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, 2002
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, 2002 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, 2002
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - Assets
March 31, 2002 (Unaudited) and December 31, 2001 (Audited) 4
Consolidated Balance Sheets - Liabilities
and Stockholders' Equity
March 31, 2002 (Unaudited) and December 31, 2001 (Audited) 5
Unaudited Consolidated Statements of Income
Three Month Periods ended March 31, 2002 and
March 31, 2001 6
Unaudited Consolidated Statements of Comprehensive Income
Three Month Periods ended March 31, 2002 and
March 31, 2001 7
Unaudited Consolidated Statement of Stockholders' Equity
Three Month Period ended March 31, 2002 8
Unaudited Consolidated Statement of Stockholders' Equity
Three Month Period ended March 31, 2001 9
Unaudited Consolidated Statements of Cash Flows
Three Month Periods ended March 31, 2002 and
March 31, 2001 10
Notes to Unaudited Interim Financial Statements 11
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks 26
PART II. OTHER INFORMATION 27
SIGNATURES 28
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except for per share data)
ASSETS
(Unaudited)
March 31, December 31,
2002 2001
------------- ------------
Current assets, Farmers Management Services:
Cash and cash equivalents $ 366,108 $ 225,008
Accrued interest 10,173 7,058
Accounts receivable, principally from the P&C Group Companies 42,560 51,429
Deferred taxes 42,727 43,165
Prepaid expenses and other 27,424 27,396
------------- ------------
Total current assets 488,992 354,056
------------- ------------
Investments, Farmers Management Services:
Fixed maturities available-for-sale, at market value
(cost: $80,776 and $81,530) 81,159 82,856
Mortgage loans on real estate, at amortized cost 17 33
Common stocks available-for-sale, at market value
(cost: $181,268 and $184,243) 171,193 167,637
Certificates of contribution of the P&C Group Companies 546,830 546,830
Real estate, at cost (net of accumulated depreciation:
$41,816 and $46,148) 85,123 98,374
Notes receivable - affiliates 345,000 345,000
Other investments 50,000 50,000
------------- ------------
1,279,322 1,290,730
------------- ------------
Other assets, Farmers Management Services:
Goodwill 1,621,183 1,621,183
Attorney-in-fact relationships 1,153,605 1,153,605
Other assets 228,581 250,640
------------- ------------
3,003,369 3,025,428
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $450,204 and $431,556) 458,621 436,010
------------- ------------
Investments of FGI Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $4,701,287 and $4,564,103) 4,718,542 4,668,755
Mortgage loans on real estate 26,845 28,901
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $10,346 and $11,123) 10,984 12,245
Common stocks available-for-sale, at market value
(cost: $350,386 and $353,748) 344,755 339,684
Certificates of contribution and surplus note of the
P&C Group Companies 490,500 490,500
Policy loans 235,185 232,287
Real estate, at cost (net of accumulated depreciation:
$32,205 and $25,217) 80,098 80,814
Joint ventures, at equity 3,559 3,625
S&P 500 call options, at fair value (cost: $36,878 and $36,453) 11,309 12,690
Marketable securities, at market value (cost: $0 and $30,303) 0 30,342
Other investments 12,435 12,435
------------- ------------
5,934,212 5,912,278
------------- ------------
Other assets of FGI Insurance Subsidiaries:
Cash and cash equivalents 141,446 172,394
Accounts receivable, from the P&C Group Companies 0 119,000
Life reinsurance receivable 69,517 65,240
Reinsurance premiums receivable, from the P&C Group Companies 34,231 0
Funds held by or deposited with reinsured companies 18,922 18,905
Accrued investment income 66,238 65,925
Income taxes 0 5,718
Deferred policy acquisition costs 583,787 561,248
Value of life business acquired 273,226 274,531
Securities lending collateral 293,046 45,494
Other assets 52,119 23,110
Assets held in Separate Accounts 64,994 53,074
------------- ------------
1,597,526 1,404,639
------------- ------------
Total assets $ 12,762,042 $ 12,423,141
============= ============
The accompanying notes are an integral part of these interim financial statements.
5
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except for per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
March 31, December 31,
2002 2001
------------ -------------
Current liabilities, Farmers Management Services:
Notes and accounts payable:
Other $ 60,107 $ 45,643
Accrued liabilities:
Profit sharing 17,548 53,232
Income taxes 177,475 128,588
Other 6,062 8,501
------------ -------------
Total current liabilities 261,192 235,964
------------ -------------
Other liabilities, Farmers Management Services:
Real estate mortgages payable 12 12
Non-current deferred taxes 534,619 512,376
Other 39,276 106,788
------------ -------------
573,907 619,176
------------ -------------
Liabilities of FGI Insurance Subsidiaries:
Policy liabilities:
Future policy benefits 3,933,537 3,858,012
Claims 39,506 38,076
Policyholders dividends 14 12
Other policyholders funds 283,087 264,446
Death benefits payable 69,034 60,980
Provision for non-life losses and loss adjustment expenses 38,122 18,922
Income taxes (including deferred taxes: $84,368 and $109,594) 113,118 109,594
Unearned investment income 897 867
Accounts payable, to the P&C Group Companies 0 107,000
Reinsurance payable, to the P&C Group Companies 13,793 0
Securities lending liability 293,046 45,494
Other liabilities 82,939 44,045
Liabilities related to Separate Accounts 64,994 53,074
------------ -------------
4,932,087 4,600,522
------------ -------------
Total liabilities 5,767,186 5,455,662
------------ -------------
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, 2002 and
December 31, 2001 - 450 shares 0.45 0.45
Class B common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 2002 and
December 31, 2001 - 500 shares 0.50 0.50
Class C common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 2002 and
December 31, 2001 - 50 shares 0.05 0.05
Additional capital 5,227,049 5,227,049
Accumulated other comprehensive income/(loss) (net of deferred
taxes: ($1,457) and $18,231) (2,705) 33,857
Retained earnings 1,270,511 1,206,572
------------ -------------
Total stockholders' equity 6,494,856 6,467,479
------------ -------------
Total liabilities and stockholders' equity $ 12,762,042 $ 12,423,141
============ =============
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,
------------------------
2002 2001
----------- -----------
Consolidated operating revenues $ 693,361 $ 889,189
=========== ===========
Farmers Management Services:
Operating revenues $ 435,888 $ 415,074
----------- -----------
Salaries and employee benefits 109,262 110,972
Building and equipment expenses 28,250 24,778
Amortization of AIF relationships and goodwill 0 25,693
General and administrative expenses 72,107 74,961
----------- -----------
Total operating expenses 209,619 236,404
----------- -----------
Operating income 226,269 178,670
Net investment income 18,724 20,935
Net realized gains 3,401 4,439
Impairment losses on investments (4,603) 0
Dividends on preferred securities of subsidiary trusts (10,518) (10,518)
----------- ----------
Income before provision for taxes 233,273 193,526
Provision for income taxes 90,791 81,046
----------- ----------
Farmers Management Services net income 142,482 112,480
----------- ----------
FGI Insurance Subsidiaries:
Life and annuity premiums 63,363 71,081
Non-life reinsurance premiums 50,000 250,000
Life policy charges 55,351 54,152
Net investment income 93,029 92,872
Net realized gains 4,647 13,658
Impairment losses on investments (8,917) (7,648)
----------- -----------
Total revenues 257,473 474,115
----------- -----------
Non-life losses and loss adjustment expenses 32,992 178,324
Life policy benefits 43,551 42,633
Increase in liability for future life policy benefits 23,795 32,439
Interest credited to life policyholders 46,351 42,674
Amortization of deferred policy acquisition costs
and value of life business acquired 22,312 29,727
Net life commissions (1,196) 181
Non-life reinsurance commissions 15,758 65,426
General and administrative expenses 15,481 15,706
----------- -----------
Total operating expenses 199,044 407,110
----------- -----------
Income before provision for taxes 58,429 67,005
Provision for income taxes 20,222 22,975
----------- -----------
FGI Insurance Subsidiaries net income 38,207 44,030
----------- -----------
Consolidated net income $ 180,689 $ 156,510
=========== ===========
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,
------------------------
2002 2001
----------- -----------
Consolidated net income $ 180,689 $ 156,510
----------- -----------
Other comprehensive income/(loss), net of tax:
Net unrealized holding gains/(losses) on securities,
net of tax of ($25,865) and $7,537 (48,035) 13,998
Change in effect of unrealized gains/(losses) on other
insurance accounts, net of tax of $6,177 and
($7,351) 11,473 (13,652)
----------- -----------
Other comprehensive income/(loss) (36,562) 346
----------- -----------
Comprehensive income $ 144,127 $ 156,856
=========== ===========
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, 2002
(Amounts in thousands)
(Unaudited)
Accumulated Other Total
Common Additional Comprehensive Retained Stockholders'
Stock Capital Income/(Loss) Earnings Equity
-------- ----------- --------------- ----------- -------------
Balance, December 31, 2001 $ 1 $ 5,227,049 $ 33,857 $ 1,206,572 $ 6,467,479
Net income 180,689 180,689
Net unrealized holding losses
on securities, net of tax
of ($25,865) (48,035) (48,035)
Change in effect of unrealized
gains on other insurance
accounts, net of tax of $6,177 11,473 11,473
Cash dividends paid (116,750) (116,750)
-------- ------------ --------------- ----------- -------------
Balance, March 31, 2002 $ 1 $ 5,227,049 $ (2,705) $ 1,270,511 $ 6,494,856
======== ============ =============== =========== =============
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, 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.
