1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 33-94670-01
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FARMERS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
95-0725935
(IRS Employer Identification No.)
4680 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices)(Zip Code)
(323) 932-3200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Registrant's Common Stock outstanding on September 30, 2002 was 1,000 shares.
2
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FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - Assets
September 30, 2002 (Unaudited) and December 31, 2001 (Audited) 4
Consolidated Balance Sheets - Liabilities
and Stockholders' Equity
September 30, 2002 (Unaudited) and December 31, 2001 (Audited) 5
Unaudited Consolidated Statements of Income
Nine Month Periods ended September 30, 2002 and
September 30, 2001 6
Unaudited Consolidated Statements of Comprehensive Income
Nine Month Periods ended September 30, 2002 and
September 30, 2001 7
Unaudited Consolidated Statements of Income
Three Month Periods ended September 30, 2002 and
September 30, 2001 8
Unaudited Consolidated Statements of Comprehensive Income
Three Month Periods ended September 30, 2002 and
September 30, 2001 9
Unaudited Consolidated Statement of Stockholders' Equity
Nine Month Period ended September 30, 2002 10
Unaudited Consolidated Statement of Stockholders' Equity
Nine Month Period ended September 30, 2001 11
Unaudited Consolidated Statements of Cash Flows
Nine Month Periods ended September 30, 2002 and
September 30, 2001 12
Notes to Unaudited Interim Financial Statements 13
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks 34
ITEM 4. Controls and Procedures 34
PART II. OTHER INFORMATION 35
SIGNATURES 36
CERITIFICATIONS 37
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)
September 30, December 31,
2002 2001
------------- ------------
Current assets, Farmers Management Services:
Cash and cash equivalents $ 439,562 $ 225,008
Marketable securities, at market value (cost: $9,188 and $0) 9,353 0
Accrued interest 10,126 7,058
Accounts receivable, principally from the P&C Group Companies 38,183 51,429
Deferred taxes 52,378 43,165
Prepaid expenses and other 32,723 27,396
------------- ------------
Total current assets 582,325 354,056
------------- ------------
Investments, Farmers Management Services:
Fixed maturities available-for-sale, at market value
(cost: $150,444 and $81,530) 157,335 82,856
Mortgage loans on real estate, at amortized cost 0 33
Common stocks available-for-sale, at market value
(cost: $156,530 and $184,243) 122,973 167,637
Certificates of contribution of the P&C Group Companies 546,830 546,830
Real estate, at cost (net of accumulated depreciation:
$44,224 and $46,148) 86,232 98,374
Notes receivable - affiliates 315,000 345,000
Other investments 0 50,000
------------- ------------
1,228,370 1,290,730
------------- ------------
Other assets, Farmers Management Services:
Goodwill (net of accumulated amortization in 2001: $780,572) 1,621,183 1,621,183
Attorney-in-fact relationships (net of accumulated
amortization in 2001: $555,438) 1,153,605 1,153,605
Other assets 234,029 250,640
------------- ------------
3,008,817 3,025,428
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $474,830 and $431,556) 413,895 436,010
------------- ------------
Investments of FGI Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $5,077,728 and $4,564,103) 5,400,654 4,668,755
Mortgage loans on real estate 12,116 28,901
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $10,346 and $11,123) 9,184 12,245
Common stocks available-for-sale, at market value
(cost: $245,492 and $353,748) 198,215 339,684
Certificates of contribution and surplus note of the
P&C Group Companies 490,500 490,500
Policy loans 238,518 232,287
Real estate, at cost (net of accumulated depreciation:
$33,579 and $31,340) 78,397 80,814
Joint ventures, at equity 2,971 3,625
S&P 500 call options, at fair value (cost: $37,793 and $36,453) 1,576 12,690
Marketable securities, at market value (cost: $2,743 and
$30,303) 2,493 30,342
Other investments 16,435 12,435
------------- ------------
6,451,059 5,912,278
------------- ------------
Other assets of FGI Insurance Subsidiaries:
Cash and cash equivalents 162,034 172,394
Accounts receivable, from the P&C Group Companies 0 119,000
Life reinsurance receivable 84,730 65,240
Reinsurance premiums receivable, from the P&C Group Companies 15,319 0
Funds held by or deposited with reinsured companies 0 18,905
Accrued investment income 68,810 65,925
Income taxes 0 5,718
Deferred policy acquisition costs 557,809 561,248
Value of life business acquired 255,303 274,531
Securities lending collateral 214,003 45,494
Other assets 31,600 23,110
Assets held in Separate Accounts 73,849 53,074
------------- ------------
1,463,457 1,404,639
