DAC amortization expense was reduced
$23.3 million due to favorable persistency experience on the fixed
universal life business. This reduction in expense was largely
offset by a $21.3 million increase in VOLBA amortization expense
resulting from unfavorable persistency experience on the pre-1988
business. The net impact of these adjustments was a $2.0 million
reduction in amortization expense in 1999.
Commissions. Commissions expense decreased $5.5 million
between years from $18.9 million in 1998 to $13.5 million in 1999
due to higher reinsurance activity.
General and Administrative Expenses. General and administrative
expenses increased $2.6 million to $44.1 million in 1999 due
primarily to $1.6 million of expenses incurred in connection with a
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
$71.2 million in 1998 to $86.0 million in 1999 due to higher pretax operating
income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
increased from $130.6 million in 1998 to $158.2 million in 1999, an increase
of $27.6 million, or 21.1%.
Consolidated Net Income
Consolidated net income of the Company increased from $576.8 million in
1998 to $677.0 million in 1999, an increase of $100.2 million, or 17.4%.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $1,324.9 million
in 1997 to $1,358.2 million in 1998, an increase of $33.3 million, or 2.5%,
reflecting higher gross premiums earned by the P&C Group. Such premiums
increased from $10,070.1 million in 1997 to $10,331.0 million in 1998 due
primarily to an increase in the number of Auto and Fire policies-in-force
between years and higher average premium levels in the Fire line of business.
Total Expenses. Total expenses as a percentage of operating revenues
increased from 55.6% in 1997 to 59.0% in 1998, an increase of 3.4 percentage
points. This increase was due to the $21.1 million of merger related expenses
and the $46.0 million write-off of impaired assets in 1998. Excluding these
two items, expenses as a percentage of revenues decreased by 1.5 percentage
points between years.
Salaries and Employee Benefits. Salaries and employee benefits
decreased from $335.8 million in 1997 to $328.6 million in 1998, a
decrease of $7.2 million, or 2.1%, primarily due to a reduction in
<PAGE> 18
employee complement due to increased operating efficiency as a result of
automation through the greater use of information technology systems.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $95.8 million in 1997 to $145.4 million in 1998, an
increase of $49.6 million, or 51.8%. Contributing to this increase were
the write-off of $43.6 million of capitalized costs that were no longer
deemed to be recoverable and higher amortization expense associated with
information technology systems software.
Amortization of AIF Contracts and Goodwill. The amortization of
these two items, reduced pretax income by approximately $102.8 million
for both 1998 and 1997.
General and Administrative Expenses. General and administrative
expenses increased from $202.6 million in 1997 to $204.1 million in 1998
due to a $2.4 million write-off of impaired assets as well as a $0.8
million increase in Year 2000 Project related expenses. Despite these
two items, the Company held the increase in general and administrative
expenses between years to less than one percent as a result of continued
attention to cost control and automation through the greater use of
information technology systems.
Merger Related Expenses. Expenses incurred by the Company as a
result of the merger with ZIC amounted to $21.1 million for the year
ended December 31, 1998 (see Note E).
Net Investment Income. Net investment income decreased from $144.2
million in 1997 to $135.1 million in 1998, a decrease of $9.1 million, or
6.3%. Of this decrease, $8.6 million was due to the redemption of
certificates of contribution of the P&C Group and the subsequent issuance of
the BAFS notes at lower interest rates (see Note T). The remaining decrease
was due substantially to lower market yield rates.
Net Realized Gains. Net realized gains decreased from $73.4 million in
1997 to $62.4 million in 1998, a decrease of $11.0 million, due to the fact
that significant gains were realized in 1997 in connection with restructuring
the equities portfolio.
Gain on Sale of Subsidiaries. The gain recorded on the April 15, 1997
sale of OSL and IGL amounted to $19.0 million in 1997.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense
related to the $500.0 million of QUIPS issued in 1995 was $42.1 million in
both 1998 and 1997.
Provision for Income Taxes. Provision for income taxes decreased from
$332.2 million in 1997 to $290.8 million in 1998, a decrease of $41.4 million,
or 12.5%. This decrease was due to the decrease in pretax income between
years as well as the fact that $26.8 million of taxes were recorded in 1997
related to the sale of OSL and IGL.
Management Services Income. As a result of the foregoing, management
services income decreased from $450.2 million for the year ended December 31,
1997 to $420.8 million for the year ended December 31, 1998, a decrease of
$29.4 million, or 6.5%. Exclusive of the merger related expenses and the
write-off of impaired assets, management services income increased $12.5
million, or 2.8%, between years.
Insurance Subsidiaries
In 1998, Farmers Re assumed $1,000.0 million of premiums, incurred $655.1
million of non-life losses and loss adjustment expenses and incurred $319.9
million of non-life reinsurance commissions expense. For the year ended
December 31, 1998, Farmers Re contributed $37.2 million to income before taxes
and $25.4 million to net income.
<PAGE> 19
On April 15, 1997, OSL and IGL were sold to Great Southern Life Insurance
Company, a subsidiary of Americo Life Inc.. As a result, there was no
contribution to net income from OSL or IGL in 1998, compared to $5.5 million
in 1997. The following commentary addresses the results of the Company's
remaining life insurance subsidiary, Farmers Life.
Total Revenues. Total revenues increased from $638.6 million in 1997 to
$660.6 million in 1998, an increase of $22.0 million, or 3.4%.
Life Premiums. Premiums increased $22.0 million, or 14.5%, between
years. This increase was due to a 15.8% growth in the average volume of
insurance in-force which was driven by sales of the Premier Whole Life
("PWL") and the Farmers Premier 20 Year Term ("FP20") products. Also
contributing to the increase in premiums was an increase in the number of
annuities in the payment phase ("AIP").
Life Policy Charges. Policy charges increased $5.6 million in 1998,
or 2.8% over 1997, reflecting growth in the average volume of universal
life-type insurance in-force.
Net Investment Income. Net investment income increased $18.0 million
in 1998, or 6.5% over 1997, due to a higher invested asset base.
Net Realized Gains/(Losses). Net realized gains/(losses) decreased
$23.6 million, from a $10.1 million gain in 1997 to a $13.5 million loss
in 1998. This decrease was due to realized losses recognized as a result
of the $26.0 million writedown of Russian bond holdings in 1998.
Total Operating Expenses. Total operating expenses increased from $427.0
million in 1997 to $458.8 million in 1998, an increase of $31.8 million, or
7.4%.
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges increased from $274.5 million in 1997 to
$308.3 million in 1998, an increase of $33.8 million, or 12.3%.
Policy Benefits. Policy benefits increased $21.6 million over
1997 to $134.0 million, due to growth in the volume of life insurance
in-force and an increase in mortality experience between periods.
Increase in Liability for Future Benefits. Increase in
liability for future benefits expense increased from $15.7 million
in 1997 to $23.7 million in 1998. This increase was primarily
attributable to an increase in AIP and sales of the PWL and Farmers
Premier Term products, particularly the FP20 product introduced in
October 1997.
Interest Credited to Policyholders. Interest credited to
policyholders increased from $146.4 million in 1997 to $150.6 million
in 1998, or 2.9%, reflecting growth in the universal life fund
balance.
General Operating Expenses. General operating expenses decreased
from $152.5 million in 1997 to $150.5 million in 1998, a decrease of $2.0
million, or 1.3%.
Amortization of DAC and VOLBA. Amortization expense decreased
from $94.7 million in 1997 to $90.1 million in 1998 due to higher
universal life death claims experience in 1998.
Commissions. Commissions increased from $17.3 million in 1997
to $19.0 million in 1998 due to the increase in the volume of
business in-force.
<PAGE> 20
General and Administrative Expenses. General and administrative
expenses increased from $40.5 million in 1997 to $41.5 million in
1998, an increase of just $1.0 million. This increase resulted
mainly from increased premium taxes.
Provision for Income Taxes. Provision for income taxes decreased from
$73.8 million in 1997 to $71.2 million in 1998, a decrease of $2.6 million, due
to the decrease in pretax operating income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
decreased from $137.8 million in 1997 to $130.6 million in 1998, a decrease of
$7.2 million, or 5.2%.
Consolidated Net Income
Consolidated net income of the Company decreased from $593.5 million in
1997 to $576.8 million in 1998, a decrease of $16.7 million, or 2.8%, due
primarily to the merger related expenses and the write-off of impaired assets
in 1998.
Year 2000 Issue
In 1995, the Company initiated a Year 2000 project in order to prepare
for the information processing problems presented by the approach of the new
millenium. Significant efforts were expended to gain a complete understanding
of Year 2000 implications and to develop a strategy to make the Company's and
the P&C Group's systems Year 2000 compliant. The costs associated with the
Year 2000 Project were expensed as incurred and, through December 31, 1999,
totaled $23.2 million, of which $5.5 million was allocated to the P&C Group.
The costs related to the Year 2000 Project were consistent with management's
expectations of the total costs that would be incurred in connection with the
Year 2000 issue. No further costs related to the Year 2000 Project are
expected.
The Year 2000 issue has not presented any significant disruptions to the
operations of the Company or the P&C Group. However, the Company will continue
to monitor its systems throughout the year to ensure that all systems are
operating properly.
Liquidity and Capital Resources
General. The principal uses of funds by the Company are (i) operating
expenses, (ii) dividends to the shareholders of the Company's QUIPS, (iii)
capital expenditures and (iv) dividends to its stockholders. In 1999,
dividends paid on QUIPS totaled $42.1 million, capital expenditures totaled
$89.7 million and cash dividends paid to stockholders totaled $433.4 million.
The principal sources of funds available to the Company are (i) the
management fees that it receives for providing management services to the P&C
Group, (ii) investment income and (iii) dividends from its subsidiaries.
Historically, funds available from the first two of these sources have been
sufficient to satisfy the liquidity needs of the Company, and the Company
anticipates that such funds will continue to be adequate to satisfy such needs
in the future. A portion of the net income of Farmers Life is available for
payment as a dividend to the Company, subject to certain limitations imposed
by the insurance laws of the state of Washington and additional state taxation.
As of December 31, 1999, an aggregate of $112.9 million was available for
distribution as a dividend without approval of the state insurance department
(see Note I). Additionally, as of December 31, 1999, the Company had available
revolving credit facilities enabling it to borrow up to $500.0 million in the
event such a need should arise (see Note U).
<PAGE> 21
In order to maintain the policyholders' surplus of the P&C Group, the
Company has, from time to time, made surplus contributions to the P&C Group,
receiving certificates of contribution or surplus notes which bear interest at
various rates. As of December 31, 1999, the Company held $23.3 million of
certificates of contribution of the P&C Group and a $119.0 million surplus
note of the P&C Group. The Company believes that these purchases of
certificates of contribution and the surplus note have helped to support the
historical growth in premiums earned by the P&C Group and the related growth
in management fees paid to the Company.
In June 1999, the Company loaned $190.0 million to Centre Reinsurance
Holdings (Delaware II) Ltd., a subsidiary of Zurich. In December 1999, this
loan was settled and the Company subsequently issued a $250.0 million loan to
OSDH (see Note S).
Net cash provided by operating activities decreased from $1,092.2 million
in 1998 to $926.3 million in 1999, a decrease of $165.9 million, or 15.2%.
This decrease in cash was due to a $273.7 million increase in reinsurance
payables to the P&C Group and non-life losses and loss adjustment expenses in
1998. Partially offsetting this decrease in cash was a $100.1 million increase
in consolidated net income.
Net cash used in investing activities decreased from $951.1 million in
1998 to $561.6 million in 1999, which resulted in an increase in cash of
$389.5 million, or 41.0%. This increase in cash was the result of an $840.9
million increase in proceeds received from sales and maturities of investments
available-for-sale in 1999 coupled with the purchase of the $119.0 million
surplus note of the P&C Group (see Note F) in 1998. Partially offsetting
these increases in cash was a $305.4 million increase in the purchases of
investments available-for-sale and the issuance of the $250.0 million loan to
OSDH in 1999.
Net cash used in financing activities increased from $329.8 million in
1998 to $378.7 million in 1999, which resulted in a decrease in cash of $48.9
million, or 14.8%, due to a $78.2 million increase in dividends paid to
stockholders. This decrease in cash was offset in part by higher cash flows
from annuity contracts in 1999.
Farmers Life. The principal uses of funds by Farmers Life are (i) policy
benefits and claims, (ii) loans to policyholders, (iii) capital expenditures,
(iv) life commissions, (v) operating expenses and (vi) stockholder's dividends.
The principal sources of funds available to Farmers Life are premiums and
amounts earned from the investment of premiums and deposits. These sources of
funds have historically satisfied the liquidity needs of Farmers Life.
Farmers Re. The principal uses of funds by Farmers Re are (i) the payment
of non-life losses and loss adjustment expenses, (ii) the payment of
reinsurance commissions and (iii) operating expenses. The principal sources
of funds available to Farmers Re are premiums assumed from the P&C Group and
investment income.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risks
The information required is presented under the caption "Risk Management"
in Exhibit No. 99 of this Report.
<PAGE> 22
ITEM 8. Financial Statements and Supplementary Data
Index for Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 23
Consolidated Financial Statements of Farmers Group, Inc. and Subsidiaries
Consolidated Balance Sheets as of December 31, 1999 and 1998 24
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 26
Consolidated Statements of Comprehensive Income for the years ended December 31, 1999,
1998 and 1997 27
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999,
1998 and 1997 28
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 29
Notes to Consolidated Financial Statements 30
Quarterly Financial Data (Unaudited) 60
</TABLE>
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Farmers Group, Inc.
We have audited the accompanying consolidated balance sheets of Farmers
Group, Inc. and subsidiaries (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. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The financial statement schedules
listed in the Table of Contents at Item 14 are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements. These schedules are the responsibility of the Company's
management. Such schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion,
are fairly stated in all material respects when considered in relation to the
basic financial statements as a whole.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Los Angeles, California
February 17, 2000
(March 7, 2000 as to Note Z)
<PAGE> 24
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Current assets, excluding Insurance Subsidiaries:
Cash and cash equivalents $ 217,466 $ 253,828
Marketable securities, at market value 66,558 53,536
Accrued interest 30,825 32,542
Accounts receivable, principally from the P&C Group 44,021 35,271
Notes receivable - affiliate 200,000 0
Deferred taxes 36,895 27,044
Prepaid expenses and other 21,950 22,126
------------- -------------
Total current assets 617,715 424,347
------------- -------------
Investments, excluding Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $516,001 and $597,262) 511,708 608,539
Mortgage loans on real estate 146 196
Common stocks available-for-sale, at market value
(cost: $299,251 and $278,107) 334,212 354,465
Certificates of contribution of the P&C Group 23,330 34,380
Real estate, at cost (net of accumulated depreciation:
$23,505 and $32,363) 49,459 62,820
Joint ventures, at equity 840 840
------------- -------------
919,695 1,061,240
------------- -------------
Other assets, excluding Insurance Subsidiaries:
Notes receivable - affiliates 1,107,000 1,057,000
Goodwill (net of accumulated amortization: $660,484
and $600,440) 1,741,271 1,801,315
Attorney-in-fact contracts (net of accumulated
amortization: $469,986 and $427,260) 1,239,057 1,281,783
Securities lending collateral 4,150 0
Other assets 244,088 258,912
------------- -------------
4,335,566 4,399,010
------------- -------------
Properties, plant and equipment, at cost: (net of
accumulated depreciation: $324,902 and $293,425) 422,311 402,061
------------- -------------
Investments of Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $4,514,104 and $4,178,305) 4,376,320 4,356,066
Mortgage loans on real estate 35,834 52,879
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $1,153 and $1,153) 1,158 1,270
Common stocks available-for-sale, at market value
(cost: $188,851 and $98,399) 212,274 106,095
Surplus note of the P&C Group 119,000 119,000
Policy loans 201,687 185,211
Real estate, at cost (net of accumulated depreciation:
$27,292 and $28,366) 66,672 59,047
Joint ventures, at equity 6,662 8,456
S&P 500 call options, at fair value (cost: $19,521 and $11,305) 32,718 14,817
------------- -------------
5,052,325 4,902,841
------------- -------------
Other assets of Insurance Subsidiaries:
Cash and cash equivalents 96,034 73,724
Reinsurance premiums receivable - P&C Group 86,245 80,124
Accrued investment income 61,040 59,910
Deferred policy acquisition costs and value of life business
acquired 879,625 801,690
Securities lending collateral 303,379 461,801
Other assets 22,350 19,856
------------- -------------
1,448,673 1,497,105
------------- -------------
Total assets $ 12,796,285 $ 12,686,604
============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 25
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Current liabilities, excluding Insurance Subsidiaries:
Notes and accounts payable:
P&C Group $ 303 $ 137
Other 55,730 28,420
Accrued liabilities:
Profit sharing 51,621 50,404
Income taxes 77,173 69,906
Other 10,109 30,724
------------- -------------
Total current liabilities 194,936 179,591
------------- -------------
Other liabilities, excluding Insurance Subsidiaries:
Real estate mortgages payable 21 25
Non-current deferred taxes 579,902 601,047
Securities lending liability 4,150 0
Other 136,487 136,135
------------- -------------
720,560 737,207
------------- -------------
Liabilities of Insurance Subsidiaries:
Policy liabilities:
Future policy benefits 3,412,452 3,184,248
Claims 28,396 26,177
Policyholder dividends 1 1
Other policyholders funds 83,478 57,357
Provision for non-life losses and loss adjustment expenses 106,444 105,944
Income taxes (including deferred taxes: $88,723 and $164,729) 98,880 168,618
Unearned investment income 936 971
Reinsurance payable - P&C Group 166,716 167,709
Securities lending liability 303,379 461,801
Other liabilities 80,868 62,573
------------- -------------
4,281,550 4,235,399
------------- -------------
Total liabilities 5,197,046 5,152,197
------------- -------------
Commitments and contingencies
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 500,000 500,000
------------- -------------
Stockholders' Equity:
Class A common stock, $1 par value per share; authorized,
issued and outstanding: as of December 31, 1999 and December
31, 1998 - 500 shares 0.5 0.5
Class B common stock, $1 par value per share; authorized,
issued and outstanding: as of December 31, 1999 and December
31, 1998 - 500 shares 0.5 0.5
Additional capital 5,212,618 5,212,618
Accumulated other comprehensive income/(loss) (net of
deferred taxes: ($18,307) and $77,897) (33,999) 144,742
Retained earnings 1,920,619 1,677,046
------------- -------------
Total stockholders' equity 7,099,239 7,034,407
------------- -------------
Total liabilities and stockholders' equity $ 12,796,285 $ 12,686,604
============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 26
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Consolidated operating revenues $ 3,270,400 $ 3,031,191 $ 2,008,988
=========== =========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 1,489,683 $ 1,358,175 $ 1,324,895
----------- ----------- -----------
Salaries and employee benefits 373,116 328,611 335,781
Buildings and equipment expenses 91,507 145,461 95,833
Amortization of AIF contracts and goodwill 102,770 102,770 102,770
General and administrative expenses 266,302 204,101 202,607
----------- ----------- -----------
Total operating expenses 833,695 780,943 736,991
Merger related expenses 244 21,056 0
----------- ----------- -----------
Total expenses 833,939 801,999 736,991
----------- ----------- -----------
Operating income 655,744 556,176 587,904
Net investment income 117,490 135,062 144,131
Net realized gains 75,238 62,428 73,403
Gain on sale of subsidiaries 0 0 19,019
Dividends on preferred securities of subsidiary trusts (42,070) (42,070) (42,070)
----------- ----------- -----------
Income before provision for taxes 806,402 711,596 782,387
Provision for income taxes 325,323 290,752 332,184
----------- ----------- -----------
Management services income 481,079 420,844 450,203
----------- ----------- -----------
Insurance Subsidiaries:
Life premiums 209,719 173,936 161,058
Non-life reinsurance premiums 1,000,000 1,000,104 0
Life policy charges 210,639 206,393 216,609
Net investment income 335,565 307,391 293,190
Net realized gains/(losses) 24,794 (14,808) 13,236
----------- ----------- -----------
Total revenues 1,780,717 1,673,016 684,093
----------- ----------- -----------
Non-life losses and loss adjustment expenses 661,260 655,125 0
Life policy benefits 137,798 133,984 124,261
Increase in liability for future life policy benefits 52,200 23,711 14,863
Interest credited to life policyholders 157,831 150,618 155,301
Amortization of deferred policy acquisition costs and
value of life business acquired 102,581 90,082 103,975
Life commissions 13,520 18,972 18,188
Non-life reinsurance commissions 313,749 319,875 0
General and administrative expenses 44,280 41,683 47,786
----------- ----------- -----------
Total operating expenses 1,483,219 1,434,050 464,374
----------- ----------- -----------
Income before provision for taxes 297,498 238,966 219,719
Provision for income taxes 101,604 82,970 76,424
----------- ----------- -----------
Insurance Subsidiaries income 195,894 155,996 143,295
----------- ----------- -----------
Consolidated net income $ 676,973 $ 576,840 $ 593,498
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 27
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Consolidated net income $ 676,973 $ 576,840 $ 593,498
----------- ----------- -----------
Other comprehensive income/(loss), net of tax:
Unrealized holding gains/(losses) on securities:
Unrealized holding gains/(losses) arising during the
year, net of tax of ($100,634) and $26,193 (186,967) 48,738
Less: reclassification adjustment for gains
included in net income, net of tax of ($23,851)
and ($7,105) (44,296) (13,195)
----------- ----------- -----------
Net unrealized holding gains/(losses) on securities,
net of tax of ($124,485), $19,088 and $16,844 (231,263) 35,543 31,533
Change in effect of unrealized gains/(losses) on other
insurance accounts, net of tax of $28,332,($1,949)
and ($5,432) 52,616 (3,619) (10,088)
Minimum pension liability adjustment, net of tax of ($51)
and ($435) (94) (731) 0
----------- ----------- -----------
Other comprehensive income/(loss) (178,741) 31,193 21,445
----------- ----------- -----------
Comprehensive income $ 498,232 $ 608,033 $ 614,943
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 28
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(Amounts in thousands)
<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, 1996 $ 1 $ 5,212,618 $ 92,104 $ 1,199,108 $ 6,503,831
Net income, 1997 593,498 593,498
Change in other
comprehensive income,
net of tax of $11,412 21,445 21,445
Cash dividends paid (337,200) (337,200)
-------- ----------- ------------- ------------ ------------
Balance, December 31, 1997 1 5,212,618 113,549 1,455,406 6,781,574
Net income, 1998 576,840 576,840
Unrealized holding gains
arising during the year,
net of tax of $26,193 48,738 48,738
Reclassification adjustment
for gains included in net
income, net of tax of
($7,105) (13,195) (13,195)
Change in effect of
unrealized losses on
other insurance accounts,
net of tax of ($1,949) (3,619) (3,619)
Minimum pension liability
adjustment, net of tax
of ($435) (731) (731)
Cash dividends paid (355,200) (355,200)
-------- ----------- ------------- ------------ -----------
Balance, December 31, 1998 1 5,212,618 144,742 1,677,046 7,034,407
Net income, 1999 676,973 676,973
Unrealized holding losses
arising during the year,
net of tax of ($100,634) (186,967) (186,967)
Reclassification adjustment
for gains included in net
income, net of tax of
($23,851) (44,296) (44,296)
Change in effect of
unrealized gains on other
insurance accounts, net
of tax of $28,332 52,616 52,616
Minimum pension liability
adjustment, net of tax
of ($51) (94) (94)
Cash dividends paid (433,400) (433,400)
-------- ----------- ------------- ------------ -----------
Balance, December 31, 1999 $ 1 $ 5,212,618 $ (33,999) $ 1,920,619 $ 7,099,239
======== =========== ============= ============ ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 29
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Consolidated net income $ 676,973 $ 576,840 $ 593,498
Non-cash and operating activities adjustments:
Depreciation and amortization 161,535 180,089 176,899
Amortization of deferred policy acquisition costs and
value of life business acquired 102,581 90,082 103,975
Policy acquisition costs deferred (99,568) (98,615) (98,372)
Life insurance policy liabilities 81,262 25,085 15,001
Provision for non-life losses and loss
adjustment expenses 500 105,944 0
Universal life type contracts:
Deposits received 302,423 299,007 295,747
Withdrawals (253,228) (241,765) (232,728)
Interest credited 71,386 67,585 62.247
Equity in earnings of joint ventures (8,888) (4,275) (4,046)
Gain on sales of assets (100,649) (48,154) (87,760)
Gain on sale of subsidiaries 0 0 (19,019)
Changes in assets and liabilities:
Current assets and liabilities 14,053 110,354 31,182
Non-current assets and liabilities (39,424) 63,351 (153,157)
Other, net 17,312 (33,345) (23,075)
---------- ---------- ----------
Net cash provided by operating activities 926,268 1,092,183 660,392
---------- ---------- ----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (2,175,297) (1,869,877) (1,685,693)
Purchases of properties (59,309) (37,806) (36,532)
Purchases of notes receivable - affiliates (440,000) (1,057,000) 0
Purchase of surplus note of the P&C Group 0 (119,000) 0
Proceeds from sales and maturities of investments
available-for-sale 1,873,122 1,032,173 1,001,351
Proceeds from sales of properties 38,240 27,329 16,778
Proceeds from redemption of certificates of contribution
of the P&C Group 11,050 650,000 0
Proceeds from redemption of notes receivable - affiliates 190,000 407,000 0
Proceeds from sale of subsidiaries 0 0 336,714
Mortgage loan collections 18,471 36,883 32,849
Increase in policy loans (16,476) (19,317) (17,836)
Other, net (1,420) (1,481) (4,554)
---------- ---------- ----------
Net cash used in investing activities (561,619) (951,096) (356,923)
---------- ---------- ----------
Cash Flows from Financing Activities:
Dividends paid to stockholders (433,400) (355,200) (337,200)
Annuity contracts:
Deposits received 157,468 144,793 131,651
Withdrawals (194,187) (202,244) (161,150)
Interest credited 91,422 82,930 80,280
Payment of long-term notes payable (4) (67) 0
Payment of real estate mortgages payable 0 0 (125)
---------- ---------- ----------
Net cash used in financing activities (378,701) (329,788) (286,544)
---------- ---------- ----------
Increase/(decrease) in cash and cash equivalents (14,052) (188,701) 16,925
Cash and cash equivalents - at beginning of year 327,552 516,253 499,328
---------- ---------- ----------
Cash and cash equivalents - at end of year $ 313,500 $ 327,552 $ 516,253
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 30
FARMERS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of presentation and summary of significant accounting policies
The accompanying consolidated financial statements of Farmers Group, Inc.
("FGI") and its subsidiaries (together "the Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP"). All
material inter-company transactions have been eliminated. Certain amounts
applicable to prior years have been reclassified to conform with the 1999
presentation. The preparation of the Company's financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
as well as the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
In December 1988, B.A.T Industries p.l.c. ("B.A.T") acquired 100%
ownership of the Company for $5,212,619,000 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.
The Company is attorney-in-fact ("AIF") for three inter-insurance
exchanges: Farmers Insurance Exchange, Fire Insurance Exchange and Truck
Insurance Exchange (collectively the "Exchanges"), which operate in the
property and casualty insurance industry. As AIF, FGI, or its subsidiaries, as
applicable, provides certain management services to the Exchanges, their
respective subsidiaries and Farmers Texas County Mutual Insurance Company
(collectively the "P&C Group") and receives compensation based on a percentage
of gross earned premiums. The management services generate a substantial
portion of the Company's revenue and profits and, as a result, the Company's
ongoing financial performance depends on the volume of business written by, and
the efficiency and financial strength of, the P&C Group. A portion of the
purchase price ($1,709,043,000) associated with B.A.T's acquisition of the
Company was assigned to these AIF contract relationships. The value so
assigned is being amortized on a straight-line basis over forty years.
The excess of the purchase price over the fair value of the net assets
("Goodwill") of the Company at the date of the Company's acquisition by B.A.T
($2,401,755,000) is being amortized on a straight-line basis over forty years.
The carrying amount of the Goodwill is regularly reviewed for indications of
impairment in value which in the view of management are other than temporary,
including unexpected or adverse changes in the following: (1) the economic or
competitive environments in which the Company operates, (2) profitability
analyses and (3) cashflow analyses. As of December 31, 1999, management
believes that the reported value is recoverable and the remaining life of
Goodwill is appropriate.
Prior to April 15, 1997 the Company's life insurance operations were
conducted by three wholly owned subsidiaries. A portion of the purchase price
($662,778,000) was assigned to the "Value of Life Business Acquired" ("VOLBA"),
which represented an actuarial determination of the expected profits from the
business in force at the date of B.A.T's acquisition of the Company. The
amount so assigned is being amortized over its actuarially determined useful
life with the unamortized amount included in "Deferred Policy Acquisition Costs
and Value of Life Business Acquired" in the accompanying consolidated balance
sheets.
On April 15, 1997, upon receipt of regulatory approval, the Company sold
two of its life insurance subsidiaries, The Ohio State Life Insurance Company
("OSL") and Investors Guaranty Life Insurance Company ("IGL"), to Great
Southern Life Insurance Company, a subsidiary of Americo Life, Inc.. The sale
of these
<PAGE> 31
subsidiaries resulted in a $19,019,000 gain and was reported on the "Gain on
sale of subsidiaries" line of the income statement. In addition, taxes
associated with the sale increased 1997 tax expense by $26,826,000 and were
reflected on the "Provision for income taxes" line. Both of these amounts
were reflected in the "Management services to property and casualty insurance
companies; and other" section of the Company's consolidated income statement
for the year ended December 31, 1997. The decision to sell these subsidiaries
was part of the Company's strategic plan to focus its life insurance efforts on
the growth of its remaining life insurance subsidiary, Farmers New World Life
Insurance Company ("Farmers Life"), by far its largest life insurance company,
through increased sales to the P&C Group's customer base. 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. These products
and services are sold directly by the P&C Group's agents.
In December 1997, Farmers Reinsurance Company ("Farmers Re"), a wholly
owned property and casualty insurance subsidiary of FGI, was formed and
licensed to conduct business. In January 1998, Farmers Re entered into a quota
share reinsurance treaty with the P&C Group under which it reinsures a
percentage of the auto physical damage business written by the P&C Group.
This agreement will remain in effect until terminated by either party.
As a result of the foregoing, references to the "Insurance Subsidiaries"
within the 1999 and 1998 consolidated financial statements are to Farmers Life
and Farmers Re, whereas, references to the "Insurance Subsidiaries" within the
1997 consolidated financial statements are to Farmers Life, OSL, IGL, and
Farmers Re.
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.
The Company's properties are depreciated over the following estimated
useful lives:
Buildings and improvements 10 to 45 years
Furniture and equipment 5 to 10 years
Data processing equipment and software 5 to 10 years
Depreciation is calculated for financial statement purposes by the
straight-line method. Repairs and maintenance are charged to operations;
significant renewals and betterments are capitalized.
In 1999, the Company adopted Statement of Position ("SOP") No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". This SOP establishes the rules for capitalizing or expensing
internally developed software.
In 1999, the Company adopted SOP No. 98-5, "Reporting on the Costs of
Start Up Activities". This SOP addresses the recording of costs associated
with a one-time activity, such as opening a new facility, introducing a new
product or service, conducting business in a new territory or conducting
business with a new class of customer.
In June 1999, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No. 137, "Deferral of the
Effective Date of FASB Statement No. 133", which defers the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. In 1998, the FASB
<PAGE> 32
released 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.
The Company does not expect the adoption of these Statements to have a material
impact on its consolidated financial statements.
B. Life insurance accounting
Traditional product premiums are recognized as revenues when they become
due and future benefits and expenses are matched with such premiums so that the
majority of profits are recognized over the premium-paying period of the
policy. This matching of revenues and expenses is accomplished through the
provision for future policy benefits and the amortization of deferred policy
acquisition costs ("DAC").