10
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three month period
ended March 31,
-----------------------
2002 2001
---------- ----------
Cash Flows from Operating Activities:
Consolidated net income $ 180,689 $ 156,510
Non-cash and operating activities adjustments:
Depreciation and amortization 21,134 41,332
Amortization of deferred policy acquisition costs and
value of life business acquired 22,312 29,727
Policy acquisition costs deferred (25,896) (29,658)
Life insurance policy liabilities 59,278 67,021
Provision for non-life losses and loss adjustment expenses 19,200 101,797
Interest credited on universal life and annuity contracts 40,018 25,432
Equity in earnings of joint ventures 83 87
Gains on sales of assets (8,081) (21,060)
Impairment losses on investments 13,520 7,648
Changes in assets and liabilities:
Current assets and liabilities (27,818) (105,088)
Non-current assets and liabilities 21,908 18,527
Other, net 22,218 14,787
---------- ----------
Net cash provided by operating activities 338,565 307,062
---------- ----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (473,905) (727,307)
Purchases of properties and equipment (12,772) (8,575)
Proceeds from sales and maturities of investments
available-for-sale 362,639 528,959
Proceeds from sales of properties 16,671 8,493
Mortgage loan collections 2,071 2,511
Increase in policy loans (2,898) (4,453)
Other, net 229 (3,048)
---------- ----------
Net cash used in investing activities (107,965) (203,420)
---------- ----------
Cash Flows from Financing Activities:
Dividends paid to stockholders (116,750) (119,775)
Deposits received from universal life and annuity contracts 112,912 293,015
Withdrawals from universal life and annuity contracts (116,610) (314,635)
---------- ----------
Net cash used in financing activities (120,448) (141,395)
---------- ----------
Increase/(decrease) in cash and cash equivalents 110,152 (37,753)
Cash and cash equivalents - at beginning of year 397,402 216,676
---------- ----------
Cash and cash equivalents - at end of period $ 507,554 $ 178,923
========== ==========
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"; references to attorney-in-fact
("AIF"), as applicable in context, are to FGI, dba Farmers Underwriters
Association, attorney-in-fact of Farmers Insurance Exchange; or Fire
Underwriters Association, attorney-in-fact of Fire Insurance Exchange; or Truck
Underwriters Association, attorney-in-fact of Truck Insurance Exchange) as of
March 31, 2002, the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for the three month periods ended
March 31, 2002 and March 31, 2001, have been prepared in accordance with
accounting principles generally accepted in the United States of America
("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, 2001 and 2000, 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,
2001.
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 2002
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 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. Each policyholder of each Exchange appoints the AIF to provide
management services to each Exchange. 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 Companies"). The P&C Group Companies are owned by
the respective 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 Companies.
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 Companies' agents.
Farmers Reinsurance Company ("Farmers Re") is a wholly owned subsidiary of
FGI. Effective January 1, 1998, Farmers Re entered into an auto physical damage
("APD") reinsurance agreement with the P&C Group Companies. Effective April 1,
2001, this APD reinsurance agreement was cancelled and replaced with a similar
APD reinsurance agreement supported by Farmers Re, Zurich affiliates and
outside re-insurers. Under the new agreement, annual premiums ceded by the P&C
Group Companies increased from $1.0 billion to $2.0 billion with Farmers Re
assuming 10%, or $200.0 million. The remaining $1.8 billion is ceded to the
Zurich affiliates and outside reinsurance companies identified in the
agreement. As a result of the new agreement, Farmers Re's premiums decreased
from $250.0 million for the three months ended March 31, 2001 to $50.0 million
for the three months ended March 31,
12
2002. Additionally, on a monthly basis, premiums assumed decreased from $83.3
million under the old agreement to $16.7 million under the new agreement.
Farmers Re continues to assume a quota share percentage of ultimate net losses
sustained by the P&C Group Companies in its APD line of business. This new
agreement, which can be terminated by any of the parties, also provides for the
P&C Group Companies to receive a ceding commission of 18% of premiums, versus
20% under the old agreement, with additional experience commissions that depend
on loss experience. Similar to the old agreement, this experience commission
arrangement limits Farmers Re's potential underwriting gain on the assumed
business to 2.5% of premiums assumed.
In December 2001, Farmers Re paid the P&C Group Companies $19.3 million of
losses and loss adjustment expenses and $0.3 million of accrued interest as an
estimate of a commutation related to the 2001 accident year. In May 2002, a
final commutation of the 2001 accident year losses and loss adjustment
expenses will be made. Under this commutation, Farmers Re and the P&C Group
Companies will commute $18.9 million of losses and loss adjustments expenses.
The difference between the estimated losses paid in December 2001 and the
actual amount that will be commuted in May 2002 will be settled in December
2002.
References to the "FGI Insurance Subsidiaries" within the consolidated
financial statements are to Farmers Life and Farmers Re. References to
"Farmers Management Services" are to the Company excluding the FGI Insurance
Subsidiaries.
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
holding company with headquarters in Zurich, Switzerland. This merger was
accounted for by ZGH as a pooling of interests under International Accounting
Standards ("IAS").
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
group holding company, Zurich Financial Services.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". This Statement addresses financial accounting and
reporting for intangible assets acquired individually or with a group of other
assets (but not those acquired in a business combination) at acquisition. This
Statement also addresses financial accounting and reporting for goodwill and
other intangible assets subsequent to their acquisition. Upon adoption of this
Statement, goodwill and other intangible assets that are determined to have an
indefinite useful life should no longer be amortized. Instead, goodwill should
be tested annually for impairment using a two-step process. The first step is
to identify a potential impairment and, in transition, this step must be
measured as of the beginning of the fiscal year. The second step of the
goodwill impairment test measures the amount of impairment loss (measured as of
the beginning of the year of adoption), if any, and must be completed by the
end of the year of initial adoption.
