1
- ----------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
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
- --------------------- -----------------------
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, 2000 was 1,000 shares.
2
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment 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: April 5, 2001 By: /s/ Julian R.M. Harvey
___________________________________________
Julian R.M. Harvey, Vice President, Finance
3
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, 2000, the Company had total assets
of $12.3 billion, stockholders' equity of $6.3 billion and for the period ended
December 31, 2000, the Company had consolidated operating revenues of $3.4
billion. As of December 31, 2000, the Insurance Subsidiaries had total assets
of $7.2 billion, combined SAP capital and surplus (including asset valuation
reserve) of $1.7 billion, life policies-in-force of 1.2 million and for the
period ended December 31, 2000, 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
FGI. 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, the financial services businesses of B.A.T, which
included the Company, were merged with Zurich Insurance Company ("ZIC"). The
businesses of ZIC and the financial services businesses of B.A.T were
transferred to Zurich Group Holding ("ZGH"), formerly known as Zurich Financial
Services, a Swiss company with headquarters in Zurich, Switzerland. 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 ZGH 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 ZGH as a pooling of interests under
International Accounting Standards.
Operating Segments
Financial information by operating segment can be found in Note Z.
Following are descriptions of the Company's operating segments.
Provision of Management Services to the P&C Group; and Other. The
Company is attorney-in-fact ("AIF") for the Exchanges, which operate in the
property and casualty insurance industry. On March 7, 2000, the Exchanges
acquired Foremost Corporation of America and its subsidiaries ("Foremost"), a
prominent writer of insurance for manufactured homes, recreational vehicles and
other specialty lines. Each policyholder of the Exchanges appoints the Company
as the exclusive AIF to provide management services to the P&C Group. For such
services, the Company earns management fees based primarily on a percentage of
gross premiums earned by the P&C Group. The P&C Group is owned by the
policyholders of the Exchanges, FTCM and Foremost County Mutual Insurance
Company as well as the underwriters of Foremost Lloyds of Texas. Accordingly,
the Company has no ownership interest in the P&C Group nor is the Company
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
significant 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, the Company provides management services to the non-claims side
of the P&C Group's business. These management services include selecting
risks, preparing and mailing policy forms and invoices, collecting premiums and
performing 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
4
Group is also responsible for the payment of commissions and bonuses for agents
and district managers, and its own premium and income taxes.
The Company is contractually permitted to receive a management fee based
on the gross premiums earned by the P&C Group. The range of fees has varied by
line of business over time. During the past five years, aggregate management
fees have averaged between 12% and 13% of 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 the contractually permitted
fee of 20% (25% in the case of the Fire Insurance Exchange). 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
and technology and the standardization of procedures. 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 on a U.S. GAAP basis were $11.4 billion, $10.8 billion and $10.3 billion
for 2000, 1999 and 1998, respectively, giving rise to management fee revenues
to the Company of $1.49 billion, $1.40 billion and $1.27 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, 2000,
approximately 59.1% of net premiums earned was from auto insurance policies,
22.9% was from homeowner policies and the remainder was primarily from
commercial policies. As of December 31, 2000, the P&C Group had total assets
of $16.1 billion, surplus as regards policyholders of $3.8 billion,
policies-in-force of 17.6 million and for the year ended December 31, 2000, had
gross premiums earned of $11.4 billion on a U.S. GAAP basis.
The Company, through its wholly owned subsidiary Prematic Service
Corporation ("Prematic"), allows individuals and businesses purchasing
insurance from one or more members of the P&C Group and Farmers Life to
combine, if they so choose, all premiums due into a single payment. In
practice, Prematic combines amounts due from a single insured for all policies
in-force into a single amount and then bills the insured on a periodic basis.
For this service, Prematic collected service fees totaling $81.6 million in
2000 and generated net income of $25.7 million for the year. FGI 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 $5.5 million
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, structured settlements and annuity
products, predominantly flexible premium deferred annuities. In 2000, Farmers
Life entered the variable universal life and annuities markets.