Certain policy acquisition costs, principally first-year commissions and
other expenses for policy underwriting and issuance (which are primarily
related to and vary with the production of new business), are deferred and
amortized proportionately over the estimated period during which the related
premiums will be recognized as income, based on the same assumptions that are
used for computing the liabilities for future policy benefits. Liabilities for
future policy benefits are computed principally by means of a net level premium
method reflecting estimated future investment yields, mortality, morbidity and
withdrawals. Interest rate assumptions range from 2.25% to 9.00%, depending on
the year of policy issue. Mortality is calculated principally on select and
ultimate tables in common usage in the industry, modified for actual
experience, and withdrawals are estimated based primarily on experience.
Revenues associated with universal life products consist of policy charges
for the cost of insurance, policy administration fees, surrender charges and
investment income on assets allocated to support policyholder account balances.
Revenues for deferred annuity products consist of surrender charges and
investment income on assets allocated to support policyholder account balances.
Expenses include interest credited to policyholder account balances and benefit
claims incurred in excess of policyholder account balances. Liabilities for
future policy benefits on universal life and deferred annuity products are
determined under the retrospective deposit method. DAC is amortized in
relation to the present value of expected gross profit margins on the policies,
after giving recognition to differences between actual and expected gross
profit margins to date. In compliance with a Securities and Exchange
Commission ("SEC") staff announcement, the Company has recorded certain entries
to the DAC and VOLBA line of the consolidated balance sheet in connection with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The SEC requires that companies record entries to those assets
and liabilities that would have been adjusted had the unrealized investment
gains or losses from securities classified as available-for-sale actually been
realized, with corresponding credits or charges reported directly to
stockholders' equity. Accordingly, DAC and VOLBA are increased or decreased to
reflect what would have been the impact on estimated future gross profits, had
net unrealized gains or losses on securities been realized at the balance sheet
date. Net unrealized gains or losses on securities, within stockholders'
equity, also reflect this impact. These entries increased the DAC and VOLBA
assets by $31,933,000 as of December 31, 1999 and decreased the DAC and VOLBA
assets by $49,015,000 as of December 31, 1998.
In 1999, Farmers Life introduced structured settlement annuity products.
Revenues and expenses for structured settlements involving life contingencies
are recognized in a manner similar to traditional products. Revenues and
expenses for structured settlements not involving life contingencies are
recorded consistent with guidelines for investment contracts which are not
subject to mortality risks.
<PAGE> 33
C. Non-life reinsurance
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 the quota share reinsurance treaty, entered into in January
1998, Farmers Re assumes monthly premiums of $83,333,000 and a quota share
percentage of ultimate net losses sustained by the P&C Group in its auto
physical damage lines of business. This treaty also provides for the P&C Group
to receive a provisional ceding commission of 20% of premiums with additional
experience commissions that depend on loss experience. This experience
commission arrangement limits Farmers Re's potential underwriting gain on the
assumed business to 2.5% of premiums assumed.
In March 1999, Farmers Re and the P&C Group commuted $105,944,000 of
losses and loss adjustment expenses associated with the 1998 accident year.
As a result, in May 1999, Farmers Re paid the P&C Group $105,944,000 of losses
and loss adjustment expenses and $8,205,000 of accrued interest in settlement
of this commutation.
Total losses paid by Farmers Re were $547,827,000 in 1999 and $543,445,000
in 1998, total loss adjustment expenses were $6,980,000 in 1999 and $5,736,000
in 1998 and reinsurance commissions were $313,749,000 in 1999 and $319,875,000
in 1998. Farmers Re had loss reserves of $106,444,000 and $105,944,000 as of
December 31, 1999 and 1998, respectively.
D. Property, plant and equipment
A schedule of the Company's operating properties, plant and equipment at
cost as of December 31 follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(Amounts in thousands)
<S> <C> <C>
Buildings and improvements $ 210,823 $ 218,268
Data processing equipment and software 347,021 291,159
Furniture and equipment 124,142 117,233
----------- -----------
681,986 626,660
Land 65,227 68,826
----------- -----------
$ 747,213 $ 695,486
=========== ===========
</TABLE>
As of December 31, 1999, the Company was committed to a plan to sell one
of its business service centers at a market price which was $1,789,000 lower
than the carrying value of the property. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of", the Company recognized an impairment loss of $1,789,000
which was reflected on the "General and administrative expenses" line in the
"Management services to property and casualty insurance companies; and other"
section of the Company's consolidated income statement for the year ended
December 31, 1999.
E. Merger related expenses
As a result of the merger between B.A.T's Financial Services Businesses
and ZIC in 1998, the Company recorded various merger related expenses
totaling $244,000 in 1999 and $21,056,000 in 1998. The expenses recorded in
1999 related to audit and legal costs incurred by the Company in connection
with the merger, while the expenses recorded in 1998 were primarily related to
$16,545,000 of losses the Company incurred in connection with taking over the
management of ZIC's United States personal lines business. An additional
$2,728,000 was recorded in 1998 relating to the write-off of redundant
capitalized software and $1,783,000 was recorded relating to miscellaneous
audit, legal and travel expenses incurred by the Company in connection with
the merger.
<PAGE> 34
F. Certificates of contribution and surplus note of the P&C Group
On April 7, 1999, the Company received $12,274,000 from the P&C Group for
the redemption of an $11,050,000 certificate of contribution issued on
December 11, 1991 and for the payment of $1,224,000 of accrued interest. As of
December 31, 1999, the Company held miscellaneous other certificates of
contribution of the P&C Group totaling $23,330,000 which bear interest at
various rates. In addition, Farmers Life held 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 note. Generally, repayment may
be made only when the surplus balance of the issuer reaches a certain specified
level, and then only after approval is granted by the issuer's governing Board
and the appropriate Department of Insurance.
G. 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 December 31, 1999 and 1998, a total of 20,000,000 shares of QUIPS
were outstanding.
H. Employees' profit sharing plans
The Company has two profit sharing plans providing for cash payment to all
eligible employees. The two plans, Deferred Profit Sharing and Cash Profit
Sharing (consisting of Cash and Quest for Gold in 1999 and 1998 and Cash and
Cash Plus in 1997), provide for a maximum aggregate expense of 16.25% of the
Company's consolidated annual pretax earnings, as adjusted. The Deferred
Profit Sharing Plan, limited to 10% of pretax earnings, as adjusted, or 15% of
the salary or wage paid or accrued to the eligible employee, provides for an
annual contribution by the Company to a trust for eventual payment to employees
as provided in the Plan. The Cash Profit Sharing Plan and Quest for Gold
Program provide for annual cash distributions to eligible employees. The Cash
Profit Sharing Plan is limited to 5% of pretax earnings, as adjusted, or 5% of
employee salaries or wages paid or accrued. The Quest for Gold Program is
limited to 1.25% of pretax earnings, as adjusted, or 6% of eligible
<PAGE> 35
employee salaries or wages paid or accrued. The Cash Plus Plan was limited to
1.25% of pretax earnings, as adjusted.
Expense under these plans was $52,984,000, $51,869,000 and $52,235,000 in
1999, 1998 and 1997, respectively.
I. Retained earnings
Statutory capital and surplus of Farmers Life was $1,052,177,000 and
$922,426,000 as of December 31, 1999 and 1998, respectively. Statutory net
income was $114,909,000 for the year ended December 31, 1999 and $98,796,000
for the year ended December 31, 1998. Combined statutory net income of the
Life Insurance Subsidiaries was $128,461,000 for the year ended December 31,
1997, which reflected the results of Farmers Life for the year and the results
of OSL and IGL through April 15, 1997.
There are certain statutory limitations on the distribution of surplus.
As of December 31, 1999, $112,941,000 was available for distribution without
approval from the Washington State Department of Insurance, the state in which
Farmers Life is domiciled.
J. Investments
The Company follows the provisions of SFAS No. 115. This Statement
addresses the accounting and reporting for investments in equity securities
that have readily determinable market values and for all investments in debt
securities. As of December 31, 1999 and 1998, the Company classified all
investments in equity and debt securities as available-for-sale under SFAS No.
115 with the exception of $59.7 million in 1999 and $53.0 million in 1998 which
relate to a grantor trust and are classified as trading securities under SFAS
No. 115. The available-for-sale investments are reported on the balance sheet
at market value, with unrealized gains and losses, net of tax, excluded from
earnings and reported as a component of stockholders' equity. The investments
classified as trading investments are reported on the "Other assets" line of
the consolidated balance sheet at market value with both realized and
unrealized gains and losses included in earnings, net of tax, in the year in
which they occur. Real estate investments are accounted for on a depreciated
cost basis. Real estate acquired in foreclosure and held for sale is carried
at the lower of market value or depreciated cost less a valuation allowance.
Marketable securities are carried at market. The Standard & Poor's 500
Composite Stock Price Index ("S&P 500") call options are carried at estimated
fair value. Other investments, which consist primarily of certificates of
contribution of the P&C Group, a surplus note of the P&C Group, policy loans
and notes receivable from affiliates, which include British American Financial
Services (UK and International), Ltd. ("BAFS") notes and an Old Stone
(Delaware) Holdings Limited ("OSDH") note, are carried at the unpaid principal
balances.
In compliance with a SEC staff announcement, the Company has recorded
certain entries to the DAC and VOLBA line of the consolidated balance sheet in
connection with SFAS No. 115. The SEC requires that companies record entries
to those assets and liabilities that would have been adjusted had the
unrealized investment gains or losses from securities classified as
available-for-sale actually been realized, with corresponding credits or
charges reported directly to stockholders' equity.
<PAGE> 36
The sources of investment income on securities owned by the Company
(excluding the Insurance Subsidiaries) for the years ended December 31 are:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C>
Related parties:
B.A.T Capital Corporation notes $ 0 $ 14,672 $ 23,620
BAFS notes 59,434 19,481 0
Centre Re note (see Note S) 7,805 0 0
OSDH note 781 0 0
---------- ---------- ----------
Total related parties 68,020 34,153 23,620
---------- ---------- ----------
Non-related parties:
Interest income-
certificates of contribution
of the P&C Group 2,123 33,417 61,131
Interest income-
fixed income securities 39,030 50,373 36,264
Dividend income 6,503 7,825 9,268
Interest income-
cash equivalents and
marketable securities 617 4,205 10,263
Other * 1,197 5,089 3,585
---------- ---------- ----------
Total non-related parties 49,470 100,909 120,511
---------- ---------- ----------
Total investment income
by component $ 117,490 $ 135,062 $ 144,131
========== ========== ==========
</TABLE>
* Includes $4.1 million, $3.4 million and $1.6 million in 1999, 1998, and
1997, respectively, of unrealized gains associated with the trading
securities reported on the "Other assets" line of the balance sheet.
The sources of investment income on securities owned by the Insurance
Subsidiaries for the years ended December 31 are:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C>
Fixed income securities $ 308,303 $ 279,157 $ 251,727
Equity securities 1,786 249 12,863
Mortgage loans 5,060 8,789 12,205
Owned real estate 9,414 9,907 9,575
Policy loans 14,436 12,993 12,118
Cash equivalents and
marketable securities 5,387 7,302 2,552
Surplus note of the P&C Group 7,259 2,279 0
Investment expenses (21,758) (13,658) (13,442)
Other 5,678 373 5,592
---------- ---------- ----------
Total investment income
by component $ 335,565 $ 307,391 $ 293,190
========== ========== ==========
</TABLE>
<PAGE> 37
Realized gains and losses on sales, redemptions and writedowns of
investments owned by the Company (excluding the Insurance Subsidiaries) are
determined based on either the cost of the individual securities or the
amortized cost of real estate. Net realized investment gains or losses for
the years ended December 31 are:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C>
Bonds $ (753) $ 280 $ (12)
Redeemable preferred stocks 0 57 365
Common stocks 76,478 59,864 69,505
Investment real estate (864) (34) 0
Other 377 2,261 3,545
---------- ---------- ----------
Net realized investment gains/(losses) $ 75,238 $ 62,428 $ 73,403
========== ========== ==========
</TABLE>
Realized gains and losses on sales, redemptions and writedowns of
investments owned by the Insurance Subsidiaries are determined based on either
the cost of the individual securities or the amortized cost of real estate.
Net realized investment gains or losses for the years ended December 31 are:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C>
Bonds $ 17,777 $ (16,461) $ 8,619
Redeemable preferred stocks 450 25 1,734
Non-redeemable preferred stocks 0 0 71
Common stocks 5,005 117 2,798
Investment real estate 1,562 1,393 3
Other 0 118 11
---------- ---------- ----------
Net realized investment gains/(losses) $ 24,794 $ (14,808) $ 13,236
========== ========== ==========
</TABLE>
<PAGE> 38
The amortized cost, gross unrealized gains and losses, and estimated
market values of investments in equity securities pertaining to non-redeemable
preferred stocks and common stocks owned by the Company (excluding the
Insurance Subsidiaries) are as follows:
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Equity Securities Available-for-Sale
Non-redeemable preferred stocks $ 0 $ 0 $ 0 $ 0
Common stocks 299,251 72,314 (37,353) 334,212
---------- ---------- ---------- ----------
Total $ 299,251 $ 72,314 $ (37,353) $ 334,212
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Equity Securities Available-for-Sale
Non-redeemable preferred stocks $ 0 $ 0 $ 0 $ 0
Common stocks 278,107 87,372 (11,014) 354,465
---------- ---------- ---------- ----------
Total $ 278,107 $ 87,372 $ (11,014) $ 354,465
========== ========== ========== ==========
</TABLE>
The amortized cost, gross unrealized gains and losses, and estimated
market values of investments in equity securities pertaining to non-redeemable
preferred stocks and common stocks owned by the Insurance Subsidiaries in 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Equity Securities Available-for-Sale
Non-redeemable preferred stocks $ 1,153 $ 97 $ (92) $ 1,158
Common stocks 188,851 35,555 (12,132) 212,274
---------- ---------- ---------- ----------
Total $ 190,004 $ 35,652 $ (12,224) $ 213,432
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Equity Securities Available-for-Sale
Non-redeemable preferred stocks $ 1,153 $ 165 $ (48) $ 1,270
Common stocks 98,399 9,751 (2,055) 106,095
---------- ---------- ---------- ----------
Total $ 99,552 $ 9,916 $ (2,103) $ 107,365
========== ========== ========== ==========
</TABLE>
<PAGE> 39
The amortized cost, gross unrealized gains and losses, and estimated
market values of investments in debt securities, including bonds and
redeemable preferred stocks, owned by the Company (excluding the Insurance
Subsidiaries) are as follows:
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Debt Securities Available-for-Sale,
including Marketable Securities
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 239 $ 1 $ 0 $ 240
Obligations of states and political
subdivisions 476,080 805 (3,788) 473,097
Corporate securities 45,503 0 (551) 44,952
Mortgage-backed securities 42,350 0 (986) 41,364
Other debt securities 18,387 280 (54) 18,613
---------- ---------- ---------- ----------
Total $ 582,559 $ 1,086 $ (5,379) $ 578,266
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Debt Securities Available-for-Sale,
including Marketable Securities
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 242 $ 10 $ 0 $ 252
Obligations of states and political
subdivisions 530,322 8,667 0 538,989
Corporate securities 43,474 885 0 44,359
Mortgage-backed securities 53,316 594 (71) 53,839
Other debt securities 23,444 1,192 0 24,636
---------- ---------- ---------- ----------
Total $ 650,798 $ 11,348 $ (71) $ 662,075
========== ========== ========== ==========
</TABLE>
<PAGE> 40
The amortized cost, gross unrealized gains and losses, and estimated
market values of investments in debt securities, including bonds and
redeemable preferred stocks, owned by the Insurance Subsidiaries in 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
As of December 31, 1999
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Debt Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 421,688 $ 553 $ (24,382) $ 397,859
Obligations of states and political
subdivisions 496,368 3,104 (14,132) 485,340
Debt securities issued by foreign governments 71,946 5,902 (1,149) 76,699
Corporate securities 1,373,138 6,957 (52,811) 1,327,284
Mortgage-backed securities 2,086,788 8,758 (71,262) 2,024,284
Other debt securities 64,176 1,346 (668) 64,854
---------- ----------- ---------- ----------
Total $4,514,104 $ 26,620 $ (164,404) $4,376,320
========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Debt Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 460,097 $ 44,434 $ (124) $ 504,407
Obligations of states and political
subdivisions 620,279 31,444 (149) 651,574
Debt securities issued by foreign governments 95,077 2,446 (16,144) 81,379
Corporate securities 999,412 59,625 (5,938) 1,053,099
Mortgage-backed securities 1,921,350 67,598 (10,003) 1,978,945
Other debt securities 82,090 4,747 (175) 86,662
---------- ---------- ---------- ----------
Total $4,178,305 $ 210,294 $ (32,533) $4,356,066
========== ========== ========== ==========
</TABLE>
<PAGE> 41
The amortized cost and estimated market value of debt securities,
including marketable securities, owned by the Company (excluding the Insurance
Subsidiaries) as of December 31, 1999, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Debt Securities Available-for-Sale,
including Marketable Securities
Due in one year or less $ 54,927 $ 54,927
Due after one year through five years 330,574 327,026
Due after five years through ten years 16,648 17,004
Due after ten years 119,673 119,332
---------- ----------
521,822 518,289
Mortgage-backed securities 42,350 41,364
Redeemable preferred stocks
with no stated maturities 18,387 18,613
---------- ----------
$ 582,559 $ 578,266
========== ==========
</TABLE>
The amortized cost and estimated market value of debt securities owned by
the Insurance Subsidiaries as of December 31, 1999, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Debt Securities Available-for-Sale
Due in one year or less $ 29,287 $ 29,183
Due after one year through five years 699,505 690,495
Due after five years through ten years 962,444 929,783
Due after ten years 671,904 637,721
---------- ----------
2,363,140 2,287,182
Mortgage-backed securities 2,086,788 2,024,284
Redeemable preferred stocks
with no stated maturities 64,176 64,854
---------- ----------
$4,514,104 $4,376,320
========== ==========
</TABLE>
Proceeds from sales of available-for-sale securities received by the
Company were $1,808,735,000, $1,504,131,000 and $735,192,000 in 1999, 1998 and
1997, respectively. Gross gains of $142,027,000, $88,751,000 and $100,269,000
and gross losses of $44,999,000, $50,798,000 and $21,274,000 were realized on
sales and writedowns during 1999, 1998 and 1997, respectively.
<PAGE> 42
The change in the net unrealized gains or (losses) of the Company
(excluding the Insurance Subsidiaries) for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Fixed maturities $ (15,570) $ 5,387
Equity securities (41,397) 10,133
</TABLE>
The change in the net unrealized gains or (losses) of the Insurance
Subsidiaries for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Fixed maturities $ (315,545) $ 31,039
Equity securities 15,615 7,619
</TABLE>
K. Equity-indexed annuities
During 1997, Farmers Life began selling an equity-indexed annuity product.
At the end of its seven year term, this product credits interest to the
annuity participant at a rate based on a specified portion of the change in the
value of the S&P 500, subject to a guaranteed annual minimum return. In order
to hedge the interest liability generated on the annuities as the index rises,
Farmers Life purchases call options on the S&P 500. Farmers Life considers
such S&P 500 call options to be held as a hedge. As of December 31, 1999 and
1998, Farmers Life had S&P 500 call options with contract values of $65,229,000
and $40,229,000, respectively, and carrying values of $32,718,000 and
$14,817,000, respectively.
Hedge accounting is used to account for the call options as Farmers Life
believes that the options reduce the risks associated with increases in the
account value of the annuities that result from increases in the S&P 500. The
call options effectively hedge the annuity contracts since they are both
purchased and sold with identical parameters. Periodically, the value of the
assets (S&P 500 call options) are matched to the potential liability (annuity
contracts) to ensure the hedge has remained effective. The annuities were
written based on a seven year investment term, absent early termination by
participants. Therefore, the anticipated hedged transaction (i.e., payment of
interest to the policyholder at the end of the investment term and maturity of
the call option) for each annuity is generally expected to occur in seven years
or less. The amount of unrealized hedging gains was $13,197,000 and $3,512,000
in 1999 and 1998, respectively.
The S&P 500 call options are carried at estimated fair value. Unrealized
gains and losses resulting from changes in the estimated fair value of the call
options are recorded as an adjustment to the interest credited to
policyholders. In addition, realized gains and losses from maturity or
termination of the call options are offset against the interest credited to
policyholders during the period incurred. Premiums paid on call options are
amortized to net investment income over the term of the contracts. There were
no early terminations by annuity participants, or maturities or sales of the
S&P 500 call options during 1999.
The cash requirement of the call options consists of the initial premium
paid to purchase the call options. Should a liability exist to the annuity
participant at maturity of the annuity policy, the termination or maturity of
the option contracts will generate positive cash flow to Farmers Life. The
appropriate amount of cash will then be remitted to the annuity participant
based on the respective participation rate. The call options are generally
expected to be held for a seven year term, but can be terminated at any time.
There are certain risks associated with the call options, primarily with
respect to significant movements in the United States stock market and
counterparty nonperformance. The Company believes that the counterparties
<PAGE> 43
to its call option agreements are financially responsible and that the
counterparty risk associated with these transactions is minimal.
L. Fair value of financial instruments
The estimated fair values of financial instruments disclosed have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented may not be indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated fair
value amounts.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------
Carrying Estimated
Value Fair Value
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Assets and liabilities excluding Insurance
Subsidiaries:
Assets:
Cash and cash equivalents $ 217,466 $ 217,466
Marketable securities 66,558 66,558
Fixed maturities available-for-sale 511,708 511,708
Common stocks available-for-sale 334,212 334,212
Mortgage loans 146 152
Certificates of contribution of the P&C Group 23,330 23,330
Notes receivable - affiliates 1,307,000 1,280,685
Grantor trust 59,727 59,727
Other assets 26,293 19,001
Liabilities:
Real estate mortgages payable 21 21
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely junior subordinated debentures 500,000 448,668
Insurance Subsidiaries:
Assets:
Cash and cash equivalents 96,034 96,034
Fixed maturities available-for-sale 4,376,320 4,376,320
Non-redeemable preferred stocks
available-for-sale 1,158 1,158
Common stocks available-for-sale 212,274 212,274
Mortgage loans 35,834 43,818
Surplus note of the P&C Group 119,000 119,000
Policy loans 201,687 199,166
Joint ventures, at equity 6,662 5,137
S&P 500 call options 32,718 32,718
Liabilities:
Future policy benefits - deferred annuities 1,531,412 1,481,098
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
December 31, 1998
--------------------------
Carrying Estimated
Value Fair Value
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Assets and liabilities excluding Insurance
Subsidiaries:
Assets:
Cash and cash equivalents $ 253,828 $ 253,828
Marketable securities 53,536 53,536
Fixed maturities available-for-sale 608,539 608,539
Common stocks available-for-sale 354,465 354,465
Mortgage loans 196 214
Certificates of contribution of the P&C Group 34,380 34,380
Notes receivable - affiliate 1,057,000 1,087,259
Grantor trust 53,016 53,016
Other assets 20,695 15,148
Liabilities:
Real estate mortgages payable 25 27
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely junior subordinated debentures 500,000 513,608
Insurance Subsidiaries:
Assets:
Cash and cash equivalents 73,724 73,724
Fixed maturities available-for-sale 4,356,066 4,356,066
Non-redeemable preferred stocks
available-for-sale 1,270 1,270
Common stocks available-for-sale 106,095 106,095
Mortgage loans 52,879 67,615
Surplus note of the P&C Group 119,000 119,000
Policy loans 185,211 192,620
Joint ventures, at equity 8,456 6,668
S&P 500 call options 14,817 14,817
Liabilities:
Future policy benefits - deferred annuities 1,492,032 1,433,494
</TABLE>
<PAGE> 45
The following methods and assumptions were used to estimate the fair value
of financial instruments as of December 31, 1999 and 1998:
Cash and cash equivalents and marketable securities. The carrying amounts
of these items are a reasonable estimate of their fair values.
Fixed maturities, non-redeemable preferred stocks and common stocks. The
estimated fair values of bonds, redeemable and non-redeemable preferred stocks
and common stocks are based upon quoted market prices, dealer quotes, and
prices obtained from independent pricing services.
Mortgage loans. The estimated fair value of the mortgage loans portfolio
is determined by discounting the estimated future cash flows, using a year-end
market rate which is applicable to the yield, credit quality and average
maturity of the composite portfolio.
Certificates of contribution and surplus note of the P&C Group. The
carrying amounts of these items are a reasonable estimate of their fair values.
Notes receivable-affiliate(s). The fair values are estimated by
discounting the future cash flows using the current rates at which similar
loans would be made by the Company to borrowers for the same remaining
maturities.
Grantor trust. The carrying amount is a reasonable estimate of its fair
value.
Joint ventures, at equity. The estimated fair values are based upon
quoted market prices, current appraisals and independent pricing services.
Other assets. Other assets consist primarily of advances to agents, the
fair value of which is determined by discounting the estimated future cash
flows using credit quality, the average maturity of related advances, and the
current rates at which similar loans would be made to borrowers by the Company.
Policy loans. The estimated fair values of policy loans are determined by
discounting the future cash flows using the current rates at which similar
loans would be made.
S&P 500 call options. S&P 500 call options are purchased as hedges
against the interest liabilities generated on the equity-indexed annuity
products. These call options are carried at an estimated fair value based on
stock price, strike price, time to expiration, interest rates, dividends and
volatility per the methodology of the Black-Scholes Option Pricing Formula.
Real estate mortgages payable. The estimated fair values are determined
by discounting the estimated future cash flows at a rate which approximates the
Company's incremental borrowing rate.
Company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debentures. The
estimated fair values are based on quoted market prices.
Future policy benefits-deferred annuities. The estimated fair values of
flexible premium and single premium deferred annuities are based on their cash
surrender values.
<PAGE> 46
M. Value of Life Business Acquired
The changes in the Value of Life Business Acquired were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 334,442 $ 359,146 $ 443,318
Amortization related to operations (50,685) (53,598) (60,134)
Interest accrued 30,998 29,701 36,207
Amortization related to net
unrealized gains/(losses) 13,963 (807) (1,700)
Sale of OSL and IGL 0 0 (58,545)
---------- ---------- ----------
Balance, end of year $ 328,718 $ 334,442 $ 359,146
========== ========== ==========
</TABLE>
Based on current conditions and assumptions as to future events, Farmers
Life expects to amortize the December 31, 1999 balance as follows:
approximately 7.0% in 2000, 2001 and 2002 and 8.0% in 2003 and 2004. The
discount rate used to determine the amortization rate of the VOLBA ranged
from 12.5% to 7.5%.
N. Security lending arrangements
The Company has security lending agreements with a financial institution.
The agreements in effect as of December 31, 1999 authorize the financial
institution to lend securities held in the Company's portfolio to a list of
authorized borrowers. Concurrent with delivery of the securities, the borrower
provides the Company with cash collateral equal to at least 102% of the market
value of domestic securities and 105% of the market value of other securities
subject to the "loan".
The securities are marked-to-market on a daily basis and the collateral is
adjusted on the next business day. The collateral is invested in highly
liquid, fixed income assets with a maturity of less than one year. Income
earned from the security lending arrangements was allocated 75% to the Company
and 25% to the institution for the year ended December 31, 1999 and 60% to the
Company and 40% to the institution for the years ended December 31, 1998 and
1997. Income earned by the Company was $799,000, $968,000 and $856,000 in
1999, 1998 and 1997, respectively. The collateral under these agreements as
of December 31, 1999 and 1998 was $307,529,000 and $461,801,000, respectively.
O. Employees' retirement plans
The Company has two noncontributory defined benefit pension plans (the
Regular Plan and the Restoration Plan). The Regular Plan covers substantially
all employees of the Company and the P&C Group who have reached age 21 and have
rendered one year of service. Benefits are based on years of service and the
employee's compensation during the last five years of employment. The
Restoration Plan provides supplemental retirement benefits for certain key
employees of the Company and the P&C Group.
The Company's policy is to fund the amount determined under the aggregate
cost method, provided it does not exceed funding limitations. There has been
no change in funding policy from prior years.
Assets of the Regular Plan are held by an independent trustee. Assets
held are primarily in fixed maturity and equity investments. The principal
liability is for annuity benefit payments of current and future retirees.
Assets of the Restoration Plan are considered corporate assets and are held in
a grantor trust.
<PAGE> 47
Information regarding the Regular Plan's and the Restoration Plan's funded
status is not developed separately for the Company and the P&C Group. The
funded status of the Plans for the Company and the P&C Group as of December 1,
1999 and 1998 (the latest date for which information is available) was as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Change in Benefit Obligation
Net benefit obligation at beginning of the year $ 853,174 $ 747,069
Service cost 29,395 26,423
Interest cost 58,469 54,998
Plan participants' contributions 0 0
Plan amendments 7,903 0
Actuarial (gain)/loss (111,100) 54,218
Benefits paid (33,948) (29,534)
---------- ----------
$ 803,893 $ 853,174
========== ==========
<S> <C> <C>
Change in Plan Assets
Fair value of plan assets at beginning of the year $ 924,301 $ 817,552
Actual return on plan assets 124,380 135,313
Employer contributions 0 0
Plan participants' contributions 0 0
Benefits paid (32,753) (28,564)
---------- ----------
Fair value of plan assets at end of the year $1,015,928 $ 924,301
========== ==========
<S> <C> <C>
Funded status at end of the year $ 212,034 $ 71,127
Unrecognized net actuarial (gain)/loss (287,586) (140,910)
Unrecognized prior service cost 35,859 31,255
Unrecognized net transition obligation/(asset) (21,510) (26,186)
---------- ----------
Net amount recognized at end of the year $ (61,203) $ (64,714)
========== ==========
<S> <C> <C>
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 0 $ 0
Accrued benefit cost (61,203) (64,714)
Additional minimum liability (5,382) (7,263)
Intangible asset 5,237 6,097
Accumulated other comprehensive income 145 1,166
---------- ----------
Net amount recognized at end of the year $ (61,203) $ (64,714)
========== ==========
</TABLE>
Upon B.A.T's purchase of the Company in 1988, the Company allocated part
of the purchase price to its portion of the Regular Plan assets in excess of
the projected benefit obligation at the date of acquisition. The asset is
being amortized for the difference between the Company's net pension cost and
amounts contributed to the Plan. The unamortized balance as of December 31,
1999 and 1998 was $16,940,000 and $20,622,000, respectively.
<PAGE> 48
Components of net periodic pension expense for the Company follow:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C>
Service costs $ 15,126 $ 13,240 $ 14,238
Interest costs 34,525 27,810 28,362
Return on plan assets (49,000) (35,817) (35,116)
Amortization of:
Transition obligation 955 1,365 1,229
Prior service cost 2,207 1,986 2,298
Actuarial (gain)/loss (2,445) (2,447) (1,248)
---------- ---------- ----------
Net periodic pension expense $ 1,368 $ 6,137 $ 9,763
========== ========== ==========
</TABLE>
The Company uses the projected unit credit cost actuarial method for
attribution of expense for financial reporting purposes. The interest cost and
the actuarial present value of benefit obligations were computed using a
weighted average interest rate of 8.00% in 1999, 6.75% in 1998 and 7.25% in
1997, while the expected return on plan assets was computed using a weighted
average interest rate of 9.25% in 1999 and 1998 and 9.00% in 1997. The
weighted average rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
was 5.00% in 1999, 4.50% in 1998 and 5.00% in 1997.
The Company's postretirement benefits plan is a contributory defined
benefit plan for employees who were retired or who were eligible for early
retirement as of January 1, 1995, and is a contributory defined dollar plan for
all other employees retiring after January 1, 1995. Health benefits are
provided for all employees who participated in the Company's and the P&C
Group's group medical benefits plan for the 10 years prior to retirement at age
55 or later. A life insurance benefit of $5,000 is provided at no cost to
retirees who maintained group insurance coverage for the 10 years prior to
retirement at age 55 or later.