------------- ------------
Total assets $ 13,147,923 $ 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)
September 30, December 31,
2002 2001
------------ -------------
Current liabilities, Farmers Management Services:
Notes and accounts payable:
Other $ 49,414 $ 45,643
Accrued liabilities:
Profit sharing 49,544 53,232
Income taxes 129,819 128,588
Other 14,595 8,501
------------ -------------
Total current liabilities 243,372 235,964
------------ -------------
Other liabilities, Farmers Management Services:
Real estate mortgages payable 10 12
Non-current deferred taxes 531,536 512,376
Other 41,552 106,788
------------ -------------
573,098 619,176
------------ -------------
Liabilities of FGI Insurance Subsidiaries:
Policy liabilities:
Future policy benefits 4,106,795 3,858,012
Claims 41,829 38,076
Policyholders dividends 19 12
Other policyholders funds 320,345 264,446
Death benefits payable 68,571 60,980
Provision for non-life losses and loss adjustment expenses 21,875 18,922
Income taxes (including deferred taxes: $149,766 and $109,594) 152,206 109,594
Unearned investment income 872 867
Accounts payable, to the P&C Group Companies 0 107,000
Reinsurance payable, to the P&C Group Companies 30,092 0
Securities lending liability 214,003 45,494
Other liabilities 109,852 44,045
Liabilities related to Separate Accounts 73,849 53,074
------------ -------------
5,140,308 4,600,522
------------ -------------
Total liabilities 5,956,778 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 September 30, 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 September 30, 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 September 30, 2002 and
December 31, 2001 - 50 shares 0.05 0.05
Additional capital 5,227,049 5,227,049
Accumulated other comprehensive income (net of deferred
taxes: $62,346 and $18,231) 115,786 33,857
Retained earnings 1,348,309 1,206,572
------------ -------------
Total stockholders' equity 6,691,145 6,467,479
------------ -------------
Total liabilities and stockholders' equity $ 13,147,923 $ 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)
Nine month period
ended September 30,
------------------------
2002 2001
----------- -----------
Consolidated operating revenues $ 2,067,374 $ 2,245,232
=========== ===========
Farmers Management Services:
Operating revenues $ 1,344,446 $ 1,256,988
----------- -----------
Salaries and employee benefits 332,115 317,383
Building and equipment expenses 86,400 78,994
Amortization of AIF relationships and goodwill 0 77,078
General and administrative expenses 254,372 230,634
----------- -----------
Total operating expenses 672,887 704,089
----------- -----------
Operating income 671,559 552,899
Net investment income 47,991 59,983
Net realized gains 4,198 13,099
Impairment losses on investments (31,888) (38,195)
Dividends on preferred securities of subsidiary trusts (31,553) (31,553)
----------- ----------
Income before provision for taxes 660,307 556,233
Provision for income taxes 252,361 229,704
----------- ----------
Farmers Management Services net income 407,946 326,529
----------- ----------
FGI Insurance Subsidiaries:
Life and annuity premiums 195,537 201,787
Non-life reinsurance premiums 150,000 350,000
Life policy charges 167,311 162,991
Net investment income 285,168 279,104
Net realized gains/(losses) (28,167) 42,287
Impairment losses on investments (46,921) (47,925)
----------- -----------
Total revenues 722,928 988,244
----------- -----------
Non-life losses and loss adjustment expenses 96,306 248,042
Life policy benefits 127,952 122,553
Increase in liability for future life policy benefits 80,028 85,120
Interest credited to life policyholders 134,597 133,432
Amortization of deferred policy acquisition costs
and value of life business acquired 66,632 72,113
Life commissions (5,460) (108)
Non-life reinsurance commissions 49,944 93,208
General and administrative expenses 45,211 40,767
----------- -----------
Total operating expenses 595,210 795,127
----------- -----------
Income before provision for taxes 127,718 193,117
Provision for income taxes 43,677 62,424
----------- -----------
FGI Insurance Subsidiaries net income 84,041 130,693
----------- -----------
Consolidated net income $ 491,987 $ 457,222
=========== ===========
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)
Nine month period
ended September 30,
------------------------
2002 2001
----------- -----------
Consolidated net income $ 491,987 $ 457,222
----------- -----------
Other comprehensive income, net of tax:
Net unrealized holding gains on securities,
net of tax of $59,783 and $38,231 111,028 71,000
Change in effect of unrealized losses on other
insurance accounts, net of tax of ($15,668)
and ($12,077) (29,099) (22,428)
----------- -----------
Other comprehensive income 81,929 48,572
----------- -----------
