1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------------------------
Commission File Number 33-94670-01
-------------------------------------
FARMERS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
95-0725935
(IRS Employer Identification No.)
4680 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices)(Zip Code)
(323) 932-3200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Registrant's Common Stock outstanding on March 31, 2001 was 1,000 shares.
2
[THIS PAGE INTENTIONALLY LEFT BLANK]
3
FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2001
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - Assets
March 31, 2001 and December 31, 2000 4
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity March 31, 2001 and December 31, 2000 5
Consolidated Statements of Income
Three Month Periods ended March 31, 2001 and
March 31, 2000 6
Consolidated Statements of Comprehensive Income
Three Month Periods ended March 31, 2001 and
March 31, 2000 7
Consolidated Statement of Stockholders' Equity
Three Month Period ended March 31, 2001 8
Consolidated Statement of Stockholders' Equity
Three Month Period ended March 31, 2000 9
Consolidated Statements of Cash Flows
Three Month Periods ended March 31, 2001 and
March 31, 2000 10
Notes to Interim Financial Statements 11
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks 22
PART II. OTHER INFORMATION 22
SIGNATURES 23
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
ASSETS
March 31,
December 31,
2001
2000
------------- --
- ----------
Current assets, excluding Insurance Subsidiaries:
Cash and cash equivalents $ 140,129 $
132,245
Marketable securities, at market value 10,386
10,386
Accrued interest 27,195
41,995
Accounts receivable, principally from the P&C Group 44,863
36,052
Note receivable - affiliate 207,000
207,000
Deferred taxes 49,249
40,609
Prepaid expenses and other 23,097
15,437
------------- --
- ----------
Total current assets 501,919
483,724
------------- --
- ----------
Investments, excluding Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $399,651 and $292,039) 400,277
291,795
Mortgage loans on real estate 78
92
Common stocks available-for-sale, at market value
(cost: $286,870 and $282,224) 220,847
242,066
Certificates of contribution and surplus notes of the
P&C Group 184,830
184,830
Real estate, at cost (net of accumulated depreciation:
$26,880 and $26,179) 65,299
69,699
Other investments 3,341
3,341
------------- --
- ----------
874,672
791,823
------------- --
- ----------
Other assets, excluding Insurance Subsidiaries:
Notes receivable - affiliates 345,000
345,000
Goodwill (net of accumulated amortization:
$735,539 and $720,528) 1,666,216
1,681,227
Attorney-in-fact relationships (net of accumulated amortization:
$523,394 and $512,712) 1,185,649
1,196,331
Other assets 255,105
255,174
------------- --
- ----------
3,451,970
3,477,732
------------- --
- ----------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $402,294 and $391,360) 430,624
438,371
------------- --
- ----------
Investments of Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $4,415,703 and $4,349,824) 4,507,419
4,365,338
Mortgage loans on real estate 34,487
36,984
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $11,128 and $11,128) 11,605
11,500
Common stocks available-for-sale, at market value
(cost: $355,623 and $330,785) 288,528
293,407
Certificates of contribution and surplus notes of the
P&C Group 502,500
502,500
Policy loans 222,615
218,162
Real estate, at cost (net of accumulated depreciation:
$30,295 and $29,369) 88,053
89,426
Joint ventures, at equity 4,525
4,651
S&P 500 call options, at fair value (cost: $32,154 and $29,696) 17,520
26,271
Other investments 8,279
5,279
------------- --
- ----------
5,685,531
5,553,518
------------- --
- ----------
Other assets of Insurance Subsidiaries:
Cash and cash equivalents 38,794
84,431
Marketable securities, at market value 9,998
9,997
Reinsurance premiums receivable - P&C Group 88,770
111,874
Accrued investment income 66,282
69,922
Deferred policy acquisition costs and value of life business
acquired 817,049
838,121
Securities lending collateral 347,295
436,744
Other assets 51,470
29,151
Assets held in Separate Account 21,283
8,423
------------- --
- ----------
1,440,941
1,588,663
------------- --
- ----------
Total assets $ 12,385,657 $
12,333,831
=============
============
The accompanying notes are an integral part of these interim financial
statements.
5
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
December 31,
2001
2000
------------- --
- -----------
Current liabilities, excluding Insurance Subsidiaries:
Notes and accounts payable:
P&C Group $ 0 $
481
Other 42,295
53,375
Accrued liabilities:
Profit sharing 16,675
58,242
Income taxes 173,782
115,223
Other 7,798
9,715
------------ --
- -----------
Total current liabilities 240,550
237,036
------------ --
- -----------
Other liabilities, excluding Insurance Subsidiaries:
Real estate mortgages payable 16
16
Non-current deferred taxes 546,493
551,097
Other 117,614
120,405
------------ --
- -----------
664,123
671,518
------------ --
- -----------
Liabilities of Insurance Subsidiaries:
Policy liabilities:
Future policy benefits 3,611,505
3,574,594
Claims 38,800
32,509
Policyholders dividends 6
3
Other policyholders funds 168,832
141,544
Death benefits payable 43,925
42,011
Provision for non-life losses and loss adjustment expenses 191,732
89,936
Income taxes (including deferred taxes: $101,320 and $97,267) 139,182
121,499
Unearned investment income 937
903
Reinsurance payable - P&C Group 76,527
185,742
Securities lending liability 347,295
436,744
Other liabilities 47,493
34,983
Liabilities related to Separate Account 21,283
8,423
------------ --
- -----------
4,687,517
4,668,891
------------ --
- -----------
Total liabilities 5,592,190
5,577,445
------------ --
- -----------
Commitments and contingencies
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 500,000
500,000
------------ --
- -----------
Stockholders' Equity:
Class A common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 2001 - 450 shares, as of
December 31, 2000 - 500 shares 0.45
0.50
Class B common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 2001 and
December 31, 2000 - 500 shares 0.50
0.50
Class C common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 2001 - 50 shares 0.05
0.00
Additional capital 5,212,618
5,212,618
Accumulated other comprehensive loss (net of deferred
taxes: ($23,760) and ($23,946)) (44,125)
(44,471)
Retained earnings 1,124,973
1,088,238
------------ --
- -----------
Total stockholders' equity 6,293,467
6,256,386
------------ --
- -----------
Total liabilities and stockholders' equity $ 12,385,657 $
12,333,831
============
=============
The accompanying notes are an integral part of these interim financial
statements.