Additionally, intangible assets with indefinite useful lives will be
evaluated each reporting period to determine whether an indefinite useful life
is still supported. Further, such assets will be tested for impairment using a
one-step process which compares the fair value to the carrying amount of the
asset as of the beginning of the fiscal year. Any intangible asset that is
determined to have a finite useful life should be amortized over this period
and its useful life should be evaluated each reporting period to determine
whether revisions to the remaining amortization period are warranted. This
Statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and supersedes APB Opinion No. 17,
"Intangible Assets". This Statement is required to be applied at the
beginning of an entity's fiscal year and to be applied to all goodwill and
other intangible assets recognized in its
13
financial statements at that date. Effective January 1, 2002, the Company
adopted the provisions of SFAS No. 142, as applicable to all goodwill and
other intangibles recognized in its financial statements at that date. The
Company has identified goodwill and the AIF relationships as intangible assets
subject to the impairment provisions of this Standard.
As of March 31, 2002, the Company completed the transitional goodwill
impairment test as well as the impairment test related to the AIF
relationships. These tests, which used discounted future cashflows, did not
result in any impairment of the recorded value of goodwill or the AIF
relationships. In addition, the Company has identified the AIF relationships
as intangible assets with indefinite useful lives. As SFAS No. 142 ceases
amortization of goodwill and assets with indefinite useful lives, the Company
will no longer record $25.7 million of pretax quarterly amortization relating
to goodwill and the AIF relationships. For the three month period ended March
31, 2001, amortization related to such assets totaled $25.7 million.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This Statement establishes the standard to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. It also applies to legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or normal operation of a long-lived asset, except
for certain obligations of lessees. This Statement amends SFAS No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies". The
provisions of this Statement are effective for fiscal years beginning after
June 15, 2002, with early application encouraged. The Company does not expect
the adoption of this Statement to have a material impact on its consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. This Statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". However, this Statement retains the fundamental
provisions of SFAS No. 121 for a) recognition and measurement of the impairment
of long-lived assets to be held and used and b) measurement of long-lived
assets to be disposed of by sale. This Statement also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for segments of a business to be disposed of. However, this
Statement retains the requirements of APB Opinion No. 30 to report discontinued
operations separately from continuing operations and extends that reporting to
a component (rather than a segment of a business) of an entity that either has
been disposed of or is classified as held for sale. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The provisions of this Statement generally are to be applied
prospectively. The adoption of this Statement did not have a material impact
on the Company's consolidated financial statements.
B. Capital structure
As of March 31, 2002, 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 $1.1 billion 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 ("Allied Zurich"), an affiliated company created
during the restructuring of B.A.T.
Subsequently, on February 9, 2001, in connection with the private
placement of the $1.1 billion 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
14
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 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, $1.1 billion 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 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).
15
C. Intangible assets
As of March 31, 2002, the Company held the following intangible assets:
Net
Book
Value
------------
(Amounts in thousands)
Amortized intangible assets:
FGI Insurance Subsidiaries:
Value of life business acquired ("VOLBA")
Balance, January 1, 2002 $ 274,531
Amortization related to operations (9,029)
Interest accrued 4,621
Amortization related to net
Unrealized gains 3,103
------------
Balance, March 31, 2002 $ 273,226
============
Gross
Carrying
Amount
------------
(Amounts in thousands)
Unamortized intangible assets:
Farmers Management Services:
Goodwill $ 1,621,183
AIF relationships 1,153,605
------------
$ 2,774,788
============
For the three months ended March 31, 2002, amortization expense, net of
accrued interest, related to the VOLBA asset totaled $4.4 million. Estimated
amortization, net of accrued interest, related to the VOLBA asset for each of
the years in the five-year period ended December 31, 2006 follows:
Annual
Amortization
Expense
------------
(Amounts in thousands)
2002 $ 22,000
2003 21,000
2004 20,000
2005 19,000
2006 18,000
------------
$ 100,000
============
Following is a reconciliation of reported net income to net income
adjusted to exclude the effects of amortization expenses related to goodwill
and the AIF relationships:
For the three months
ended March 31,
2002 2001
---------- ----------
(Amounts in thousands)
Farmers Management Services:
Reported net income $ 142,482 $ 112,480
Add back: Goodwill amortization 15,011
AIF amortization, net of tax 6,655
---------- ----------
Adjusted net income $ 142,482 $ 134,146
========== ==========
16
D. Management fees
The Company, through its AIF relationships with the Exchanges, provides
management services to the non-claims side of the P&C Group Companies and
receives management fees for the services rendered. As a result, the
Company received management fees from the P&C Group Companies of $407.7
million and $389.3 million for the three month periods ended March 31, 2002
and March 31, 2001, respectively.
E. Material contingencies
The Company is a party to numerous lawsuits arising from its AIF
relationships with the Exchanges. The Company is also a party to additional
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 in various governmental and
administrative proceedings.
F. 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 FGI, 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 FGI of all of the Subsidiary Trusts' Common Securities ("Common
Securities"), FGI issued to Farmers Group Capital $422.7 million 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 $92.8 million 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 FGI 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 FGI 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, FGI had the
option to redeem, in whole or 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, 2002 and 2001, a total of 20.0 million shares of QUIPS
were outstanding.
G. Related parties
As of March 31, 2002, the Company held a $250.0 million note receivable
from ZGA US Limited ("ZGAUS"), a subsidiary of Zurich, formerly known as Orange
Stone (Delaware) Holdings Limited. The Company loaned $250.0 million to ZGAUS
on December 15, 1999 and, in return, received a medium-term note with a 7.50%
fixed interest rate that matures on December 15, 2004. Interest on this note
is paid semi-annually and totaled $4.7 million for each of the three month
periods ended March 31, 2002 and March 31, 2001.
17
In addition, as of March 31, 2002, the Company held $95.0 million of notes
receivable from Zurich Financial Services (UKISA) Limited ("UKISA"), a
subsidiary of Zurich. The Company purchased $1.1 billion of notes from UKISA
on September 3, 1998. Subsequently, on March 1, 2000, Eagle Star Life
Assurance Company Limited, also an affiliate of Zurich, assigned $175.0 million
of matured surplus notes of the P&C Group Companies to the Company and, in
return, the Company reduced the outstanding balance of the notes receivable
from UKISA by $175.0 million. Additionally, on September 3, 2000, $25.0
million 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.
Also, on October 23, 2000, to help fund the payment of a $1.1 billion
special dividend associated with the Zurich holding structure unification in
October 2000, the Company sold $580.0 million of the notes receivable from
UKISA to ZIC for par value. Finally, on September 3, 2001, the Company
received $214.6 million from UKISA in settlement of a $207.0 million note
receivable and $7.6 million of accrued interest. This note had a maturity date
of September 3, 2001 and a coupon rate of 5.48%.
As a result, as of March 31, 2002, the Company held $95.0 million of notes
receivable from UKISA each with a maturity date of September 2002. The $95.0
million of notes receivable are fixed rate short-term notes with coupon rates
as follows: $25.0 million at a coupon rate of 6.80% and $70.0 million 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, 2002 and March 31, 2001 totaled
$1.4 million and $4.8 million, respectively.
H. Certificates of contribution and surplus note of the P&C Group Companies
From time to time, the Company has purchased certificates of contribution
or surplus notes of the P&C Group Companies in order to maintain the
policyholders' surplus of the P&C Group Companies. Effective December 2001,
Farmers Life redeemed a $119.0 million surplus note of the P&C Group Companies
and subsequently purchased $107.0 million of certificates of contribution of
the P&C Group Companies. These transactions were settled in January 2002.
At March 31, 2002, the Company held the following certificates of
contribution and surplus note of the P&C Group Companies:
An $87.5 million surplus note, issued in March 2000, bearing interest
at 8.50% annually and maturing in February 2005.
$370.0 million of certificates of contribution, issued in March 2000,
bearing interest at 7.85% annually and maturing in March 2010.
$350.0 million of certificates of contribution, issued in November
2001, bearing interest at 6.00% annually and maturing in September
2006.