There are no assets separated and allocated to this plan.
<PAGE> 49
The funded status of the entire plan, which includes the Company and the
P&C Group, as of December 1, 1999 and 1998 (the latest date for which
information is available), was as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Change in Benefit Obligation
Net benefit obligation at beginning of the year $ 80,367 $ 70,758
Service cost 1,537 1,280
Interest cost 5,374 5,080
Plan participants' contributions 1,575 1,297
Plan amendments 0 0
Actuarial (gain)/loss (5,892) 6,936
Benefits paid (3,460) (4,984)
---------- ----------
$ 79,501 $ 80,367
========== ==========
<S> <C> <C>
Fair value of plan assets at end of the year $ 0 $ 0
========== ==========
<S> <C> <C>
Funded status at end of the year $ (79,501) $ (80,367)
Unrecognized net actuarial (gain)/loss (14,070) (8,193)
Unrecognized prior service cost 0 0
Unrecognized net transition obligation/(asset) 17,044 18,354
---------- ----------
Net amount recognized at end of the year $ (76,527) $ (70,206)
========== ==========
<S> <C> <C>
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 0 $ 0
Accrued benefit cost (76,527) (70,206)
Additional minimum liability 0 0
Intangible asset 0 0
Accumulated other comprehensive income 0 0
---------- ----------
Net amount recognized at end of the year $ (76,527) $ (70,206)
========== ==========
</TABLE>
<PAGE> 50
The unrecognized net transition obligation of $17,044,000 in 1999 and
$18,354,000 in 1998 represents the remaining transition obligation of the P&C
Group.
The Company's share of the accrued postretirement benefit cost was
approximately $55,578,000 in 1999 and $53,206,000 in 1998.
Components of postretirement benefits expense for the Company follow:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C>
Service costs $ 696 $ 636 $ 753
Interest costs 3,263 2,527 2,918
Return on plan assets 0 0 0
Amortization of:
Transition obligation 0 0 0
Prior service cost 0 0 0
Actuarial (gain)/loss (9) (435) (13)
---------- ---------- ----------
Net periodic expense $ 3,950 $ 2,728 $ 3,658
========== ========== ==========
</TABLE>
The weighted average interest rate used in the above benefit computations
was 8.00% in 1999, 6.75% in 1998 and 7.25% in 1997. Beginning in 1997, the
initial medical inflation rate was 7.00%, to be graded over a 2-year period to
6.00% and level thereafter, and contribution levels from retirees were the same
as applicable medical cost increases where defined benefits exist. The
weighted average rate of increase in future compensation levels used in
determining the actuarial present value of the accumulated benefit obligation
was 5.00% in 1999, 4.50% in 1998 and 5.00% in 1997.
A 1.00% increase or decrease in the medical inflation rate assumption
would have resulted in the following:
<TABLE>
<CAPTION>
1% increase 1% decrease
------------- -------------
(Amounts in thousands)
<S> <C> <C>
Effect on 1999 service and interest components
of net periodic cost $ 116 $ (106)
Effect on accumulated postretirement benefit
obligation at December 31, 1999 2,028 (1,849)
</TABLE>
P. Commitments and contingencies
Rental expense incurred by the Company was $28,727,000, $22,332,000 and
$20,322,000 in 1999, 1998 and 1997, respectively.
The Company has long-term operating lease commitments on equipment and
buildings, with options to renew at the end of the lease periods. As of
December 31, 1999, the remaining commitments payable over the next five years
under these leases were:
<PAGE> 51
<TABLE>
<CAPTION>
Equipment Buildings
----------- -----------
(Amounts in thousands)
<S> <C> <C>
2000 $ 11,188 $ 2,658
2001 6,689 1,743
2002 1,405 1,476
2003 383 715
2004 88 34
----------- -----------
$ 19,753 $ 6,626
=========== ===========
</TABLE>
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.
The Company has entered into employment agreements with certain executives
of the Company. Each agreement obligates the Company to compensate the
executive should the executive's employment be terminated due to a qualifying
event, as defined within the agreement. In the opinion of management, any
payments made as a result of these agreements would not have a material
adverse effect on the Company's consolidated results of operations or
financial position.
Q. Income taxes
The Company follows the provisions of SFAS No. 109, "Accounting for
Income Taxes". Deferred tax assets and deferred tax liabilities are recorded
to reflect the tax consequences in future years of differences between the tax
bases of assets and liabilities and the corresponding bases used for financial
statements. On April 15, 1997, OSL and IGL were sold pursuant to Internal
Revenue Code 338(h)(10). Federal and state taxes incurred as a result of
this transaction amounted to $26,826,000.
<PAGE> 52
The components of the provision for income taxes are:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C>
Management services to the P&C
Group; and other:
Current
Federal $ 293,191 $ 302,669 $ 317,396
State 43,148 38,271 42,601
Deferred
Federal (10,976) (46,701) (25,286)
State (40) (3,487) (2,527)
---------- ---------- ----------
Total 325,323 290,752 332,184
---------- ---------- ----------
Insurance Subsidiaries:
Current
Federal 98,166 83,981 80,119
State 1,512 1,089 1,704
Deferred
Federal 2,500 (2,100) (5,399)
State (574) 0 0
---------- ---------- ----------
Total 101,604 82,970 76,424
---------- ---------- ----------
Consolidated total $ 426,927 $ 373,722 $ 408,608
========== ========== ==========
</TABLE>
The table below reconciles the provision for income taxes computed at
the U.S. statutory income tax rate of 35% to the Company's provision for
income taxes:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C>
Management services to the P&C
Group; and other:
Expected tax expense $ 282,241 $ 249,059 $ 273,836
State income taxes, net of
federal income tax benefits 27,442 22,059 21,152
Tax exempt investment income (10,026) (11,086) (8,490)
Tax-effect of gain on sale of
OSL and IGL in excess of U.S.
statutory rate 0 0 20,169
Goodwill 21,015 21,015 21,015
Other, net 4,651 9,705 4,502
---------- ---------- ----------
Reported income tax expense 325,323 290,752 332,184
---------- ---------- ----------
Insurance Subsidiaries:
Expected tax expense 104,124 83,637 76,902
Tax exempt investment income (4,523) (3,013) (2,337)
State taxes 1,029 362 1,704
Other, net 974 1,984 155
---------- ---------- ----------
Reported income tax expense 101,604 82,970 76,424
---------- ---------- ----------
Consolidated income tax expense $ 426,927 $ 373,722 $ 408,608
========== ========== ==========
</TABLE>
<PAGE> 53
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1999 and 1998 are presented in the following tables:
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------------------------
Current Non-current Total
----------- ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C>
Management services to the P&C
Group; and other:
Depreciation $ 0 $ (60,781) $ (60,781)
Achievement awards 298 0 298
Employee benefits 7,050 14,585 21,635
Capitalized expenditures 0 (68,114) (68,114)
California franchise tax 26,338 0 26,338
Postretirement benefits 0 22,052 22,052
Postemployment benefits 0 161 161
Valuation of investments
in securities 1,503 (11,537) (10,034)
Attorney-in-fact contracts 0 (467,124) (467,124)
Other 1,706 (9,144) (7,438)
----------- ------------ ------------
Total deferred tax
asset/(liability) 36,895 (579,902) (543,007)
----------- ------------ ------------
Insurance Subsidiaries:
Deferred policy acquisition
costs and value of life
business acquired 0 (245,850) (245,850)
Future policy benefits 0 115,336 115,336
Investments 0 15,447 15,447
Valuation of investments
in securities 0 28,990 28,990
Depreciable assets 0 (4,620) (4,620)
Loss reserves 0 1,323 1,323
Other 0 651 651
----------- ------------ ------------
Total deferred tax liability 0 (88,723) (88,723)
----------- ------------ ------------
Consolidated total deferred tax
asset/(liability) $ 36,895 $ (668,625) $ (631,730)
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
----------------------------------------------
Current Non-current Total
----------- ----------- ------------
(Amounts in thousands)
<S> <C> <C> <C>
Management services to the P&C
Group; and other:
Depreciation $ 0 $ (68,069) $ (68,069)
Achievement awards 693 0 693
Employee benefits 5,381 12,982 18,363
Capitalized expenditures 0 (50,441) (50,441)
California franchise tax 23,779 0 23,779
Postretirement benefits 0 22,416 22,416
Postemployment benefits 0 161 161
Valuation of investments
in securities (3,947) (25,439) (29,386)
Attorney-in-fact contracts 0 (483,232) (483,232)
Other 1,138 (9,425) (8,287)
----------- ----------- ------------
Total deferred tax
asset/(liability) 27,044 (601,047) (574,003)
----------- ----------- ------------
Insurance Subsidiaries:
Deferred policy acquisition
costs and value of life
business acquired 0 (251,626) (251,626)
Future policy benefits 0 135,215 135,215
Investments 0 10,842 10,842
Valuation of investments
in securities 0 (47,659) (47,659)
Depreciable assets 0 (5,520) (5,520)
Loss reserves 0 2,596 2,596
Other 0 (8,577) (8,577)
----------- ----------- ------------
Total deferred tax liability 0 (164,729) (164,729)
----------- ----------- ------------
Consolidated total deferred tax
asset/(liability) $ 27,044 $ (765,776) $ (738,732)
=========== =========== ============
</TABLE>
<PAGE> 54
R. Management fees
As AIF, the Company, or its subsidiaries, as applicable, manages the
affairs of 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 $1,402,107,000, $1,271,763,000 and $1,241,153,000 in 1999, 1998 and
1997, respectively.
S. Related parties
Certain directors of the Company are partners in legal firms that received
fees for legal services from the Company and the P&C Group. These fees totaled
$8,492,000, $6,544,000 and $5,208,000 in 1999, 1998 and 1997, respectively.
On December 15, 1999, the Company received $197,805,000 from Centre
Reinsurance Holdings (Delaware II) Ltd. ("Centre Re"), a subsidiary of Zurich,
in settlement of a $190,000,000 loan made on June 30, 1999 and $7,805,000 of
accrued interest. This note was a short-term note with a fixed interest rate
of 8.75% and a maturity date of December 31, 1999.
Also, on December 15, 1999, the Company, using the $190,000,000 of proceeds
from the Centre Re loan settlement, loaned $250,000,000 to OSDH, a subsidiary
of Zurich. In return, the Company received a $250,000,000 medium-term note
that matures on December 15, 2004. Interest on the note is paid semi-annually
at a fixed rate of 7.50%. Income earned on this note through December 31,
1999 was $781,000.
In addition, as of December 31, 1999, the Company held $1,057,000,000 of
notes receivable from BAFS, a subsidiary of Zurich. The Company purchased the
notes from BAFS on September 3, 1998, using proceeds received in settlement
of $407,000,000 of notes receivable from B.A.T Capital Corporation, a
subsidiary of B.A.T, and proceeds received from the redemption of $650,000,000
of certificates of contribution of the P&C Group on July 10, 1998. The
$1,057,000,000 notes receivable are fixed rate medium-term notes with maturity
dates as follows: $200,000,000 in September 2000, $207,000,000 in September
2001, $200,000,000 in September 2002, $200,000,000 in September 2003 and
$250,000,000 in September 2004. Interest on these notes is paid semi-annually
at coupon rates of 5.44%, 5.48%, 5.67%, 5.71% and 5.78%, respectively. Income
earned on these notes for the years ended December 31, 1999 and December 31,
1998 was $59,434,000 and $19,481,000, respectively.
T. Supplemental cash flow information
For financial statement purposes, the Company considers all investments
with original maturities of 90 days or less as cash equivalents. Following is
a reconciliation of the individual balance sheet cash and cash equivalent
totals to the consolidated cash flow total:
<TABLE>
<CAPTION>
Excluding
Insurance Insurance
Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash and cash equivalents --December 31, 1996 $ 412,018 $ 87,310 $ 499,328
1997 Activity 16,925
------------
Cash and cash equivalents --December 31, 1997 479,935 36,318 516,253
1998 Activity (188,701)
------------
Cash and cash equivalents --December 31, 1998 253,828 73,724 327,552
1999 Activity (14,052)
------------
Cash and cash equivalents --December 31, 1999 217,466 96,034 $ 313,500
============
</TABLE>
<PAGE> 55
Cash payments for interest were $1,693,000, $2,671,000 and $2,247,000 in
1999, 1998 and 1997, respectively, while cash payments for dividends to the
holders of the Company's QUIPS were $42,070,000 in 1999, 1998 and 1997. Cash
payments for income taxes were $426,017,000, $423,803,000 and $430,588,000 in
1999, 1998 and 1997, respectively.
In 1999, the Company used $190,000,000 of proceeds it received from the
settlement of the Centre Re loan to substantially fund the issuance of a
$250,000,000 loan to OSDH (see Note S).
In 1998, the Company used $650,000,000 of proceeds it received from the
redemption of the certificates of contribution of the P&C Group and
$407,000,000 of proceeds it received from the settlement of the B.A.T Capital
Corporation notes receivable, to issue $1,057,000,000 of notes receivable to
BAFS (see Note S). In addition, Farmers Life purchased a $119,000,000 surplus
note of the P&C Group on September 8, 1998 (see Note F).
In 1997, net cash proceeds from the sale of OSL and IGL amounted to
$336,714,000 and were in consideration primarily for the following:
Investments $ 823,666,000
Deferred policy acquisition costs and Value of Life
Business Acquired 181,196,000
Life insurance policy liabilities (690,426,000)
As a result of the adoption of SFAS No. 115, Farmers Life decreased the
DAC asset and increased the VOLBA asset to account for the impact on estimated
future gross profits of the net unrealized gains or losses on securities.
U. Revolving credit agreement
As of December 31, 1999 and 1998, the Company had a revolving credit
agreement with certain financial institutions and had an aggregate borrowing
facility of $500,000,000. The proceeds of the facility were available to the
Company for general corporate purposes, including loans to the P&C Group. As
of December 31, 1999 and 1998, facility fees were payable on the aggregate
borrowing facility in the amount of 7 basis points per annum and were
reimbursable to the Company by the P&C Group. In the case of a draw on the
facility, the Company has the option to borrow at annual rates equal to the
prime rate, the banks' certificate of deposit rate plus one percentage point,
the federal funds effective rate plus 1/2 of one percentage point or the London
Interbank Offered Rate plus certain percentages. As of December 31, 1999 and
1998, the Company did not have any outstanding borrowings under the revolving
credit agreement. Facility fees were $350,000 for each of the years ended
December 31, 1999 and 1998 and $399,000 for the year ended December 31, 1997,
and were reimbursed by the P&C Group. The revolving credit agreement in effect
as of December 31, 1999 expires on July 1, 2002.
V. Participating policies
Participating business, which consists of group business, comprised
approximately 8.6% of Farmers Life's total insurance in-force as of both
December 31, 1999 and 1998. In addition, participating business represented
2.0%, 2.1% and 2.2% of Farmers Life's premium income for the years ended
December 31, 1999, 1998 and 1997, respectively.
The amount of dividends paid on participating business is determined by
the Farmers Life Board of Directors and is paid annually on the policyholder's
anniversary date. Amounts allocable to participating policyholders are based
on published dividend projections or expected dividend scales.
<PAGE> 56
W. Life reinsurance
Farmers Life has retention limits for automatic reinsurance ceded which
set the maximum retention on new issues at $2,000,000 per life for the Farmers
Flexible Universal Life policy; $1,500,000 per life for all Traditional
policies except Farmers Yearly Renewable Term; and $800,000 per life for
Farmers Yearly Renewable Term. The excess is reinsured with a third party
reinsurer. In addition, beginning in July 1999, Farmers Life entered into a
coinsurance agreement with a third party insurer to reinsure the Farmers
Premier 10 and 20 year products. Premiums ceded under these agreements totaled
$13,939,000 in 1999, $3,728,000 in 1998 and $4,236,000 in 1997. Life
reinsurance receivables, which totaled $10,846,000 and $8,453,000 at December
31, 1999 and 1998, respectively, were included in "Other assets" of the
Insurance Subsidiaries.
X. Current liabilities accrued, other
Current liabilities accrued, other consisted of the following:
<TABLE>
<CAPTION>
As of December 31,
------------------------------
1999 1998
----------- ------------
(Amounts in thousands)
<S> <C> <C>
Accrued employee bonuses $ 8,020 $ 9,403
Accrued restructuring costs (see Note E) 0 16,545
Other 2,089 4,776
----------- ------------
$ 10,109 $ 30,724
=========== ============
</TABLE>
Y. Operating segments
The Company's principal services 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: the management
services segment, the life insurance segment and the reinsurance segment.
As the Company is the exclusive AIF of the P&C Group, 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
$1,402,107,000, $1,271,763,000 and $1,241,153,000 for the years ended December
31, 1999, 1998 and 1997, 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. 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 the PGAAP
adjustments.
The Company accounts for intersegment transactions as if they were to
third parties and, as such, records the transactions at current market prices.
There were no reportable intersegment revenues among the Company's three
reportable operating segments for the years ended December 31, 1999, 1998 and
1997.
The Company operates in 41 states and does not earn revenues or hold
assets in any foreign countries.
<PAGE> 57
Information regarding the Company's reportable operating segments follows:
<TABLE>
<CAPTION>
Year ended December 31, 1999
---------------------------------------------------------------------------------------------------------
GAAP historical basis PGAAP adjustments Consolidated
------------------------------------------------------ -------------------------------------
Management Life Management Life PGAAP
services insurance Reinsurance Total services insurance Total basis
------------------------------------------------------ ------------------------------------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,489,683 $ 753,463 (a) $1,028,526 (a) $3,271,672 $ 0 $ (1,272) $ (1,272) $ 3,270,400
Investment
income 118,829 320,760 37,512 477,101 (1,339) (949) (2,288) 474,813
Investment
expenses 0 (12,137) (9,621) (21,758) 0 0 0 (21,758)
Net realized
gains/(losses) 82,667 24,482 635 107,784 (7,429) (323) (7,752) 100,032
Dividends
on preferred
securities of
subsidiary
trusts (42,070) 0 0 (42,070) 0 0 0 (42,070)
Income before
provision for
taxes 924,084 (b) 273,289 53,314 1,250,687 (117,682)(c) (29,105)(d) (146,787) 1,103,900
Provision for
income taxes 347,351 96,740 15,625 459,716 (22,028) (10,761) (32,789) 426,927
Assets 3,215,497 5,516,874 849,192 9,581,563 3,065,440 (e) 149,282 (f) 3,214,722 12,796,285
Capital
expenditures 87,167 2,507 0 89,674 0 0 0 89,674
Depreciation &
amortization 53,163 77,652 (g) 0 130,815 105,079 (c) 28,222 (d) 133,301 264,116
- -----------------------
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains/(losses).
(b) Amount includes $47.9 million of corporate expenses.
(c) Amount includes PGAAP adjustments associated with the amortization of
the AIF contracts ($42.7 million) and goodwill ($60.0 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.
(e) Amount includes PGAAP adjustments associated with the AIF contracts
($1,239.1 million) and goodwill ($1,741.3 million).
(f) Amount includes PGAAP adjustments related to the DAC (($190.1) million) and
VOLBA ($328.7 million) assets.
(g) 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.
<PAGE> 58
<TABLE>
<CAPTION>
Year ended December 31, 1998
---------------------------------------------------------------------------------------------------------
GAAP historical basis PGAAP adjustments Consolidated
------------------------------------------------------ -------------------------------------
Management Life Management Life PGAAP
services insurance Reinsurance Total services insurance Total basis
------------------------------------------------------ ------------------------------------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,358,175 $ 660,419 (a) $1,012,390 (a) $3,030,984 $ 0 $ 207 $ 207 $ 3,031,191
Investment
income 136,024 307,221 13,621 456,866 (962) 207 (755) 456,111
Investment
expenses 0 (13,658) 0 (13,658) 0 0 0 (13,658)
Net realized
gains/(losses) 64,430 (13,473) (1,335) 49,622 (2,002) 0 (2,002) 47,620
Dividends
on preferred
securities of
subsidiary
trusts (42,070) 0 0 (42,070) 0 0 0 (42,070)
Income before
provision for
taxes 821,885 (b) 199,609 37,178 1,058,672 (110,289)(c) 2,179 (108,110) 950,562
Provision for
income taxes 309,992 71,072 11,784 392,848 (19,240) 114 (19,126) 373,722
Assets 3,089,150 5,437,577 797,984 9,324,711 3,183,651 (d) 178,242 (e) 3,361,893 12,686,604
Capital
expenditures 59,300 572 0 59,872 0 0 0 59,872
Depreciation &
amortization 71,658 94,902 (f) 0 166,560 104,891 (c) (1,280)(g) 103,611 270,171
- -----------------------
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains/(losses).
(b) Amount includes $35.1 million of corporate expenses.
(c) Amount includes PGAAP adjustments associated with the amortization of
the AIF contracts ($42.7 million) and goodwill ($60.0 million).
(d) Amount includes PGAAP adjustments associated with the AIF contracts
($1,281.8 million) and goodwill ($1,801.3 million).
(e) Amount includes PGAAP adjustments related to the DAC (($168.3) million)
and VOLBA ($334.4 million) assets.
(f) Amount includes the historical basis amortization associated with the
DAC asset.
(g) Amount includes PGAAP adjustments related to the amortization of the DAC
(($26.2) million) and VOLBA ($23.9 million) assets.
<PAGE> 59
<TABLE>
<CAPTION>
Year ended December 31, 1997
---------------------------------------------------------------------------------------------------------
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 $1,324,895 $ 683,330 (a) $ 47 (a) $2,008,272 $ 0 $ 716 $ 716 $ 2,008,988
Investment
income 144,525 305,869 47 450,441 (394) 716 322 450,763
Investment
expenses 0 (13,442) 0 (13,442) 0 0 0 (13,442)
Net realized
gains 73,403 13,236 0 86,639 0 0 0 86,639
Gain on sale
of subsidiaries 12,044 0 0 12,044 6,975 0 6,975 19,019
Dividends
on preferred
securities of
subsidiary
trusts (42,070) 0 0 (42,070) 0 0 0 (42,070)
Income before
provision for
taxes 883,234 (b) 223,156 9 1,106,399 (100,847)(c) (3,446) (104,293) 1,002,106
Provision for
income taxes 350,557 78,266 3 428,826 (18,373) (1,845) (20,218) 408,608
Assets 3,418,785 5,177,311 50,115 8,646,211 3,293,963 (d) 177,259 (e) 3,471,222 12,117,433
Capital
expenditures 64,534 1,696 0 66,230 0 0 0 66,230
Depreciation &
amortization 68,916 102,958 (f) 0 171,874 104,437 (c) 4,563 (g) 109,000 280,874
- -----------------------
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains/(losses).
(b) Amount includes $35.1 million of corporate expenses.
(c) Amount includes PGAAP adjustments associated with the amortization of the
AIF contracts ($42.7 million) and goodwill ($60.0 million).
(d) Amount includes PGAAP adjustments associated with the AIF contracts
($1,324.5 million) and goodwill ($1,861.4 million).
(e) Amount includes PGAAP adjustments related to the DAC (($195.2) million)
and VOLBA ($359.1 million) assets.
(f) Amount includes the historical basis amortization associated with the
DAC asset.
(g) Amount includes PGAAP adjustments related to the amortization of the DAC
(($20.2) million) and VOLBA ($23.9 million) assets.
Z. Subsequent events
In October 1999, the Exchanges announced an agreement to acquire Foremost
Corporation of America ("Foremost"), the country's leading writer of
manufactured homes and a prominent insurer of recreational vehicles and other
specialty lines, for approximately $812,000,000. This acquisition was approved
by the shareholders of Foremost on February 25, 2000 and, after receiving
regulatory and other approvals, the acquisition was completed on March 7, 2000.
To help fund this acquisition, the Company purchased $370,000,000 of
certificates of contribution of the P&C Group bearing interest at 7.85%
annually.
On March 1, 2000, Eagle Star Life Assurance Company Limited, an affiliate
of Zurich, assigned $175,000,000 of matured surplus notes of the P&C Group to
the Company. As a result, the P&C Group issued new surplus notes of
$175,000,000 to the Company which bear interest at 8.50% annually and mature
in March 2005. In return, the Company reduced the outstanding balance of the
notes receivable from BAFS (see Note S), also an affiliate of Zurich, by
$175,000,000. Except for the principal sum, all other terms governing the BAFS
notes remained unchanged with principal amounts maturing 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.
<PAGE> 60
FARMERS GROUP, INC.
AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Year ended
-------------------------------------------------------- ------------
Mar. 31 June 30 Sept. 30 Dec. 31 Dec. 31
----------- ----------- ----------- ----------- ------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
1999
- ------
Revenues:
Management services $ 365,778 $ 375,312 $ 375,177 $ 373,416 $ 1,489,683
Insurance Subsidiaries 436,375 449,272 437,964 457,106 1,780,717
----------- ----------- ----------- ----------- ------------
Consolidated 802,153 824,584 813,141 830,522 3,270,400
----------- ----------- ----------- ----------- ------------
Income before provision for
income taxes:
Management services 186,784 221,992 213,487 184,139 806,402
Insurance Subsidiaries 67,392 76,546 67,374 86,186 297,498
----------- ----------- ----------- ----------- ------------
Consolidated 254,176 298,538 280,861 270,325 1,103,900
----------- ----------- ----------- ----------- ------------
Provision for income taxes:
Management services 76,778 89,885 89,145 69,515 325,323
Insurance Subsidiaries 22,353 26,007 22,818 30,426 101,604
----------- ----------- ----------- ----------- ------------
Consolidated 99,131 115,892 111,963 99,941 426,927
----------- ----------- ----------- ----------- ------------
Consolidated net income $ 155,045 $ 182,646 $ 168,898 $ 170,384 $ 676,973
=========== =========== =========== =========== ============
1998
- ------
Revenues:
Management services $ 335,539 $ 336,373 $ 343,904 $ 342,359 $ 1,358,175
Insurance Subsidiaries 417,609 422,838 430,450 402,119 1,673,016
----------- ----------- ----------- ----------- ------------
Consolidated 753,148 759,211 774,354 744,478 3,031,191
----------- ----------- ----------- ----------- ------------
Income before provision for
income taxes:
Management services 190,985 185,975 110,259 224,377 711,596
Insurance Subsidiaries 64,205 64,710 68,617 41,434 238,966
----------- ----------- ----------- ----------- ------------
Consolidated 255,190 250,685 178,876 265,811 950,562
----------- ----------- ----------- ----------- ------------
Provision for income taxes:
Management services 76,826 74,300 47,329 92,297 290,752
Insurance Subsidiaries 23,652 22,585 23,965 12,768 82,970
----------- ----------- ----------- ----------- ------------
Consolidated 100,478 96,885 71,294 105,065 373,722
----------- ----------- ----------- ----------- ------------
Consolidated net income $ 154,712 $ 153,800 $ 107,582 $ 160,746 $ 576,840
=========== =========== =========== =========== ============
</TABLE>
<PAGE> 61
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
ITEM 10. Directors and Executive Officers of Farmers Group, Inc.
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning each
person who is an executive officer or director of FGI as of the filing
date:
<TABLE>
<CAPTION>
Name Age Position
- ------ ----- -----------
<S> <C> <C>
Martin D. Feinstein (1) 51 Chairman of the Board, President and Chief Executive Officer
Jason L. Katz (1) 52 Executive Vice President, General Counsel and Director
John H. Lynch 48 Executive Vice President-Field Operations and Director
Keitha T. Schofield 48 Executive Vice President-Support Services and Director
Cecilia Claudio 45 Senior Vice President and Chief Information Officer
Gerald E. Faulwell 57 Senior Vice President and Chief Financial Officer
Stephen J. Feely 51 Senior Vice President and Chief Marketing Officer
Leonard H. Gelfand 55 Senior Vice President and President of Farmers Business Insurance
Paul N. Hopkins 43 Senior Vice President-State Operations
Stephen J. Leaman 52 Senior Vice President and President of Farmers Personal Lines
Edwin A. Heafey, Jr. (3) 69 Director
Rolf Huppi 56 Director
Benjamin C. Neff (2) 65 Director
Jack C. Parnell (2) (3) 64 Director
Cornelius J. Pings (1) (2) (3) 71 Director
Van Gordon Sauter (3) 64 Director
M. Faye Wilson (2) 62 Director
Clayton Yeutter (2) (3) 69 Director
- - -----------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
</TABLE>
The present position and principal occupation during each of the last five
years of the executive officers and directors named above are set forth below.
Martin D. Feinstein has served as Chairman of the Board since November
1997, Chief Executive Officer of FGI since January 1997, President of FGI since
January 1995 and as a director of FGI since February 1995. Mr. Feinstein also
has served as a director of Allied Zurich p.l.c. since March 1998 and is a
member of the Group Executive Board of Zurich. In addition, Mr. Feinstein
served as a director of B.A.T from January 1997 to September 1998.
Previously, Mr. Feinstein held various positions with FGI, including serving
as Vice President-Sales and Marketing from November 1989 to January 1993, as
Senior Vice President-Special Projects from January 1993 to October 1993, as
Senior Vice President-Property and Casualty Staff from October 1993 to January
1995 and as Chief Operating Officer of FGI from January 1995 to January 1997.
Jason L. Katz has served as Executive Vice President and General Counsel
of FGI since June 1998 and as a director of FGI since May 1986. Previously,
Mr. Katz served as Vice President and General Counsel of FGI from August 1984
through February 1992 and Senior Vice President and General Counsel of FGI from
February 1992 to June 1998.
<PAGE> 62
John H. Lynch has served as Executive Vice President-Field Operations
since June 1999 and as a director of FGI since July 1998. Previously, Mr.
Lynch served as Vice President of FGI and Regional Manager of the Pleasanton
Region from January 1993 to January 1995, Vice President-Personal Lines
Operations of FGI from January 1995 to October 1995, Vice President of FGI
and Regional Manager of the Colorado Springs Region from October 1995 to
January 1997. Additionally, Mr. Lynch served as Vice President-Personal Lines
Operations of FGI from January 1997 to October 1997, Senior Vice President-
Personal Lines Operations of FGI from October 1997 to July 1998 and Senior Vice
President of FGI and President-Farmers Personal Lines from July 1998 to June
1999.
Keitha T. Schofield has served as Executive Vice President-Support
Services since January 1998 and as a director of FGI since May 1997. Ms.
Schofield served as Senior Vice President and Chief Information Officer of FGI
from May 1995 to January 1997 and Executive Vice President-Support Services and
Chief Information Officer from January 1997 to January 1998. Previously, Ms.
Schofield served as Vice President-Technology Division of Continental Airlines,
Inc. from 1988 to May 1995.
Cecilia Claudio has served as Senior Vice President and Chief Information
Officer of FGI since July 1998. Previously, Ms. Claudio served as Chief
Information Officer and Senior Vice President of Information Technology of
Harvard Pilgrim Health Care from 1994 to 1996 and Chief Information Officer and
Senior Vice President of Information Technology of Anthem, Inc. from 1996 to
May 1998. Additionally, Ms. Claudio has served on the Board of Directors of
Sybase, Inc., a business intelligence and mobile technology company, since
November 1999.
Gerald E. Faulwell has served as Senior Vice President and Chief Financial
Officer of FGI since September 1998. Previously, Mr. Faulwell served as Vice
President-Corporate Investments and Treasurer of FGI from October 1987 to
January 1993, Vice President-Strategic Planning, Budgeting and Administration
of FGI from January 1993 to January 1996 and Senior Vice President-Strategic
Planning, Budgeting and Administration of FGI from January 1996 to September
1998.
Stephen J. Feely has served as Senior Vice President and Chief Marketing
Officer of FGI since January 2000. Previously, Mr. Feely served as Vice
President-Public Affairs of FGI from September 1987 to September 1996, Vice
President of FGI and California State Executive from September 1996 to
September 1998 and Vice President-State Operations of FGI from September 1998
to January 2000.