6
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
Three month
period
ended
March 31,
--------------
- ----------
2001
2000
----------- -
- ----------
Consolidated operating revenues $ 889,189 $
825,132
===========
===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 415,074 $
375,332
Operating expenses 236,404
206,621
----------- -
- ----------
Operating income 178,670
168,711
Net investment income 20,935
33,950
Net realized gains 4,439
17,765
Dividends on preferred securities of subsidiary trusts (10,518)
(10,518)
-----------
- ----------
Income before provision for taxes 193,526
209,908
Provision for income taxes 81,046
86,039
-----------
- ----------
Management services income 112,480
123,869
-----------
- ----------
Insurance Subsidiaries:
Life and annuity premiums 71,081
51,927
Non-life reinsurance premiums 250,000
250,000
Life policy charges 54,152
53,739
Net investment income 92,872
85,817
Net realized gains 6,010
8,317
----------- -
- ----------
Total revenues 474,115
449,800
----------- -
- ----------
Non-life losses and loss adjustment expenses 178,324
164,426
Life policyholders' benefits and charges 117,746
89,778
Non-life reinsurance commissions 65,426
79,341
General operating expenses 45,614
42,951
----------- -
- ----------
Total operating expenses 407,110
376,496
----------- -
- ----------
Income before provision for taxes 67,005
73,304
Provision for income taxes 22,975
25,091
----------- -
- ----------
Insurance Subsidiaries income 44,030
48,213
----------- -
- ----------
Consolidated net income $ 156,510 $
172,082
===========
===========
The accompanying notes are an integral part of these interim financial
statements.
7
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
Three month
period
ended
March 31,
--------------
- ----------
2001
2000
----------- -
- ----------
Consolidated net income $ 156,510 $
172,082
----------- -
- ----------
Other comprehensive gain/(loss), net of tax:
Net unrealized holding gains/(losses) on securities,
net of tax of $7,537 and ($1,819) 13,998
(3,378)
Change in effect of unrealized losses on other
insurance accounts, net of tax of ($7,351) and
($979) (13,652)
(1,818)
----------- -
- ----------
Other comprehensive gain/(loss) 346
(5,196)
----------- -
- ----------
Comprehensive income $ 156,856 $
166,886
===========
===========
The accompanying notes are an integral part of these interim financial
statements.
8
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three month period ended March 31, 2001
(Amounts in thousands)
(Unaudited)
Accumulated Other
Total
Common Additional Comprehensive
Retained Stockholders'
Stock Capital Loss
Earnings Equity
-------- ----------- ---------------- --------
- -- ---------------
Balance, December 31, 2000 $ 1 $ 5,212,618 $ (44,471)
$1,088,238 $ 6,256,386
Net income
156,510 156,510
Net unrealized holding gains
on securities, net of tax
of $7,537 13,998
13,998
Change in effect of unrealized
losses on other insurance
accounts, net of tax of (13,652)
(13,652)
($7,351)
Cash dividends paid
(119,775) (119,775)
-------- ----------- ---------------- --------
- -- ------------
Balance, March 31, 2001 $ 1 $ 5,212,618 $ (44,125)
$1,124,973 $ 6,293,467
======== =========== ================
========== ============
The accompanying notes are an integral part of these interim financial
statements.
9
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three month period ended March 31, 2000
(Amounts in thousands)
(Unaudited)
Accumulated Other
Total
Common Additional Comprehensive
Retained Stockholders'
Stock Capital Loss
Earnings Equity
-------- ----------- ----------------- --------
- -- ---------------
Balance, December 31, 1999 $ 1 $ 5,212,618 $ (33,999)
$1,920,619 $ 7,099,239
Net income
172,082 172,082
Net unrealized holding losses
on securities, net of tax
of ($1,819) (3,378)
(3,378)
Change in effect of unrealized
losses on other insurance
accounts, net of tax of ($979) (1,818)
(1,818)
Cash dividends declared and/or
paid
(241,350) (241,350)
-------- ------------ --------------- ------
- ---- -----------
Balance, March 31, 2000 $ 1 $ 5,212,618 $ (39,195)
$1,851,351 $ 7,024,775
======== ============ ===============
========== ============
The accompanying notes are an integral part of these interim financial
statements.
10
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three month
period
ended
March 31,
--------------
- ---------
2001
2000
---------- -
- ---------
Cash Flows from Operating Activities:
Consolidated net income $ 156,510 $
172,082
Non-cash and operating activities adjustments:
Depreciation and amortization 41,332
40,683
Amortization of deferred policy acquisition costs and
value of life business acquired 29,727
29,674
Policy acquisition costs deferred (29,658)
(23,791)
Life insurance policy liabilities 67,021
26,545
Provision for non-life losses and loss adjustment expenses 101,797
82,781
Universal life type contracts:
Deposits received 76,306
76,380
Withdrawals (67,981)
(67,616)
Interest credited 20,127
18,425
Equity in earnings of joint ventures 87
3,163
Gains on sales of assets (13,412)
(26,173)
Changes in assets and liabilities:
Current assets and liabilities (105,088)
(49,990)
Non-current assets and liabilities 18,527
(12,279)
Other, net 14,787
(3,978)
---------- --
- ---------
Net cash provided by operating activities 310,082
265,906
---------- --
- ---------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (727,307)
(279,009)
Purchases of properties (8,575)
(34,719)
Purchase of surplus notes of the P&C Group 0
(175,000)
Purchase of certificates of contribution of the P&C Group 0
(370,000)
Proceeds from sales and maturities of investments
available-for-sale 528,959
500,604
Proceeds from sales of properties 8,493
1,015
Proceeds from redemption of notes receivable - affiliate 0
175,000
Mortgage loan collections 2,511
1,086
Increase in policy loans (4,453)
(4,636)
Other, net (3,048)
(969)
---------- --
- ---------
Net cash used in investing activities (203,420)
(186,628)
---------- --
- ---------
Cash Flows from Financing Activities:
Dividends paid to stockholders (119,775)
(120,675)
Annuity contracts:
Deposits received 216,709
38,528
Withdrawals (246,654)
(66,688)
Interest credited 5,305
20,856
--------- --
- ---------
Net cash used in financing activities (144,415)
(127,979)
--------- --
- ---------
Decrease in cash and cash equivalents (37,753)
(48,701)
Cash and cash equivalents - at beginning of year 216,676
313,500
---------- --
- ---------
Cash and cash equivalents - at end of period $ 178,923 $
264,799
==========
===========
The accompanying notes are an integral part of these interim financial
statements.