$206.5 million of certificates of contribution, issued in December
2001, bearing interest at 6.00% annually and maturing in September
2006.
Other certificates of contribution totaling $23.3 million which bear
interest at various rates.
Conditions governing repayment of these amounts are outlined in the
certificates of contribution and the surplus note. Generally, repayment may be
made only when the surplus balance of the issuer reaches a certain specified
level, and then only after approval is granted by the issuer's governing Board
and the appropriate state insurance regulatory department.
18
I. 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:
Farmers FGI
Management Insurance
Services Subsidiaries Consolidated
------------ ------------ ------------
(Amounts in thousands)
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 and cash equivalents -- December 31, 2001 $ 225,008 $ 172,394 $ 397,402
Activity through
March 2002 110,152
------------
Cash and cash equivalents -- March 31, 2002 366,108 141,446 $ 507,554
============
Cash payments for interest were $1.0 million and $1.8 million for the
three month periods ended March 31, 2002 and March 31, 2001, respectively,
while the cash payment for dividends to the holders of the Company's QUIPS was
$10.5 million for each of the three month periods ended March 31, 2002 and
March 31, 2001. Cash payments for income taxes were $10.5 million and $41.4
million for the three month periods ended March 31, 2002 and March 31, 2001,
respectively.
J. Operating segments
The Company's principal activities are the provision of management
services to the P&C Group Companies 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.
Through it AIF relationships with the Exchanges, the Company's management
services segment (Farmers Management Services) is primarily responsible for
providing management services to the P&C Group Companies. Management fees
earned from the P&C Group Companies totaled $407.7 million and $389.3 million
for the three month periods ended March 31, 2002 and March 31, 2001,
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 APD business written by the P&C Group
Companies.
The Company's management uses an IAS basis of accounting for evaluating
segment performance and determining how resources should be allocated. 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 is based on GAAP and
therefore excludes the effects of all IAS adjustments.
The P&C Group Companies collectively represent the Company's largest
customer. Management fees earned by the Company as AIF for the Exchanges
totaled $407.7 million and $389.3 million, respectively, for the three months
ended March 31, 2002 and 2001, which represented 58.8% and 43.8%, respectively,
of the Company's consolidated operating revenues for the same periods. The
Company has no ownership interest in the P&C Group Companies and therefore is
not directly affected by the underwriting results of the P&C Group Companies.
However, as management fees comprise a significant part of the Company's
revenues, the ongoing financial performance of the Company depends on the
volume of business written by, and the business efficiency and financial
strength of, the P&C Group Companies.
19
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, 2002 and March
31, 2001.
Information regarding the Company's reportable operating segments follows:
Three month period ended March 31, 2002
-----------------------------------------------------------------------------------------------------
IAS basis Adjustments Consolidated
------------------------------------------------------ --------------------------------
Management Life Management Life GAAP
services insurance Reinsurance Total services insurance Total basis
------------------------------------------------------ -------------------------------- ----------
(Amounts in thousands)
Revenues $ 435,888 $ 199,812 (a) $ 58,421 (a) $ 694,121 $ 0 $ (760) $ (760) $ 693,361
Investment
income 19,731 87,394 9,810 116,935 (1,007) (760) (1,767) $ 115,168
Investment
expenses 0 (3,415) 0 (3,415) 0 0 0 $ (3,415)
Net realized
gains 3,386 3,295 1,352 8,033 15 0 15 $ 8,048
Impairment
losses on
investments (4,603) (6,176) (2,741) (13,520) 0 0 0 $ (13,520)
Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0 0 0 $ (10,518)
Income before
provision for
taxes 223,496 49,458 9,621 282,575 9,777 (b) (650) 9,127 $ 291,702
Provision for
income taxes 87,080 17,445 3,005 107,530 3,711 (228) 3,483 $ 111,013
Depreciation and
amortization 29,612 22,749 0 52,361 (9,675)(b) 760 (8,915) $ 43,446
- -----------------------
(a) Revenues for the insurance operating segments include net investment
income, net realized gains/(losses) and impairment losses on investments.
(b) Amount includes adjustment associated with the amortization of the AIF
relationships ($10.7 million).
19
Three month period ended Match 31, 2001
-----------------------------------------------------------------------------------------------------
IAS basis Adjustments Consolidated
------------------------------------------------------ --------------------------------
Management Life Management Life GAAP
services insurance Reinsurance Total services insurance Total basis
------------------------------------------------------ -------------------------------- ----------
(Amounts in thousands)
Revenues $ 415,074 $ 215,530 (a) $ 259,142 (a) $ 889,746 $ 0 $ (557) $ (557) $ 889,189
Investment
income 21,476 89,020 11,023 121,519 (541) (763) (1,304) $ 120,215
Investment
expenses 0 (3,959) (2,449) (6,408) 0 0 0 $ (6,408)
Net realized
gains 4,079 12,884 568 17,531 360 206 566 $ 18,097
Impairment
losses on
investments 0 (7,648) 0 (7,648) 0 0 0 $ (7,648)
Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0 0 0 $ (10,518)
Income before
provision for
taxes 209,032 52,195 15,376 276,603 (15,506)(b) (566) (16,072) $ 260,531
Provision for
income taxes 81,219 18,292 4,881 104,392 (173) (198) (371) $ 104,021
Depreciation and
amortization 24,637 30,107 0 54,744 15,552 (b) 763 16,315 $ 71,059
- -----------------------
(a) Revenues for the insurance operating segments include net investment
income, net realized gains/(losses) and impairment losses on investments.
(b) Amount includes adjustment associated with the amortization of goodwill
($15.0 million).
K. Impairment losses on investments
The Company regularly reviews its investment portfolio to determine
whether declines in the value of investments are other then temporary as
defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company's review for declines in value includes reviewing
historical and forecasted financial information as well as reviewing the market
performance of similar types of investments. As a result of the Company's
review, the Company determined that some of its investments had declines in
value that were other than temporary as of March 31, 2002 due to unfavorable
market and economic conditions. Accordingly, as of March 31,
20
2002, the Company has recorded $13.5 million of impairment losses on
investments in the equity portfolios. Impairment losses were recorded for
each reporting segment and, for the three months ended March 31, 2002,
amounted to $4.6 million, $2.7 million and $6.2 million for Farmers Management
Services, Farmers Re and Farmers Life, respectively. Also, for the three
months ended March 31, 2001, Farmers Life recorded $7.6 million of impairment
losses related to fixed income securities of Indah Kiat International Finance.
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 Companies and the ownership and operation of the FGI
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 FGI Insurance Subsidiaries are required
to use for regulatory reporting purposes.
Farmers Life, a wholly owned subsidiary of the Company, underwrites and
sells life insurance, structured settlement and annuity products as well as
variable universal life and 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.
The Company provides reinsurance coverage to the P&C Group Companies
through its subsidiary, Farmers Re. Effective April 1, 2001, the APD
reinsurance agreement between Farmers Re and the P&C Group Companies which had
been in force since January 1998 was cancelled and replaced with a similar APD
reinsurance agreement supported by Farmers Re, Zurich affiliates and outside
reinsurers. Under the new agreement, premiums ceded by the P&C Group Companies
increased from $1.0 billion to $2.0 billion, with Farmers Re assuming 10%, or
$200.0 million. The remaining $1.8 billion is ceded to the Zurich affiliates
and outside reinsurance companies identified in the agreement. As a result of
this new agreement, Farmers Re's premiums decreased from $250.0 million for the
three month period ended March 31, 2001 to $50.0 million for the three month
period ended March 31, 2002. Additionally, on a monthly basis, premiums
assumed by Farmers Re decreased from $83.3 million under the old agreement to
$16.7 million under the new agreement. Farmers Re continues to assume a quota
share percentage of ultimate net losses sustained by the P&C Group Companies in
their APD lines of business. This new agreement, which can be terminated by
any of the parties, also provides for the P&C Group Companies to receive a
ceding commission of 18% of premiums, versus 20% under the old agreement, with
additional experience commissions that depend on loss experience. Similar to
the old agreement, this experience commission arrangement limits Farmers Re's
potential underwriting gain on the assumed business to 2.5% of premium
assumed.