Leonard H. Gelfand has served as Senior Vice President of FGI and
President of Farmers Business Insurance since July 1998. Previously, Mr.
Gelfand served as Vice President-Commercial of FGI and President-Truck
Underwriters Association from April 1991 to January 1995 and Senior Vice
President-Commercial of FGI and President-Truck Underwriters Association
from January 1995 to July 1998.
Paul N. Hopkins has served as Senior Vice President-State Operations of
FGI since January 2000. Previously, Mr. Hopkins served as Assistant Vice
President-Regional Operations of FGI from June 1992 to November 1994, Vice
President-Agencies of FGI from November 1994 to October 1997, Senior Vice
President-Agencies of FGI from October 1997 to September 1998, and Senior
Vice President and Chief Marketing Officer of FGI from September 1998 to
January 2000.
Stephen J. Leaman has served as Senior Vice President of FGI and
President of Farmers Specialty Products from January 1999 to June 1999 and as
Senior Vice President of FGI and President of Farmers Personal Lines since
June 1999. Previously, Mr. Leaman served as Chief Operating Officer of
Providian Direct Insurance from 1995 to 1996, Senior Vice President of
Maryland Casualty Company from January 1997 to June 1997 and Executive Vice
President of Maryland Casualty Company from June 1997 to January 1999.
Edwin A. Heafey, Jr. has served as a director of FGI since 1978. Mr.
Heafey is a practicing attorney and has been a partner of the law firm of
Crosby, Heafey, Roach and May since 1962.
<PAGE> 63
Rolf Huppi has served as a director of FGI since September 1999. Mr.
Huppi is Chairman and Chief Executive Officer of Zurich, Deputy Chairman of
Allied Zurich p.l.c. and Chairman of Zurich Allied AG. He joined Zurich
Insurance Company in 1963 and became a member of the Corporate Executive
Board of the Zurich Group in 1983 when he assumed overall responsibility for
activities in the U.S.. In 1991, he became President and Chief Executive
Officer of the Zurich Group. In 1993, he was elected as a member of the board
of Zurich Insurance Company and has been its Chairman since 1995.
Benjamin C. Neff has served as a director of FGI since 1995. Mr. Neff has
served as Chairman of NECO Financial Services, Inc. since May 1995. During the
period from May 1992 through May 1995, Mr. Neff was the Managing Director of
Seabury & Smith, Inc., a wholly owned subsidiary of Marsh & McClennan, Inc..
Prior to May 1992, Mr. Neff served as the President of Smith Sternau Insurance
Services, Inc., a wholly owned subsidiary of Marsh & McClennan, Inc..
Jack C. Parnell has served as a director of FGI since 1995. Mr. Parnell
has served as a Governmental Relations Advisor to the law firm of Kahn, Soares
& Conway and the public relations firm of Fleishman, Hilliard since 1991.
Previously, Mr. Parnell served as the Deputy Secretary-United States Department
of Agriculture from 1989 to 1991. Mr. Parnell also serves on the Board of
Directors of Neogen Corporation, a company engaged in the veterinary
instruments and diagnostics business.
Cornelius J. Pings has served as a director of FGI since August 1991. Dr.
Pings served as the President of the Association of American Universities from
February 1993 to June 1998 and served as the Provost (Senior Vice President for
Academic Affairs) for the University of Southern California from 1981 to early
1993. Dr. Pings also serves as Chairman of the Board of Directors of Pacific
Horizon Funds, Inc.. He previously served on the boards of Hughes Aircraft Co.
and Maxtor, Inc., a company engaged in the disk drive business.
Van Gordon Sauter has served as a director of FGI since May 1996. Mr.
Sauter previously served as President and General Manager of PBS affiliate
KVIE in Sacramento, California and President of CBS News and Fox News.
M. Faye Wilson has served as a director of FGI since May 1996. Ms. Wilson
has served as Senior Vice President of Home Depot since June 1998 and also
serves on the Board of Directors of Home Depot. Previously, Ms. Wilson served
as Executive Vice President of BankAmerica from 1977 to June 1998.
Clayton Yeutter has served as a director of FGI since 1994. Mr. Yeutter
has served as a non-executive director of Zurich and Allied Zurich p.l.c. since
March 1998 and as a non-executive director of Zurich Allied AG since September
1998. Previously, Mr. Yeutter served as a non-executive director of B.A.T from
January 1993 until September 1998. Mr. Yeutter has been Of Counsel to the law
firm of Hogan and Hartson since February 1993. During the preceding four
years, he served in a series of positions in the Bush Administration, first as
Secretary of Agriculture, then as Chairman of the Republican National Committee
and finally as Counselor to the President for Domestic Policy.
<PAGE> 64
ITEM 11. Executive Compensation
The following table sets forth the annual compensation for services in all
capacities to FGI for the fiscal years ended December 31, 1999, 1998 and 1997
of those persons who were, as of December 31, 1999, (i) FGI's Chief Executive
Officer and (ii) the other four most highly compensated executive officers of
FGI (the "Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
------------------------
Name and LTIP Payouts All Other
Principal Position Year Salary ($) Bonus ($)(1) ($)(2) Compensation
($)(3)
- ------------------------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Martin D. Feinstein 1999 900,000 1,006,690 0 135,000
Chairman of the 1998 900,000 948,192 0 137,024
Board, President 1997 600,000 615,477 0 91,582
and Chief Executive
Officer
Jason L. Katz 1999 364,000 413,018 0 54,600
Executive Vice President 1998 345,000 407,642 0 52,526
and General Counsel 1997 328,800 351,813 0 50,187
Keitha T. Schofield 1999 363,000 331,640 0 54,450
Executive Vice 1998 332,500 330,784 0 50,623
President 1997 275,000 275,489 0 41,975
Stephen J. Leaman 1999 316,666 272,463 0 47,500
Senior Vice President
John H. Lynch 1999 285,417 261,587 0 42,813
Executive Vice President 1998 237,500 234,267 0 36,159
1997 192,709 189,084 0 29,414
</TABLE>
- ---------------------
(1) Bonus amounts reported in the year in which service related to such bonus
is rendered. Payment does not occur until the year subsequent to the year
of service.
(2) In 1999, Messrs. Feinstein, Katz, Leaman and Lynch and Ms. Schofield
became participants of Zurich and FGI's Long Term Performance Share Plans.
The target number of performance shares to be awarded is 12,468, 3,530,
2,958, 2,570 and 3,520, respectively, from Allied Zurich p.l.c. and 337,
95, 80, 70 and 95, respectively, from Zurich Allied AG. The number of
shares to be awarded is linked to performance goals over a three-year
period. Depending upon performance, the range of shares to be awarded
will vary from 0% to 200% of the number of shares indicated.
In 1998, Messrs. Feinstein, Katz, Lynch and Ms. Schofield received awards
of 90,000, 17,000, 11,250 and 15,750 Long Term Incentive Plan Units
("LTIPs"), respectively, under FGI's 1998 Long Term Incentive Plan. The
Value of the LTIPs is linked to performance goals set by the Compensation
Committee based on the financial and operating results of the Company and
the P&C Group over a three year period.
In 1997, Messrs. Feinstein, Katz, Lynch and Ms. Schofield received awards
of 17,982, 8,200, 4,995 and 8,200 Premier Award Units ("PAUs"),
respectively, under FGI's Premier Award Units Plan. The value of the PAUs
is linked to performance goals set by the Compensation Committee based on
the financial and operating results of the Company and the P&C Group and
the price of B.A.T ADRs over a four-year period. Effective September 8,
1998, the B.A.T ADR performance category was replaced by a measurement of
Allied Zurich p.l.c. and Zurich Allied AG stock performance. In 1999, Mr.
Leaman received 7,245 PAUs under the terms of the 1997 grant.
The value of the LTIPs and PAUs will be paid to eligible employees in
cash. The receipt of such amounts may be deferred at the election of
participants, subject to the approval of the Compensation Committee. In
the event of certain changes in the capital structure of FGI or other
events relating to control of FGI, the Compensation Committee has the
discretion to pay out the value of outstanding LTIPs and PAUs immediately
or make other appropriate adjustments to the LTIPs and PAUs.
(3) Represents estimated amounts to be contributed by FGI under the Employees'
Profit Sharing Savings Plan Trust (the "Deferred Plan") and reported in
the year of service as earned. To the extent that a participant's annual
benefits under the Deferred Plan exceed certain limits imposed by law,
such amounts will be paid under FGI's nonqualified Employee Benefits
Restoration Plan (the "Benefits Restoration Plan"), which is funded
through a grantor trust.
<PAGE> 65
The following table sets forth the options granted to the Named Executive
Officers for the year ended December 31, 1999 under the Zurich Global Share
Option Plan.
<TABLE>
<CAPTION>
Options Options
Over Over
Allied Zurich
Zurich p.l.c. Allied AG
Officer Shares (#)(1)(2) Shares (#)(1)(3)
------- ---------------- ----------------
<S> <C> <C>
Martin D. Feinstein 40,835 1,342
Jason L Katz 8,258 271
Keitha T. Schofield 8,258 271
Stephen J. Leaman 6,919 227
John H. Lynch 6,012 198
</TABLE>
- ---------------------
(1) The exercise price of Allied Zurich p.l.c. and Zurich Allied AG options
granted in 1999 were based on a 10% premium to the average market value
during January 1999. The exercise period related to these options was
February 1, 2002 through January 31, 2006.
(2) The average Allied Zurich p.l.c. share market price during January 1999
was 9.40 GBP. The Allied Zurich p.l.c. options were granted at an
exercise price of 10.34 GBP. As of the grant date, the currency exchange
rate was 0.61 GBP per $1.
(3) The average Zurich Allied AG share market price during January 1999 was
1,051.90 CHF. The Zurich Allied AG options were granted at an exercise
price of 1,157.10 CHF. As of the grant date, the currency exchange rate
was 1.42 CHF per $1.
Employees' Pension Plan
In addition to the compensation set forth above, the Named Executive
Officers participate with all eligible employees of the Company in the
Company's tax-qualified Employees' Pension Plan (the "Pension Plan"). The
Named Executive Officers also participate in the Benefits Restoration Plan,
funded through a grantor trust, which provides supplemental benefits to the
extent amounts otherwise payable under the Pension Plan and the Deferred Plan
are limited under applicable laws. (Together, the Pension Plan and the
Benefits Restoration Plan are referred to as the "Retirement Plans").
Effective May 7, 1997, the Employee Benefits Restoration Plan was amended
to include awards made under the Executive Incentive Plan as compensation in
calculating pension benefits, starting with the 1996 awards paid in 1997. The
entire benefit derived from inclusion of the Executive Incentive Plan award(s)
will be paid from the Employee Benefits Restoration Plan. This amendment
impacts certain key officers and includes the Named Executive Officers.
The Pension Plan bases retirement benefits upon the employees' final
five-year average annual base salary and the total years of credited service,
subject to a maximum of 35 years of credited service. Employees who are at
least 21 years of age and who have completed one year of service participate in
the Pension Plan retroactive to the first day of the month following their hire
date. Eligible participants become vested and earn a nonforfeitable right to
Pension Plan benefits after completing five years of service or upon reaching
the first day of the month in which they become age 65.
Unreduced monthly pension benefits begin at age 62 with 30 years of
service and at age 65 with less than 30 years of service, but participants may
retire as early as age 55 at actuarially reduced rates, provided that they have
at least 15 years of service. Participants who become totally and permanently
disabled may qualify for disability retirement benefits if they have 10 or more
years of service and are between the ages of 35 and 65.
<PAGE> 66
For purposes of illustration, the following table provides examples of the
annual pension benefits payable at age 65 pursuant to the defined benefit
portions of the Retirement Plans, assuming benefits are paid in the form of a
straight life annuity. Such benefits are not reduced for Social Security
payments or other offset amounts.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
Years of Credited Service
-----------------------------------------------------------------------
Five-Year Average 15 20 25 30 35
Remuneration
- ------------------------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 150,000 $ 38,247 $ 50,997 $ 63,746 $ 76,495 $ 89,244
200,000 51,372 68,497 85,621 102,745 119,870
250,000 64,497 85,997 107,496 128,995 150,494
300,000 77,622 103,497 129,371 155,245 181,119
350,000 90,747 120,997 151,246 181,495 211,745
400,000 103,872 138,497 173,121 207,745 242,369
450,000 116,997 155,997 194,996 233,995 272,994
500,000 130,122 173,497 216,871 260,245 303,620
600,000 156,372 208,497 260,621 312,745 364,869
700,000 182,622 243,497 304,371 365,245 426,119
800,000 208,872 278,497 348,121 417,745 487,370
900,000 235,122 313,497 391,871 470,245 548,619
</TABLE>
At the end of 1999, Messrs. Feinstein, Katz, Leaman, Lynch and Ms.
Schofield were credited under the Pension Plans with 26.0, 15.4, 1.0, 22.8 and
4.6 years of service, respectively. The average annual salary for the
five-year period ended December 31, 1999 for Messrs. Feinstein, Katz, Leaman,
Lynch and Ms. Schofield was $966,360, $504,400, $316,666, $293,673 and
$433,302, respectively. These figures include the 1996, 1997 and 1998
Executive Incentive Plan Awards paid in 1997, 1998 and 1999.
Employment Agreements and Change-in-Control Arrangements
The Company has entered into employment agreements with each of Messrs.
Feinstein, Katz, Lynch and Ms. Schofield. Each of the agreements provide that
if the executive's employment is terminated following a "Change-in-Control" (as
defined in the agreement), the executive will receive a severance payment equal
to two (2) times the executive's "Cash Compensation" (as defined in the
agreement, but generally including certain base salary, bonus and profit
sharing plan allocation amounts). In addition to the Cash Compensation amount
payable, the executive is also entitled to (i) continued coverage under
applicable group welfare benefit plans of the Company (for example, the
Company's life, disability and health insurance plans), (ii) a benefit under
the Company's long-term incentive plan (determined as if the executive
terminated employment due to retirement, and as if any remaining performance
criteria had been waived) and (iii) a lump sum payment of certain enhanced
benefit amounts under the Company's pension plans (including the supplemental
pension plan). In the cases of Messrs. Feinstein and Katz, the agreements
provide for a tax gross-up payment equal to the amount of any excise tax
payable under Section 4999 of the Internal Revenue Code of 1986, as amended.
In the case of the other executives, amounts payable under the agreements will
be reduced to the extent necessary to avoid the application of such excise tax.
The payments under the agreement will be made if the executive is employed
at the time of the Change-in-Control and his or her termination is (i) by the
Company other than for "Cause" (as defined in the agreement), (ii) by the
executive for "Good Reason" (as defined in the agreement) or (iii) other than
due to the executive's death, disability or retirement.
The agreement provides for an extension of the "Initial Term" (as defined
in the agreement), in the event of a Change-in-Control. As a Change-in-Control
occurred in 1998, the agreements have been extended to October
<PAGE> 67
31, 2000. In all cases, however, the agreements will expire upon the death,
retirement or disability termination of the executive.
Compensation of Directors
Directors who are not employees of FGI or of Zurich receive an annual
retainer of $25,000, together with $1,000 plus expenses for each FGI Board of
Directors (the "Board") meeting attended in 1999. Additionally, committee
members of the Board receive $950 plus expenses for each committee meeting
attended and Committee Chairs receive $1,100 plus expenses for each committee
meeting attended. Directors who are employees of FGI or Zurich do not receive
the retainer fees, Board meeting fees or committee fees referred to above.
Total payments, excluding reimbursement of expenses, to Messrs. Heafey, Neff,
Parnell, Pings, Sauter, Yeutter and Ms. Wilson amounted to $33,100, $32,800,
$36,900, $36,900, $32,800, $33,700 and $33,100, respectively, in 1999 for
services rendered in that year.
FGI has established an Outside Directors' Retirement Benefit Program. Any
director who is not an employee of FGI or of Zurich who has attained age 70 at
the time such director retires from service as a member of the Board and has
either accrued 10 or more calendar years of service as a Board member or who
was a Board member as of August 7, 1987, the inception date of this Program, is
entitled to an annual benefit commencing in May of the calendar year following
the director's retirement from the Board. Such annual benefit is equal to 100%
of the annual retainer fee in effect during the last year the director served
on the Board. Benefit payments are made for five or more years, depending on
the director's length of service on the Board. Based on their tenure as Board
members, Mr. Heafey has accrued benefits of ten annual payments, and Messrs.
Neff, Parnell, Pings, Sauter, Yeutter and Ms. Wilson have accrued no benefits
under this Program. Benefits for this Program were funded through a grantor
trust through 1995. Effective January 1, 1996, retirement payments to
directors retiring after January 1, 1996 will be paid directly by FGI.
Payments under this Program to former Board members amounted to $66,000 in
1999.
Compensation Committee Interlocks and Insider Participation
During 1999, FGI's Compensation Committee (the "Committee") consisted of
Mr. Parnell, who is Chairman, and Messrs. Heafey, Pings, Sauter and Yeutter.
None of these individuals is now or has ever been an officer or employee of the
Company.
The Committee receives compensation recommendations from the Chief
Executive Officer and amends or revises them as appropriate. The Committee
then submits a recommendation regarding executive compensation to the Board.
Compensation levels for Mr. Feinstein and certain senior officers are approved
by the Remuneration Committee of Zurich and the Chairman of Zurich,
respectively.
The law firm of Crosby, Heafey, Roach and May received fees of $8,350,000
for legal services rendered to the Company or the P&C Group in 1999. Mr.
Heafey is a partner in such firm and has been a director of FGI since 1978.
The law firm of Kahn, Soares and Conway received $122,000 for legal services
rendered to the Company or the P&C Group in 1999. Mr. Parnell is an advisor to
such firm and has been a director of FGI since 1995. In addition, the law firm
of Hogan and Hartson, LLP, received fees of $20,000 for legal services rendered
to the Company or the P&C Group in 1999. Mr. Yeutter is Of Counsel in such
firm and has been a director of FGI since 1994.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
All of the outstanding Class A common stock, which has 90% of the voting
power of FGI, are owned beneficially and of record by Zurich, Mythenquai 2,
P.O. Box 8022, Zurich, Switzerland. All of the outstanding Class B common
stock, which has the remaining 10% of the voting power of FGI, are owned
beneficially and of
<PAGE> 68
record by Allied Zurich Holdings Limited, Mourant du Feu & Jeune, P.O. Box 87,
22 Grenville Street, St. Helier, Jersey JE4 8PX, Channel Islands.
The following table sets forth information regarding beneficial ownership
of Allied Zurich p.l.c. ADRs and ordinary shares and Zurich Allied AG ordinary
shares as of December 31, 1999 by (a) the Chief Executive Officer of FGI, (b)
each of the four most highly compensated executive officers of FGI other than
the Chief Executive Officer and (c) all directors and executive officers of
FGI, as a group.
<TABLE>
<CAPTION>
Allied Zurich p.l.c. Allied Zurich p.l.c. Zurich Allied AG
ADRs Ordinary Shares Ordinary Shares
Beneficially Owned Beneficially Owned Beneficially Owned
------------------- ---------------------- ----------------------
Name Number Percent Number Percent Number Percent
- ------ --------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Martin D. Feinstein 0 17,564 (1) 0
Jason L. Katz 0 0 0
Keitha T. Schofield 0 0 0
Stephen J. Leaman 0 0 0
John H. Lynch 98 (2) 0 0
All Directors and
Executive Officers as a
group 1,754 (2) 25,328 (1) 26,262 (3)
</TABLE>
- ------------
(1) Less than 1% of the outstanding Allied Zurich p.l.c. ordinary shares.
(2) Less than 1% of the outstanding Allied Zurich p.l.c. ADRs.
(3) Less than 1% of the outstanding Zurich Allied AG ordinary shares.
ITEM 13. Certain Relationships and Related Transactions
Certain directors of the Company are partners in legal firms that received
fees for legal services from the Company and the P&C Group. These fees totaled
$8,492,000, $6,544,000 and $5,208,000 in 1999, 1998 and 1997, respectively.
On December 15, 1999, the Company received $197,805,000 from Centre Re in
settlement of a $190,000,000 loan made on June 30, 1999 and $7,805,000 of
accrued interest. This note was a short-term note with a fixed interest rate
of 8.75% and a maturity date of December 31, 1999.
Also, on December 15, 1999, the Company, using the $190,000,000 of
proceeds from the Centre Re loan settlement, loaned $250,000,000 to OSDH. In
return, the Company received a $250,000,000 medium-term note that matures on
December 15, 2004. Interest on the note is paid semi-annually at a fixed rate
of 7.50%. Income earned on this note through December 31, 1999 was $781,000.
In addition, as of December 31, 1999, the Company held $1,057,000,000 of
notes receivable from BAFS. The Company purchased the notes from BAFS in
September 1998, using proceeds received in settlement of $407,000,000 of notes
receivable from B.A.T Capital Corporation, and proceeds received from the
redemption of $650,000,000 of certificates of contribution of the P&C Group in
July 1998. The $1,057,000,000 notes receivable are fixed rate medium-term
notes with maturity dates as follows: $200,000,000 in September 2000,
$207,000,000 in September 2001, $200,000,000 in September 2002, $200,000,000
in September 2003 and $250,000,000 in September 2004. Interest on these notes
is paid semi-annually at coupon rates of 5.44%, 5.48%, 5.67%, 5.71% and 5.78%,
respectively. Income earned on these notes for the years ended December 31,
1999 and December 31, 1998 was $59,434,000 and $19,481,000, respectively.
<PAGE> 69
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits and Financial Statement Schedules
(1) Exhibits
3.1 Restated Articles of Incorporation of FGI, as amended May 23,
1977, as further amended September 24, 1984, as further amended May
19, 1986 (i), as further amended February 3, 1989 (ii), as further
amended September 4, 1998 (vi)
3.2 Bylaws of FGI (i)
3.3 Form of Certificate of Trust of the Issuer (ii)
3.4 Trust Agreement (ii)
4.1 Form of Amended and Restated Trust Agreement (ii)
4.2 Form of Indenture among FGI and The Chase Manhattan Bank, N.A., as
Debenture Trustee (ii)
4.3 Form of Preferred Security (included in Exhibit 4.1) (ii)
4.4 Form of Junior Subordinated Debentures (included in Exhibit 4.2)
(ii)
4.5 Form of Guarantee by FGI and The Chase Manhattan Bank, N.A., as
Guarantee Trustee (ii)
10.1 Form of Subscription Agreement (Farmers Underwriters Association)
(ii)
10.2 Form of Subscription Agreement (Truck Underwriters Association) (ii)
10.3 Form of Subscription Agreement (Fire Underwriters Association) (ii)
10.4 The Farmers Group, Inc. 1993 Premier Award Unit Plan, as amended
November 4, 1993 (ii), as further amended February 14, 1996 (iii),
as further amended November 10, 1997 (v)
10.5 Farmers Group, Inc. Executive Incentive Program (ii), as amended May
7, 1997 and August 13, 1997 (v), as further amended February 10,
1999
10.6 Description of Farmers Group, Inc. Outside Directors' Retirement
Program (ii)
10.7 The Farmers Group, Inc. Discretionary Management Incentive Program
for Exceptional Performance (ii), as amended December 1996 (iv)
10.8 Farmers Group, Inc. Employee Benefits Restoration Plan (ii), as
amended May 7, 1997 (v)
10.9 The Zurich Financial Services Group Long Term Performance Share Plan
For Selected Executives
10.10 Form of Employment Agreement with certain officers (v), as amended
June 15, 1998 (vii), as further amended June 1, 1999
10.11 The Zurich Financial Services Group Share Option Plan For Selected
Executives
12 Statement of Computation of the Ratio of Earnings to Fixed Charges
21 Subsidiaries of FGI (viii)
24 Power of Attorney (ii)
99 Risk Management
- ----------------
(i) Incorporated by reference to the corresponding Exhibit to FGI's Annual
Report on Form 10-K for the year ended December 31, 1987.
(ii) Incorporated by reference to the corresponding Exhibit to FGI's
Registration Statement No. 33-94670 and No. 33-94670-01 on Form S-1.
(iii) Incorporated by reference to the corresponding Exhibit to FGI's
Annual Report on Form 10-K for the year ended December 31, 1995.
(iv) Incorporated by reference to the corresponding Exhibit to FGI's
Annual Report on Form 10-K for the year ended December 31, 1996.
(v) Incorporated by reference to the corresponding Exhibit to FGI's
Annual Report on Form 10-K for the year ended December 31, 1997.
(vi) Incorporated by reference to the corresponding Exhibit to FGI's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998.
(vii) Incorporated by reference to the corresponding Exhibit to FGI's Annual
Report on Form 10-K for the year ended December 31, 1998.
(viii) Incorporated by reference to the corresponding Exhibit to FGI's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1999.
<PAGE> 70
(2) Financial Statement Schedules
Page
------
a. Financial Statements. See Index to Financial Statements and
Supplementary Data for a list of financial statements
included in this Report. 22
b. Financial Statement Schedules
Schedule I - Marketable Securities - Other Investments, as
of December 31, 1999 S-1
Schedule III - Supplementary Insurance Information, for the
years ended December 31, 1999, 1998 and 1997 S-2
Schedule IV - Reinsurance, for the years ended
December 31, 1999, 1998 and 1997 S-3
Schedule V - Valuation and Qualifying Accounts, for the
years ended December 31, 1999, 1998 and 1997 S-4
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the year ended
December 31, 1999.
<PAGE> 71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Los Angeles, State of California on
FARMERS GROUP, INC.
---------------------------------------------
(Registrant)
Date: March 27, 2000 By: /s/ Martin D. Feinstein
---------------------------------------------
Martin D. Feinstein, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Principal Executive Officer
/s/ Martin D. Feinstein Chairman of the Board, March 27, 2000
- ------------------------------- President and Chief
(Martin D. Feinstein) Executive Officer
Principal Financial and
Accounting Officer
/s/ Gerald E. Faulwell Senior Vice President and March 27, 2000
- ------------------------------- Chief Financial Officer
(Gerald E. Faulwell)
Directors
/s/ Jason L. Katz Executive Vice President, March 27, 2000
- ------------------------------- General Counsel and Director
(Jason L. Katz)
/s/ John H. Lynch Executive Vice President March 27, 2000
- ------------------------------- and Director
(John H. Lynch)
/s/ Keitha T. Schofield Executive Vice President March 27, 2000
- ------------------------------- and Director
(Keitha T. Schofield)
/s/ Edwin A. Heafey, Jr. Director March 27, 2000
- -------------------------------
(Edwin A. Heafey, Jr.)
/s/ Rolf Huppi Director March 27, 2000
- -------------------------------
(Rolf Huppi)
/s/ Benjamin C. Neff Director March 27, 2000
- -------------------------------
(Benjamin C. Neff)
/s/ Jack C. Parnell Director March 27, 2000
- -------------------------------
(Jack C. Parnell)
/s/ Cornelius J. Pings Director March 27, 2000
- -------------------------------
(Cornelius J. Pings)
/s/ Van Gordon Sauter Director March 27, 2000
- -------------------------------
(Van Gordon Sauter)
/s/ M. Faye Wilson Director March 27, 2000
- -------------------------------
(M. Faye Wilson)
/s/ Clayton Yeutter Director March 27, 2000
- -------------------------------
(Clayton Yeutter)
<PAGE> S-1
FARMERS GROUP, INC.
AND SUBSIDIARIES
SCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS
December 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Market value Amount at which
at balance shown in the
Type of Investment Cost sheet date balance sheet
- -------------------- ------------ ------------- ---------------
<S> <C> <C> <C>
Insurance Subsidiaries:
Marketable securities - available-for-sale:
United States government and its agencies $ 1,693,428 $ 1,636,513 $ 1,636,513
States and municipalities 496,368 485,340 485,340
Public utilities 78,107 76,112 76,112
Foreign government 71,946 76,699 76,699
All other corporate 2,110,079 2,036,802 2,036,802
Preferred stocks (redeemable) 64,176 64,854 64,854
------------ ------------- ---------------
4,514,104 4,376,320 4,376,320
------------ ------------- ---------------
Preferred stocks (non-redeemable) 1,153 1,158 1,158
------------ ------------- ---------------
Common stocks:
Public utilities 6,744 5,925 5,925
Banks, trusts and insurance companies 30,053 28,522 28,522
Industrial, miscellaneous and all other 152,054 177,827 177,827
------------ ------------- ---------------
188,851 212,274 212,274
------------ ------------- ---------------
Mortgage loans on real estate 35,834 xxxxx 35,834
------------ ------------- ---------------
Policy loans 201,687 xxxxx 201,687
------------ ------------- ---------------
Real estate (1) 66,672 (1) xxxxx 66,672
------------ ------------- ---------------
Joint ventures 6,662 xxxxx 6,662
------------ ------------- ---------------
Surplus note of the P&C Group 119,000 xxxxx 119,000
------------ ------------- ---------------
S&P 500 call options 19,521 32,718 32,718
------------ ------------- ---------------
Total investments $ 5,153,484 $ 4,622,470 $ 5,052,325
============ ============= ===============
(1) Net of accumulated depreciation of $27,292.
</TABLE>
<PAGE> S-2
FARMERS GROUP, INC.
AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 1999, 1998 and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G
- -------- -------- -------- -------- -------- -------- --------
Future policy
Deferred benefits, Other policy Premium
policy losses, claims claims and and policy Net
Insurance acquisition and loss Unearned benefits charge investment
Subsidiaries costs (1) expenses premiums payable revenues income
- -------------- ----------- -------------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 $ 879,625 $ 3,547,292 $ 1,686 $ 81,792 $1,420,358 $ 335,565
=========== ============= ======== ========== ========== ==========
December 31, 1998 801,690 3,316,369 1,696 55,661 1,380,433 307,391
=========== ============= ======== ========== ========== ==========
December 31, 1997 377,667 293,190
========== ==========
Column A Column H Column I Column J
- ---------- -------- -------- --------
Benefits, Amortization
claims, of deferred
losses and policy Other
Insurance settlement acquisition operating
Subsidiaries expenses costs (1) expenses
- -------------- ---------- -------------- ------------
<S> <C> <C> <C>
December 31, 1999 $ 851,258 $ 102,581 $ 371,549
========== ============= ============
December 31, 1998 812,820 90,082 380,530
========== ============= ============
December 31, 1997 139,124 103,975 65,974
========== ============= ============
- -------------------
(1) Includes value of life business acquired
</TABLE>
<PAGE> S-3
FARMERS GROUP, INC.
AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
For the years ended December 31, 1999, 1998 and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------- ------------ ------------ ------------ ------------- ------------
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
1999
- ----------
Life insurance in-force $102,137,710 $ 12,179,486 $ 9,724,860 $ 99,683,084 9.8%
------------ ------------ ------------ ------------- ------------
Life premium & policy charges 425,232 13,939 9,065 420,358 2.2
------------ ------------ ------------ ------------- ------------
Non-life premiums 0 0 1,000,000 1,000,000 100.0
------------ ------------ ------------ ------------- ------------
1998
- ----------
Life insurance in-force $ 96,883,459 $ 968,606 $ 8,893,263 $104,808,116 8.5%
------------ ------------ ------------ ------------- ------------
Life premiums & policy charges 375,259 3,728 8,798 380,329 2.3
------------ ------------ ------------ ------------- ------------
Non-life premiums 104 0 1,000,000 1,000,104 100.0
------------ ------------ ------------ ------------- ------------
1997
- ----------
Life insurance in-force $ 89,613,224 $ 1,209,978 $ 8,428,465 $ 96,831,711 8.7%
------------ ------------ ------------ ------------- ------------
Life premiums & policy charges 371,606 4,236 10,297 377,667 2.7
------------ ------------ ------------ ------------- ------------
</TABLE>
<PAGE> S-4
FARMERS GROUP, INC.
AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
beginning end of
of year year
------------ ------------
<S> <C> <C>
YEAR
- ----------
1999 $ 14,206 $ 11,817
1998 15,118 14,206
1997 18,960 15,118
</TABLE>
Exhibit 10.5
FARMERS GROUP, INC.
EXECUTIVE INCENTIVE PROGRAM
December 1999
<PAGE>
TABLE OF CONTENTS
Purpose................................................................... 1
Administration............................................................ 1
Eligibility and Participation............................................. 1
Determination and Allocation of Awards.................................... 1
Rights of Participants and Beneficiaries.................................. 3
Termination of Employment................................................. 4
Effective Date, Amendment and Termination of Program...................... 5
Special Rule.............................................................. 5
Governing Law............................................................. 5
<PAGE> 1
Purpose
The Farmers Group, Inc. Executive Incentive Program (the "Program") is
designed to award and compensate key executives who contribute substantially
to the financial success of Farmers Group, Inc., its subsidiaries and its
affiliates (the "Corporation"), and to focus the efforts of such key executives
on the continued success of the Corporation.
Administration
(a) The Program shall be administered by the Board of Directors of the
Corporation (the "Board") and by the Compensation Committee of the Board (the
"Compensation Committee"), as hereinbelow described. The Board shall have
discretion to select key executives who are to be eligible to receive awards
under the Program with respect to each fiscal year, and to determine the amount
of such awards, subject to the terms and conditions set forth in the Program
and such other terms and conditions as are not inconsistent with the purposes
and provisions of the Program.
(b) The Board may establish such rules and regulations as deemed
appropriate for proper administration of the Program and may modify or revoke
such rules and regulations from time to time. In addition, the Board may
make such determinations and take such action in connection with the Program
as are necessary.
(c) All determinations and interpretations of the Board shall be final
and binding, except that all awards are subject to final approval by the Zurich
Financial Services Chairman.
Eligibility and Participation
Eligibility and participation in the Program are restricted to the Chief
Executive Officer of the Corporation and such Home Office Officers and Field
Executives of the Corporation whom the Board, in its discretion, selects to
receive awards under the Program.
Determination and Allocation of Awards
(a) Awards under the Program shall be made from a pool (the "Pool"), which
Pool for a given year shall consist of twenty percent (20%) of Growth in
Earnings (as hereinbelow defined) for that year, less a factor for a decrease
in Exchange Surplus as also defined below.
(b) Growth in Earnings for a particular year shall mean the increase in
the U.S. PGAAP net income of the Corporation over the U.S. PGAAP net income
of the Corporation for the immediately preceding year. For purposes of
determining the amount of the Pool, U.S. PGAAP net income shall be adjusted
as follows:
(1) Awards paid or accrued under this Program shall be excluded;
(2) Capital gains or losses attributable to sales of real estate or
equipment used solely in the Corporation's insurance business
shall be excluded to the extent that they individually or
collectively exceed two percent (2%) of U.S. PGAAP net income
in any one calendar quarter;
(3) In the event that the statutory rates used in determining Federal
Income Tax and/or California Franchise Tax are increased or
decreased in a particular year from the rates applicable during
the immediately preceding year, or if the method of determining
and reporting said taxes changes due to a change in accounting
method required by a recognized rule-making body, said taxes
applicable to the preceding year shall be recalculated on an
equivalent basis in determining U.S. PGAAP net income for such
preceding year;
<PAGE> 2
(4) Capital gains or losses arising from the sale or other
disposition of any joint venture investment of FIG Holding
Company entered into before January 1, 1974 shall be excluded;
(5) Any expense or income attributable to merger or acquisition
activities shall be excluded; and
(6) Other extraordinary items as approved by the Compensation
Committee.
(c) Growth in Earnings for each year shall be determined by the Chief
Financial Officer for the Corporation and verified by the independent certified
public accountants of the Corporation. The Pool shall be an accrued liability
in the consolidated financial statements of the Corporation and the amount
accrued in the Pool shall not be placed in a separate account or in trust or
otherwise be segregated from the general funds of the Corporation.
(d) A three-year weighted average Surplus Ratio shall be calculated and
compared to the Target Surplus Ratio of 33 1/3% (premium written to surplus of
3 to 1). If the three-year weighted average Surplus Ratio is at or greater
than 33 1/3%, no reduction in the Bonus Pool will be made. If the three-year
weighted average Surplus Ratio is less than 33 1/3%, the Bonus Pool will be
reduced in the following manner. A Maximum Reduction of 20% of the Bonus Pool
will be made when the Exchange Surplus Ratio is 28.57% (premium written to
surplus of 3.5 to 1) or lower. The Maximum Reduction will be reduced
proportionately based on where the three-year weighted average Surplus Ratio
falls between 33 1/3% and 28.57%.
(e) The Award to the Chief Executive Officer of the Corporation under the
Program for each year shall not exceed seventy-five percent (75%) of the base
salary paid to the Chief Executive Officer during the year to which the award
relates, except as outlined in section 4(h) below. The Award amount for the
Chief Executive Officer shall be determined by the Zurich Financial Services
Chairman.
(f) The Chief Executive Officer shall evaluate the performance and
contribution to the successful operation of the Corporation of each Officer
and Field Executive of the Corporation and shall recommend to the Compensation
Committee each year, prior to the February meeting of the Board, the percentage
of the Pool for the preceding year which he believes should be awarded to each
such individual. Such recommendations shall be in an amount not to exceed one
hundred percent (100%) of the Pool, except as outlined in section 4(h) below,
less the percentage of the Pool awarded to the Chief Executive Officer. Awards
for Level I executives shall not exceed 75% of salary, awards to Level II
executives shall not exceed 60% of salary, awards for Level III executives
shall not exceed 40% of salary, except as outlined in section 4(h) below.
Membership in each level shall be determined by the Chief Executive Officer at
the outset of the performance year. Generally, Level I executives are direct
reports to the CEO, Level II executives are Home Office Officers and Level III
executives are Field Executives, or more junior executives.
(g) Each year, prior to the February meeting of the Board, the
Compensation Committee shall receive the recommendations of the Chief
Executive Officer and shall confer with him concerning such recommendations.
Such recommendations will be based on estimated prior year end and financial
results. The Compensation Committee shall then recommend to the Board at the
February meeting of the Board the individuals to receive awards under the
Program and the percentage of the Pool which should be awarded to each such
individual. The Board shall, in its absolute discretion, select the
individuals to whom awards shall be made under the Program and determine the
percentage of the Pool which shall be awarded to such individuals. No award
made under the Program shall exceed the maximum award applicable to the level
of the incumbent either 75%, 60% or 40% of the base salary paid to an
individual during the year to which the award relates, except as outlined in
section 4(h) below. Final confirmation by the Board based on actual prior
year end results will occur at the May meeting of the Board.
(h) Payment of EIP awards is contingent upon performance of the
Corporation as it relates to the performance of a peer group of companies.
Depending upon which quartile performance falls, individual awards may be
increased/decreased based on individual performance as shown below:
<PAGE> 3
<TABLE>
<CAPTION>
Peer Group Standing Award Adjustment
------------------- ----------------
<S> <C>
4th Quartile +33 1/3%
3rd Quartile No Adjustment
2nd Quartile -33 1/3%
1st Quartile -66 2/3%
</TABLE>
Should the results in the Peer Group Comparison differ between the
Property & Casualty operations and the Life Company, the proportion of
each business' net income to total net income will be used to modify the above
award adjustments.
Should the Award Pool be insufficient to fund the approved awards in the
4th quartile, additional funds will be added and expensed. In no event will
the amount of the additional funds be greater than one-third of the original
Pool for the year. A comparative analysis is to be provided to the
Compensation Committee each year to substantiate the current year's awards.
(i) Payments of awards under the Program shall be within the absolute
discretion of the Board subject to the final approval of the Zurich Financial
Services Chairman. The Board shall be under no obligation to award all of the
Pool or any portion thereof.
(j) The Pool shall not accumulate from year to year, and any amount in
the Pool not distributed pursuant to the Program shall revert to net income
of this Corporation.
(k) Payment of awards under the Program shall be made no later than
April 15 after the close of the calendar year to which the award relates.
(l) The Corporation shall have the right to deduct any sums required to
be withheld by federal, state or other applicable laws from payments of awards
under the Program.
Rights of Participants and Beneficiaries
(a) No individual shall have any vested or protectable interest in, legal
right to, or shall otherwise be entitled to, any amount under the Program until
such time as the Board by resolution approves an award to such individual.
Nothing in the Program shall be deemed to give any individual, or his or
her legal representative or assigns, or any other person or entity claiming
under or through him, any contract or right to participate in the benefits of
the Program.
(b) The Corporation shall pay all amounts payable hereunder only to the
individual or beneficiaries entitled thereto pursuant to this Program. The
Corporation shall not be liable for the debts, contracts, or engagements of
any individual or his or her beneficiaries, and rights to payments under this
Program may not be taken in execution by attachment or garnishment, or by any
other legal or equitable proceeding while in the hands of the Corporation; nor
shall any individual or his or her beneficiaries have any right to assign,
pledge, or hypothecate any benefits or payments hereunder.
(c) Participation in the Program shall not be construed as constituting a
commitment, guarantee, agreement or understanding of any kind that the
Corporation shall continue to employ any individual.
<PAGE> 4
(d) Any individual eligible to participate in the Program may designate a
beneficiary to receive payments of awards under the Program in the case of
such individual's death.
(e) Commencing with awards to be made for services rendered, on or after
January 1, 1984 and for which awards are to be paid after January 1, 1985, any
individual eligible to participate in the Program may request that payment of
all or a portion of any award be deferred until the occurrence of retirement,
death or permanent disability. Such request must be made to the Compensation
Committee in writing on or before December 31 of the performance year which is
the year prior to the date the awards are determined and paid (i.e., a request
must be made on or before December 31, 1988, relating to any award under the
Program which might be determined and paid in 1989). Such request shall
specify that either 25%, 50%, 75% or 100% of awards which might be made are to
be deferred and shall specify whether such request relates only to awards
relating to services to be performed during the next calendar year or to all
awards which might be made under the Program in the second succeeding and all
future years. Once such a request for deferral is made, it may not be
withdrawn by the participant except with respect to any awards for service to
be performed in calendar years following the year in which the date such
request for withdrawal is made. Any such request for withdrawal must be made
in writing to the Compensation Committee. If the Board selects the individual
for an award and in its sole discretion consents to the request for deferred
payment, to any amount so deferred there will be interest added to the deferred
amount for each year or partial year the payment of the award is deferred.
The participant in this Deferred Payment Plan may elect at the time of
initially requesting deferral to commence payment of benefits within thirty
(30) days of retirement, death or the date it is established to the
satisfaction of the Compensation Committee that the participant has a permanent
disability, either in a single payment or in five (5) or ten (10) equal annual
payments to which will be added an interest equivalent from the first payment
date computed as provided above.
On single payments made within 30 days of retirement, death or disability,
the interest rate earned between the date of retirement, death or disability
until the date of disbursement will be based on the average yield of the
institutional money market fund in which the Corporation invests.
In the event of extreme hardship, any participant may make a written
request to the Compensation Committee for immediate payment. For this purpose,
an extreme hardship is an unanticipated emergency caused by an event beyond
the control of the participant that would result in severe financial hardship
if early withdrawal were not permitted. The amount to be withdrawn must be
limited to the amount necessary to meet the emergency. Amounts deferred under
this Section 5 (e) will be held as part of the general assets of the
Corporation and shall not be set aside or funded in any manner; provided that
deferred amounts and any earnings thereon may be set aside in one or more
non-qualified grantor trusts so long as such arrangements do not result in
benefits hereunder being considered funded for federal tax purposes.
Notwithstanding any other provision hereof, to the extent deferred amounts
are funded through one or more grantor trusts, then earnings or appreciation
thereon shall be determined solely by reference to the experience of assets in
such trust or trusts. This Corporation shall direct the trustee or trustees of
such trust or trusts, as the case may be, as to the investment of assets in
such trust or trusts and the Corporation may, in advising the trustee, offer,
in any manner and to any extent it deems appropriate, Participants the
opportunity to advise the Corporation as to how assets allocated to their
respective accounts are to be invested. In no event may Participants
communicate directly with any trustee in regard to asset investment.
Participants shall in no event have rights greater than those of general
creditors of the Corporation with respect to any amounts held in trust. Any
amounts deferred hereunder as well as any earnings are not subject to
anticipation, alienation or hypothecation by any Participant.
Termination of Employment
(a) In the event of death, disability or retirement during the year to
which the award relates, a pro rata award shall be paid to any individual who
would have otherwise received an award under the Program. In the event of
disability or retirement, such award shall be paid to the individual. In the
event of death, such award shall be paid to the individual's estate or legal
representative, as determined by the Compensation Committee or, in the event
the individual has designated a beneficiary to receive payments of awards
under the Program in the case of such individual's death, to such beneficiary.
<PAGE> 5
(b) In the event of termination of employment for any other reason during
the year to which the award relates, such individual's eligibility to receive
any award for such year shall be terminated, although the Chief Executive
Officer may, at his discretion, recommend to the Compensation Committee that
a pro rata award be made.
(c) In the event of termination of a participant's employment in the
Deferred Payment Plan for any reason other than retirement, permanent
disability or death, payment of all deferred amounts in the Deferred Payment
Plan together with the appropriate interest equivalent will be made in a single
payment within 30 days after the employment termination date. From the date of
termination until distribution, Deferred amounts will earn an interest rate
based on the average yield of the institutional money market fund in which the
Corporation invests.
Effective Date, Amendment and Termination of Program
The amendments to the Program adopted by the Board of Directors on August
5, 1983 shall be effective for the year ending December 31, 1983. The
amendments to the Program adopted by the Board of Directors in November 1987
and in February 1988 shall be effective for the year ending December 31, 1987
and subsequent years. The amendments to the Program adopted in November 1988
shall be effective for the year ending in December 1988 and subsequent years.
The amendments to the Program adopted in February 1990 shall be effective for
the year ending in December 1990 and subsequent years. The amendments to the
Program adopted in May and November 1993 shall be effective for the year ending
in December 1993 and subsequent years. The amendments to the Program adopted
in May and August 1997 shall be effective for the year ending in December 1997
and subsequent years. The amendments to the Program adopted in February 1999
shall be effective for the year ending December 31, 1998 and subsequent years.
The Program may be amended or terminated at any time by the Board. Such
amendment or termination shall not adversely affect or alter any right or
obligation with respect to any award previously made hereunder.
Special Rule
Benefits under the Program, whether paid currently or deferred under
Section 5, constitute no more than an unsecured promise by the Corporation to
provide said benefits and no participant or beneficiary shall have rights
greater than those of a general creditor of the Corporation in either the
general assets of the Corporation or the assets of any trust established under
Section 7 hereof in connection with such benefits.
Governing Law
This Program shall be governed by the laws of the State of California.
Exhibit 10.9
THE ZURICH FINANCIAL SERVICES GROUP
LONG TERM PERFORMANCE SHARE PLAN
FOR SELECTED EXECUTIVES
As adopted by resolution of the Board of Directors of Zurich Financial
Services on September 2, 1998.
<PAGE>
CONTENTS
Clause Page
1. PURPOSE............................................................... 1
2. ESTABLISHMENT OF SUB-PLANS............................................ 1
3. ELIGIBILITY........................................................... 1
4. PERFORMANCE TERMS..................................................... 1
5. TERMINATION OF EMPLOYMENT............................................. 2
6. TRANSFERS AND PROMOTIONS.............................................. 3
7. GRANT OF AWARDS....................................................... 3
8. CHANGE OF CONTROL AND LIQUIDATION..................................... 4
9. ADJUSTMENT OF AWARD................................................... 4
10. OVERALL LIMITS........................................................ 4
11. ADMINISTRATION........................................................ 4
12. AMENDMENT............................................................. 4
13. GENERAL............................................................... 5
APPENDIX 1................................................................ 6
APPENDIX 2................................................................ 8
APPENDIX 3................................................................ 9
DEFINITIONS............................................................... 11
<PAGE> 1
RULES OF THE ZURICH FINANCIAL SERVICES GROUP
LONG TERM PERFORMANCE SHARE PLAN
FOR SELECTED EXECUTIVES
PURPOSE
1. The Zurich Financial Services ("Zurich") Group Long Term Performance
Share Plan for Selected Executives is a plan for encouraging organizational
performance with the purpose of:
(a) strengthening the focus of key executives of Zurich Group on
planning, developing, leading and controlling the Group's
long-term business strategies;
(b) focusing management's attention on shareholders, analysts and
potential investor's interests;
(c) sharing entrepreneurial reward and risk;
(d) strengthening the alignment between executive rewards and the
creation of shareholder value; and
(e) attracting, motivating and retaining world-class executive talent.
The overall objective of the plan is intended to focus the attention of
the key executive group on the main financial issues essential to
achieving long-term business success and the creation of shareholder
value.
The Plan is the framework for long term performance awards at the Group
and Business Unit levels and focuses on the underlying drivers of long
term shareholder value.
The Shares over which Awards are granted under the Plan and any Sub-Plans
will be provided through the Central Share Vehicle which may subscribe
Shares from Allied Zurich and Zurich Allied or purchase such Shares on
any relevant stock exchange where the Shares are traded.
ESTABLISHMENT OF SUB-PLANS
2. The Committee of a Business Unit may establish with the prior approval of
the Group Chief Executive Officer a Sub-Plan to the Plan for selected
executives of that Business Unit provided that:
(a) the terms of any such Sub-Plan are substantially based on the basic
principles of the Plan modified as appropriate to take account of
tax, securities and trust laws and exchange control requirements and
local practices in the countries in which Executives are resident;
and
(b) the number of new Shares that may be issued (including to the
Central Share Vehicle) pursuant to the Sub-Plan shall count against
the limits in Appendix 1.
ELIGIBILITY
3. Positions eligible for participation in the Plan will be agreed annually
by the Committee. Participants for each Performance Period will be newly
defined each year and accordingly an individual has no contractual
entitlement to ongoing participation in the Plan or to be granted an
Award.
PERFORMANCE TERMS
4.1 The Committee will determine for each Performance Period, and a
Participant shall be notified of, the terms and conditions on which an
Award will be made. The setting of appropriate performance
<PAGE> 2
objectives is critical to the success of the Plan. The Group Chief
Executive Officer will therefore establish guidelines to assure
consistency in the application of performance criteria and goals in the
Group.
4.2 The Committee will also set for each Participant a target number of
Shares to be awarded if target performance is achieved. In setting the
target number, consideration shall be given to the Participant's position
and level of responsibility, to local market conditions and the extent
of the Participant's participation in other long term incentive programs
of the Group.
4.3 The actual number of Shares over which Awards are granted to the
Participants after the completion of the Performance Period will depend
on the extent to which the performance conditions are met over the
Performance Period. At the end of a performance period, the Committee
will assess the performance achieved during that period and will
calculate the number of Shares which are awarded. No Award shall be made
unless the minimum performance level is satisfied.
4.4 The maximum number of Shares over which an Award may be granted is 200%
of the target Shares.
4.5 The Award may be increased or reduced by 25% if the Committee considers
that special or unusual circumstances have occurred which have affected
the performance achievement. If the Award is in respect of Share Baskets
the number of Allied Zurich Shares and Zurich Allied Shares shall be
adjusted proportionately.
4.6 Unless the Committee decides otherwise, the average of the Market Values
over the first month of the Performance Period of the maximum number of
Shares over which a Participant may be granted an Award shall not exceed
an amount equal to 100% of his annual salary at the start of the
Performance Period.
4.7 Until the Award Date, the Participant shall have no dividend, voting or
other rights commonly enjoyed by a beneficial owner of shares.
TERMINATION OF EMPLOYMENT
5.1 If the Participant ceases to be an employee of a member of the Group at
any time before the end of the Performance Period for any reason other
than one stated in 5.2 and 5.3 below, his participation in the Plan shall
cease and he shall not receive an Award for that Performance Period.
5.2 In the event that the Participant ceases to be an employee of the Group
before the end of the Performance Period by reason of:
(a) retirement at or after his normal retirement age;
(b) injury, disability or ill-health (as agreed by the Committee);
(c) early retirement (as agreed by the Committee); or
(d) any other reason than one stated in this rule 5.2 and rule 5.3,
which the Committee so decides in its absolute discretion,
the Participant shall be granted an Award for that Performance Period
after the end of the Performance Period subject to rule 7 and the number
of Shares in the Award shall be calculated according to the performance
achieved up to the end of the Performance Period but pro rated
according to the length of the Participant's service during the relevant
Performance Period.
5.3 In the event that the Participant ceases to be an employee of the Group
before the end of the Performance Period by reason of death he shall be
granted an Award and the Shares in the Award shall be based on an
assessment by the Committee of the performance achieved up to the date of
death and
<PAGE> 3
the Shares shall be transferred to his personal representatives
or designated beneficiary or any other person who has power over his
estate within the period of six months from such date.
TRANSFERS AND PROMOTIONS
6.1 If the Participant is transferred to a position in the Group which is
ineligible for participation in the Plan or Sub-Plan at a time when he
has more than 24 months of participation in any long term incentive
arrangement in the Group, he shall be granted an Award for each
Performance Period in which he was participating at the time of the
transfer. The Award will be pro rated.
6.2 If a Participant is promoted and/or transferred during the Performance
Period from a position in a Business Unit which is eligible for
participation in the Plan or Sub-Plan to another position which is also
eligible to participate in the Plan or Sub-Plan, he may at the discretion
of the Committees of the relevant Business Units participate in both
plans and be granted Awards under the plans for numbers of Shares which
are pro rated according to that proportion of the relevant Performance
Periods during which he was employed in the eligible positions.
6.3 If an employee is hired, promoted or transferred into a position in which
he becomes eligible to participate in the Plan or Sub-Plan and this
occurs during the first seven months of a Performance Period he may
participate in the plan and be eligible for an Award of Shares which is
pro rated according to the length of his anticipated service during the
Performance Period and if this occurs during the last five months of a
Performance Period he may participate and be granted an Award on a like
basis but only if the Committee so decides.
GRANT OF AWARDS
7.1 Save as otherwise permitted in these rules an Award shall be made to a
Participant who has remained an employee of the Group throughout the
relevant Performance Period within the period of:
(a) six weeks commencing on the day immediately following the day on
which the Company or, in the case of a Sub-Plan, the Business Unit
announces its results for the last preceding financial year, half
year or other period immediately following the Performance Period
for which an Award is due to the Participant; or,
(b) any day on which the Committee resolves that exceptional
circumstances exist which justify the grant of Awards,
provided that the granting of Awards shall comply with the London Stock
Exchange's Model Code for Securities Transactions by Directors of Listed
Companies, any equivalent regulations or rules imposed under Swiss law or
by the Swiss Exchange, which are applicable to the Company and which
govern dealings in Shares.
7.2 On the grant of an Award the Participant shall as soon as reasonably
practicable be transferred such proportion of Restricted Shares and
Unrestricted Shares as shall have been determined by the Committee at the
beginning of the Performance Period.
7.3 The Committee shall have the discretion to determine that Awards may be
deferred and or satisfied in the form of a cash payment or a pension
contribution or in some other manner as is considered appropriate to take
account of local tax, legal, exchange control or other regulatory
matters.
7.4 The Committee shall make such arrangements, as it considers necessary to
ensure that the Restricted Shares remain restricted from dealings for
the period ending on the third anniversary of the Award Date.
7.5 Any liability of a Participant to taxation and/or social security
contributions in respect of an Award shall be for the account of the
relevant Participant. In a case where any member of the Group is
<PAGE> 4
required to withhold or account for any tax and/or social security
contributions for which the Participant is liable by virtue of the
receipt of Shares under an Award, any transfer of Shares to the
Participant shall be conditional on the Participant entering into
arrangements acceptable to the Committee to secure that such payment
is made (whether by authorizing the sale of some of the Unrestricted
Shares or the payment to the relevant Group member) of an amount
required to discharge the tax or social security liability.
CHANGE OF CONTROL AND LIQUIDATION
8. Appendix 1 shall apply in the event of a change of control and
liquidation or other similar event affecting Allied Zurich or
Zurich Allied.
ADJUSTMENT OF AWARD
9. Appendix 2 shall apply in the event of any variation of the share capital
of Zurich Allied or Allied Zurich.
OVERALL LIMITS
10. Appendix 3 shall apply to limit the number of new Shares that may be
issued for the purposes of the Plan
ADMINISTRATION
11.1 The decision of the Committee shall be final and binding in all matters
relating to the Plan and it may at any time discontinue participation in
the Plan and the grant of further Awards.
11.2 Benefits under the Plan shall not be considered pensionable income nor be
taken into account in determining any benefits.
The rights and obligations of any individual under the terms of his
office or employment shall not be affected by his participation in the
Plan, and each Participant shall by his participation waive all and any
rights to compensation or damages in consequence of the termination of
his office or employment for any reason whatsoever insofar as those
rights arise or may arise from his ceasing to have rights under the Plan
as a result of such termination or from the loss or diminution in value
of such rights or entitlements. Participation in this Plan shall not
impose or be deemed to impose any obligations on the Company or any
member of the Group to continue to employ him.
11.3 All Share certificates and other documents of title relating to the
Shares including communications relating to the Plan shall be sent at
the Participant's risk.
11.4 Any member of the Group or relevant Business Unit which employs
Participants who participate in the Plan shall provide such monies as
the Central Share Vehicle determines to provide Shares to satisfy all
Awards granted to such Executives.
AMENDMENT
12. The Board may amend any of the provisions of the Plan in any way it
thinks fit PROVIDED THAT:
(a) no amendment to the advantage of Executives or Participants may be
made without the prior approval of an ordinary resolution of Allied
Zurich in general meeting except in the case of minor amendments to
benefit the administration of the Plan, to take account of a change
in legislation or developments in the law affecting the Plan or to
obtain or maintain favorable tax, exchange control or regulatory
treatment for Executives or Participants or any member of the Group;
and
<PAGE> 5
(b) no amendment shall have effect until any approvals which are
necessary in accordance with clause 10 of the Governing Agreement
have been obtained.
AND FURTHER PROVIDED THAT the Board shall be entitled to alter the
performance targets applying to Awards from one Performance Period to
another.
GENERAL
13.1 The Board reserves the right to terminate this Plan at any time.
13.2 No Performance Period may commence after August 31, 2008.
13.4 These rules shall be governed by and construed in accordance with the
laws of Switzerland.
<PAGE> 6
APPENDIX 1
(Rule 8)
CHANGE OF CONTROL AND LIQUIDATION
Award
Awards granted following any of the events mentioned in this Appendix 1 shall
be determined for each Performance Period where the Awards have not been
awarded to the Participants at such a date on the following basis:
(a) using actual performance for completed Financial Years, assuming
the performance is known at the date the Award is made and
(b) using target performance for those Financial Years where the
performance is not known at the date the Award is made.
The Awards will be pro rated according to the time completed during the
performance period and delivered in the form of Unrestricted Shares.
For each Performance Period where the Shares are already awarded, the sales
restriction shall be removed (subject to such removal being permissible under
any applicable law).
Offers for Allied Zurich and Zurich Allied
1. If during a Performance Period, or before an Award is made, any person
(either alone or together with any person acting in concert with him)
obtains Control of a Qualifying Company as a result of making;
(a) Joint Offers; or
(b) a general offer to acquire the whole of the issued share capital of
one of the Qualifying Companies (other than those shares which are
already owned by him and/or any person acting in concert with him)
Awards shall be granted in respect of Shares in the relevant Qualifying
Company (subject to such grant being permissible under any applicable
law) as soon as reasonably practicable thereafter and in any event not
later than 3 months from the date such Control is obtained.
Compulsory Acquisition
2. If during a Performance Period, or before an Award is made, whether in
connection with Joint Offers or a general offer within paragraph 1 any
person becomes bound or entitled to acquire Allied Zurich Shares under
sections 428 to 430F of the Companies Act 1985, (or there occurs in
relation to Zurich Allied an event entitling an offer or to acquire
compulsorily Zurich Allied Shares held by minority shareholders pursuant
to Art. 33 of the Swiss Stock Exchange Act). Awards in respect of Shares
in the relevant Qualifying Company to which such acquisition provisions
relate shall be granted (subject to such grant being permissible under
any applicable law) as soon as reasonably practicable after, and not
later than the period of 30 days from, the date on which such person
becomes so bound or entitled.
Scheme of Arrangement
3. If during a Performance Period, or before an Award is made, a court
shall direct that a meeting of the holders of Allied Zurich Shares be
convened pursuant to section 425 of the Companies Act 1985 for the
purposes of considering a scheme of arrangement involving the
reconstruction of Allied Zurich or its amalgamation with any other
company or companies Awards in respect of Allied Zurich Shares shall
<PAGE> 7
be granted (subject to such grant being permissible under any applicable
law), conditionally on the scheme of arrangement being approved or
sanctioned by the court (the relevant condition), between the date of
the court's direction and twelve noon on the day immediately preceding
the date for which the shareholders' meeting is convened. If the
relevant condition is not satisfied, the Award shall not be granted and
participation in the relevant Performance Period shall continue.
PROVIDED THAT Awards shall not unless the Committee (in the meaning of
the definition (a)) so decides be granted under this rule if the purpose
and effect of the scheme of arrangement is to create a new holding
company for Allied Zurich, such company having substantially the same
shareholders and proportionate shareholdings as those of Allied Zurich
immediately prior to the scheme of arrangement.
Winding up
4. If during a Performance Period, or before an Award is made, notice is
duly given of a resolution for the voluntary winding up of a Qualifying
Company, Awards may be granted in respect of Shares in the relevant
Qualifying Company (subject to such grant being permissible under any
applicable law) within the period of two months from the date of the
resolution.
<PAGE> 8
APPENDIX 2
(Rule 9)
ADJUSTMENT OF AWARD
In the event of any of the following:
(a) the issue of any shares of whatever class or any other securities
of Allied Zurich or Zurich Allied (as the case may be) to the
Central Share Vehicle by way of capitalization of reserves or
profits (but not by way of rights);
(b) the sub-division or consolidation of the ordinary share capital of
Allied Zurich or Zurich Allied (as the case may be); or
(c) a demerger, dividend in specie, super dividend or other transaction
affecting the Group which in the Committee's (in the meaning of
definition (a)) opinion may affect the current or future value of
Awards,
the number of Shares over which an Award may be granted to a Participant
shall be adjusted to such extent and in such manner as the Committee (in
the meaning of definition (a)) thinks fit.
2. Any adjustments to the number of Shares made pursuant to this Appendix 2
shall be notified to the relevant Participants.
<PAGE> 9
APPENDIX 3
(Rule 10)
OVERALL LIMITS
1. To the extent that Awards shall or may be satisfied out of a new issue
of Shares subscribed by the Central Share Vehicle for the purpose of
satisfying Awards under the Plan, no such Shares shall be so issued and
no Award shall be granted if the result of that issue would be that:
(a) the aggregate number of Shares that could be issued in relation to
that Award and any other Awards granted at the same time, when
added to the number of Shares that:
(i) have been, or could be, issued to the Central Share Vehicle
for the purpose of satisfying subsisting Awards granted during
the preceding ten years under the Plan;
(ii) have been, or could be, issued to the Central Share Vehicle
for the purpose of the exercise of any share option granted
during the preceding ten years under any employee share option
scheme adopted by the Company; and
(iii) have been issued during the preceding ten years under any
profit sharing or other employee share incentive scheme (not
being a share option scheme) adopted by the Company,
would exceed 10 percent of the ordinary share capital of each of Allied
Zurich and Zurich Allied for the time being in issue; or
(b) the aggregate number of Shares that could be issued in relation to
that Award and any other Awards granted at the same time, when added
to the number of Shares that:
(i) have been, or could be, issued to the Central Share Vehicle
for the purpose of satisfying subsisting Awards granted during
the preceding ten years under the Plan;
(ii) have been, or could be, issued on the exercise of any share
option granted during the preceding ten years under any
Executive Scheme,
would exceed 5 percent of the ordinary share capital of each of Allied
Zurich and Zurich Allied for the time being in issue; or
(c) the aggregate number of Shares that could be issued in relation to
that Award and any other Awards granted at the same time, when added
to the number of Shares that:
(i) have been, or could be, issued to the Central Share Vehicle
for the purpose of satisfying subsisting Awards granted during
the preceding five years under the Plan;
(ii) have been or could be issued to the Central Share Vehicle for
the purpose of satisfying the exercise of any share option
granted during the preceding five years under or any employee
share option scheme adopted by the Company, and
(iii) have been issued during the preceding five years to the
Central Share Vehicle for the purpose of any profit sharing or
other employee share incentive scheme (not being a share option
scheme) adopted by the Company,
would exceed 5 percent of the ordinary share capital of each of Allied
Zurich and Zurich Allied for the time being in issue.