11
FARMERS GROUP, INC.
AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
A. Basis of presentation and summary of significant accounting policies
The accompanying consolidated balance sheet of Farmers Group, Inc. ("FGI")
and its subsidiaries (together, the "Company") as of March 31, 2001, the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the three month periods ended March 31, 2001 and
March 31, 2000, have been prepared in accordance with accounting principles
generally accepted in the United States ("GAAP") for interim periods and are
unaudited. However, in management's opinion, the consolidated financial
statements include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of results for such interim
periods. These statements do not include all of the information and footnotes
required by GAAP for complete financial statements and should be read in
conjunction with the consolidated balance sheets of the Company as of December
31, 2000 and 1999, 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, 2000.
Interim results are not necessarily indicative of results for the full
year. All material inter-company transactions have been eliminated. Certain
amounts applicable to prior years have been reclassified to conform to the
2001 presentation.
The preparation of the Company's financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The Company is attorney-in-fact ("AIF") for three inter-insurance
exchanges: Farmers Insurance Exchange, Fire Insurance Exchange and Truck
Insurance Exchange (collectively the "Exchanges"), which operate in the
property and casualty insurance industry. On March 7, 2000, the Exchanges
acquired Foremost Corporation of America and its subsidiaries ("Foremost"), a
prominent writer of insurance for manufactured homes, recreational vehicles and
other specialty lines. Each policyholder of the Exchanges appoints the Company
as the exclusive AIF to provide management services. For such services,
the Company earns management fees based on a percentage of gross premiums
earned by the Exchanges, their respective subsidiaries, Farmers Texas
County Mutual Insurance Company, Foremost County Mutual Insurance Company and
Foremost Lloyds of Texas (collectively the "P&C Group"). The P&C Group is
owned by the policyholders of the Exchanges, Farmers Texas County Mutual
Insurance Company and Foremost County Mutual Insurance Company as well as the
underwriters of Foremost Lloyds of Texas. Accordingly, the Company has no
ownership interest in the P&C Group.
Farmers New World Life Insurance Company ("Farmers Life"), a Washington
based insurance company, is a wholly owned subsidiary of the Company. Farmers
Life markets a broad line of individual life insurance products, including
universal life, term life and whole life insurance, structured settlement and
annuity products, predominately flexible premium deferred annuities, as well as
variable universal life insurance and variable annuity products. These
products are sold directly by the P&C Group's agents.
Farmers Reinsurance Company ("Farmers Re"), a wholly owned subsidiary of
the Company, reinsures a percentage of the auto physical damage business
written by the P&C Group. Under a quota share reinsurance treaty, Farmers Re
assumes monthly premiums of $83,333,000 and a quota share percentage of
ultimate net losses sustained by the P&C Group in its auto physical damage
lines of business. This treaty, which will remain in effect until terminated
by either party, also provides for the P&C Group to receive a provisional
ceding commission of 20% of premiums with additional experience commissions
that depend on loss experience. This experience commission arrangement limits
Farmers Re's potential underwriting gain on the assumed business to 2.5% of
premiums assumed.
12
On March 31, 2001, Farmers Re and the P&C Group commuted $89,936,000 of
losses and loss adjustment expenses associated with the 2000 accident year.
As a result, in May 2001, Farmers Re will pay the P&C Group $89,936,000 of
losses and loss adjustment expenses and $8,766,000 of accrued interest in
settlement of this commutation.
References to the "Insurance Subsidiaries" within the consolidated
financial statements are to Farmers Life and Farmers Re.
In December 1988, B.A.T Industries p.l.c. ("B.A.T"), acquired 100%
ownership of the Company through its wholly owned subsidiary BATUS Financial
Services. Immediately thereafter, BATUS Financial Services was merged into
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 fair values at December 31, 1988.
In September 1998, the financial 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. This merger was accounted
for by ZGH as a pooling of interests under International Accounting Standards.
As a result of a unification of the holding structure of the Zurich
Financial Services Group in October 2000, Zurich Financial Services was renamed
Zurich Group Holding, as noted above, and a new group holding company, Zurich
Financial Services, was formed. As such, references to "Zurich" are to the new
group holding company, Zurich Financial Services.