Critical Accounting Policies
The consolidated financial statements of the Company have been prepared in
accordance with GAAP. The preparation of these financial statements requires
the Company to make estimates and judgments 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.
21
The Company's critical accounting policies relate to revenue recognition,
valuation of intangible assets, impairment of investments and the fair value of
financial instruments.
Revenue Recognition. Through its AIF relationships with the Exchanges,
the Company provides management services to the non-claims side of the P&C
Group Companies' business and receives management fees for the services
rendered. The Company recognizes management fee revenue according to the
revenue recognition criteria established by Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements".
The Company, through its AIF relationships with the Exchanges, is
contractually permitted to receive a management fee based on the gross premiums
earned by the P&C Group Companies. 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
Companies. In order to enable the P&C Group Companies to maintain appropriate
capital and surplus while offering competitive insurance rates, each AIF has
historically charged a lower management fee than the contractually permitted
fee of 20% (25% in the case of the Fire Insurance Exchange). In order to
ensure that its management fees remain competitive, the Company periodically
reviews the fee it charges for the services it provides based on the level and
cost of the services as well as market conditions.
As the P&C Group Companies earn gross premiums ratably over the life of
the underlying insurance policy, the Company receives and recognizes the
corresponding management fee ratably over the life of the underlying policies
for which it is providing services. The risk of uncollectable premiums is
borne by the P&C Group Companies and collectability of the premiums does not
affect the amount of revenues the Company recognizes in a given period.
Intangible Assets. The Company's critical accounting policies related to
the valuation of intangible assets include the AIF relationships, Goodwill,
VOLBA and DAC.
AIF. As AIF, the Company receives a substantial portion of its revenues
and profits through the management services the Company provides to the P&C
Group Companies. Therefore, the Company's ongoing financial performance
depends on the volume of business written by, and the efficiency and financial
strength of, the P&C Group Companies. As a result, a portion of the purchase
price ($1.7 billion) associated with B.A.T's acquisition of the Company in 1988
was assigned to these AIF relationships. Through December 31, 2001, the value
so assigned was amortized on a straight-line basis over forty years and was
regularly reviewed for indications of impairment in value which in the view of
management were other than temporary, including unexpected or adverse changes
in the following: (1) the economic or competitive environments in which the
Company operates, (2) profitability analyses and (3) cashflow analyses.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142 (see Note A) and has identified the AIF relationships as intangible assets
with indefinite useful lives. The Company performed impairment tests of the
AIF relationships using discounted future cashflows and such tests did not
result in any impairment of the recorded AIF relationships. Additionally, as
SFAS No. 142 ceases amortization of intangible assets with indefinite useful
lives, the Company will no longer record $42.8 million of pretax annual
amortization relating to the AIF relationships. For the three months ended
March 31, 2001 pretax amortization of the AIF relationships totaled $10.7
million.
Goodwill. The excess of the purchase price over the fair value of the net
assets of the Company at the date of the Company's acquisition by B.A.T ($2.4
billion) was amortized on a straight-line basis over forty years as of December
31, 2001. The carrying amount of the Goodwill was regularly reviewed for
indications of impairment in value which in the view of management were other
than temporary, including unexpected or adverse changes in the following: (1)
the economic or competitive environments in which the Company operates, (2)
profitability analyses and (3) cashflow analyses.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142 (see Note A). As of March 31, 2002, the Company completed the transitional
goodwill impairment test using discounted future cashflows. This test did not
result in any impairment of recorded goodwill. Additionally, as SFAS No. 142
ceases amortization of
22
goodwill, the Company will no longer record $60.0 million of annual
amortization. For the three months ended March 31, 2001, amortization of
goodwill totaled $15.0 million.
VOLBA. At the date of B.A.T's acquisition of the Company, a portion of
the purchase price ($662.8 million) was assigned to the VOLBA asset, which
represented an actuarial determination of the expected profits from the life
business in force at that time. The amount so assigned is being amortized over
its actuarially determined useful life with the unamortized amount included in
the "Value of Life Business Acquired" line in the accompanying consolidated
balance sheets.
DAC. The Company recognizes traditional life product premiums as revenues
when they become due and future benefits and expenses are matched with such
premiums so that the majority of profits are recognized over the premium-paying
period of the policy. This matching of revenues and expenses is accomplished
through the provision for future policy benefits and the amortization of DAC.
DAC is amortized in relation to the present value of expected gross profit
margins on the policies, after giving recognition to differences between actual
and expected gross profit margins to date.
In compliance with a SEC staff announcement, the Company has recorded
certain entries to the DAC and VOLBA lines 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. Accordingly, DAC and VOLBA are increased or
decreased to reflect what would have been the impact on estimated future gross
profits, had net unrealized gains or losses on securities been realized at the
balance sheet date. Net unrealized gains or losses on securities, within
stockholders' equity, also reflect this impact.
Impairment of Investments. The Company regularly reviews its investment
portfolio to determine whether declines in the value of investments are other
than temporary as defined by SFAS No. 115. The Company's review for declines
in value includes reviewing historical and forecasted financial information as
well as reviewing the market performance of similar types of investments. As
a result of this review, the Company determined that some of its investments
had declines in value that were other than temporary as of March 31, 2002 due
to unfavorable market and economic conditions. Accordingly, for the three
months ended March 31, 2002, the Company recorded $13.5 million of impairment
losses on investments in the equity portfolios. Impairment losses were
recorded for each reporting segment and, for the three months ended March 31,
2002, amounted to $4.6 million, $2.7 million and $6.2 million for Farmers
Management Services, Farmers Re and Farmers Life, respectively. For the three
months ended March 31, 2001, Farmers Life recorded $7.6 million of impairment
losses on fixed income securities of Indah Kiat International Finance.
Fair Value of Financial Instruments. The fair values of financial
instruments have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, these estimates may not be indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a significant effect on
the estimated fair value amounts.
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Farmers Management Services
Operating Revenues. Operating revenues, which primarily consist of
management fees paid to Farmers Management Services as a percentage of gross
premiums earned by the P&C Group Companies, increased $20.8 million, or 5.0%,
to $435.9 million for the three months ended March 31, 2002. This growth in
operating revenues was primarily attributable to higher volumes of gross
premiums earned by the P&C Group Companies, which benefited from a rising
premium rate environment. Gross premiums earned increased $140.9 million, or
4.7%, to
23
$3,121.1 million for the three months ended March 31, 2002 due primarily to
continued growth in the auto, fire and commercial lines of business.
Operating Expenses. Operating expenses as a percentage of operating
revenues decreased from 57.0% for the three months ended March 31, 2001 to
48.1% for the three months ended March 31, 2002, a decrease of 8.9 percentage
points. This decrease was substantially due to the fact that effective
January 1, 2002, the Company ceased recording amortization related to goodwill
and the AIF relationships as a result of the adoption of SFAS No. 142 (see Note
A). For the three months ended March 31, 2001, amortization related to these
two items totaled $25.7 million. Excluding the effects of the amortization of
goodwill and the AIF relationships for the three months ended March 31, 2001,
operating expenses as a percentage of operating revenues decreased from 50.8%
for the three months ended March 31, 2001 to 48.1% for the three months ended
March 31, 2002, a decrease of 2.7 percentage points.