<PAGE> 10
2. The limits set out in this Appendix 3 are subject to any limits contained
in the Articles of Incorporation of Zurich Allied from time to time on
the issuance of new Zurich Allied Shares to employees of Zurich Allied
and its group companies.
3. Whenever the Central Share Vehicle subscribes for Allied Zurich Shares it
shall subscribe for shares in Zurich Allied in the proportion of 57
(Zurich Allied) : 43 (Allied Zurich).
4. Reference in this Appendix 3 to the issue of Shares shall, for the
avoidance of doubt, mean the issue and allotment of Shares, and not the
transfer of Shares (other then where the Central Share Vehicle transfers
to a Participant Shares which have previously been issued allotted to the
Central Share Vehicle). In calculating the number of Shares that may be
issued in relation to an Award, it shall be assumed that the maximum
performance level is achieved and Awards are granted over the maximum
number of Shares.
<PAGE> 11
DEFINITIONS
1. In the rules of the Plan, unless the context otherwise requires, the
following expressions shall have the following meanings respectively:
Allied Zurich means Allied Zurich p.l.c.
Allied Zurich Share means an ordinary share in the capital of Allied
Zurich or any other share representing that share;
Award means a right granted under the Plan to receive Shares;
Award Date means the date on which Shares under an Award are transferred;
Board means the Board of directors of the Company or a duly authorized
committee thereof;
Business Unit means a business unit of the Group;
Central Share Vehicle means the entity which will acquire (by
subscription or purchase) and hold both Allied Zurich Shares and shares
in Zurich Allied for the purpose of employees' share schemes and which
may without limitation take the form of a trust, a Stiftung or an
administrative unit of or an account in the name of the Company or any
Subsidiary;
Committee means:
(a) in relation to this Plan, the Group Chief Executive Officer or,
in the case of the participation and grant of Awards to the
Group Chief Executive Officer and any member of the Company's
Group Management Board, the Remuneration Committee of the
Company; and
(b) in relation to a Sub-Plan, the Chief Executive Officer of the
relevant Business Unit acting with the approval of the
responsible member of the Group Management Board;
Company means Zurich Financial Services, a company incorporated in
Zurich, Switzerland;
Control means in relation to a body corporate, the power of a person to
secure:
(a) by means of the holding of shares or the possession of voting
power in or in relation to that or any other body corporate;
or
(b) by virtue of any powers conferred by the articles of
association or other document regulating that or any other
body corporate,
that the affairs of the first-mentioned body corporate are conducted in
accordance with the wishes of that person;
Participant means a person selected from time to time for participation
in the Plan or Sub-Plan by the Committee;
Executive means an employee or executive director of any company within
the Group who in the case of an executive director is required to work
for substantially the whole of his time for the Group;
Executive Scheme means any employees' share scheme (other than the Plan)
adopted by the Company under which the individuals selected for
participation at the discretion of the body administering that scheme
are senior executive employees;
<PAGE> 12
Financial Year means an accounting reference period;
Governing Agreement means the Governing Agreement between Allied Zurich
and Zurich Allied relating to the merger of the financial services
business of Zurich Insurance Company and B.A.T Industries p.l.c.;
Group means the Company and the Subsidiaries from time to time and member
of the Group shall be construed accordingly;
Market Value means on any day:
(a) in respect of an Allied Zurich Share, the middle market
quotation of an Allied Zurich Share on the London Stock
Exchange as derived from the Daily Official List for that
day; and
(b) in respect of any Zurich Allied Share, the market price of
a Zurich Allied Share on the Swiss Exchange for that day;
Participant means a person who has been selected for participation in
the Plan or a Sub-Plan (or where the context permits, the legal
personal representatives or designated beneficiary of a deceased
participant);
Performance Period means a period of three consecutive Financial Years
prior to an Award Date unless the Committee determines a longer period;
the Plan means the Zurich Financial Services Group Long Term Performance
Share Plan for Selected Executives as constituted by these Rules and
amended from time to time;
Restricted Shares means Shares the sale of which is prohibited for such
period as the Committee determines;
Share means an Allied Zurich Share or a Zurich Allied Share or any other
share representing such Share including a collection of such number or
value of Allied Zurich Shares and Zurich Allied Shares as the Committee
shall from time to time determine (Share Basket);
Sub-Plan means a sub-plan established under rule 3;
Swiss Exchange means the Swiss Exchange owned and operated by the Swiss
Stock Exchange Association;
Unrestricted Shares means Shares the sale of which is not prohibited;
Zurich Allied means Allied Zurich AG;
Zurich Allied Share means any share in the capital of Zurich Allied or
any other share representing such share.
2. References to any statute or statutory instrument or to any part or parts
thereof include any modification, amendment or re-enactment thereof for
the time being in force.
3. Words of the masculine gender shall include the feminine and vice versa
and words in the singular shall include the plural and vice versa unless
in either case the context otherwise requires or is otherwise stated.
Headings shall be ignored in construing the Plan.
Exhibit 10.10
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement"), dated as of October 15,
1997, is made and entered into by and between Farmers Group, Inc., a Nevada
corporation (the "Company") and John H. Lynch (the "Executive").
The Executive is presently employed by the Company.
The Board of Directors of the Company (the "Board") recognizes that the
Executive's contribution to the growth and success of the Company has been
substantial. The Company, on behalf of itself and its stockholders, desires
to continue to attract and retain well-qualified executive and key personnel
who are an integral part of the management of the Company, such as the
Executive, and to assure itself of continuity of management. The Executive is
willing to commit himself to continue to serve the Company, on the terms and
conditions herein provided.
In order to effect the foregoing, the Company and the Executive wish to
enter into an employment agreement on the terms and conditions set forth below.
Accordingly, in consideration of the premises and the respective covenants
and agreements of the parties herein contained, and intending to be legally
bound hereby, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to continue to employ the
Executive, and the Executive hereby agrees to continue to serve
the Company, on the terms and conditions set forth herein.
2. Term. This Agreement shall commence on the date set forth above
(the "Commencement Date") and shall expire on the last day of the
twenty-fourth (24th) month immediately following the Commencement
Date, unless further extended or sooner terminated as hereinafter
provided. In no event, however, shall the term of the Executive's
employment hereunder extend beyond the date of the Executive's
actual retirement in accordance with the Company's retirement
policies in effect on the date hereof.
Notwithstanding the foregoing, (a) if a Potential Change in
Control shall have occurred during the Initial Term or any
Extended Term, the term of this Agreement shall be extended and
shall continue in effect through the last day of the twenty-fourth
(24th) month immediately following the date on which such
Potential Change in Control occurred and (b) if a Change in
Control shall have occurred during the Initial Term or any
Extended Term, the term of this Agreement shall be extended and
shall continue in effect through the last day of the
twenty-fourth (24th) month immediately following the date on which
such Change in Control occurred; provided that, if such Potential
Change in Control is abandoned prior to the occurrence of a Change
in Control, this Agreement shall expire in accordance with the
provisions hereof, without regard to such extension.
3. Position and Duties. The Executive shall continue to serve in his
current position and shall have such responsibilities, duties and
authority as he may have as of the date hereof (or any position to
<PAGE> 2
which he may be promoted after the date hereof) and as may from
time to time be assigned to the Executive by the Board that are
consistent with such responsibilities, duties and authority. The
Executive shall devote substantially all his working time and
efforts to the business and affairs of the Company.
4. Place of Performance. In connection with the Executive's
employment by the Company, the Executive shall continue to be
based in his current location, except for required travel on the
Company's business to an extent substantially consistent with
the duties of the Executive.
5. Compensation and Related Matters.
(a) Compensation. During the period of the Executive's
employment hereunder, the Company shall pay to the
Executive an annual amount equal to the Executive's Cash
Compensation at a rate not less than the rate in effect as
of the date hereof or such higher rate as may from time to
time be determined by the Board, such compensation to be
paid in such installments as are customary from time to
time for executive officers of the Company. This
compensation may be increased from time to time in
accordance with normal business practices of the Company
and, if so increased, shall not thereafter during the term
of this Agreement be decreased. Such compensation shall
not be deemed exclusive and shall not prevent the Executive
from participating in any other compensation or benefit
plan of the Company. The Cash Compensation payments
(including any increased salary payments) hereunder shall
not in any way limit or reduce any other obligation of the
Company hereunder, and no other compensation, benefit or
payment hereunder shall in any way limit or reduce the
obligation of the Company to pay the Executive's Cash
Compensation hereunder.
(b) Expenses. During the term of the Executive's employment
hereunder, the Executive shall be entitled to receive
prompt reimbursement for all reasonable and customary
expenses incurred by the Executive in performing services
hereunder, including all expenses of travel and living
expenses while away from home on business or at the request
of and in the service of the Company; provided that, such
expenses are incurred and accounted for in accordance with
the policies and procedures established by the Company.
(c) Other Benefits. The Executive shall be entitled to
continue to participate in all Company and Parent
compensation, incentive, welfare or benefit plans or
arrangements, as well as any plan or arrangement whereby
the Executive may acquire securities of the Company or
Parent in effect on the date hereof in which the Executive
is participating, or subsequent plans or arrangements
providing the Executive with substantially similar benefits
thereunder, including without limitation the Company's
Employees' Profit Sharing and Savings Plan, Employees'
Pension Plan, Farmers Stock Incentive Plan, Employees'
Stock Ownership Plan, the Farmers Executive Incentive
Program (the "EIP"), the Premier Award Unit Plan (the
"Premier Plan") and any other plan or arrangement to
receive and exercise stock options or stock appreciation
rights, supplemental pension plan, insured medical
reimbursement plan, automobile benefits, executive
financial planning, group life insurance plan, personal
catastrophe liability insurance, medical, dental, accident
and disability plans (each a "Benefit Plan"). The
Executive shall be entitled to participate in or
<PAGE> 3
receive benefits under any Benefit Plan made available by
the Company in the future to its executives and key
management employees, subject to and on a basis consistent
with the terms, conditions and overall administration of
such plans and arrangements. Nothing paid to the Executive
under any Benefit Plan presently in effect or made available
in the future shall be deemed to be in lieu of the salary
payable to the Executive pursuant to paragraph (a) of this
Section. Any payments or benefits payable to the Executive
hereunder in respect of any calendar year during which the
Executive is employed by the Company for less than the
entire such year shall, unless otherwise provided in the
applicable Benefit Plan be prorated in accordance with the
number of days in such calendar year during which he is
so employed.
(d) Vacations. The Executive shall be entitled to no less than
the number of vacation days in each calendar year, and to
compensation in respect of earned but unused vacation days,
determined in accordance with the Company's vacation policy
as in effect on the date hereof.
(e) Services Furnished. The Company shall furnish the
Executive with office space, stenographic assistance and
such other facilities and services as shall be suitable to
the Executive's position and adequate for the performance
of his duties as set forth in Section 3 hereof.
6. Termination. Without prejudice to Section 2 hereof, the
Executive's employment hereunder may be terminated without any
breach of this Agreement only under the following circumstances:
(a) Death. The Executive's employment hereunder shall
terminate upon his death.
(b) Disability. If, (i) as a result of the Executive's
incapacity due to physical or mental illness, the Executive
shall have been absent from his duties with the Company on
a full-time basis for the entire period of six (6)
consecutive months, and within thirty (30) days after
written "Notice of Termination" (as defined in Section 12
below) is thereafter given by the Company (which may occur
before or after the end of such six month period) the
Executive shall not have returned to the performance of his
duties hereunder on a full-time basis, or (ii) the
Executive becomes eligible for benefits under the Company's
long-term disability plan or any successor plan, the
Company may terminate this Agreement and the Executive's
employment hereunder for "Disability."
(c) Cause. The Company may, in writing and without prior
notice, terminate the Executive's employment hereunder for
Cause (except as otherwise provided in clause (iv) of
subsection 13(d)(iv)). Notwithstanding the foregoing, the
Executive shall have the right to contest his termination
for Cause (for purposes of this Agreement) by mediation in
accordance with the provisions of this Agreement as set
forth in Section 17 herein.
(d) Termination by the Executive. The Executive may terminate
his employment hereunder for Good Reason. For purposes of
any determination regarding the existence of Good Reason,
any claim by the Executive that Good Reason exists shall be
presumed to be
<PAGE> 4
correct unless the Company establishes to the then existing
Compensation Committee of the Board that Good Reason does
not exist.
7. Compensation During Disability or Upon Termination.
(a) During any period that the Executive fails to perform his
duties hereunder as a result of incapacity due to physical
or mental illness ("Disability Period"), the Executive
shall continue to receive his full salary at the rate then
in effect for such period until his employment is
terminated pursuant to Section 6(b) hereof; provided that,
payments so made to the Executive during the Disability
Period shall be reduced by the sum of the amounts, if any,
payable to the Executive at or prior to the time of any
such payment under disability benefit plans of the Company
or under the Social Security disability insurance program,
and which amounts were not previously applied to reduce any
such payment.
(b) If the Executive's employment is terminated by his death,
the Company shall pay any amounts due to the Executive
under Section 5 through the date of his death in accordance
with Section 11(b).
(c) If the Executive's employment is terminated by the Company
for Cause or by the Executive for other than Good Reason,
the Company shall pay the Executive his full salary through
the Date of Termination at the rate in effect at the time
Notice of Termination is given and the Company shall have
no further obligations to the Executive under this
Agreement.
(d) If (1) in breach of this Agreement, the Company shall
terminate the Executive's employment other than for
Disability pursuant to Section 6(b) or for Cause (it being
understood that a purported termination for Disability
pursuant to Section 6(b) or for Cause which is disputed and
finally determined not to have been proper shall be a
termination by the Company in breach of this Agreement) or
(2) the Executive shall terminate his employment for Good
Reason, then, subject to the provisions of Section 10
hereof, the Company shall:
(i) pay the Executive his full annual base salary through
the Date of Termination at the rate in effect at the
time Notice of Termination is given and all other
unpaid amounts, if any, to which the Executive is
entitled as of the Date of Termination under any
Benefit Plan at the time such payments are due;
(ii) subject to the provisions of Section 9 hereof, in
lieu of any further salary payments to the Executive
for periods subsequent to the Date of Termination,
pay as liquidated damages to the Executive an amount
equal to the Executive's Cash Compensation (as defined
below), times a fraction the numerator of which is the
number of months remaining in the then current term of
the Agreement, and the denominator of which is twelve
(12), such payment to be made in a lump sum in cash,
on or before the fifth day following the Date of
Termination;
<PAGE> 5
(iii) subject to the provisions of Section 9 hereof,
arrange to provide the Executive for two (2) years
(or such shorter period as Executive may elect), with
disability, life, accident and health insurance
substantially similar to those insurance benefits
which Executive is receiving immediately prior to the
Notice of Termination (including coverage for
dependents at the same per person cost as the
Executive is then paying); provided that, benefits
otherwise receivable by Executive pursuant to this
subsection 6 (d)(iii) shall be reduced to the extent
comparable benefits are actually received by the
Executive during such two (2) year period following
his termination (or such shorter period elected by
the Executive), and any such benefits actually
received by Executive shall be reported by him to the
Company;
(iv) subject to the provisions of Section 9 hereof, pay
the Executive a benefit under the Premier Plan (or
other long term incentive plan) as if he had
terminated employment by reason of his retirement
(without regard to whether the Executive has, and
without deeming the Executive to have, reached his
normal retirement age) and as if any remaining
performance criteria and any time period of service
requirement had been waived; and
(v) subject to the provisions of Section 9 hereof, pay to
the Executive a single lump sum payment equal to the
excess of (x) over (y), where (x) is equal to the
present lump sum value of the combined pension
benefits that the Executive would receive under the
Employees' Pension Plan (the "Pension Plan"), taking
into account Article XV thereof, the Employee
Benefits Restoration Plan (the "Restoration Plan")
and providing supplemental pension benefits
(collectively, the "Plans"), at his earliest benefit
commencement date under the Pension Plan computed by
increasing, in the case of each Plan, the number of
years of credited service actually taken into account
under each Plan as of the date of his termination of
employment, or, if earlier, the termination of the
Pension Plan, by two (2) years, and (y) is equal to
the present lump sum value of the combined pension
benefits actually payable to the Executive on his
earliest benefit commencement date under the Pension
Plan (taking into account Article XV thereof), the
Restoration Plan and the Agreement based, in the case
of each Plan, on the actual number of years of
credited service actually taken into account under
each Plan as of the date of his termination of
employment, or, if earlier, the termination of the
Pension Plan. The foregoing lump sum present value
amount, shall be computed using the actuarial factors
under the Pension Plan in effect on the date of the
Executive's termination of employment or, if earlier,
the termination of the Pension Plan.
Notwithstanding the foregoing, in the event the Executive does not have two (2)
full years remaining until the Executive's mandatory-retirement date under the
Company's retirement policies, for purposes of this Section 7, the minimum two
(2) year period set forth above shall automatically be reduced to the number of
years and/or partial years (measured by months) remaining until such
Executive's retirement. For example, if Executive terminated his employment
for Good Reason six months before mandatory retirement, the minimum two (2)
year period set forth above would be reduced from 2 to 1.5. For purposes of
this Agreement, the mandatory retirement age of an Executive shall be 65.
<PAGE> 6
8. Indemnification for Excise Tax.
(a) Notwithstanding any other provisions of this Agreement, in
the event that any of the payments or benefits received or
to be received by the Executive in connection with a
"change in control" (as defined in Section 280G of the
Code) (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company,
any Person whose actions result in a change in control or
any Person affiliated with the Company or such Person)
(such payments or benefits, excluding the Gross-Up Payment,
being hereinafter referred to as the "Total Payments") will
be subject to the Excise Tax, the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Executive, after
deduction of any Excise Tax on the Total Payments and any
federal, state and local income and employment taxes and
Excise Tax upon the Gross-Up Payment, shall be equal to the
Total Payments.
(b) For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amount
of such Excise Tax, (i) all of the Total Payments shall be
treated as "parachute payments" (within the meaning of
section 280G(b)(2) of the Code) unless, in the opinion of
tax counsel ("Tax Counsel") reasonably acceptable to the
Executive and selected by the accounting firm which was,
immediately prior to the change in control, the Company's
independent auditor (the "Auditor"), such payments or
benefits (in whole or in part) do not constitute parachute
payments, including by reason of section 280G(b)(4)(A) of
the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(1) of the Code shall be treated
as subject to the Excise Tax unless, in the opinion of Tax
Counsel, such excess parachute payments (in whole or in
part) represent reasonable compensation for services
actually rendered (within the meaning of section 280G(b)(4)
(B) of the Code) in excess of the Base Amount allocable to
such reasonable compensation, or are otherwise not subject
to the Excise Tax, and (iii) the value of any noncash
benefits or any deferred payment or benefit shall be
determined by the Auditor in accordance with the principles
of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal income tax at the
highest marginal rate of federal income taxation in the
calendar year in which the Gross-Up Payment is to be made
and state and local income taxes at the highest marginal
rate of taxation in the state and locality of the
Executive's residence on the Date of Termination (or if
there is no Date of Termination, then the date on which the
Gross-Up Payment is calculated for purposes of this Section
8), net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and
local taxes.
(c) In the event that the Excise Tax is finally determined to
be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Executive shall repay
to the Company, within five (5) business days following the
time that the amount of such reduction in the Excise Tax is
finally determined, the portion of the Gross-Up Payment
attributable to such reduction (plus that portion of the
Gross-Up Payment attributable to the Excise Tax and
federal, state and local income and employment taxes
imposed on the Gross-Up Payment being repaid by the
Executive, to the extent that such repayment results in a
reduction in the Excise Tax and a dollar-for-dollar
reduction in the Executive's taxable income and wages for
purposes of federal, state and local income and employment
<PAGE> 7
taxes, plus interest on the amount of such repayment at
120% of the rate provided in section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder in
calculating the Gross-Up Payment (including by reason of
any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment in
respect of such excess (plus any interest, penalties or
additions payable by the Executive with respect to such
excess) within five (5) business days following the time
that the amount of such excess is finally determined. The
Executive and the Company shall each reasonably cooperate
with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Total Payments.
(d) Preparation of Tax Return. The Company, at its expense,
agrees to supply the Executive with advice from competent
tax counsel as to whether said Executive must reflect and
pay an excise tax under Sections 280G and 4999 of the Code
on the filing of any federal income tax return of said
Executive relating to the period or periods in which said
Executive received payments or benefits under this
Agreement which may result in the imposition of such an
excise tax. If such tax counsel advises that such excise
tax must be reflected and paid on such tax return, said
Executive agrees to so reflect and pay such tax at which
time the Company will reimburse said Executive in
accordance with this Section 8. If such tax counsel
advises that such excise tax need not be reflected and paid
on such tax return, said Executive agrees to prepare and
file his tax return in accordance with such advice. In
either case the Company shall indemnify said Executive in
accordance with Section 8(a) of this Agreement for any
subsequent assessment of excise taxes made by the Internal
Revenue Service under Section 4999 of the Code in
accordance with the provisions of this Section 8.
(e) Duty to Cooperate. The Executive agrees promptly to notify
the Company in the event of any audit by the Internal
Revenue Service ("IRS") in which the IRS asserts that any
excise tax should be assessed against said Executive and to
cooperate with the Company in contesting (at the Company's
expense) any such proposed assessment. Said Executive
agrees not to settle or compromise any such assessment
without the Company's consent. If said Executive's failure
to settle a proposed assessment with respect to such excise
tax ("Proposed Assessment") at the direction of the Company
is the reason his overall audit cannot be finally resolved,
then said Executive may demand that the Company consent to
settle the Proposed Assessment. If the Company does not
settle the Proposed Assessment, or consent to allow said
Executive to settle, within sixty (60) days, the Company
shall indemnify and hold harmless said Executive from any
additional interest or penalties resulting from the delay
in finally resolving the audit.
9. Effect of Agreement on Other Contractual Rights. The provisions
of this Agreement, and any payment provided for hereunder, shall
not reduce any amounts otherwise payable, or in any way diminish
the Executive's existing rights, or rights which would accrue
solely as a result of the passage of time, under any Benefit Plan
or other contract, plan or arrangement.
<PAGE> 8
10. Restrictive Covenants.
(a) During the term of this Agreement, Executive shall not,
directly or indirectly, without the prior written consent
of the Company, provide consultative service to (with or
without pay), own, manage, operate, join, control,
participate in, or be connected with (as a stockholder,
partner, officer, director, employee or otherwise) any
business, individual, partner, firm, corporation, or other
entity that directly or indirectly competes with the
Company (a "Competitor of the Company"); provided that, the
"beneficial ownership" by Executive, either individually or
as a member of a "group," as such terms are used in Rule
13d of the General Rules and Regulations Exchange Act, of
not more than five percent (5%) of the voting stock of any
publicly held corporation shall not be a violation of this
Agreement.
(b) Confidential Information. Executive acknowledges that in
his employment hereunder he occupies a position of trust
and confidence. During the term of the Agreement and for
all periods thereafter, Executive shall not, except as may
be required to perform his duties hereunder or as required
by applicable law, and except for information which is or
becomes publicly available other than as a result of a
breach by the Executive of the provisions hereof, disclose
to others or use, whether directly or indirectly, any
Confidential Information. Executive acknowledges that such
Confidential Information is specialized, unique in nature
and of great value to the Company, and that such
information gives the Company a competitive advantage. The
Executive agrees to deliver or return to the Company, at
the Company's request at any time or upon termination or
expiration of his employment or as soon thereafter as
possible, all documents, computer tapes and disks, records,
lists, data, drawings, prints, notes and written
information (and all copies thereof) furnished by the
Company or prepared by the Executive during the term of his
employment by the Company.
(c) Business Diversion. During the term of this Agreement and
any Severance Period thereafter, Executive shall not,
directly or indirectly, influence or attempt to influence
customers or suppliers of the Company to divert their
business to any Competitor of the Company.
(d) Nonsolicitation. Executive recognizes that he will possess
confidential information about other employees of the
Company, relating to, among other things, their education,
experience, skills, abilities, compensation and benefits,
and inter-personal relationships with suppliers and
customers of the Company. Executive recognizes that the
information he will possess about these other employees is
not generally known, is of substantial value to the
Company and will be acquired by him because of his business
position with the Company. Executive agrees that, during
the term of this Agreement and for one (1) year thereafter,
he will not, directly or indirectly, solicit or recruit any
employee of the Company for the purpose of being employed by
him or by any other person on whose behalf he is acting as
an agent, representative or employee and that he will not
convey any such confidential information or trade secrets
about other employees of the Company.
<PAGE> 9
11. Successors; Binding Agreement.
(a) In connection with any agreement to which it is a party, the
Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of
the Company, by agreement in form and substance satisfactory
to the Executive, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to
obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to
compensation from the Company in the same amount and on the
same terms as he would be entitled to hereunder if he
terminated his employment for Good Reason, except that for
purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the
Date of Termination. As used in this Agreement, "Company"
shall mean the Company as herein before defined and any
successor to its business and/or assets as aforesaid which
executes and delivers the agreement provided for in this
Section 11 or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal
representatives, executors, administrators, successors,
heirs, distributees, devises and legatees. If the
Executive should die while any amounts are still payable to
him hereunder, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the
Executive's estate.
12. Notice/Notice of Termination. For purposes of this Agreement,
notices and all other communications provided for in the Agreement
shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, as follows: if to the
Company - Farmers Group, Inc., 4680 Wilshire Boulevard, Los
Angeles, California 90010, Attention: Secretary; and if to the
Executive at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may
have furnished to the other in writing in accordance herewith,
except that notices of change of address shall be effective only
upon receipt. Any purported termination of the Executive's
employment by the Company or the Executive hereunder shall be
communicated by a Notice of Termination to the other party as set
forth herein. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate
those specific termination provisions in this Agreement relied
upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision of Sections 6(b),
(c) and (d) hereof.
13. Definitions. Terms not otherwise defined in this Agreement shall
have the meanings set forth in this Section 13.
(a) Beneficial Owner. "Beneficial Owner" shall have the meaning
of such term as defined in Rule 13d-3 of the Exchange Act.
<PAGE> 10
(b) Cash Compensation. "Cash Compensation" shall mean the sum
of (x) the average of the final three (3) year's base salary
of the Executive, and (y) an amount equal to the sum of (i)
the average of the final three (3) year's cash bonus paid to
the Executive under the EIP or any other bonus plan of the
Company, for any of the fiscal years ended during the term
of this Agreement, and (ii) the average of the amounts
allocated to the Executive under the Employee's Profit
Sharing and Savings Trust for such years.
(c) Cause. "Cause" shall mean: (i) the commission of a felony
(other than driving while intoxicated or while under the
influence of alcohol or drugs), (ii) the engaging by
Executive in misconduct involving dishonesty which is
injurious to the Company, monetarily or otherwise or which
is inimical to the effective performance of the Executive's
duties, (iii) a willful dereliction of duty or intentional
and malicious conduct contrary to the best interests of the
Company or its business if such dereliction of duty or
misconduct is not corrected within thirty (30) days after
written notice hereof from the Company, (iv) a refusal to
perform reasonable services customarily performed by the
Executive (other than by reason of a Disability); unless
such refusal, if capable of being corrected, is corrected
within thirty (30) days after written notice thereof from
the Company, or (v) the Executive's engaging in conduct that
violates the Restrictive Covenants set forth in Section 10
hereof.
(d) Change in Control. A "Change in Control" of the Company
shall be deemed to have occurred if the event set forth in
any one of the following paragraphs shall have occurred:
(i) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company
(other than Parent) representing 30% or more of the
combined voting power of the then outstanding
securities of the Company, excluding any Person who
becomes such a Beneficial Owner in connection with a
transaction described in clause (x) of paragraph (iv)
below; or
(ii) members of the public become the Beneficial Owners,
directly or indirectly, of securities of the Company
(other than Parent) representing 60% or more of the
combined voting power of the then outstanding
securities of the Company; or
(iii) the following individuals cease for any reason to
constitute a majority of the number of directors of
the Board then serving: individuals who, on the date
hereof, constitute such board and any new director
(other than a director whose initial assumption of
office is in connection with an actual or threatened
election contest, including but not limited to a
consent solicitation, relating to the election of
directors of the Company) whose appointment or
election by such board or nomination for election by
stockholders was approved or recommended by a vote of
at least two-thirds (2/3) of the directors then still
in office who either were directors on the date hereof
or whose appointment, election or nomination for
election was previously so approved or recommended; or
<PAGE> 11
(iv) there is consummated a merger or consolidation of the
Company, Parent or any direct or indirect subsidiary
of the Company with any other corporation, other than
(x) a merger or consolidation which would result in
the voting securities of the Company outstanding
immediately prior to such merger or consolidation
continuing to represent (either by remaining
outstanding or by being converted into voting
securities of the surviving entity or any parent
thereof), in combination with the ownership of any
trustee or other fiduciary holding securities under
an employee benefit plan of Parent, the Company or
any subsidiary of the Company, at least 60% of the
combined voting power of the securities of the Company
or such surviving entity or any parent thereof
outstanding immediately after such merger or
consolidation, or (y) a merger or consolidation
effected to implement a recapitalization of Parent or
the Company (or similar transaction) in which no
Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not
including in the securities Beneficially Owned by such
Person, any securities acquired directly from the
Company, other than in connection with the acquisition
by the Company or its affiliates of a business)
representing 30% or more of the combined voting power
of the Company's then outstanding securities; or
(v) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or
there is consummated an agreement for the sale or
disposition by the Company of all or substantially all
of the assets of the Company, other than a sale or
disposition by the Company of all or substantially all
of the assets of the Company, to an entity, at least
60% of the combined voting power of the voting
securities of which are owned by stockholders of the
Company in substantially the same proportions as their
ownership of the Company immediately prior to such
sale.
(e) Confidential Information. "Confidential Information" shall
mean information about the Company and its respective
suppliers, clients and customers that is not disclosed by
the Company for financial reporting purposes and that was
learned by Executive in the course of his employment
hereunder, including (without limitation) proprietary
knowledge, trade secrets, market research, data, formulae,
information and supplier, client and customer lists and all
papers, resumes, and records (including computer records) of
the documents containing such Confidential Information.
(f) Date of Termination. "Date of Termination" shall mean (i)
if the Executive's employment is terminated by his death,
the date of his death, (ii) if the Executive's employment
is terminated pursuant to subsection (b) above, thirty (30)
days after Notice of Termination is given (provided that the
Executive shall not have returned to the performance of his
duties on a full-time basis during such thirty (30) day
period), (iii) if the Executive's employment is terminated
pursuant to subsection (c) above, the date specified in the
Notice of Termination, and (iv) if the Executive's
employment is terminated for any other reason, the date on
which a Notice of Termination is given; provided that, if
within thirty (30) days after any Notice of Termination is
given the party receiving such Notice of Termination
notifies the other party that a dispute exists concerning
the termination, the Date of
<PAGE> 12
Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of
the parties or by a final judgment, order or decree of a
court of competent jurisdiction (the time for appeal there
from having expired and no appeal having been perfected).