In 1998, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement establishes
accounting and reporting standards for derivative instruments (including
certain derivative instruments embedded in other contracts) and for hedging
activities. SFAS No.133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at market value. Subsequently, in June 1999, the FASB
released SFAS No. 137, "Deferral of the Effective Date of FASB Statement
No. 133", which deferred the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. Finally, in June 2000, the FASB released SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities". This Statement amends the accounting and reporting standards of
SFAS No. 133 for the following items: normal purchases and normal sales
exception, interest rate risk, recognized foreign-currency-denominated debt
instruments and intercompany derivatives. This Statement also amends SFAS
No. 133 for certain provisions related to the implementation guidance arising
from the Derivative Implementation Group process. SFAS No. 133, No. 137, and
No.138 are effective for financial statements issued by the Company for periods
ending after December 31, 2000. The adoption of these Statements did not have
a material impact on the Company's consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement revises accounting standards for securitizations and other transfers
of financial assets and collateral. SFAS No. 140 replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", and rescinds SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125". This Statement, which is
required to be applied prospectively with certain exceptions, is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Additionally, this Statement is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The adoption of this Statement did not have a material
impact on the Company's consolidated financial statements.
13
B. Capital structure
As of March 31, 2001, the Company had three classes of common stock -
Class A Common Stock (the "Class A Shares"), Class B Common Stock (the "Class B
Shares") and Class C Common Stock (the "Class C Shares"). Prior to a
recapitalization of the Company's capital structure which occurred in
connection with a private placement of an aggregate of $1,125,000,000 of
securities by six Zurich RegCaPS Funding Trusts on February 9, 2001, the
Company had 500 shares of Class A Common Stock, par value $1.00 per share, and
500 shares of Class B Common Stock, par value $1.00 per share. All Class A
Shares were wholly owned by ZGH and all Class B Shares were wholly owned by
Allied Zurich Holdings Limited, an affiliated company created during the
restructuring of B.A.T.
Subsequently, on February 9, 2001, in connection with the private
placement of the $1,125,000,000 of securities, ZGH exchanged 50 Class A Shares
for 50 shares of Class C Common Stock, par value $1.00 per share. The Class C
Shares were issued in six series (C-1 through C-6). ZGH subsequently
contributed each respective series of the Class C Shares to one of six Zurich
RegCaPS Funding Limited Partnerships (collectively, the "Partnerships"), which
are controlled by ZIC. As a result, upon completion of the recapitalization,
450 Class A Shares were owned by ZGH, 500 Class B Shares were owned by Allied
Zurich Holdings Limited and 50 Class C Shares were owned by the Partnerships.
The holders of the Class A Shares are entitled to 1.0694444 votes per
share and the holders of Class B Shares are entitled to .1111111 of a vote per
share (each subject to adjustment in the event of any stock dividend, stock
split, stock distribution or combination with respect to any shares of capital
stock of the Company) upon the election of directors and on all other matters
upon which stockholders generally are entitled to vote. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Class A
Shares are entitled to share equally and ratably with the holders of Class C
Shares in the assets of the Company, if any, remaining after payment of all
liabilities of the Company and the Class C Share liquidation preference, to the
exclusion of the holders of Class B Shares.
Subject to the rights of the holders of Class C Shares, the holders of
Class A Shares and the holders of Class B Shares shall be entitled to receive
dividends, when and if declared by the Board of Directors, out of funds legally
available therefor.
The holders of Class C Shares are entitled to 0.375 of a vote per share
upon the election of directors and on all other matters upon which stockholders
generally are entitled to vote. However, at no time shall the aggregate voting
power of the Class C Shares be greater than 3.375% of the total voting power of
the Company. Upon any dissolution, liquidation or winding up of the Company,
after payment of the liabilities of the Company and the expenses of such
dissolution, liquidation or winding up, the holders of Class C Shares will be
entitled to receive in the aggregate out of the assets of the Company, before
any payment or distribution is made to the holders of Class A Shares or Class
B Shares, $1,125,000,000 in liquidation preference (the "Class C Liquidation
Preference"). To the extent the amount available for distribution upon
liquidation, dissolution or winding up exceeds the Class C Liquidation
Preference, the holders of Class C Shares are entitled to receive 7.4503311%
(as adjusted from time to time based upon the percentage of the Company's fair
market value represented by the Class C Shares at the time of such adjustment)
of the aggregate amount available for payment of distributions on liquidation
with respect to the Company's common stock. Amounts payable on the Class C
Shares in connection with the liquidation of the Company in excess of the Class
C Liquidation Preference are payable on a pari passu basis with the holders of
the Class A Shares and any other shares that rank junior to the Class C Shares
with respect to payments upon liquidation.
The holders of Class C Shares are entitled to receive non-cumulative
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. No cash dividends may be declared or paid on any
Class A Shares, Class B Shares or any other shares of common stock that rank
junior to the Class C Shares with respect to payment of dividends, unless
(i) full dividends have been declared for payment on the Class C Shares in an
amount at least equal to the greater of (A) the dividends payable or set apart
during the dividend period during which such cash dividends are paid at the
respective Class C Share indicative rate (as defined in the Certificates of
Designations of Class C-1 through Class C-6 Shares) or (B) 7.4503311% (as
adjusted as set forth above) of the amount of dividends paid or
14
set apart for payment by the Company on its common shares (including the Class
C Shares) during any relevant dividend period, (ii) the Partnerships have set
apart or paid the full amount of cash remittances (the "RegCaPS Payments")
payable to the holders of the regulatory capital preferred securities (the
"RegCaPS") issued by the Partnerships during any RegCaPS Payments period, (iii)
the six Zurich RegCaPS Funding LLCs (collectively, the "LLC") who hold the
RegCaPS, have set apart or paid certain cash payments during any LLC payment
period on the LLC preferred interests issued by each LLC, and (iv) such
dividend does not cause the net worth of the Company to be less than $3 billion
(as adjusted from time to time).
C. Material contingencies
The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery and
development, and some seek punitive as well as compensatory damages. In the
opinion of management, the Company has not engaged in any conduct which should
warrant the award of any material punitive or compensatory damages. The
Company intends to vigorously defend its position in each case, and management
believes that, while it is not possible to predict the outcome of such matters
with absolute certainty, ultimate disposition of these proceedings should not
have a material adverse effect on the Company's consolidated results of
operations or financial position.