As of December 31, 2000, 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,
2000, approximately 77.4% of Farmers Life's portfolio was invested in fixed
income securities and cash and 6.4% in equity securities and owned real estate.
As of December 31, 2000, approximately 93.6% 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, 2000 was 22.3%.
Farmers Reinsurance Company. Farmers Re is a wholly owned subsidiary of
FGI. On January 1, 1998, Farmers Re entered into an auto physical damage
reinsurance treaty with the P&C Group. This treaty provides 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 treaty, which will remain in effect until terminated
by
5
either party, also provides for the P&C Group to receive a provisional
ceding commission of 20% of premiums with additional experience commissions
that depend on loss experience. This experience commission arrangement limits
Farmers Re's potential underwriting gain on the assumed business to 2.5% of
premiums assumed.
Under this quota share reinsurance treaty, Farmers Re assumed $1,000.0
million of premiums in 2000, 1999 and 1998. Total losses and loss adjustment
expenses paid by Farmers Re were $596.9 million, $554.8 million and $549.2
million in 2000, 1999 and 1998, respectively, while total reinsurance
commissions paid were $288.1 million in 2000, $313.7 million in 1999 and $319.9
million in 1998. In March 2000, Farmers Re and the P&C Group commuted $106.4
million of losses and loss adjustment expenses associated with the 1999
accident year. As a result, in May 2000, Farmers Re paid the P&C Group $106.4
million of losses and loss adjustment expenses and $9.0 million of accrued
interest in settlement of this commutation. Similarly, 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. In order to settle this
commutation, 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.
Employees
As of December 31, 2000, the Company had 7,533 employees.
Business Environment
Strategic Objectives. The Company's strategic objective is to assist
the Farmers Insurance Group of Companiesr 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 more than 10.5
million existing customers, (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.
Marketing and Distribution. The P&C Group and Farmers Life operate
using federally registered trade names, including Farmers Insurance Group of
Companiesr, Farmers Insurance Groupr and Farmersr, 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, 2000, this network consisted of approximately
15,000 direct writing agents and approximately 500 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 direct
writing 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 direct writing agents may offer the
business to other insurers.
Farmers' direct writing agents market to 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 more than 10.5 million customers 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 promotes its brand name throughout its operating territory
through television, radio and print advertising on both a national and local
basis. To further assist the direct writing 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
6
recontact program, the "Farmers Friendly Reviewr", 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.
Additionally, in 2000, Farmers completed the rollout of its Agency Dashboard to
the entire direct writing agency force in its core 29-state territory. The
Agency Dashboard is a secure internet website that the Farmers agency force can
use to obtain forms, manuals, sales brochures and online training, as well as
the latest news and bulletins they need to efficiently run their businesses.
In a rapidly evolving U.S. personal lines market place, the Agency Dashboard
gives Farmers' agents a major competitive edge, taking advantage of internet
technology.
In 1999, the Company and the P&C Group expanded their operations into
twelve new eastern states and expanded into new specialty lines of business,
such as recreational products. This was a result of the merger with ZIC and
was accomplished with the assistance of Zurich Personal Insurance employees,
who became employees of either the Company or the P&C Group as of
January 1, 2000. The distribution of Farmers' products in these new eastern
states is accomplished through a network of approximately 800 independent
agents, many of whom have established books of business.
Additionally, in 2000, the Exchanges' acquisition of Foremost enabled the
P&C Group to increase its presence in the specialty homeowners market and
enabled the P&C Group's direct writing agency force to distribute Foremost
products. Foremost writes insurance throughout the United States,
particularly in southern and southwestern states. Foremost's insurance
products are primarily offered through three distribution channels: general and
independent agents, mobile home and recreational vehicle dealer agents and
direct marketing.