(g) Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934 as amended from time to time and as now
or hereafter construed, interpreted and applied by
regulations, rulings and cases.
(h) Good Reason. The Executive's termination of employment with
the Company shall be deemed for "Good Reason" if it occurs
within twelve (12) months of any of the following without
the Executive's express written consent:
(i) the assignment to the Executive by the Company of
duties inconsistent with, or a substantial adverse
alteration in the nature or status of, Executive's
responsibilities as of the date hereof;
(ii) a reduction by the Company in the Executive's annual
Cash Compensation as in effect on the date hereof or
as in effect from time to time if such amounts are
increased during the term of this Agreement;
(iii) any failure by the Company to continue in effect
without substantial change any Benefit Plan, or the
taking of any action by the Company which would
adversely affect the Executive's participation in or
materially reduce the Executive's benefits under any
such Benefit Plan (including a more than 10% reduction
from the highest percentage of available EIP award
paid in the three (3) immediately preceding calendar
years to the Executive) or deprive the Executive of
any material fringe benefit currently enjoyed by the
Executive unless an equitable substitute arrangement
(embodied in an ongoing substitute or alternative
Benefit Plan) has been made for the benefit of the
Executive with respect to the Benefit Plan in
question;
(iv) any material breach by the Company of any provision of
this Agreement which, if capable of being rectified by
the Company, is not rectified within thirty (30) days
of notice (which notice specifies the nature of such
breach);
(v) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the
Company; or
(vi) any purported termination of the Executive's
employment by the Company which is not effected
pursuant to a Notice of Termination satisfying the
requirements of Section 12 below, and for purposes of
this Agreement, no such purported termination shall be
effective.
(i) Parent. "Parent" shall mean the ultimate controlling
parent of the Company.
<PAGE> 13
(j) Person. "Person" shall have the meaning of such term as
used in Section (3)(a)(9) of the Exchange Act.
(k) Potential Change in Control. A "Potential Change in
Control" shall be deemed to have occurred if the event set
forth in any one of the following paragraphs shall have
occurred:
(i) the Company, Parent or any Person publicly announces
an intention to take or to consider taking actions
which, if consummated, would constitute a Change in
Control;
(ii) in connection with the purchase of the voting
securities of the Company, any person, or group of
persons, file or are required to file, an application
seeking approval of insurance regulatory authorities
relative to the acquisition of control of a domestic
insurer or reciprocal exchanges;
(iii) the Company or Parent enters into an agreement, the
consummation of which would result in the occurrence
of a Change in Control;
(iv) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (other than
Parent) representing 15% or more of either the then
outstanding shares of common stock of the Company or
the combined voting power of the then outstanding
securities of the Company (not including in the
securities beneficially owned by such Person or any
securities acquired directly from the Company).
For purposes of this Agreement, a Potential Change in
Control shall be deemed to have been abandoned if, prior to
a Change in Control (and provided that no Change in Control
occurs within 180 days thereafter), (A) in connection with
a Potential Change in Control described in (k)(i) above, an
announcement is made recanting such intention, (B) in
connection with a Potential Change in control described in
(k)(ii) above such approval is formally rejected, (C) in
connection with a Potential Change in Control described in
(k)(iii) above, such agreement is abandoned prior to
consummation, (D) in connection with a Potential Change in
Control described in (k)(iv) above, such Person ceases to
be a Beneficial Owner, directly or indirectly, of
securities of the Company representing 15% or more of such
securities; or (E) the Board adopts a resolution to the
effect that, for purposes of this Agreement, such Potential
Change in Control has been abandoned.
14. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge
is agreed to in writing signed by the Executive and the Company. No
waiver by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a
waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect
to the subject matter hereof have been made by either party which
are not set forth expressly in this agreement.
<PAGE> 14
15. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
17. Mediation. Before any party commences an action for damages or
other relief (except injunctive relief that is sought by the Company
for an alleged violation of Section 10 of this Agreement), Executive
and the Company agree to submit any dispute, claim or controversy
arising out of or relating to this Agreement, including the breach,
termination or validity thereof (a "Dispute") to non-binding
mediation. The mediation provided for in this Section shall occur
before a retired judge who shall be selected by the parties from
JAMS/Endispute. If the parties are unable to agree upon a mediator,
a mediator will be selected from JAMS/Endispute pursuant to its
applicable rules then in existence. The mediation shall occur
within 45 days following the appointment of the mediator. In
connection with the mediation, each party shall bear his or its own
attorneys' fees and costs and the mediator's fee shall be paid in
equal shares by the parties to the mediation. Notwithstanding the
foregoing, the Company shall be entitled to seek a restraining order
or injunction in any court of competent jurisdiction to prevent any
continuation of any violation of the provisions of Section 10 of the
Agreement and the Executive hereby consents that such restraining
order or injunction may be granted without the necessity of the
Company's posting any bond and, provided further that, the Executive
shall be entitled to seek specific performance of his right to be
paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this
Agreement.
18. Controlling Law. This Agreement and the rights of the parties
hereunder shall be governed by and construed and enforced in
accordance with laws of the State of California (excluding its
conflict of laws, principles, statutes or other similar laws)
including all matters of construction, validity, performance and
enforcement.
19. Entire Agreement. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein
and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any
party hereto; and any prior agreement of the parties hereto in
respect of the subject matter contained herein is hereby terminated
and cancelled.
<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement on the date and
year first above written.
FARMERS GROUP, INC., a Nevada corporation
By: /s/ Jason L. Katz
-------------------------------
Name: Jason L. Katz
Title: Senior Vice President and
General Counsel
John H. Lynch
/s/ John H. Lynch
- ------------------------------
(Signature)
John H. Lynch
- ------------------------------
(Name)
Exhibit 10.11
THE ZURICH FINANCIAL SERVICES GROUP
SHARE OPTION PLAN
FOR SELECTED EXECUTIVES
As adopted by resolution of the Board of Directors of Zurich Financial Services
on September 2, 1998.
<PAGE> 2
Contents
Clause Page
1. PURPOSE............................................................... 3
2. AUTHORITY OF THE ADMINISTRATOR........................................ 4
3. GRANT OF OPTIONS...................................................... 5
4. TERMS OF OPTIONS...................................................... 6
Exercise Price........................................................ 6
Exercise of Options................................................... 6
Termination of Employment............................................. 7
Transfers and Promotions.............................................. 7
Overriding Lapse of Options........................................... 8
5. AVAILABILITY OF SHARES................................................ 8
6. TRANSFER OF SHARES ON EXERCISE OF OPTION.............................. 8
7. RIGHTS ATTACHING TO SHARES TRANSFERRED PURSUANT TO OPTION............. 8
8. CHANGE OF CONTROL AND LIQUIDATION..................................... 8
9. ADJUSTMENT OF AWARD................................................... 8
10. OVERALL LIMITS........................................................ 8
11. ADMINISTRATION........................................................ 8
12. AMENDMENT............................................................. 9
13. GENERAL............................................................... 9
APPENDIX 1................................................................. 11
APPENDIX 2................................................................. 14
APPENDIX 3................................................................. 15
DEFINITIONS................................................................ 17
<PAGE> 3
RULES OF THE ZURICH FINANCIAL SERVICES GROUP
SHARE OPTION PLAN
FOR SELECTED EXECUTIVES
PURPOSE
1. The Zurich Financial Services ("Zurich") Group Share Option Plan for
Selected Executives is a share option program for encouraging
organizational performance with the purpose of:
(a) strengthening the focus of key Participants of Zurich Group
on planning, developing, leading and controlling the
Group's long-term business strategies;
(b) focusing management's attention on shareholders, analysts and
potential investor's interests;
(c) sharing entrepreneurial reward and risk;
(d) strengthening the alignment between Participant rewards and the
creation of shareholder value; and
(e) attracting, motivating and retaining world-class Participant
talent.
The overall objective of the plan is intended to focus the attention of the key
Participant group on the main financial issues essential to achieving long-term
business success and the creation of shareholder value.
The share option program focuses on Group performance, with a direct link to
shareholder value creation.
The Shares over which Options are granted under the Plan will be provided
through the Central Share Vehicle which may subscribe Shares from Allied Zurich
and Zurich Allied or purchase such Shares on any relevant stock exchange where
the Shares are traded.
<PAGE> 4
AUTHORITY OF THE ADMINISTRATOR
2. Except as otherwise provided in these rules, the Administrator shall
have full power and authority to:
(a) designate the Participants to whom Options are to be granted;
(b) determine the number of Shares over which each Option shall be
granted;
(c) where Options are granted in respect of Share Baskets, determine
the number and respective values of Allied Zurich Shares and
Zurich Allied Shares which are comprised in the Share Basket;
(d) determine any conditions to be imposed on Options in accordance
with rule 3.4;
(e) determine the Exercise Period and the Vesting Schedule that
shall apply to an Option;
(f) interpret and construe the Plan;
(g) adopt such rules and regulations as the Administrator shall deem
necessary and advisable to implement and administer the Plan;
(h) decide upon the funding and financing of the liabilities related
to the grant of Options. The Administrator may decide whether
the liabilities are to be met through the purchase of Shares on
a relevant stock exchange or by subscription from Allied Zurich
or Zurich Allied; and
(i) designate persons or organizations to carry out the
Administrator's responsibilities, subject to such limitations,
restrictions and conditions as the Administrator may prescribe,
such determinations to be made in accordance with the best
interests of the Company and its shareholders and in accordance
with the purposes of the Plan.
<PAGE> 5
GRANT OF OPTIONS
3.1 The Administrator may, in its absolute discretion, grant Options to any
of the Executives of the Group. The Chief Executive Officer of a
Business Unit, with the approval of the responsible Group Management
Board member, may propose to the Administrator Executives for
participation in the Plan. Option grants to the Participants shall be
subject to the rules of the Plan. No consideration shall be payable by
the Participant on the grant of an Option.
3.2 The number of Shares over which an Option is granted to a Participant
shall be based on the Participant's position and level of
responsibility, local market conditions and the extent of the
Participant's participation in other long-term incentive arrangements
of the Group.
3.3 Options may be granted in respect of Allied Zurich Shares only or
Zurich Allied Shares only or Share Baskets.
3.4 The Administrator may impose such condition(s) regarding the exercise
of the Options, which may (without limitation) relate to the
performance of the Group, one or more businesses or divisions of the
Group or the Option Holder or any combination of them. The
Administrator may impose more than one condition in respect of any one
Option such that one condition may apply to a proportion of the Shares,
the subject of the Option, and another condition or conditions may
apply to such other proportion or proportions of such Shares. Such
conditions:
(a) may be amended following the Date of Grant if:
(i) the circumstances which prevailed at the Date of Grant
and which were relevant to the conditions when they
were originally imposed have subsequently changed; and
(ii) the Administrator is satisfied that any such amended
conditions would be a fairer measure of performance
and the Administrator considers that such amended
conditions are no more difficult to satisfy than the
original conditions;
(b) shall cease to apply in circumstances in which Option Holders
become entitled to exercise Options in accordance with rules
4.5(a) (death), 4.5(b)(i) (injury or disability), 4.5(b)(ii)
(redundancy), 4.5(b)(iii) (any other reason) (but only to the
extent that the Administrator has exercised its discretion that
the conditions shall cease to apply) pursuant to Appendix 1
(change of control and liquidation).
3.5 Any liability for an Option Holder to taxation and/or social security
contributions in respect of an Option shall be for the account of the
relevant Option Holder. In any case where any member of the Group is
required to withhold or account for any tax and/or social security
contributions for which the Option Holder is liable by virtue of the
grant or exercise of an Option, such grant and/or exercise shall be
conditional on the Option Holder entering into arrangements acceptable
to the Administrator to secure that such payment is made (whether by
authorizing the sale of some of the Shares acquired on exercise or the
payment to the relevant Group member) of an amount required to
discharge the tax or social security liability.
3.6 Grants shall be made, if at all:
(a) within the period of six weeks commencing on the day of
Listing;
(b) within the period of six weeks commencing on the day
immediately following the day on which the Company makes an
announcement of its results for the last preceding financial
year, half year or other period; or
<PAGE> 6
(c) within the period of six weeks commencing on any day on which
the Administrator resolves that exceptional circumstances exist
which justify the grant of options;
(d) within the period of three months commencing on the first day
of a financial year of the Company.
PROVIDED THAT the grant of Options shall comply with the
London Stock Exchange's Model Code for Securities Transactions
by Directors of Listed Companies, any equivalent rules imposed
under Swiss law or the Swiss Exchange applicable to the Company
or Zurich Allied governing dealings in Shares.
3.7 Any Participant to whom an Option is granted may, by notice in writing
to the Administrator given within 30 days after the Date of Grant,
renounce in whole or in part his rights under the Option. In such a
case, the Option shall pro tanto be treated, for all the purposes of
the Plan, as never having been granted.
TERMS OF OPTIONS
Exercise Price
4.1 The Exercise Price shall be determined by the Administrator.
4.2 The Exercise Price shall be, in the case of any Option under which
Shares are to be issued not less than the higher of the nominal value
of a Share; and either
(a) the average of the Market Values of a Share over such number of
Dealing Days (not exceeding 30 days) immediately preceding the
Date of Grant as the Administrator decides; or
(b) the Market Value of a Share on the Dealing Day immediately
preceding the Date of Grant; or
(c) the Market Value of a Share on the Date of Grant.
4.3 In the case of Options granted in respect of Share Baskets there shall
be separate Exercise Prices for the Allied Zurich Shares and for the
Zurich Allied Shares comprised in the Share Basket.
Exercise of Options
4.4 (a) Save as provided in rule 4.6 (termination of employment) and
Appendix 1 (change of control and liquidation) an Option shall
be first exercisable (in whole or in part) only after the
commencement of the Exercise Period and not later than the
expiration of the Exercise Period and shall be exercisable
during the Exercise Period in accordance with the Vesting
Schedule applying to that Option.
(b) If an Option Holder ceases to be employed within the Group for
any reason whatsoever, any Option granted to him shall, save as
provided in rule 4.6 (termination of employment), lapse and not
be exercisable.
(c) Save as provided in rules 4.6(a) (death) and (c) (redundancy,
injury, etc.) and Appendix 1 (change of control and
liquidation) an Option shall only be exercisable if the
conditions imposed under rule 3.4 (performance conditions) have
been fulfilled or waived in accordance with these rules.
4.5 An Option may be exercised by the Option Holder giving notice to the
Administrator in the form for the time being prescribed by the
Administrator, specifying the number of Shares in respect of which the
Option is being exercised and enclosing or arranging to provide payment
in full of the aggregate Exercise Price of those Shares.
<PAGE> 7
Termination of Employment
4.6 (a) If an Option Holder dies while in service, or at any time after
leaving service by reason of retirement or disability, when he
holds an Option, his legal personal representatives or any
person who shall under the law of the applicable jurisdiction
have power to deal with the Option Holder's estate following
his death shall be entitled to exercise his Options (whether or
not any conditions imposed under rule 3.4 (performance
conditions) have been satisfied) in full or in part during the
period ending twelve months after the date of death.
(b) If an Option Holder ceases to be employed within the Group
owing to:
(i) injury or disability (as determined by the
Administrator); or
(ii) redundancy (within the meaning of the relevant law
applying to the Option Holder's employment);
(iii) any other reason if the Administrator so decides in its
absolute discretion
subject to rule 4.6(c) (waiver of performance conditions)
below, he shall be entitled to exercise his Options (whether or
not the Exercise Period has commenced) in full or in part
during the period ending twelve months from the date on which
employment ceased PROVIDED THAT he shall not in any event be
entitled to exercise his Options after the end of the Exercise
Period.
(c) Where an Option becomes exercisable under rule 4.6(b)
(redundancy, injury, etc.) above, in relation to any conditions
imposed under rule 3.4:
(i) such conditions shall cease to apply in the case of
rules 4.6(b)(i) (injury or disability) and
(ii) (redundancy);
(iii) in the case of rule 4.6(b)(iii) (any other reason), the
Administrator shall determine, in its absolute
discretion, whether or not such conditions shall
continue to apply and to what extent.
(d) For the purposes of rule 4.3(b) (ceasing employment within the
Group) and rule 4.6(b) (redundancy, injury, etc.) a female
Option Holder shall not be treated as ceasing to be employed
within the Group if absent from work wholly or partly because
of pregnancy or confinement, until she ceases to be entitled to
exercise any contractual or statutory right to return to work.
(e) For the purposes of rules 4.3(b) and 4.6(b) following an option
rollover pursuant to Appendix 1 an Option Holder shall not be
treated as ceasing to be an employee of a member of the Group
until he ceases to be employed by a company or body corporate
which is either (i) the Acquirer (as defined in paragraph 6 of
Appendix 1) or (ii) a company or body corporate of which the
Acquirer has Control.
Transfers and Promotions
4.7 If an Option Holder is transferred to a position in the Group, which is
ineligible for participation in the Plan, he will remain entitled to
exercise his Options according to rule 4.4, but no further Option
grants will occur.
4.8 If an Executive is hired, promoted or transferred into a position in
which he becomes eligible to participate in the Plan, Options may be
granted at the next Date of Grant following the
hire/transfer/promotion.
<PAGE> 8
Overriding Lapse of Options
4.9 (a) Save as provided in rule 4.6(a) (death), no Option shall be
capable of being exercised after the expiration of the Exercise
Period.
(b) All Options shall lapse automatically at the end of any period
during which they are exercisable under rules 4.6(a) (death)
and (b) (redundancy, injury, etc.) and Appendix 1.
(c) If a bankruptcy order is made in respect of an Option Holder,
all Options held by him shall lapse forthwith unless such lapse
would be unlawful in which case the Company may make an offer
to acquire an Option which is the subject of a bankruptcy
order.
AVAILABILITY OF SHARES
5. The Administrator shall procure that sufficient Shares are available
for transfer by the Central Share Vehicle to satisfy the exercise of
Options.
TRANSFER OF SHARES ON EXERCISE OF OPTION
6. Subject to paragraph 9 of Appendix 1 (Consideration Shares) and to any
necessary consents, to payment being made for the Shares and to
compliance by the Option Holder with the terms of the Plan, the Central
Share Vehicle shall as soon as practicable after receipt of any notice
of exercise procure the transfer to the Option Holder (or to his
nominee) of the number of Shares specified in the notice at the
Exercise Price.
RIGHTS ATTACHING TO SHARES TRANSFERRED PURSUANT TO OPTION
7. All Shares transferred pursuant to the exercise of any Option shall, as
to voting, dividend, transfer and other rights, including those arising
on a liquidation of Allied Zurich or Zurich Allied as appropriate, rank
equally in all respects with the Shares in issue at the date of such
exercise save as regards any rights attaching to such Shares by
reference to a record date prior to the date of such exercise.
CHANGE OF CONTROL AND LIQUIDATION
8. Appendix 1 shall apply in the event of a change of control or
liquidation or other similar event affecting Allied Zurich Shares or
Zurich Allied Shares.
ADJUSTMENT OF AWARD
9. Appendix 2 shall apply in the event of any variation of the share
capital of Zurich Allied or Allied Zurich.
OVERALL LIMITS
10. Appendix 3 shall apply to limit the number of new Shares that may be
issued for the purposes of the Plan.
ADMINISTRATION
11.1 The decision of the Administrator shall be final and binding in all
matters relating to the Plan and it may at any time discontinue the
grant of further Options.
11.2 The rights and obligations of an Option Holder under the terms and
conditions of the Option Holder's office or employment shall not be
affected by that Option Holder's participation in the Plan or any right
that Option Holder may have to participate in the Plan. An individual
who participates in the Plan waives all and any rights to compensation
or damages in consequence of the termination of that
<PAGE> 9
individual's office or employment with any company for any reason
whatsoever insofar as those rights arise, or may arise, from the
individual ceasing to have rights under or be entitled to exercise any
Option under the Plan as a result of such termination or from the loss
or diminution in value of such rights or entitlements. If necessary,
the Option Holder's terms of employment shall be varied accordingly.
11.3 All documents of title relating to the Shares including communications
relating to the Plan shall be sent at the Participant's risk.
11.4 Any Member of the Group or relevant Business Unit which employs
Participants who are granted Options or any relevant Business Unit in
the Group shall provide such monies as the Central Share Vehicle
determines for the provision of Options/Shares.
AMENDMENT
12. The Board may amend any of the provisions of the Plan in any way it
thinks fit PROVIDED THAT:
(a) no amendment to the advantage of Participants or Option Holders
may be made to:
(i) the definition of Executive in the Definitions;
(ii) the limits on the numbers of Shares available for issue
for the purposes of the Plan;
(iii) the maximum entitlement of a Participant under the
Plan;
(iv) the basis for determining a Participant's entitlement
to Shares under the Plan;
(v) the terms of Shares to be provided under the Plan;
(vi) the adjustment provisions of Appendix 2 of the Plan;
without the prior approval of an ordinary resolution of Allied
Zurich in general meeting except in the case of minor
amendments to benefit the administration of the Plan, to take
account of a change in legislation or developments in the law
affecting the Plan or to obtain or maintain favorable tax,
exchange control or regulatory treatment for Participants and
Option Holders or any member of the Group; and
(b) no amendment shall have effect until any approvals which are
necessary in accordance with clause 10 of the Governing
Agreement have been obtained.
GENERAL
13.1 The Board reserves the right to terminate the Plan at any time.
13.2 No Option may be granted under the Plan later than August 31, 2008.
13.3 The existence of any Option shall not affect in any way the right or
power of Allied Zurich or Zurich Allied or their shareholders to make
or authorize any or all adjustments, recapitalizations, reorganizations
or other changes in the capital structure of Allied Zurich or Zurich
Allied, or any merger or consolidation of Allied Zurich or Zurich
Allied, or any issue of shares, bonds, debentures, preferred or prior
preference stocks ahead of or convertible into, or otherwise affecting
the Shares or the rights thereof, or the dissolution or liquidation of
Allied Zurich or Zurich Allied or any sale or transfer of all or any
part of its or their assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
<PAGE> 10
13.4 Benefits under the Plan shall not be considered as income for
calculating contributions or benefits under regular pension or other
employee benefits programs.
13.5 The rights and obligations of any individual under the terms of his
office or employment shall not be affected by his participation in the
Plan, and each Participant shall by his participation waive all and any
rights to compensation or damages in consequence of the termination of
his office or employment for any reason whatsoever insofar as those
rights arise or may arise from his ceasing to have rights under the
Plan as a result of such termination or from the loss or diminution in
value of such rights or entitlements. Participation in this Plan shall
not impose or be deemed to impose any obligations on the Company or any
member of the Group to continue to employ him.
13.6 Any Option granted under the Plan is voluntary and shall not be treated
as creating any future rights to participate in the Plan or to receive
an Option or Shares.
13.7 The Administrator shall be entitled in its absolute discretion to
invite an Option Holder to elect to surrender all or part of any Option
which is exercisable under the Plan in consideration for the payment of
a cash sum equal in amount to the difference between the aggregate
Market Value on the date the election is made of the Shares in respect
of which the Option is surrendered, and the aggregate Exercise Price
for such Shares less any deductions which are required by any
applicable law to be withheld. The payment of the cash sum may be paid
immediately or deferred as the Administrator may decide.
13.8 The Administrator may establish sub-plans to the Plan for employees of
Subsidiaries and/or groups of Subsidiaries and/or Business Units
provided that the terms of any such sub-plan are substantially based on
the basic principles of the Plan modified as appropriate to take
account of tax, securities and trust laws and exchange control
requirements and local practices in the countries in which Participants
are resident and that the Shares which may be issued (including to the
Central Share Vehicle) pursuant to such sub-plan shall count against
the limits in Appendix 3.
13.9 The Administrator may establish sub-plans to the Plan for employees of
Subsidiaries and/or groups of Subsidiaries which involve the grant of
"stock appreciation rights" to receive cash or Shares having a value
equal to the increase in value of a specified number of Shares between
the grant and exercise of the right provided that the terms of such
sub-plan (except to the extent of the "stock appreciation rights") are
substantially based on the basic principles of the Plan modified as
appropriate to take account of tax, securities and trust laws and
exchange control requirements and local practices in the countries in
which Participants are resident and that the Shares which may be issued
(including to the Central Share Vehicle) pursuant to such sub-plan
shall count against the limits in Appendix 3.
13.10 These rules shall be governed by, and construed in accordance with, the
laws of Switzerland.
<PAGE> 11
APPENDIX 1
(Rule 8)
CHANGE OF CONTROL AND LIQUIDATION
Offers for Allied Zurich and Zurich Allied
1. If any person (either alone or together with any person acting in
concert with him) obtains Control of a Qualifying Company as a result
of making:
(a) Joint Offers; or
(b) a general offer to acquire the whole of the issued share
capital of one of the Qualifying Companies (other than those
shares which are already owned by him and/or any person acting
in concert with him),
an Option Holder will be entitled to exercise any Option held by him
in respect of Shares in the relevant Qualifying Company (subject to
such exercise being permissible under any applicable law) whether or
not the Exercise Period has commenced, whether or not the vesting
conditions have been fulfilled and whether or not any conditions
imposed under rule 3.4 have been satisfied within the period of six
months following the date on which the Joint Offers or the general
offer within paragraph (b) above become or are declared unconditional
in all respects. Failing such exercise the Options shall (without
prejudice to the operation of paragraphs 6 to 9 of this Appendix) lapse
automatically.
PROVIDED THAT, if an event as described in paragraph 2 of this
Appendix occurs during the period for exercise, the period during which
the Options may be exercised in respect of Shares shall be the shorter
of the periods specified under paragraphs 1 and 2 and FURTHER PROVIDED
THAT any provision for lapse shall be without prejudice to the
operation of paragraphs 6 to 9 of this Appendix.
Compulsory Acquisition
2. If, whether in connection with Joint Offers or a general offer within
paragraph 1(b) any person becomes bound or entitled to acquire Allied
Zurich Shares under sections 428 to 430F of the Companies Act of 1985,
(or there occurs in relation to Zurich Allied an event entitling an
offeror to acquire compulsorily Zurich Allied Shares held by minority
shareholders pursuant to Article 33 of the Swiss Stock Exchange Act)
each Option Holder may exercise any Option held by him which is in
respect of Shares in the relevant Qualifying Company to which such
acquisition provisions relate, (subject to such exercise being
permissible under any applicable law) whether or not the Exercise
Period has commenced, whether or not the vesting conditions have been
fulfilled and whether or not any conditions imposed under rule 3.4 have
been satisfied, at any time during the period of 30 days from the date
on which such person becomes so bound or entitled, failing which
exercise the Options shall as regards the Shares in the relevant
Qualifying Company to which such acquisition provisions relate and
without prejudice to the operation of paragraphs 6 to 9, lapse
automatically.
Scheme of Arrangement
3. If a court shall direct that a meeting of the holders of Allied Zurich
Shares be convened pursuant to section 425 of the Companies Act of 1985
for the purposes of considering a scheme of arrangement involving the
reconstruction of Allied Zurich or its amalgamation with any other
company or companies:
(a) each Option Holder may exercise his Options in respect of
Allied Zurich Shares (subject to such exercise being
permissible under any applicable law), whether or not the
Exercise Period has commenced and whether, whether or not the
vesting conditions have been fulfilled or not any
<PAGE> 12
conditions imposed under rule 3.4 have been satisfied,
conditionally on either the scheme of arrangement being
approved by the shareholders' meeting or sanctioned by the
court (as determined by the Administrator in its absolute
discretion) (the relevant condition), between the date of the
court's direction and twelve noon on the day immediately
preceding the date for which the shareholders' meeting is
convened. Any Option not exercised by the end of that period
shall cease to be exercisable between that time and the first
date on which it can be determined whether or not the relevant
condition is satisfied. If the relevant condition is not
satisfied, the Options shall continue. If the relevant
condition is satisfied the Options shall, without prejudice to
the operation of paragraphs 6 to 9, lapse automatically on the
date on which the scheme of arrangement is sanctioned by the
court PROVIDED THAT where the Option is in respect of Share
Units the Option shall lapse only in respect of Allied Zurich
Shares; and
(b) the Administrator shall endeavor to procure that where an
Option Holder has conditionally exercised his Options in
accordance with (a) above prior to twelve noon on the day
immediately preceding the date for which the shareholders'
meeting is initially convened the scheme of arrangement shall,
so far as it relates to Allied Zurich Shares, be extended to
such Option Holder as if each Share in respect of which the
Option was conditionally exercised had been transferred, to him
by that time.
PROVIDED THAT (without prejudice to the operation of paragraph 6(b))
Options shall not without the consent of the Administrator be
exercisable under the foregoing provisions if the purpose and effect of
the scheme of arrangement is to create a new holding company for Allied
Zurich, such company having substantially the same shareholders and
proportionate shareholdings as those of Allied Zurich immediately prior
to the scheme of arrangement.
Winding up
4. If notice is duly given of a resolution for the voluntary winding up of
Qualifying Company an Option Holder may exercise any Option held by him
which is in respect of Shares in the relevant Qualifying Company
(subject to such exercise being permissible under any applicable law)
(whether or not the Exercise Period has commenced, whether or not the
vesting conditions have been fulfilled and whether or not any
conditions imposed under rule 3.4 have been satisfied) within the
period of two months from the date of the resolution, failing which
exercise the said Options will lapse automatically.
Option Rollover
5. If any person (the Acquiring Company):
(a) obtains Control of a Qualifying Company as a result of making:
(i) Joint Offers; or
(ii) a general offer to acquire the whole of the issued
Share capital of one of the Qualifying Companies (other
than those shares which are already owned by him and/or
any person acting in concert with him); or
(b) obtains Control of Allied Zurich in pursuance of a compromise
or arrangement sanctioned by the court under section 425 of the
Companies Act of 1985; or
(c) becomes bound or entitled to acquire Allied Zurich Shares under
sections 428 to 430 of the Companies Act of 1985; or
(d) becomes entitled to acquire compulsorily Zurich Allied Shares
held by minority shareholders;
<PAGE> 13
the Administrator may in its absolute discretion and subject
to applicable law allow an Option Holder, at any time within
the Appropriate Period, to release all or any part of any
Option held by him which is in respect of Shares in the
Qualifying Company affected by any event within paragraphs (a)
to (d) above and which has not lapsed, in consideration of the
grant to him of a right (the New Right) which is equivalent to
the Option or such part as is released but relates to shares
or securities in the Acquiring Company or a body corporate
which Controls the Acquiring Company (the Replacement Shares).
6. The New Right shall not be regarded for the purposes of paragraph 6 as
equivalent to the Option unless:
(a) the New Right will be exercisable in the same manner as the
Option and subject (mutatis mutandis) to the provisions of the
Plan as it had effect immediately before the release; and
(b) the total market value, as determined by the Board,
immediately before the release, of the Shares which were
subject to the Option or to such part as is released is, as
nearly as may be, equal to the total market value as
determined by the Board, immediately after the release, of the
Replacement Shares; and
(c) the total amount payable by the Option Holder for the
acquisition of the Replacement Shares is, as nearly as may be,
equal to the total Exercise Price of the Shares which were
subject to the Option or such part as is released immediately
before the release.
7. For the purposes of paragraph 6(a) any New Right granted shall be
deemed to have been granted on the date on which the equivalent
Option was granted.
8. In the application of the Plan to the New Right:
(a) references to Shares shall be read as if they were references
to the Replacement Shares;
(b) references to Allied Zurich or Zurich Allied shall be read as
if they were references to the company to whose shares the New
Right relates;
(c) any conditions imposed under rule 3.4 shall not at any time
apply unless the Administrator decides in its discretion that
they shall continue to apply either unaltered or with such
variations as the Administrator considers appropriate.