D. 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. As of September 27, 2000, Farmers Group,
Inc. had the option to redeem, in whole or in part, the Junior Subordinated
Debentures. The QUIPS are subject to mandatory redemption upon repayment of
the Junior Subordinated Debentures at maturity, or upon their earlier
redemption, at a redemption price of $25 per Preferred Security, plus accrued
and unpaid distributions thereon to the date fixed for redemption.
As of March 31, 2001 and 2000, a total of 20,000,000 shares of QUIPS were
outstanding.
E. Management fees
As AIF, the Company, provides management services to the non-claims side
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
$389,278,000 and $352,392,000 for the three month periods ended March 31,
2001 and March 31, 2000, respectively.
15
F. Related parties
As of March 31, 2001, the Company held a $250,000,000 note receivable from
Orange Stone (Delaware) Holdings Limited ("OSDH"), a subsidiary of Zurich.
The Company loaned $250,000,000 to OSDH on December 15, 1999 and, in return,
received a medium-term note with a 7.50% fixed interest rate that matures on
December 15, 2004. Interest on this note is paid semi-annually. Income earned
on this note totaled $4,688,000 in each of the three month periods ended
March 31, 2001 and March 31, 2000.
In addition, as of March 31, 2001, the Company held $302,000,000 of notes
receivable from Zurich (UKISA) Limited ("UKISA"), a subsidiary of Zurich. The
Company purchased $1,057,000,000 of notes from UKISA on September 3, 1998.
Subsequently, on March 1, 2000, Eagle Star Life Assurance Company Limited
("Eagle Star"), also an affiliate of Zurich, assigned $175,000,000 of matured
surplus notes of the P&C Group to the Company and, in return, the Company
reduced the outstanding balance of the notes receivable from UKISA by
$175,000,000. Additionally, on September 3, 2000, $25,000,000 of the notes
receivable from UKISA, bearing interest at a coupon rate of 5.44% with an
original maturity date of September 3, 2000, were renewed for medium-term notes
with a 6.80% fixed interest rate maturing in September 2002.
Finally, on October 23, 2000, to help fund the payment of a $1,075,000,000
special dividend associated with the Zurich capital structure unification in
October 2000, the Company sold $580,000,000 of notes receivable from UKISA to
ZIC for par value. As a result, as of March 31, 2001, the Company held
$302,000,000 of notes receivable from UKISA with the following amounts,
maturity dates and coupon rates: $207,000,000 maturing in September 2001 at a
coupon rate of 5.48% and $95,000,000 maturing in September 2002, $25,000,000 of
which is at a coupon rate of 6.80% and $70,000,000 of which is at a coupon rate
of 5.67%. Interest on the UKISA notes is paid semi-annually and for the three
month periods ended March 31, 2001 and March 31, 2000 totaled $4,805,000 and
$14,065,000, respectively.
G. Certificates of contribution and surplus notes of the P&C Group
As of March 31, 2001, the Company held $175,000,000 of surplus notes of
the P&C Group. These notes bear interest at 8.50% annually and mature in March
2005. These notes were obtained in March 2000 in connection with the
assignment of the $175,000,000 of matured surplus notes of the P&C Group from
Eagle Star (see Note F).
Additionally, as of March 31, 2001, the Company held $370,000,000 of
certificates of contribution of the P&C Group bearing interest at 7.85%
annually. These certificates of contribution of the P&C Group were purchased
on March 7, 2000 to help fund the Exchanges' acquisition of Foremost.
Furthermore, the Company continued to hold $23,330,000 of miscellaneous other
certificates of contribution of the P&C Group, which bear interest at various
rates, and a $119,000,000 surplus note of the P&C Group, which bears interest
at 6.10% annually.
Conditions governing repayment of these amounts are outlined in the
certificates of contribution and the surplus notes. Generally, repayment may
be made only when the surplus balance of the issuer reaches a certain specified
level, and then only after approval is granted by the issuer's governing Board
and the appropriate state insurance regulatory department.
H. Supplemental cash flow information
For financial statement purposes, the Company considers all investments
with original maturities of 90 days or less as cash equivalents. Following is
a reconciliation of the balance sheet cash and cash equivalent totals to the
consolidated cash flow total:
16
Excluding
Insurance Insurance
Subsidiaries Subsidiaries
Consolidated
------------ ------------ -
- -----------
(Amounts in thousands)
Cash and cash equivalents -- December 31, 1999 $ 217,466 $ 96,034
$ 313,500
Activity through March 2000
(48,701)
- ---------
Cash and cash equivalents -- March 31, 2000 182,529 82,270
$ 264,799
=========
Cash and cash equivalents -- December 31, 2000 $ 132,245 $ 84,431
$ 216,676
Activity through March 2001
(37,753)
- ---------
Cash and cash equivalents -- March 31, 2001 140,129 38,794
$ 178,923
=========
Cash payments for interest were $1,792,000 and $1,671,000 for the three
month periods ended March 31, 2001 and March 31, 2000, respectively, while the
cash payment for dividends to the holders of the Company's QUIPS was
$10,518,000 for each of the three month periods ended March 31, 2001 and March
31, 2000. Cash payments for income taxes were $41,367,000 and $18,809,000 for
the three month periods ended March 31, 2001 and March 31, 2000, respectively.
On March 7, 2000, the Company purchased $370,000,000 of certificates of
contribution of the P&C Group to help fund the Exchanges' acquisition of
Foremost (see Note G).
I. Operating segments
The Company's principal activities are the provision of management
services to the P&C Group and the ownership and operation of the life and
reinsurance subsidiaries. These activities are managed separately as each
offers a unique set of services. As a result, the Company is comprised of the
following three reportable operating segments as defined in SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information": the
management services segment, the life insurance segment and the reinsurance
segment.