Comprehensive income $ 573,916 $ 505,794
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
8
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
Three month period
ended September 30,
------------------------
2002 2001
----------- -----------
Consolidated operating revenues $ 695,813 $ 666,770
=========== ===========
Farmers Management Services:
Operating revenues $ 459,224 $ 428,272
----------- -----------
Salaries and employee benefits 112,642 107,435
Building and equipment expenses 28,120 27,573
Amortization of AIF relationships and goodwill 0 25,693
General and administrative expenses 101,340 70,647
----------- -----------
Total operating expenses 242,102 231,348
----------- -----------
Operating income 217,122 196,924
Net investment income 14,877 16,568
Net realized gains/(losses) 232 (67)
Impairment losses on investments (10,993) (38,195)
Dividends on preferred securities of subsidiary trusts (10,518) (10,518)
----------- ----------
Income before provision for taxes 210,720 164,712
Provision for income taxes 77,262 69,316
----------- ----------
Farmers Management Services net income 133,458 95,396
----------- ----------
FGI Insurance Subsidiaries:
Life and annuity premiums 69,808 68,463
Non-life reinsurance premiums 50,000 50,000
Life policy charges 56,077 54,276
Net investment income 96,516 92,222
Net realized gains/(losses) (17,896) 13,167
Impairment losses on investments (17,916) (39,630)
----------- -----------
Total revenues 236,589 238,498
----------- -----------
Non-life losses and loss adjustment expenses 28,879 35,296
Life policy benefits 43,633 41,493
Increase in liability for future life policy benefits 31,002 29,897
Interest credited to life policyholders 43,811 45,665
Amortization of deferred policy acquisition costs
and value of life business acquired 19,927 21,814
Life commissions (2,425) 160
Non-life reinsurance commissions 19,870 13,454
General and administrative expenses 14,801 12,865
----------- -----------
Total operating expenses 199,498 200,644
----------- -----------
Income before provision for taxes 37,091 37,854
Provision for income taxes 12,594 13,871
----------- -----------
FGI Insurance Subsidiaries net income 24,497 23,983
----------- -----------
Consolidated net income $ 157,955 $ 119,379
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
9
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
Three month period
ended September 30,
------------------------
2002 2001
----------- -----------
Consolidated net income $ 157,955 $ 119,379
----------- -----------
Other comprehensive income, net of tax:
Net unrealized holding gains on securities,
net of tax of $56,522 and $34,504 104,972 64,079
Change in effect of unrealized losses on other
insurance accounts, net of tax of ($15,434) and
($7,881) (28,664) (14,636)
----------- -----------
Other comprehensive income 76,308 49,443
----------- -----------
Comprehensive income $ 234,263 $ 168,822
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
10
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine month period ended September 30, 2002
(Amounts in thousands)
(Unaudited)
Accumulated Other Total
Common Additional Comprehensive Retained Stockholders'
Stock Capital Income Earnings Equity
-------- ----------- --------------- ----------- -------------
Balance, December 31, 2001 $ 1 $ 5,227,049 $ 33,857 $ 1,206,572 $ 6,467,479
Net income 491,987 491,987
Net unrealized holding gains
on securities, net of tax
of $59,783 111,028 111,028
Change in effect of unrealized
losses on other insurance
accounts, net of tax of
($15,668) (29,099) (29,099)
Cash dividends paid (350,250) (350,250)
-------- ------------ --------------- ----------- -------------
Balance, September 30, 2002 $ 1 $ 5,227,049 $ 115,786 $ 1,348,309 $ 6,691,145
======== ============ =============== =========== =============
The accompanying notes are an integral part of these interim financial statements.
11
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine month period ended September 30, 2001
(Amounts in thousands)
(Unaudited)
Accumulated Other Total
Common Additional Comprehensive Retained Stockholders'
Stock Capital Income/(Loss) Earnings Equity
-------- ----------- --------------- ---------- ---------------
Balance, December 31, 2000 $ 1 $ 5,212,618 $ (44,471) $1,088,238 $ 6,256,386
Net income 457,222 457,222
Net unrealized holding gains
on securities, net of tax
of $38,231 71,000 71,000
Change in effect of unrealized
losses on other insurance
accounts, net of tax of (22,428) (22,428)
($12,077)
Cash dividends paid (348,500) (348,500)
-------- ----------- ---------------- ---------- ---------------
Balance, September 30, 2001 $ 1 $ 5,212,618 $ 4,101 $1,196,960 $ 6,413,680
======== =========== ================ ========== ===============
The accompanying notes are an integral part of these interim financial statements.