Salaries and Employee Benefits. Salaries and employee benefits
expenses decreased $1.7 million, or 1.5%, to $109.3 million for the three
months ended March 31, 2002 due to a decrease in the use of outside
contractors. This decrease in outside contractors expense was offset in
part by an increase in employee pension expenses.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $24.8 million for the three months ended March 31, 2001 to
$28.2 million for the three months ended March 31, 2002, an increase of
$3.4 million, or 13.7%, due primarily to an increase in the amortization
expense related to internally developed software.
Amortization of Attorney-In-Fact Relationships and Goodwill.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142 (see Note A). As a result, the Company ceased recording amortization
related to goodwill and the AIF relationships. For the three months ended
March 31, 2001, amortization of the AIF relationships and goodwill totaled
$25.7 million. This amortization resulted from purchase accounting
adjustments made as a result of the acquisition of the Company by B.A.T.
in December 1988.
General and Administrative Expenses. General and administrative
expenses decreased from $74.9 million for the three months ended March 31,
2001 to $72.1 million for the three months ended March 31, 2002, a
decrease of $2.8 million, or 3.7%, due primarily to continued focus on
cost controls.
Net Investment Income. Net investment income decreased from $20.9 million
for the three months ended March 31, 2001 to $18.7 million for the three months
ended March 31, 2002, a decrease of $2.2 million, or 10.5%. This decrease was
due mainly to a change in the portfolio mix with a larger portion of invested
assets held in short term securities earning lower investment yields.
Net Realized Gains. Net realized gains decreased from $4.4 million for
the three months ended March 31, 2001 to $3.4 million for the three months
ended March 31, 2002, a decrease of $1.0 million.
Impairment Losses on Investments. Impairment losses on investments were
$4.6 million for the three months ended March 31, 2002.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense
related to the $500.0 million of QUIPS issued in 1995 was $10.5 million in each
of the three months ended March 31, 2002 and March 31, 2001.
Provision for Income Taxes. Provision for income taxes increased from
$81.0 million for the three months ended March 31, 2001 to $90.8 million for
the three months ended March 31, 2002, an increase of $9.8 million, or 12.1%,
due mainly to an increase in pretax income between periods.
Farmers Management Services. As a result of the foregoing, Farmers
Management Services income increased from $112.5 million for the three months
ended March 31, 2001 to $142.5 million for the three months ended March 31,
2002, an increase of $30.0 million, or 26.7%.
24
FGI Insurance Subsidiaries
Farmers Re
As a result of the quota share reinsurance agreement which became
effective April 1, 2001, Farmers Re's assumed premiums decreased from $250.0
million for the three months ended March 31, 2001 to $50.0 million for the
three months ended March 31, 2002, a decrease of $200.0 million, or 80.0%.
Losses and loss adjustment expenses incurred were $33.0 million for the three
months ended March 31, 2002 and $178.3 million for the three months ended
March 31, 2001 and non-life reinsurance commissions paid were $15.8 million for
the three months ended March 31, 2002 and $65.4 million for the three months
ended March 31, 2001. Income before taxes decreased $5.8 million from $15.4
million for the three months ended March 31, 2001 to $9.6 million for the three
months ended March 31, 2002. This decrease was due primarily to the decrease
in underwriting gains between periods resulting from the new reinsurance
agreement and the $2.7 million of impairment losses on investments recorded in
2002. For the three month periods ended March 31, 2002 and March 31, 2001,
Farmers Re's contribution to net income was $6.6 million and $10.5 million,
respectively.
Farmers Life
Total Revenues. Total revenues decreased $15.9 million, or 7.4%, from
$215.0 million for the three months ended March 31, 2001 to $199.1 million for
the three months ended March 31, 2002.
Life and Annuity Premiums. Life premiums decreased $7.7 million, or
10.8%, for the three months ended March 31, 2002 compared to the three
months ended March 31, 2001. This decrease was due primarily to a 35.5%
decrease in premiums from structured settlements with life contingencies
between periods.
Life Policy Charges. Life policy charges increased $1.2 million, or
2.2%, for the three months ended March 31, 2002 over the three months
ended March 31, 2001, reflecting a 1.3% growth in universal life-type
insurance in-force.
Net Investment Income. Net investment income decreased $1.1 million,
or 1.3%, for the three months ended March 31, 2002 from the three months
ended March 31, 2001. This decrease was due to a decline in bond yields
(59 basis points) as well as the sale of several income generating
properties during 2001.
Net Realized Gains. Net realized gains decreased by $9.7 million to
$3.3 million for the three months ended March 31, 2002. This decrease was
due to continued unfavorable market conditions.
Impairment Losses on Investments. Impairment losses on investments
decreased $1.4 million, or 18.4%, from $7.6 million for the three months
ended March 31, 2001 to $6.2 million for the three months ended March 31,
2002.
Total Operating Expenses. Total operating expenses decreased $13.1
million, or 8.0%, for the three months ended March 31, 2002 compared to the
three months ended March 31, 2001.
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges decreased $4.0 million or 3.4%, for the three
months ended March 31, 2002, compared to the three months ended March 31,
2001.
Policy Benefits. Policy benefits, which consist primarily of
death and surrender benefits on life products, increased $1.0
million, or 2.3%, for the three months ended March 31, 2002, to
$43.6 million, due to a 9.1% growth in the volume of life insurance
in-force.
Increase in Liability for Future Benefits. Increase in
liability for future benefits expense decreased from $32.4 million
for the three months ended March 31, 2001 to $23.8 million for the
three months
25
ended March 31, 2002. This decrease was primarily attributable to
the 35.5% decrease in deposits for structured settlement products
during the three months ended March 31, 2002.
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 $42.7 million for the three months ended
March 31, 2001 to $46.3 million for the three months ended March 31,
2002, or 8.4%, reflecting growth in the universal life and deferred
annuity fund balances.
General Operating Expenses. General operating expenses decreased
from $45.6 million for the three months ended March 31, 2001 to $36.5
million for the three months ended March 31, 2002, a decrease of $9.1
million, or 20.0%.
Amortization of DAC and VOLBA. Amortization expense decreased
from $29.7 million for the three months ended March 31, 2001 to $22.3
million for the three months ended March 31, 2002. This decrease
reflects a $5.0 million DAC unlocking due to crediting rate changes
in the annuity product line.
Life Net Commissions. Life net commissions decreased $1.4
million from $0.2 million for the three months ended March 31, 2001
to ($1.2) million for the three months ended March 31, 2002 due to a
35.8% growth in reinsurance activity.
General and Administrative Expenses. General and administrative
expenses decreased from $15.7 million for the three months ended
March 31, 2001 to $15.4 million for the three months ended March 31,
2002, a decrease of $0.3 million, or 1.9%. This decrease was due
to close monitoring of discretionary expenses.
Provision for Income Taxes. Provision for income taxes decreased from
$18.1 million for the three months ended March 31, 2001 to $17.2 million for
the three months ended March 31, 2002 as a result of a decrease in pretax
income between periods.
Farmers Life Income. As a result of the foregoing, Farmers Life income
decreased from $33.5 million for the three months ended March 31, 2001 to $31.6
million for the three months ended March 31, 2002, a decrease of $1.9 million,
or 5.7%.
Consolidated Net Income
Consolidated net income of the Company increased from $156.5 million for
the three months ended March 31, 2001 to $180.7 million for the three months
ended March 31, 2002, an increase of $24.2 million, or 15.5%.