As AIF, the management services segment is primarily responsible for
providing management services to the P&C Group. Management fees earned from
the P&C Group totaled $389,278,000 and $352,392,000 for the three month periods
ended March 31, 2001 and March 31, 2000, respectively. The life insurance
segment provides individual life insurance products, including universal life,
term life and whole life insurance and structured settlement and annuity
products, as well as variable universal life and annuity products. Finally,
the reinsurance segment provides reinsurance coverage to a percentage of the
auto physical damage business written by the P&C Group.
The basis of accounting used by the Company's management in evaluating
segment performance and determining how resources should be allocated is
referred to as the Company's GAAP historical basis, which excludes the effects
of the purchase accounting ("PGAAP") adjustments related to the acquisition of
the Company by B.A.T in December 1988 (see Note A). This differs from the
basis used in preparing the Company's financial statements included in the SEC
Form 10-K and 10-Q reports, which incorporates the effects of these
adjustments.
The Company accounts for intersegment transactions as if they were to
third parties and, as such, records the transactions at current market prices.
There were no intersegment revenues among the Company's three reportable
operating segments for the three month periods ended March 31, 2001 and March
31, 2000.
Information regarding the Company's reportable operating segments follows:
17
Three month period ended March 31, 2001
-------------------------------------------------------------------
- --------------------
- ------------------
GAAP historical basis
PGAAP adjustments
Consolidated
------------------------------------------------------ -----------
- --------------------
- ------
Management Life Management
Life
PGAAP
services insurance Reinsurance Total services
insurance
Total basis
------------------------------------------------------ -----------
- --------------------
- ------ -----------
(Amounts in thousands)
Revenues $ 415,074 $ 215,201 <F1> $ 259,142 <F1> $ 889,417 $ 0
$ (228) $
(228) $ 889,189
Investment
income 21,089 88,485 11,023 120,597 (154)
(228)
(382) 120,215
Investment
expenses 0 (3,959) (2,449) (6,408) 0
0
0 (6,408)
Net realized
gains/(losses) 5,465 5,442 568 11,475 (1,026)
0
(1,026) 10,449
Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0
0
0 (10,518)
Income before
provision for
taxes 221,463 53,691 15,376 290,530 (27,937)
(2,062)
(29,999) 260,531
Provision for
income taxes 85,994 18,998 4,881 109,873 (4,948)
(904)
(5,852) 104,021
Depreciation and
amortization 14,124 28,948 0 43,072 26,065
<F2> 1,922 <F3>
27,987 71,059
- -----------------------
<FN>
<F1> Revenues for the insurance operating segments include net investment
income and net realized gains/(losses).
<F2> Amount includes PGAAP adjustments associated with the amortization of the
AIF relationships ($10.7 million) and goodwill ($15.0 million).
<F3> Amount includes PGAAP adjustments associated with the amortization of the
Value of Life Business Acquired ("VOLBA") asset and the reversal of
amortization associated with the pre-1988 Deferred Policy Acquisition
Costs ("DAC") asset.
</FN>
Three month period ended March 31, 2000
-------------------------------------------------------------------
- --------------------
- ------------------
GAAP historical basis
PGAAP adjustments
Consolidated
------------------------------------------------------ -----------
- --------------------
- ------
Management Life Management
Life
PGAAP
services insurance Reinsurance Total services
insurance
Total basis
------------------------------------------------------ -----------
- --------------------
- ------ -----------
(Amounts in thousands)
Revenues $ 375,332 $ 189,876 <F1> $ 260,153 <F1> $ 825,361 $ 0
$ (229) $
(229) $ 825,132
Investment
income 34,105 81,200 7,567 122,872 (155)
(229)
(384) 122,488
Investment
expenses 0 (2,721) 0 (2,721) 0
0
0 (2,721)
Net realized
gains/(losses) 17,765 5,731 2,586 26,082 0
0
0 26,082
Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0
0
0 (10,518)
Income before
provision
for taxes 236,880 59,139 16,330 312,349 (26,972)
(2,165)
(29,137) 283,212
Provision for
income taxes 90,623 20,959 5,063 116,645 (4,584)
(931)
(5,515) 111,130
Depreciation and
amortization 13,763 28,504 0 42,267 26,065
<F2> 2,025 <F3>
28,090 70,357
- -----------------------
<FN>
<F1> Revenues for the insurance operating segments include net investment
income and net realized gains/(losses).
<F2> Amount includes PGAAP adjustments associated with the amortization of the
AIF relationships ($10.7 million) and goodwill ($15.0 million).
<F3> Amount includes PGAAP adjustments associated with the amortization of the
VOLBA asset and the reversal of amortization associated with the pre-1988
DAC asset.
</FN>
18
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's principal activities are the provision of management
services to the P&C Group and the ownership and operation of the Insurance
Subsidiaries. Revenues and expenses relating to these principal business
activities are reflected in the Company's Consolidated Financial Statements
prepared in accordance with GAAP, which differs from statutory accounting
practices ("SAP"), which the Insurance Subsidiaries are required to use for
regulatory reporting purposes.
On March 7, 2000, the Exchanges acquired Foremost. Foremost is the
country's leading writer of manufactured homes and a prominent insurer of
recreational vehicles and other specialty lines. The Company provides
management services in respect of this business and receives compensation
based on a percentage of gross premiums earned.
Farmers Life, a wholly owned subsidiary of the Company, underwrites and
sells life insurance, structured settlement and annuity products as well as
variable universal life and variable annuity products. Revenues attributable
to traditional life insurance products, such as whole life or term life
contracts, as well as structured settlements with life contingencies are
classified as premiums as they become due. Future benefits are associated with
such premiums (through increases in liabilities for future policy benefits),
and prior period capitalized costs are amortized (through amortization of DAC)
so that profits are generally recognized over the same period as revenue
income. Revenues attributable to universal life, variable universal life and
variable annuity products consist of policy charges for the cost of insurance,
policy administration charges, surrender charges and investment income on
assets allocated to support policyholder account balances on deposit. Revenues
for deferred annuity products consist of surrender charges and investment
income on assets allocated to support policyholder account balances. Expenses
on universal life and annuity policies as well as on variable products include
interest credited to policyholders on policy balances as well as benefit claims
incurred in excess of policy account balances. Revenues attributable to
structured settlements without life contingencies consist of investment income
on assets allocated to support the policyholder benefits schedule and expenses
consist of interest credited to policyholders on policy balances.