9. If as a result of any event mentioned in this Appendix the Central
Share Vehicle ceases to hold any Shares which it held for the purpose
of satisfying the exercise of Options and receives other shares or
securities in another company or body corporate in consideration for
those Shares (Consideration Shares), the Administrator may direct that
any future exercise of an Option shall be satisfied by the transfer of
Consideration Shares, the aggregate number or value of which
corresponds to the number or value of the Shares over which the Option
is exercised, calculated according to the value imputed to the Shares
by the terms on which the Consideration Shares were acquired by the
Central Share Vehicle.
<PAGE> 14
APPENDIX 2
(Rule 9)
ADJUSTMENT OF OPTION
1. In the event of any Reorganization of the share capital of Allied
Zurich or Zurich Allied, or if the Administrator becomes aware that
the Group is or is expected to be affected by any de-merger, dividend
in specie, super dividend or other transaction affecting the Group
which in the Administrator's opinion may affect the current or future
value of any Options, the Exercise Price, the definition of Shares and
the number of Shares comprised in an Option may be adjusted in such
manner as the Administrator may determine and such decision of the
Administrator shall be final and binding on the Option Holder PROVIDED
ALWAYS THAT:
(a) no adjustment to the Exercise Price shall be made pursuant to
the provisions of this rule which would result in the Exercise
Price being less than the nominal value of Shares subject to
any Option;
(b) no adjustment shall be made pursuant to the rule which would
increase the aggregate Exercise Price payable on exercise of
an Option.
<PAGE> 15
APPENDIX 3
(Rule 10)
OVERALL LIMITS
1. To the extent that Options shall or may be satisfied out of a new issue
of Shares subscribed by the Central Share Vehicle for the purpose of
satisfying Options under the Plan, no such Shares shall be so issued
and no Award shall be granted if the result of that grant would be
that:
(a) the aggregate number of Shares that could be issued for the
purpose of satisfying the exercise of that Option and any
other Options granted at the same time, when added to the
number of Shares that:
(i) have been or could be issued to the Central Share
Vehicle for the purpose of satisfying the exercise of
any other subsisting share options granted during the
preceding ten years under the Plan or any other Share
Option Plan; and
(ii) have been issued to the Central Share Vehicle for the
purpose of satisfying the exercise of any share
options granted during the preceding ten years under
the Plan or any other Share Option Plan; and
(iii) have been issued during the preceding ten years to the
Central Share Vehicle for the purpose of any profit
sharing or other employee share incentive plan (not
being a Share Option Plan),
would exceed 10 percent of the ordinary share capital of each
of Allied Zurich and Zurich Allied for the time being in
issue; or
(b) the aggregate number of Shares that could be issued for the
purpose of satisfying the exercise of that Option and any
other Options granted at the same time, when added to the
number of Shares that:
(i) have been or could be issued to the Central Share
Vehicle for the purpose of satisfying the exercise of
any other subsisting share options granted during the
preceding ten years under the Plan or any other
Participant Plan; and
(ii) have been issued to the Central Share Vehicle for the
purpose of satisfying the exercise of any share
options granted during the preceding ten years under
the Plan or any other Participant Plan,
would exceed 5 percent of the ordinary share capital of each
of Allied Zurich and Zurich Allied for the time being in
issue; or
(c) the aggregate number of Shares that could be issued for the
purpose of satisfying the exercise of that Option and any
other Options granted at the same time, when added to the
number of Allied Zurich Shares that:
(i) have been or could be issued to the Central Share
Vehicle for the purpose of satisfying the exercise of
any other subsisting share options granted after the
Adoption Date under the Plan or any other Participant
Plan; and
(ii) have been issued to the Central Share Vehicle for the
purpose of satisfying the exercise of any share
options granted after the Adoption Date under the Plan
or any other Participant Plan,
<PAGE> 16
would exceed 2 1/2 percent of the ordinary share capital of
each of Allied Zurich and Zurich Allied for the time being in
issue: PROVIDED THAT this limit shall apply only in respect of
grants of Options made before the fourth anniversary of the
Adoption Date;
(d) the aggregate number of Allied Zurich Shares that could be
issued for the purpose of satisfying the exercise of that
Option and any other Options granted at the same time, when
added to the number of Allied Zurich Shares that:
(i) have been or could be issued to the Central Share
Vehicle for the purpose of satisfying the exercise of
any other subsisting share options granted during the
preceding three years under the Plan or any other
Participant Plan; and
(ii) have been issued to the Central Share Vehicle for the
purpose of satisfying the exercise of any share options
granted during the preceding three years under the Plan
or any other Participant Plan,
would exceed 3 percent of the ordinary share capital of Allied
Zurich for the time being in issue.
AND FURTHER PROVIDED that no Option shall be granted to the
extent that it would result in the issue of Zurich Allied
Shares which would be unlawful under Swiss law.
2. Whenever the Central Share Vehicle subscribes for Allied Zurich Shares
it shall also subscribe for shares in Zurich Allied in the proportion
of 57 (Zurich Allied) : 43 (Allied Zurich).
3. No Option shall be granted to any Participant which would, at the
proposed Date of Grant, cause the aggregate Market Value of Shares the
subject of subsisting Options held by him pursuant to a grant under the
Plan and the market value of Shares the subject of subsisting options
held by him under any other Participant Plan to exceed in amount four
times his total annual earnings (including bonuses and benefits in
kind) from the Group PROVIDED THAT no account shall be taken of any
such options which will not be satisfied by the issue and allotment of
Shares to the Option Holder or the Central Share Vehicle.
4. If the grant of any Option would have the result of breaching any limit
in this Appendix 3, that Option shall be treated as taking effect over
the maximum number of Shares over which it could have been granted
without breaching such limit.
5. Reference in this Appendix 3 to the issue of Shares shall, for the
avoidance of doubt, mean the issue and allotment of Shares and not the
transfer of Shares (other than where the Central Share Vehicle
transfers to a Participant Shares which have previously been issued and
allotted to the Central Share Vehicle).
<PAGE> 17
DEFINITIONS
1. In this Plan unless the context otherwise requires the following words
and expressions shall have the following meanings, namely:
Administrator means in relation to this Plan, the Group Chief Executive
Officer or, in the case of the grant of Options to the Group Executive
Officer and any member of the Company's Group Management Board, the
Remuneration Committee of the Company;
Allied Zurich means Allied Zurich p.l.c with registered number 3525388;
Allied Zurich Share means an ordinary share in the capital of Allied
Zurich or shares representing those shares following any
Reorganization;
Appropriate Period means:
(a) in the case of Joint Offers, the period of six months
from the date each of the Offers becomes or is declared
unconditional in all respects;
(b) in the case of an Offer, the period of six months from
the date the Offer becomes or is declared unconditional
in all respects;
(c) in the case of a Scheme of Arrangement the period of
six months from the date of the relevant condition
mentioned in paragraph 3 of Appendix 1;
(d) in the case of a person being bound or entitled to
acquire Shares compulsorily, the period during which
that person remains so bound or entitled;
Associated Plan means any Share Option Plan (other than the Plan) (but
excluding any savings-related share option scheme) established by the
Company or any member of the Group;
Board means the Board of directors of the Company or a duly authorized
committee thereof;
Business Unit means a business unit of the Group including the Group's
home office;
Central Share Vehicle means entity which will acquire (by subscription
or purchase) and hold both Allied Zurich Shares and shares in Zurich
Allied for the purpose of employees' share schemes and which may
without limitation take the form of a trust, a Stiftung or an
administrative unit of or an account in the name of the Company or any
Subsidiary;
Company means Zurich Financial Services;
Consideration Shares has the meaning given in paragraph 10 of
Appendix 1;
Control means in relation to a body corporate, the power of a person to
secure:
(a) by means of the holding of shares or the possession of
voting power in or in relation to that or any other
body corporate; or
(b) by virtue of any powers conferred by the articles of
association or other document regulating that or any
other body corporate, that the affairs of the
first-mentioned body corporate are conducted in
accordance with the wishes of that person;
Date of Grant means in relation to an Option, the date on which an
Option is granted;
<PAGE> 18
Dealing Day means a day on which the London Stock Exchange or the Swiss
Stock Exchange (as the context requires) is open for business;
Participant means any employee or Participant director of any company
within the Group who in the case of a Participant director is required
to work for substantially the whole of his time for the Group;
Participant Plan means any Share Option Plan (other than the Plan)
under which the individuals selected for participation at the
discretion of the body administering that plan are senior
Participant employees;
Exercise Period means the period commencing and ending on such dates as
the Administrator may determine during which the Option(s) can be
exercised by the Option Holder. The Exercise Period will not commence
earlier than the third anniversary of the Date of Grant unless the
Administrator decides otherwise in exceptional circumstances. In any
event the Exercise Period will end not later than tenth anniversary of
the Date of Grant;
Exercise Price means the price per Share payable on the exercise of an
Option;
Group means the Company and the Subsidiaries and member of the Group
shall be construed accordingly;
Joint Offers means Offers which are made by a person (either alone or
together with any person acting in concert with him) for the whole of
the issued share capital of both Allied Zurich and Zurich Allied (other
than those Shares already owned by him and/or any person acting in
concert with him) in each case on the condition that each Offer can
only be declared unconditional if the other is declared unconditional
at the same time;
Listing means the first admission of the Shares to the London Stock
Exchange or the Swiss Exchange as the case may be;
Market Value means on any day:
(a) in respect of an Allied Zurich Share, the middle market
quotation of an Allied Zurich Share on the London Stock
Exchange as derived from the Daily Official List for
that day; and
(b) in respect of any Zurich Allied Share the middle market
quotation of a Zurich Allied Share on the Swiss
Exchange for that day;
Offer means a general offer for Shares;
Option means a right granted under the Plan to purchase Shares or if
the Administrator so determines, Shares comprised in Share Baskets;
Option Holder means any individual who holds an Option (or, where the
context permits, the legal personal representatives or designated
beneficiary of a deceased Option Holder);
Plan this Plan as amended from time to time;
Qualifying Company means each of Allied Zurich and Zurich Allied;
Reorganization means any capitalization or rights issue, and any sub-
division or consolidation, or reduction of the share capital of Allied
Zurich or Zurich Allied or any other variation of the share capital of
Allied Zurich or Zurich Allied;
<PAGE> 19
Share Option Plan means any employee share option Plan established by
the Company;
Share means an Allied Zurich Share or a Zurich Allied Share or shares
representing those shares following any Reorganization or a Share
Basket;
Share Basket means a collection of such number or value of Allied
Zurich Shares and Zurich Allied Shares as the Administrator shall from
time to time determine (subject to any change in composition by reason
of a partial lapse of an Option under paragraphs 1 to 5 of Appendix 1
or the operation of paragraph 6 of Appendix 1 or an adjustment under
Appendix 2);
Subsidiary means any body corporate which from time to time is listed
as a subsidiary of the Company in the consolidated annual report and
accounts of the Company;
Swiss Exchange means the Swiss Exchange owned and operated by the Swiss
Stock Exchange Association;
Vesting Schedule means a schedule which specifies the percentage of
Shares in respect of which an Option shall become exercisable at
different times during the overall term of the Option;
Zurich Allied means Zurich Allied AG;
Zurich Allied Share means a share in the capital of Zurich Allied.
2. Where the context permits the singular shall include the plural and
vice versa and the masculine shall include the feminine. Headings shall
be ignored in construing the Plan.
3. References to any Act shall include any statutory modification,
amendment or re-enactment thereof.
Exhibit 12
FARMERS GROUP, INC.
AND SUBSIDIARIES
COMPUTATION OF THE RATIO
OF EARNINGS TO FIXED CHARGES
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated income before
provision for taxes $1,103,900 $ 950,562 $1,002,106 $ 863,143 $ 763,493
Add:
Portion of rents
representative of interest 9,576 7,444 7,120 6,707 7,315
Interest 45,552 43,935 45,031 52,883 29,836
---------- ---------- ---------- ---------- ----------
Income, as adjusted $1,159,028 $1,001,941 $1,054,057 $ 922,733 $ 800,644
========== ========== ========== ========== ==========
Fixed Charges:
Portion of rents
representative of interest $ 9,576 $ 7,444 $ 7,120 $ 6,707 $ 7,315
Interest 45,552 43,935 45,031 52,883 29,836
---------- ---------- ---------- ---------- ----------
Total fixed charges $ 55,128 $ 51,379 $ 52,151 $ 59,590 $ 37,151
========== ========== ========== ========== ==========
Ratio of earnings to fixed
charges: 21.0 x 19.5 x 20.2 x 15.5 x 21.5 x
</TABLE>
Exhibit 99
RISK MANAGEMENT
Disclosure - General Comment
- ----------------------------
When used or incorporated by reference in disclosure documents, the words
"anticipate", "estimate", "expect", "project", "target", "goal" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. These forward-looking
statements are subject to certain uncertainties, risks and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove to be inaccurate, the actual results may vary
materially from those anticipated, estimated, expected or projected.
Additionally, these forward-looking statements are relevant only as of the
date of the document. The Company's management expressly disclaims any
obligation to publicly release updates or revisions to any forward-looking
statement contained herein to reflect changes in the Company's expectations
with regard to any change in events, conditions or circumstances on which any
such statement is based.
Market Risk
- -----------
Generally, market risk represents the risk of loss that may occur due to
potential changes in a financial instrument's valuation or cash flow due to
changes in interest rates, currency exchange rates, and in equity and
commodity prices. Market risk is inherent to both derivative and
non-derivative financial instruments.
General Risk Management Procedures
- ----------------------------------
The Company's Investment Committee has oversight responsibilities for all
operational and other matters that affect the Company's day-to-day investment
activities. The Investment Committee monitors the market risk faced by the
Company's various entities and portfolios. The asset and liability management
strategy are formulated and monitored by the Investment Committee. The
Committee meets monthly to review, among other things, statements detailing
the Company's market risks and trends, portfolio holdings at book and market
value, equity exposure and surplus positions, and interest rate scenario
stress tests. The stress testing provides insights into the sensitivity of
the assets to interest rate changes. The committee is comprised of the Chief
Executive Officer, Chief Investment Officer, Chief Financial Officer and other
senior executives. The Company also conducts extensive cash flow testing on
an annual basis for the Farmers Life book of business. This review examines
the adequacy of reserves under various interest rate environments. The
Company examines the asset and liability matching throughout the year using
quarterly scenario tests and monthly asset duration reports. This Committee
also reviews investment policies and procedures and makes recommendations to
the Board of Directors of the Company based upon the results of their review.
In addition, Farmers Life's Interest Committee has responsibility for
managing spreads between rates credited on interest-sensitive products and
portfolio earnings rates. The Interest Committee is comprised of the
following Farmers Life personnel: President, Actuary, Treasurer, VP-Insurance
Operations, VP-Staff Operations, AVP-Information Systems, AVP-Annuities and
Life Marketing Director.
The Company has contracted with Scudder Kemper Investments, Inc. ("SKI")
for the purpose of providing investment advice, trade execution and other
investment related services.
SKI utilizes a number of market risk management tools including, but not
limited to, fixed income securities interest rate sensitivity analysis,
following established limits on trading activity and asset allocation, marking
all equity positions to market on a daily basis, marking all fixed income
positions to market at least monthly and analyzing investment profit and loss
statements and investment holding asset class mix reports. Additionally, SKI
reports positions, profits and losses, credit quality evaluation results and
trading strategies, including the period's acquisitions and dispositions to
the Investment Committee on a monthly basis. The Company believes that these
procedures, which focus on meaningful communication between SKI and the
Company's senior management, are one of the most important elements of the
risk management process.
<PAGE> 2
Although the Company has a number of procedures to reduce the level of
exposure to interest rate risk and equity price risk, the Company continues
to remain vulnerable to both of these market risks. There can be no assurance
that the Company will not experience changes in stockholders' equity, net
income and net interest income during periods of increasing or decreasing
interest rates and/or equity prices.
The Company's management does not anticipate any significant changes in
the way it currently manages market risks.
Primary Market Risk Exposures
- -----------------------------
The Company's exposure to market risk is primarily attributable to the
interest rate risk and equity price risk inherent in the Company's investment
related activities and in the Company's annuity product underwriting
activities. To a lesser extent, the Company has exposure to interest rate risk
as a result of its issuance of Cumulative Quarterly Income Preferred
Securities ("QUIPS").
A description of the Company's primary market risk exposures as of
December 31, 1999 and a brief narrative explaining how each exposure is
currently being managed follows:
Interest Rate Risk
- ------------------
The Company has significant exposure to interest rate risk primarily as
a result of maintaining an investment portfolio which includes interest rate
sensitive financial instruments and as a consequence of underwriting interest
rate sensitive annuity products. Therefore, the Company exposes itself to
interest rate risk, arising from changes in the level or volatility of
interest rates, mortgage prepayment speeds or the shape and slope of the yield
curve. Additionally, the fair value of the Company's QUIPS has exposure to
interest rate risk.
In general, the fair values of fixed-rate financial instruments have an
inverse correlation to changes in interest rates. Therefore, an increase in
interest rates could result in an unfavorable or untimely decrease in the
market value of the Company's fixed income investments. Furthermore, the
Company has classified all of its marketable fixed income investments as
available-for-sale as defined by SFAS No. 115, with the exception of $59.7
million in 1999 which relate to a grantor trust and are classified as trading
securities as defined by SFAS No. 115. The available-for-sale fixed income
investments are reported on the consolidated balance sheet at market value,
with unrealized gains and losses, net of tax, excluded from earnings and
reported as a component of stockholders' equity. The trading investments are
reported on the "Other assets" line of the consolidated balance sheet at market
value with both realized and unrealized gains and losses included in earnings,
net of tax, in the year in which they occur. As such, an increase in interest
rates could adversely affect the Company's stockholders' equity.
Generally, the change in fair value of the Company's QUIPS (see Note G),
BAFS notes receivable and OSDH note receivable (see Note S), investments in
certificates of contribution and the surplus note of the P&C Group (see Note F)
that may arise due to changes in interest rates would not be reflected in the
Company's consolidated financial statements, since these financial instruments
are not classified as marketable securities pursuant to SFAS No. 115.
Exposure Management
- -------------------
The principal objective of the Company's interest rate risk management
activities are to evaluate the interest rate risk included in certain balance
sheet accounts, determine the level of risk appropriate given the Company's
business objectives, operating environment, capital and liquidity requirements
and performance objectives and to manage this risk consistent with approved
guidelines.
Farmers Life employs various methodologies to manage its exposure to
interest rate risks. Its asset/liability matching process focuses primarily
on the management of interest rate risk. The duration of insurance liabilities
is compared to the duration of assets backing the insurance product lines,
measured in terms of cash flows. The goal is to prudently balance
profitability and risk for each insurance product class and for Farmers Life
as a whole.
<PAGE> 3
Farmers Life also considers the timing of cash flows arising from market
risk sensitive instruments and insurance portfolios under varying interest
rate scenarios (cash flow testing) to verify its ability to meet future
obligations. Although these activities seek to reduce interest rate
exposures, a change in levels of interest rates remains an uncertainty that
could have an impact on the fair values or earnings of the Company.
Quantitative Disclosure of Interest Rate Risk
- ---------------------------------------------
The table below represents a summary of the par values of the Company's
financial instruments at their expected maturity dates, the weighted average
coupons by those maturity dates and the estimated fair value of those
instruments for the period ended December 31, 1999. The expected maturity
categories take into consideration par amortization (for mortgage backed
securities), call features and sinking fund features.
The estimated market value of available-for-sale securities is based on
bid quotations from security dealers or on bid prices published in news quote
services. The fair value of BAFS notes receivable, OSDH note receivable,
QUIPS, certificates of contribution of the P&C Group, the surplus note of the
P&C Group, mortgage loans, policy loans and future policy benefits, were
analytically determined utilizing discounted cash analysis. December 31, 1999
market interest rates were used as discounting rates in the estimation of fair
value.
Generally, the assets included in the table below have fixed stated
interest rates. The QUIPS also have fixed stated rates; whereas, the future
policy benefits-deferred annuities generally include variable rate contract
terms.
<PAGE> 4
Financial Instruments - With Interest Rate Risk
As of December 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Expected Maturity Date
There Total
12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 After Par Value Fair Value
-------- -------- -------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninsurance
- ----------------
Assets -
Debt Securities Available-
For-Sale:
U.S. Treasury Securities &
Other Obligations of U.S.
Government $ - $ 235 $ - $ - $ - $ - $ 235 $ 240
Weighted Avg Coupon 7.88% 7.88% 0.00% 0.00% 0.00% 0.00%
Obligations of States &
Political Subs $ 39,415 $139,140 $130,465 $ 95,180 $ 50,385 $ 6,210 $ 460,795 $ 473,097
Weighted Avg Coupon 5.83% 5.90% 5.71% 5.25% 4.69% 4.69%
Corporate Securities $ 15,000 $ 20,535 $ - $ - $ 10,000 $ 20 $ 45,555 $ 44,952
Weighted Avg Interest Rate 6.70% 6.50% 6.35% 6.35% 6.35% 6.35%
Mortgaged-Backed Securities $ 13,996 $ 1,880 $ 11,653 $ 2,003 $ 2,782 $ 10,121 $ 42,435 $ 41,364
Weighted Avg Coupon 3.05% 6.20% 6.55% 6.53% 6.51% 6.51%
Other Debt Securities $ 2,500 $ - $ 13,728 $ 2,250 $ - $ - $ 18,478 $ 18,613
Weighted Avg Coupon 6.70% 6.70% 4.30% 2.00% 2.00% 2.00%
Mortgage Loans $ 54 $ 59 $ 33 $ - $ - $ - $ 146 $ 152
Weighted Avg Interest Rate 9.5% 9.5% 9.5% 0.0% 0.0% 0.0%
Notes Receivable-Affiliates $200,000 $207,000 $200,000 $200,000 $500,000 $ - $1,307,000 $1,280,685
Weighted Avg Interest Rate 6.00% 6.11% 6.25% 6.43% 6.76%
Certificates of Contribution
of the P&C Group $ - $ - $ - $ - $ - $ 23,330 $ 23,330 $ 23,330
Weighted Avg Interest Rate 8.48% 8.48% 8.48% 8.48% 8.48% 8.48%
Liabilities -
QUIPS $ - $ - $ - $ - $ - $ 500,000 $ 500,000 $ 448,668
Weighted Avg Interest Rate 8.41% 8.41% 8.41% 8.41% 8.41% 8.41%
Insurance Subsidiaries
- ----------------------
Assets -
Debt Securities Available-
For-Sale:
U.S. Treasury Securities &
Other Obligations of U.S.
Government $ - $ - $ 1,500 $ 10,025 $ 42,000 $ 318,815 $ 372,340 $ 397,859
Weighted Avg Interest Rate 7.29% 7.29% 7.22% 7.29% 6.48% 6.63%
Obligations of States &
Political Subs $ 27,170 $ 11,071 $ 27,976 $ 35,255 $ 58,670 $ 321,060 $ 481,202 $ 485,340
Weighted Avg Interest Rate 6.46% 6.32% 6.45% 6.48% 6.80% 6.74%
Debt Securities Issued By
Foreign Governments $ - $ 9,786 $ 2,784 $ 2,018 $ 3,846 $ 78,505 $ 96,939 $ 76,699
Weighted Avg Interest Rate 8.56% 8.14% 8.56% 7.99% 8.25% 9.08%
Corporate Securities $ 41,233 $136,374 $ 95,187 $205,323 $164,961 $ 723,805 $1,366,883 $1,327,284
Weighted Avg Interest Rate 7.43% 7.59% 7.39% 7.44% 7.53% 7.46%
Mortgage-Backed Securities $ 90,044 $ 91,103 $186,415 $218,753 $232,004 $1,664,518 $2,482,837 $2,024,284
Weighted Avg Interest Rate 5.55% 5.50% 5.39% 5.21% 4.94% 4.83%
Other Debt Securities $ 114 $ 39 $ 75 $ 137 $ 17 $ 818 $ 1,200 $ 64,854
Weighted Avg Interest Rate 3.59% 3.33% 3.19% 3.17% 2.57% 2.47%
Surplus Note of the P&C
Group $ - $119,000 $ - $ - $ - $ - $ 119,000 $ 119,000
Weighted Avg Interest Rate 6.10% 6.10% 0.00% 0.00% 0.00% 0.00%
Mortgage Loans $ 4,068 $ 6,505 $ 15,872 $ 4,566 $ 2,895 $ 7,878 $ 41,784 $ 43,818
Weighted Avg Interest Rate 9.91% 9.88% 9.84% 9.88% 9.95% 9.88%
Policy Loans $ 11,047 $ 10,135 $ 9,031 $ 8,448 $ 8,165 $ 154,861 $ 201,687 $ 199,166
Weighted Avg Interest Rate 7.60% 7.60% 7.60% 7.60% 7.60% 7.60%
Liabilities -
Future Policy Benefits -
Deferred Annuities $119,465 $114,867 $108,280 $100,779 $ 92,447 $ 906,977 $1,442,815 $1,392,500
Weighted Avg Interest Rate 5.54% 5.54% 5.54% 5.54% 5.54% 5.54%
</TABLE>
<PAGE> 5
Equity Price Risk
- -----------------
As a consequence of maintaining an investment portfolio composed of
equity securities and maintaining purchased S&P 500 call options that hedge
certain liabilities created as a result of underwriting equity-linked annuity
products, the Company is exposed to equity price risk. Equity price risk
arises as a result of changes in the level and volatility of equity prices
which in turn affect the value of equity securities and/or instruments that
derive their value from a particular equity security, basket of equity
securities or an equity securities index.
The Company has classified all of its marketable equity investments as
available-for-sale as defined by SFAS No. 115, with the exception of $59.7
million in 1999 which relate to a grantor trust and are classified as trading
securities as defined by SFAS No. 115. The available-for-sale equity
investments are reported on the consolidated balance sheet at market value,
with unrealized gains and losses, net of tax, excluded from earnings and
reported as a component of stockholders' equity. The trading investments are
reported on the "Other assets" line of the consolidated balance sheet at market
value with both realized and unrealized gains and losses included in earnings,
net of tax, in the year in which they occur. As such, an increase in interest
rates could adversely affect the Company's stockholders' equity.
The Company's equity price risk relative to its underwriting of equity-
linked annuity products exists as a result of the potential liability that may
exist at the end of these product's contract terms. At the end of a seven
year term, these annuity products credit interest to the annuity participant
at a rate based on a specified portion of the change in the value of the
S&P 500, subject to a guaranteed annual minimum return. As such, an increase
in the S&P 500 could increase the liability due at the maturity of these
annuity products and adversely affect the Company's stockholders' equity.
Exposure Management
- -------------------
On a monthly basis, the Investment Committee evaluates the level of
equity price risk that it believes the Company should carry giving
consideration to, among other things, the ratio of investments in equity
securities as a percentage of stockholders' equity. Management utilizes a
number of equity price risk management tools including, but not limited to,
reviewing equity investment trading activity, marking all equity positions to
market daily, analyzing investment profit and loss statements and reviewing
the industry sector allocation and capitalization mix of the Company's
investments in marketable equity securities.
As indicated above, the Company is exposed to equity price risk
(primarily the S&P 500) as a consequence of underwriting equity-linked annuity
products through Farmers Life. However, the Company addresses this risk
through a controlled program of risk management that includes the use of
derivative financial instruments. The Company purchases S&P 500 call options
to reduce the exposure to rising equity prices that results from underwriting
the equity linked annuity product. Call options are contracts that grant the
purchaser the right to buy the underlying index on a certain date for a
specified price. The Interest Committee of Farmers Life monitors option
market pricing and manages the participation rate on the equity-linked annuity
products to minimize the associated equity price risk. See Note K of the
Company's consolidated financial statements.
Quantitative Disclosure of Equity Price Risk
- --------------------------------------------
The table below represents a sensitivity analysis of the equity price
risk that exists within the Company's investment in equity financial
instruments. The equity market risk associated with the equity-linked annuity
products is substantially offset by the related option contracts, therefore,
these instruments taken as a whole, do not materially impact the Company's
market risk position. As such, the table below focuses on the equity
instrument securities. The Noninsurance and the Insurance Subsidiaries
equity investment portfolios have weighted average betas of .98 and .97,
respectively. The weighted average beta is calculated as the portfolio
weighted average of the individual asset betas. The individual asset betas
are calculated using sixty months of historical data. The individual asset
betas are calculated relative to a broadly defined universe of approximately
8,000 assets. Then a portfolio beta is calculated for both the Company's
portfolio and the benchmark Russell 3000 index. The weighted average beta is
equal to the ratio of the portfolio beta to the Russell 3000 beta.
<PAGE> 6
In light of the Company's weighted average beta, the Company expects the
market value of its equity investment portfolio to have a strong correlation
to movements in the Russell 3000 index. As indicated in the table below, if
the Russell 3000 index were to move by a positive or negative 10%, the Company
estimates that there would be a corresponding 9.8% change in the market value
of Noninsurance's investment in equity securities and a 9.7% change in the
market value of the Insurance Subsidiaries' investment in equity securities.
The change in the market value of the Company's investments in equity
securities would be in the same direction as the change in the Russell 3000
index.
Trading Financial Instruments - With Equity Price Risk
As of December 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Estimated Estimated
Value If Value If
Russell 3000 Russell 3000
Historical Market Value Index Increased Index Decreased
Cost Basis 12/31/1999 By 10% By 10%
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Noninsurance
- ------------
Equity Investments $ 299,251 $ 334,212 $ 366,965 $ 301,459
Insurance Subsidiaries
- ----------------------
Equity Investments $ 190,004 $ 213,432 $ 234,135 $ 192,729
</TABLE>
Foreign Exchange Rate Risk
- --------------------------
Foreign exchange rate risk arises from the possibility that changes in
foreign exchange rates will impact the value or cash flows of financial
instruments. When a company buys or sells a financial instrument denominated
in a currency other than US dollars, exposure exists from the net open
currency position. Until the position is covered by the selling or buying of
an equivalent amount of the same currency or by entering into a financing
arrangement denominated in the same currency, a company is exposed to a risk
that the exchange rate may move in an unfavorable direction against the US
dollar.
The Company does not have any material holdings of financial instruments
denominated in a currency other than U.S. dollars as of December 31, 1999.
Credit Risk
- -----------
Credit risk arises from the potential inability of a counterparty to
perform on an obligation in accordance with the terms of the contract. The
Company's primary credit risk exposure exists as a result of maintaining both
a fixed income investment portfolio and a mortgage loan portfolio. As a
holder of these financial instruments, the Company is exposed to default by
the issuer or to the possibility of market price deterioration as a
counterparty may experience deterioration in its credit quality. The Company
has established policies and procedures to manage this credit risk. For
example, the Investment Committee is responsible for monitoring the credit
quality of securities positions held in the Company's fixed income investment
portfolios in order to quantify and limit the risk to the Company of issuer
default or changes in credit spreads. The Company's management does not
believe that there are any concentrations of credit risk to unaffiliated
parties as of the year ended December 31, 1999. The Company does not
currently use derivative products to manage credit risk.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Farmers Group, Inc. and subsidiaries as of
December 31, 1999 and the related consolidated statements of income,
comprehensive income, stockholders' equity and cash flows for the twelve
month period ended December 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 313,500
<SECURITIES> 66,558
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 861,034
<PP&E> 747,213
<DEPRECIATION> 324,902
<TOTAL-ASSETS> 12,796,285
<CURRENT-LIABILITIES> 469,032
<BONDS> 0
500,000
0
<COMMON> 1
<OTHER-SE> 7,099,238
<TOTAL-LIABILITY-AND-EQUITY> 12,796,285
<SALES> 0
<TOTAL-REVENUES> 3,270,400
<CGS> 0
<TOTAL-COSTS> 2,124,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,070
<INCOME-PRETAX> 1,103,900
<INCOME-TAX> 426,927
<INCOME-CONTINUING> 676,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 676,973
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