Liquidity and Capital Resources
As of March 31, 2002 and March 31, 2001, the Company held cash and cash
equivalents of $507.6 million and $178.9 million, respectively. In addition,
as of March 31, 2002, 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 $307.1 million
for the three months ended March 31, 2001 to $338.6 million for the three
months ended March 31, 2002, an increase of $31.5 million. This increase in
cash was due primarily to a $77.3 million net increase resulting from changes
in current assets and liabilities, resulting mainly from a decrease of the
Reinsurance payable to the P&C Group Companies in the three month period ended
March 31, 2001. Also contributing to the increase in cash was a $14.6 million
increase in interest credited on universal life and annuity contracts for the
three month period ended March 31, 2002. Partially offsetting the increase in
cash was an $82.6 million decrease in cash from the provision for non-life
losses and loss adjustment expenses which resulted from Farmers Re's reduced
retention under the new APD agreement. Although consolidated
26
net income increased by $24.2 million between periods, this increase had no
effect on cash, due to the $25.7 million decrease in amortization expense for
the three months ended March 31, 2002 resulting from the adoption of SFAS No.
142 (see Note A) as well as the $5.9 million increase in impairment losses
between periods.
Net cash used in investing activities decreased from $203.4 million for
the three months ended March 31, 2001 to $108.0 million for the three months
ended March 31, 2002, an increase in cash of $95.4 million. This increase in
cash was the result of a $253.4 million decrease in purchases of investments
available-for-sale in the three month period ended March 31, 2002. Partially
offsetting this decrease was a $166.3 million decrease in cash proceeds from
sales and maturities of investments available-for-sale in the first quarter of
2002.
Net cash used in financing activities decreased from $141.4 million for
the three months ended March 31, 2001 to $120.4 million for the three months
ended March 31, 2002, resulting in an increase in cash of $21.0 million. This
increase was due primarily to a reduction in the net cash outflows associated
with universal life and annuity contracts between periods.
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 2001.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to numerous lawsuits arising from its AIF
relationships with the Exchanges. The Company is also party to additional
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.
3.1 Amendments to Certificates of Designation C-3 through C-6.
(b) Reports on Form 8-K. None.
28
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 13, 2002 /s/ Martin D. Feinstein
---------------------------------------------
Date Martin D. Feinstein
Chairman of the Board,
President and Chief Executive Officer
May 13, 2002 /s/ Gerald E. Faulwell
---------------------------------------------
Date Gerald E. Faulwell
Senior Vice President,
Chief Financial Officer
and Director
1
AMENDMENT TO CERTIFICATE OF DESIGNATION
OF
CLASS C-3 COMMON STOCK
of
FARMERS GROUP, INC.
Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the
State of Nevada
Farmers Group, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the provisions of the General Corporation Law
of the State of Nevada, certifies as follows:
FIRST: The Amended and Restated Articles of Incorporation of the
Corporation (the "Articles of Incorporation") authorizes the Board of Directors
of the Corporation (the "Board of Directors") to amend, alter, change or repeal
any provisions contained in the Articles of Incorporation.
SECOND: The following resolution authorizing this Amendment to the
Certificate of Designation (the "Certificate of Designation") of Class C-3
Common Stock, par value $1.00 per share, of the Company (the "Class C-3
Shares"), was duly adopted by unanimous written consent of the Board of
Directors and by unanimous written consent of the Shareholders of the
Corporation on the 13th day of February, 2001, in accordance with Sections
78.1955 and 78.315 of the Nevada General Corporation Law.
RESOLVED, that the Board of Directors, pursuant to authority vested in it
by the provisions of the Articles of Incorporation, hereby authorizes the
following amendments to the Certificate of Designation:
1. Article I of the Certificate of Designation is hereby amended as
follows:
(a) The definition of "Dividend Date" is hereby amended and restated
in its entirety as follows:
"Dividend Date" means initially, February 23, 2001, and thereafter
the 15th day of May, August, November and February in each year (or the
preceding Business Day if such day is not a Business Day) commencing May 15,
2001, with respect to Dividends for each relevant Dividend Period on the Class
C-3 Shares.
(b) The definition of "RegCaPS III Payment Date" is hereby amended
and restated in its entirety as follows:
"RegCaPS III Payment Date" means initially, February 23, 2001, and
thereafter the 15th day of May, August, November and February in each year
(or on the preceding Business Day if such day is not a Business Day) commencing
May 15, 2001 with respect to the RegCaPS III Payments for each relevant RegCaPS
III Payment Period.
2. Article 4 of the Certificate of Designation is hereby amended as
follows:
2
(a) The first sentence of Section 4.01(a) is hereby amended by
deleting the reference to "February 15, 2001" at the end thereof and replacing
it with "February 23, 2001."
(b) Section 4.02(a) is hereby amended by adding the following
sentence at the end thereof: "The foregoing restrictions in this Section
4.02(a) shall only apply on or after February 24, 2001."
3
IN WITNESS WHEREOF, Farmers Group, Inc. has caused this Amendment to the
Certificate of Designation to be signed and attested by its undersigned Vice
President and Secretary this 13th day of February, 2001.
----
FARMERS GROUP, INC.
By:/s/ Julian R.M. Harvey
--------------------------------
Name: Julian R.M. Harvey
Title: Vice President
/s/ Doren Hohl
-----------------------------------
Name: Doren Hohl
Title: Secretary
STATE OF CALIFORNIA )
)ss
COUNTY OF Los Angeles
-----------
On February 13, 2001 before me, Kathleen Osano, personally appeared Julian R.M.
--- --------------
Harvey and Doren Hohl.
X personally known to me.
- ---
- -or-
___ proved to me on the basis of satisfactory evidence to be the persons whose
names are subscribed to the within instrument and acknowledge to me that they
executed the same in their authorized capacities, and that by their signatures
on the instrument the persons, or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Kathleen Osano
----------------------------------------------
Notary Public in and for said County and State
1
AMENDMENT TO CERTIFICATE OF DESIGNATION
OF
CLASS C-4 COMMON STOCK
of
FARMERS GROUP, INC.
Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the
State of Nevada
Farmers Group, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the provisions of the General Corporation Law
of the State of Nevada, certifies as follows:
FIRST: The Amended and Restated Articles of Incorporation of the
Corporation (the "Articles of Incorporation") authorizes the Board of Directors
of the Corporation (the "Board of Directors") to amend, alter, change or repeal
any provisions contained in the Articles of Incorporation.
SECOND: The following resolution authorizing this Amendment to the
Certificate of Designation (the "Certificate of Designation") of Class C-4
Common Stock, par value $1.00 per share, of the Company (the "Class C-4
Shares"), was duly adopted by unanimous written consent of the Board of
Directors and by unanimous consent of the Shareholders of the Corporation on
the 13th day of February, 2001, in accordance with Sections 78.1955 and 78.315
of the Nevada General Corporation Law.
RESOLVED, that the Board of Directors, pursuant to authority vested in it
by the provisions of the Articles of Incorporation, hereby authorizes the
following amendments to the Certificate of Designation:
1. Article I of the Certificate of Designation is hereby amended as
follows:
(a) The definition of "Dividend Date" is hereby amended and restated
in its entirety as follows:
"Dividend Date" means initially, February 23, 2001, and thereafter
the 15th day of May, August, November and February in each year (or the
preceding Business Day if such day is not a Business Day) commencing May 15,
2001, with respect to Dividends for each relevant Dividend Period on the Class
C-4 Shares.
(b) The definition of "RegCaPS IV Payment Date" is hereby amended
and restated in its entirety as follows:
"RegCaPS IV Payment Date" means initially, February 23, 2001, and
thereafter the 15th day of May, August, November and February in each year (or
on the preceding Business Day if such day is not a Business Day) commencing
May 15, 2001 with respect to the RegCaPS IV Payments for each relevant RegCaPS
IV Payment Period.
2. Article 4 of the Certificate of Designation is hereby amended as
follows:
2
(a) The first sentence of Section 4.01(a) is hereby amended by
deleting the reference to "February 15, 2001" at the end thereof and replacing
it with "February 23, 2001."
(b) Section 4.02(a) is hereby amended by adding the following
sentence at the end thereof: "The foregoing restrictions in this Section
4.02(a) shall only apply on or after February 24, 2001."