Competition. Property and casualty insurance is a very competitive
industry with approximately 3,300 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 1,500
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 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 and certain other states where the
insurance company writes a substantial amount of insurance business. 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, 2000, neither the Insurance Subsidiaries nor the P&C Group were
subject to such regulatory actions. Most of the business of Farmers Life and
the P&C Group 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, 2000, 1999 and 1998, the Insurance
Subsidiaries had pretax net investment income and realized investment gains/
(losses) of $414.5 million, $360.4 million and $292.6 million,
7
respectively, and the Company other than the Insurance Subsidiaries
(collectively, the "Noninsurance investment portfolio") had pretax net
investment income and realized investment gains of $195.6 million, $192.7
million and $197.5 million, respectively. As of December 31, 2000, the book
value of the Insurance Subsidiaries investment portfolio was approximately
$5.6 billion and the book value of the Noninsurance investment portfolio was
approximately $1.5 billion. The Board of Directors of the Company is
responsible for developing investment policies and the Investment Committee,
which is comprised of eleven officers of the Company who are appointed by the
Board of Directors, is responsible for administering such policies. During
1998, Zurich Scudder Investments, Inc., formerly known as 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 and surplus notes of the P&C Group and notes from
affiliates, relatively short maturities are maintained 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 20.3% of
the Noninsurance investment portfolio consists of notes issued by Zurich
Financial Services (UKISA) Limited, formerly known as British American
Financial Services (UK and International), Ltd., ("UKISA"), a subsidiary of
ZGH, and 16.8% consists of a note issued by Orange Stone (Delaware) Holdings
Limited, formerly known as Old Stone (Delaware) Holdings Limited, ("OSDH"),
also a subsidiary of ZGH. Approximately 12.5% and 8.9% of the Noninsurance
investment portfolio and the Insurance Subsidiaries investment portfolio,
respectively, consists of certificates of contribution and surplus notes of
the P&C Group. See Item 13 and Notes F and G.
Approximately 94.2% of the fixed income securities in the Insurance
Subsidiaries investment portfolio are rated investment grade and approximately
96.3% of the fixed income securities in the Noninsurance investment portfolio
are rated investment grade. Approximately 59.1% 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 87.1% of the
remaining 40.9% are rated "AAA". Approximately 36.1% of the mortgage-backed
securities in the Noninsurance investment portfolio are guaranteed by GNMA,
FHA, FNMA or FHLMC, and the remaining 63.9% are rated "AAA".
8
The following table sets forth the book value of each portfolio, by asset
category, as of December 31, 2000 and 1999.
Book Value of Invested Assets
(Amounts in millions)
As of December 31,
-------------------------------------------------------------
2000 1999
------------------------- ---------------------------
Book Value % Book Value %
---------- --------- ---------- ----------
Insurance Subsidiaries
Fixed income securities $ 4,375.3 77.5 % $ 4,376.3 85.0 %
Mortgage loans 37.0 0.6 35.9 0.7
Equity securities 304.9 5.4 213.4 4.2
Owned real estate 89.4 1.6 66.7 1.3
Cash and cash equivalents 84.4 1.5 96.0 1.9
Certificates of contribution and
surplus notes of the P&C Group 502.5 8.9 119.0 2.3
Policy loans 218.2 3.8 201.7 3.9
S&P 500 call options 26.3 0.5 32.7 0.6
Other 9.9 0.2 6.7 0.1
--------- ------- ---------- ----------
Total $ 5,647.9 100.0 % $ 5,148.4 100.0 %
========= ======= ========== ==========
Noninsurance
Fixed income securities $ 302.2 20.3 % $ 578.3 23.0 %
Mortgage loans 0.1 0.0 0.1 0.0
Equity securities 242.1 16.3 334.2 13.3
Owned real estate 69.7 4.7 49.5 2.0
Cash and cash equivalents 132.3 8.9 217.5 8.7
Certificates of contribution and
surplus notes of the P&C Group 184.8 12.5 23.3 0.9
UKISA notes 302.0 20.3 1,057.0 42.1
OSDH note 250.0 16.8 250.0 10.0
Other 3.3 0.2 0.8 0.0
--------- ------- ---------- ----------
Total $ 1,486.5 100.0 % $ 2,510.7 100.0 %
========= ======= ========== ==========
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, 2000 and 1999,the Company classified all investments in
equity and debt securities as available-for-sale under SFAS No. 115, with the
exception of $61.1 million in 2000 and $59.7 million in 1999 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.