Farmers Re, a wholly owned subsidiary of the Company, reinsures a
percentage of the auto physical damage business written by the P&C Group.
Under a quota share reinsurance treaty, Farmers Re assumes monthly premiums of
$83.3 million and a quota share percentage of ultimate net losses sustained by
the P&C Group in its auto physical damage lines of business. This treaty,
which will remain in effect until terminated by either party, also provides for
the P&C Group to receive a provisional ceding commission of 20% of premiums
with additional experience commissions that depend on loss experience. This
experience commission arrangement limits Farmers Re's potential underwriting
gain on the assumed business to 2.5% of premiums assumed.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $375.3 million for
the three months ended March 31, 2000 to $415.1 million for the three months
ended March 31, 2001, an increase of $39.8 million, or 10.6%. Operating
revenues primarily consist of management fees paid to the Company as a
percentage of gross premiums earned by the P&C Group. Such premiums increased
from $2,734.6 million in the first quarter of 2000 to $2,980.2 million in the
first quarter of 2001, an increase of $245.6 million, or 9.0%, due mainly to
continued growth in all lines of business. Also contributing to the increase
between periods was the fact that revenues earned in connection with the
provision of management services on the business the P&C Group assumed from
Foremost increased $12.0 million due to the fact that the Foremost acquisition
was not completed until March 2000.
19
Operating Expenses.
Salaries and Employee Benefits. Salaries and employee benefits
expenses increased from $96.8 million for the three months ended March 31,
2000 to $111.0 million for the three months ended March 31, 2001, an
increase of $14.2 million, or 14.7%. This increase was primarily the
result of a $6.2 million increase in employee benefits expenses between
periods coupled with a $5.3 million increase in expenses incurred in
connection with providing management services to the business assumed from
Foremost.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $23.2 million for the three months ended March 31, 2000 to
$24.8 million for the three months ended March 31, 2001, an increase of
$1.6 million, or 6.9%, due to a $1.7 million increase in expenses incurred
in connection with providing management services to the business assumed
from Foremost.
Amortization of Attorney-In-Fact Relationships and Goodwill.
Purchase accounting entries related to the acquisition of the Company by
B.A.T in December 1988 include goodwill (capitalized at $2.4 billion) and
the value of the AIF relationships of the P&C Group (capitalized at $1.7
billion). Amortization of these two items, which is being taken on a
straight-line basis over forty years, reduced pretax income by
approximately $25.7 million in each of the three month periods ended March
31, 2001 and March 31, 2000.
General and Administrative Expenses. General and administrative
expenses increased from $60.9 million for the three months ended March 31,
2000 to $74.9 million for the three months ended March 31, 2001, an
increase of $14.0 million, or 23.0%. This increase was primarily due to
increased levels of business activity between periods as well as an
increase in expenses incurred in connection with providing management
services to the business assumed from Foremost.
Net Investment Income. Net investment income decreased from $33.9 million
for the three months ended March 31, 2000 to $20.9 million for the three months
ended March 31, 2001, a decrease of $13.0 million, or 38.3%. This decrease was
due mainly to lower investment yields and a decrease in the average invested
asset base resulting from the fact that a sizeable portion of the investment
portfolio was liquidated to help fund the payment of the $1,075.0 million
special dividend associated with the Zurich capital structure unification in
October 2000 (see Note F).
Net Realized Gains. Net realized gains decreased $13.4 million from $17.8
million for the three months ended March 31, 2000 to $4.4 million for the three
months ended March 31, 2001, due primarily to unfavorable market conditions
experienced during the three month period ended March 31, 2001.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense
related to the $500.0 million of QUIPS issued in 1995 was $10.5 million for the
three months ended March 31, 2001 and March 31, 2000.
Provision for Income Taxes. Provision for income taxes decreased from
$86.0 million for the three months ended March 31, 2000 to $81.0 million for
the three months ended March 31, 2001, a decrease of $5.0 million, or 5.8%, due
mainly to a decrease in pretax income between periods.
Management Services Income. As a result of the foregoing, management
services income decreased from $123.9 million for the three months ended
March 31, 2000 to $112.5 million for the three months ended March 31, 2001, a
decrease of $11.4 million, or 9.2%.
Insurance Subsidiaries
Farmers Re
Under the quota share reinsurance treaty, Farmers Re assumed $250.0
million of premiums in each of the three month periods ended March 31, 2001 and
March 31, 2000. Losses and loss adjustment expenses incurred under this treaty
were $178.3 million for the three months ended March 31, 2001 and $164.4
million for the three months
20
ended March 31, 2000 and non-life reinsurance commissions were $65.4 million
for the three months ended March 31, 2001 and $79.3 million for the three
months ended March 31, 2000. Income before taxes decreased $0.9 million from
$16.3 million for the three months ended March 31, 2000 to $15.4 million for
the three months ended March 31, 2001. For the three month periods ended March
31, 2001 and March 31, 2000, Farmers Re's contribution to net income was $10.5
million and $11.3 million, respectively.
Farmers Life
Total Revenues. Total revenues increased from $189.6 million for the
three months ended March 31, 2000 to $215.0 million for the three months ended
March 31, 2001, an increase of $25.4 million, or 13.4%.
Life and Annuity Premiums. Life premiums increased $19.2 million for
the three months ended March 31, 2001, or 36.9%, over the three months
ended March 31, 2000. This increase was due to a 24.8% growth in the
volume of traditional life insurance in-force as well as a 273.7% increase
in structured settlement premiums over the three months ended March 31,
2000.