3
IN WITNESS WHEREOF, Farmers Group, Inc. has caused this Amendment to the
Certificate of Designation to be signed and attested by its undersigned Vice
President and Secretary this 13th day of February, 2001.
----
FARMERS GROUP, INC.
By:/s/ Julian R.M. Harvey
--------------------------------
Name: Julian R.M. Harvey
Title: Vice President
/s/ Doren Hohl
-----------------------------------
Name: Doren Hohl
Title: Secretary
STATE OF CALIFORNIA )
)ss
COUNTY OF Los Angeles
-----------
On February 13, 2001 before me, Kathleen Osano, personally appeared Julian R.M.
--- --------------
Harvey and Doren Hohl.
X personally known to me.
- ---
- -or-
___ proved to me on the basis of satisfactory evidence to be the persons whose
names are subscribed to the within instrument and acknowledge to me that they
executed the same in their authorized capacities, and that by their signatures
on the instrument the persons, or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Kathleen Osano
----------------------------------------------
Notary Public in and for said County and State
1
AMENDMENT TO CERTIFICATE OF DESIGNATION
OF
CLASS C-5 COMMON STOCK
of
FARMERS GROUP, INC.
Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the
State of Nevada
Farmers Group, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the provisions of the General Corporation Law
of the State of Nevada, certifies as follows:
FIRST: The Amended and Restated Articles of Incorporation of the
Corporation (the "Articles of Incorporation") authorizes the Board of Directors
of the Corporation (the "Board of Directors") to amend, alter, change or repeal
any provisions contained in the Articles of Incorporation.
SECOND: The following resolution authorizing this Amendment to the
Certificate of Designation (the "Certificate of Designation") of Class C-5
Common Stock, par value $1.00 per share, of the Company (the "Class C-5
Shares"), was duly adopted by unanimous written consent of the Board of
Directors and by unanimous written consent of the Shareholders of the
Corporation on the 13th day of February, 2001, in accordance with Sections
78.1955 and 78.315 of the Nevada General Corporation Law.
RESOLVED, that the Board of Directors, pursuant to authority vested in it
by the provisions of the Articles of Incorporation, hereby authorizes the
following amendments to the Certificate of Designation:
1. Article I of the Certificate of Designation is hereby amended as
follows:
(a) The definition of "Dividend Date" is hereby amended and restated
in its entirety as follows:
"Dividend Date" means initially, February 23, 2001, and thereafter
the 15th day of May, August, November and February in each year (or the
preceding Business Day if such day is not a Business Day) commencing May 15,
2001, with respect to Dividends for each relevant Dividend Period on the Class
C-5 Shares.
(b) The definition of "RegCaPS V Payment Date" is hereby amended and
restated in its entirety as follows:
"RegCaPS V Payment Date" means initially, February 23, 2001, and
thereafter the 15th day of May, August, November and February in each year (or
on the preceding Business Day if such day is not a Business Day) commencing May
15, 2001 with respect to the RegCaPS V Payments for each relevant RegCaPS V
Payment Period.
2. Article 4 of the Certificate of Designation is hereby amended as
follows:
2
(a) The first sentence of Section 4.01(a) is hereby amended by
deleting the reference to "February 15, 2001" at the end thereof and replacing
it with "February 23, 2001."
(b) Section 4.02(a) is hereby amended by adding the following
sentence at the end thereof: "The foregoing restrictions in this Section
4.02(a) shall only apply on or after February 24, 2001."
3
IN WITNESS WHEREOF, Farmers Group, Inc. has caused this Amendment to the
Certificate of Designation to be signed and attested by its undersigned Vice
President and Secretary this 13th day of February, 2001.
----
FARMERS GROUP, INC.
By:/s/ Julian R.M. Harvey
--------------------------------
Name: Julian R.M. Harvey
Title: Vice President
/s/ Doren Hohl
-----------------------------------
Name: Doren Hohl
Title: Secretary
STATE OF CALIFORNIA )
)ss
COUNTY OF Los Angeles
-----------
On February 13, 2001 before me, Kathleen Osano, personally appeared Julian R.M.
--- --------------
Harvey and Doren Hohl.
X personally known to me.
- ---
- -or-
___ proved to me on the basis of satisfactory evidence to be the persons whose
names are subscribed to the within instrument and acknowledge to me that they
executed the same in their authorized capacities, and that by their signatures
on the instrument the persons, or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Kathleen Osano
----------------------------------------------
Notary Public in and for said County and State
1
AMENDMENT TO CERTIFICATE OF DESIGNATION
OF
CLASS C-6 COMMON STOCK
of
FARMERS GROUP, INC.
Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the
State of Nevada
Farmers Group, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the provisions of the General Corporation Law
of the State of Nevada, certifies as follows:
FIRST: The Amended and Restated Articles of Incorporation of the
Corporation (the "Articles of Incorporation") authorizes the Board of Directors
of the Corporation (the "Board of Directors") to amend, alter, change or repeal
any provisions contained in the Articles of Incorporation.
SECOND: The following resolution authorizing this Amendment to the
Certificate of Designation (the "Certificate of Designation") of Class C-6
Common Stock, par value $1.00 per share, of the Company (the "Class C-6
Shares"), was duly adopted by unanimous written consent of the Board of
Directors of the Corporation on the 13th day of February, 2001, in accordance
with Sections 78.1955 and 78.315 of the Nevada General Corporation Law.
RESOLVED, that the Board of Directors, pursuant to authority vested in it
by the provisions of the Articles of Incorporation, hereby authorizes the
following amendments to the Certificate of Designation:
1. Article I of the Certificate of Designation is hereby amended as
follows:
(a) The definition of "Dividend Date" is hereby amended and restated
in its entirety as follows:
"Dividend Date" means initially, February 23, 2001, and thereafter
the 15th day of May, August, November and February in each year (or the
preceding Business Day if such day is not a Business Day) commencing May 15,
2001, with respect to Dividends for each relevant Dividend Period on the Class
C-6 Shares.
(b) The definition of "RegCaPS VI Payment Date" is hereby amended
and restated in its entirety as follows:
"RegCaPS VI Payment Date" means initially, February 23, 2001, and
thereafter the 15th day of May, August, November and February in each year (or
on the preceding Business Day if such day is not a Business Day) commencing
May 15, 2001 with respect to the RegCaPS VI Payments for each relevant RegCaPS
VI Payment Period.
2. Article 4 of the Certificate of Designation is hereby amended as
follows:
2
(a) The first sentence of Section 4.01(a) is hereby amended by
deleting the reference to "February 15, 2001" at the end thereof and replacing
it with "February 23, 2001."
(b) Section 4.02(a) is hereby amended by adding the following
sentence at the end thereof: "The foregoing restrictions in this Section
4.02(a) shall only apply on or after February 24, 2001."
3
IN WITNESS WHEREOF, Farmers Group, Inc. has caused this Amendment to the
Certificate of Designation to be signed and attested by its undersigned
Vice President and Secretary this 13th day of February, 2001.
----
FARMERS GROUP, INC.
By:/s/ Julian R.M. Harvey
--------------------------------
Name: Julian R.M. Harvey
Title: Vice President
/s/ Doren Hohl
-----------------------------------
Name: Doren Hohl
Title: Secretary
STATE OF CALIFORNIA )
)ss
COUNTY OF Los Angeles
-----------
On February 13, 2001 before me, Kathleen Osano, personally appeared Julian R.M.
--- --------------
Harvey and Doren Hohl.
X personally known to me.
- ---
- -or-
___ proved to me on the basis of satisfactory evidence to be the persons whose
names are subscribed to the within instrument and acknowledge to me that they
executed the same in their authorized capacities, and that by their signatures
on the instrument the persons, or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Kathleen Osano
----------------------------------------------
Notary Public in and for said County and State