9
Real estate held for investment is accounted for on a depreciated cost
basis. Real estate held for sale is carried at the lower of fair value less
selling costs or depreciated cost less a valuation allowance. Marketable
securities are carried at market. Other investments, which consist primarily
of the UKISA notes receivable, the OSDH note receivable, certificates of
contribution of the P&C Group, surplus notes 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, 2000, approximately 77.5% of
the Insurance Subsidiaries investment portfolio and 20.3% 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 94.2% and 96.3% 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, 2000.
Value of Fixed Income Securities
(Amounts in millions)
Insurance Subsidiaries Noninsurance Total
---------------------- ----------------------- -----------------------
Market Market Market
Value % Value % Value %
----------- -------- ----------- --------- ----------- ---------
Mortgage-backed $ 2,002.1 45.8 % $ 103.1 34.1 % $ 2,105.2 45.0 %
Corporate 1,851.3 42.3 28.5 9.4 1,879.8 40.2
U.S. Government 262.5 6.0 0.4 0.1 262.9 5.6
Municipal 165.7 3.8 159.5 52.8 325.2 7.0
Foreign 63.1 1.4 0.0 0.0 63.1 1.3
Redeemable preferred stock 30.6 0.7 10.7 3.6 41.3 0.9
--------- ------- -------- ------- --------- -------
Total $ 4,375.3 100.0 % $ 302.2 100.0 % $ 4,677.5 100.0 %
========= ======= ======== ======= ========= =======
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, 2000, the
Insurance Subsidiaries held $253.8 million in below investment grade bonds,
representing 4.5% of total invested assets, and the Noninsurance investment
portfolio held $10.7 million in below investment grade bonds, representing
0.7% of total invested assets.
Mortgage-backed Securities. Mortgage-backed securities ("MBS") are the
largest component of the Insurance Subsidiaries fixed income portfolio,
representing approximately 45.8% of its fixed income portfolio, as of December
31, 2000. The Noninsurance investment portfolio's MBS represented
approximately 34.1% of its fixed income portfolio as of December 31, 2000.
Approximately 59.1% 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 87.1% of the
remaining 40.9% are rated "AAA". Approximately 36.1% of the MBS in the
Noninsurance investment portfolio are guaranteed by GNMA, FHA, FNMA or FHLMC,
and the remaining 63.9% 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
$704.4 million of planned amortization classes ("PACs") and $18.0 million of
10
targeted amortization classes ("TACs"), and the Noninsurance investment
portfolio held $5.0 million of PACs. These securities provide protection by
passing a substantial portion of the risk of prepayment uncertainty to other
tranches.
Mortgage Loans. As of December 31, 2000, the Insurance Subsidiaries
investment portfolio included mortgage loans with an aggregate book value of
approximately $37.0 million, or 0.6%, 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 single 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, 2000, the Insurance Subsidiaries
investment portfolio included owned real estate investments with a book value
of $89.4 million, or 1.6% of total invested assets, and the Noninsurance
investment portfolio included owned real estate investments with a book value
of $69.7 million, or 4.7% 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. In 2000, the Company wrote
down approximately $22.4 million in fixed income securities held in the
Insurance Subsidiaries investment portfolio. As of December 31, 2000, none of
the fixed income securities held in the Noninsurance investment portfolio or
the Insurance Subsidiaries investment portfolio were classified as "problem" or
"potential problem" assets.
Problem Investments-Mortgage Loan Investments. As of December 31, 2000,
none of the mortgage loans held by the Insurance Subsidiaries investment
portfolio or the Noninsurance investment portfolio were classified as "troubled
loans".