Life Policy Charges. Life policy charges increased $0.5 million for
the three months ended March 31, 2001, or 0.9%, over the three months
ended March 31, 2000, reflecting a 1.0% growth in universal life-type
insurance in-force.
Net Investment Income. Net investment income increased $6.0 million
for the three months ended March 31, 2001, or 7.7%, over the three months
ended March 31, 2000. The increase was due to an increase in average
invested assets and higher bond yields.
Net Realized Gains. Net realized gains decreased by $0.3 million,
from $5.7 million for the three months ended March 31, 2000 to $5.4
million for the three months ended March 31, 2001. This decrease was due
to unfavorable market conditions.
Total Operating Expenses. Total operating expenses increased $30.7
million for the three months ended March 31, 2001, or 23.1%, over the three
months ended March 31, 2000.
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges increased $28.0 million for the three months
ended March 31, 2001, or 31.2%, over the three months ended March 31,
2000.
Policy Benefits. Policy benefits, which consist primarily of
death and surrender benefits on life products, increased $7.4
million, or 21.0%, for the three months ended March 31, 2001, to
$42.6 million, due to a 10.5% growth in the volume of life insurance
in-force and higher traditional life and Farmers Flexible Universal
Life mortality experience.
Increase in Liability for Future Benefits. Increase in
liability for future benefits expense increased from $14.3 million
for the three months ended March 31, 2000 to $32.5 million for the
three months ended March 31, 2001. This increase was primarily
attributable to a 273.7% increase in deposits for structured
settlement products.
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 $40.3 million for the three months ended
March 31, 2000 to $42.7 million for the three months ended March 31,
2001, or 6.0%, reflecting growth in the universal life fund balance.
General Operating Expenses. General operating expenses increased
from $42.9 million for the three months ended March 31, 2000 to $45.6
million for the three months ended March 31, 2001, an increase of $2.7
million, or 6.3%.
21
Amortization of DAC and VOLBA. Amortization expense remained
constant at $29.7 million for the three months ended March 31, 2000
as well as the three months ended March 31, 2001.
Net Commissions. Net commissions decreased $1.3 million from
$1.5 million for the three months ended March 31, 2000 to $0.2
million for the three months ended March 31, 2001 due to 48.5% growth
in reinsurance activity.
General and Administrative Expenses. General and administrative
expenses increased from $11.7 million for the three months ended
March 31, 2000 to $15.7 million for the three months ended March 31,
2001, an increase of $4.0 million, or 34.2%. This increase was due
primarily to timing differences associated with increased staffing
costs necessary to support business growth and new initiatives.
Provision for Income Taxes. Provision for income taxes decreased from
$20.0 million for the three months ended March 31, 2000 to $18.1 million for
the three months ended March 31, 2001 due to lower pretax operating income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
decreased from $36.9 million for the three months ended March 31, 2000 to $33.5
million for the three months ended March 31, 2001, a decrease of $3.4 million,
or 9.2%.
Consolidated Net Income
Consolidated net income of the Company decreased from $172.1 million for
the three months ended March 31, 2000 to $156.5 million for the three months
ended March 31, 2001, a decrease of $15.6 million, or 9.1%.
Liquidity and Capital Resources
As of March 31, 2001 and March 31, 2000, the Company held cash and cash
equivalents of $178.9 million and $264.8 million, respectively. In addition,
as of March 31, 2001, the Company had available revolving credit facilities
enabling it to borrow up to $500.0 million in the event such a need should
arise.
Net cash provided by operating activities increased from $265.9 million
for the three months ended March 31, 2000 to $310.1 million for the three
months ended March 31, 2001, an increase of $44.2 million. This increase in
cash was due primarily to a $40.5 million increase in life insurance policy
liabilities between periods as well as a $19.0 million increase in the
provision for non-life losses and loss adjustment expenses. Partially
offsetting these increases in cash was a $15.6 million decrease in consolidated
net income.
Net cash used in investing activities increased from $186.6 million for
the three months ended March 31, 2000 to $203.4 million for the three months
ended March 31, 2001, a decrease in cash of $16.8 million. This decrease in
cash was the result of a $448.3 million increase in purchases of investments
available-for-sale in the three month period ended March 31, 2001. This
decrease in cash was offset in part by a $370.0 million increase in cash
resulting from the purchase of certificates of contribution of the P&C Group in
March 2000, a $28.4 million increase in cash from proceeds from sales and
maturities of investments available-for-sale in the first quarter of 2001 as
well as a $26.1 million decrease in purchases of properties in the first
quarter of 2001.
Net cash used in financing activities increased from $128.0 million for
the three months ended March 31, 2000 to $144.4 million for the three months
ended March 31, 2001, resulting in a decrease in cash of $16.4 million. This
decrease was due to lower cash flows from annuity contracts between periods.
22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
The market risks associated with the Company's investment portfolios have
not changed materially from those disclosed at year-end 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to numerous lawsuits arising from its
normal business activities. These actions are in various stages of
discovery and development, and some seek punitive as well as
compensatory damages. In the opinion of management, the Company has
not engaged in any conduct which should warrant the award of any
material punitive or compensatory damages. The Company intends to
vigorously defend its position in each case, and management believes
that, while it is not possible to predict the outcome of such matters
with absolute certainty, ultimate disposition of these proceedings
should not have a material adverse effect on the Company's
consolidated results of operations or financial position. In
addition, the Company is, from time to time, involved as a party to
various governmental and administrative proceedings.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. None.
23
FARMERS GROUP, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Farmers Group, Inc.
(Registrant)
May 14, 2001 /s/ Martin D. Feinstein
---------------------------------------------
Date Martin D. Feinstein
Chairman of the Board,
President and Chief Executive Officer
May 14, 2001 /s/ Gerald E. Faulwell
---------------------------------------------
Date Gerald E. Faulwell
Senior Vice President,
Chief Financial Officer
and Director