12
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine month period
ended September 30,
-----------------------
2002 2001
---------- ----------
Cash Flows from Operating Activities:
Consolidated net income $ 491,987 $ 457,222
Non-cash and operating activities adjustments:
Depreciation and amortization 63,805 128,586
Amortization of deferred policy acquisition costs and
value of life business acquired 66,632 72,113
Policy acquisition costs deferred (88,732) (83,980)
Life insurance policy liabilities 160,722 169,716
Provision for non-life losses and loss adjustment liability 2,953 (42,190)
Interest credited on universal life and annuity contracts 106,983 98,453
Equity in earnings of joint ventures 1,935 750
(Gains)/losses on sales of assets 23,992 (69,325)
Impairment losses on investments 78,810 86,120
Changes in assets and liabilities:
Current assets and liabilities (1,418) 10,439
Non-current assets and liabilities 10,673 (28,399)
Other, net 44,628 (4,038)
---------- ----------
Net cash provided by operating activities 962,970 795,467
---------- ----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (1,535,492) (1,949,135)
Purchases of properties and equipment (40,394) (60,335)
Proceeds from sales and maturities of investments
available-for-sale 988,977 1,955,838
Proceeds from sales of other investments 50,000 0
Proceeds from sales of properties and equipment 46,811 23,831
Proceeds from redemption of notes receivable - affiliate 30,000 207,000
Mortgage loan collections 16,818 5,632
Increase in policy loans (6,231) (10,508)
Other, net 250 (1,706)
---------- ----------
Net cash provided by/(used in) investing activities (449,261) 170,617
---------- ----------
Cash Flows from Financing Activities:
Dividends paid to stockholders (350,250) (348,500)
Deposits received from universal life and annuity contracts 390,282 542,631
Withdrawals from universal life and annuity contracts (349,545) (559,190)
Payment of long-term notes payable (2) (2)
---------- ----------
Net cash used in financing activities (309,515) (365,061)
---------- ----------
Increase in cash and cash equivalents 204,194 601,023
Cash and cash equivalents - at beginning of year 397,402 216,676
---------- ----------
Cash and cash equivalents - at end of period $ 601,596 $ 817,699
========== ==========
The accompanying notes are an integral part of these interim financial statements.
13
FARMERS GROUP, INC.
AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
A. Basis of presentation and summary of significant accounting policies
The accompanying consolidated balance sheet of Farmers Group, Inc. ("FGI")
and its subsidiaries (together, the "Company"; 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 September 30, 2002, the related consolidated statements of income,
comprehensive income for the three and nine month periods ended September
30, 2002 and September 30, 2001 and stockholders' equity and cash flows for
the nine month periods ended September 30, 2002 and September 30, 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 reported in the SEC Form 10-K
for 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 FGI. Farmers Life
markets a broad line of individual life insurance products, including universal
life, term life and whole life insurance and fixed 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 Life also markets
structured settlement annuities sold by independent brokers. However, by year
end 2002, Farmers Life will exit the business of writing structured
settlements. This decision to exit the structured settlement market was
driven by A.M. Best's recent rating downgrade of Farmers Life from A+
(superior) to A (excellent) as structured settlements can often be written
only by companies rated A+ or better. For the nine months ended September 30,
2002, the structured settlement business represented only 1.2% of Farmers
Life's $168.9 million operating income.
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
14
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 reinsurers. As a result, 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 current agreement, on a
monthly basis, premiums assumed by Farmers Re decreased from $83.3 million
under the old agreement to $16.7 million under the current agreement. As
such, Farmers Re's assumed premiums decreased from $350.0 million for the
nine months ended September 30, 2001 to $150.0 million for the nine months
ended September 30, 2002. For each of the three month periods ended September
30, 2002 and September 30, 2001, Farmers Re assumed premiums of $50.0 million.
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. The
agreement, which can be terminated after 30 days notice 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 reserves 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 was made. Under this commutation, Farmers Re and the P&C Group
Companies ultimately commuted $18.9 million of losses and loss adjustment
expenses related to the 2001 accident year.
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. 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. 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
15
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
Accounting Principles Board ("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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This Statement rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers". In addition, this Statement amends SFAS No. 13, "Accounting
for Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The provisions of this Statement are effective for fiscal years
beginning after June 15, 2002. The Company does not expect the adoption of
this Statement to have a material impact on its consolidated financial
statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement replaces Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". This Statement requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. The provisions of the Statement are to be applied
prospectively to exit or disposal activities initiated after December 31,
2002. The Company does not expect the adoption of this Statement to have a
material impact on its consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions". This Statement amends SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions", SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", and FASB
Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method". This Statement provides guidance on the
accounting for the acquisitions of a financial institution. The provisions of
this Statement are effective for activity on or after October 1, 2002. The
Company is not impacted by the adoption of this Statement as it is not
involved in the acquisition of banking or thrift institutions.
16
B. Intangible assets
As of September 30, 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
Amortization related to operations (9,134)
Interest accrued 4,548
Amortization related to net
unrealized losses (3,236)
------------
Balance, June 30, 2002 $ 265,404
Amortization related to operations (7,588)
Interest accrued 4,511
Amortization related to net
unrealized losses (7,024)
------------
Balance, September 30, 2002 $ 255,303
============
As of September 30, 2002 As of December 31, 2001
-------------------- -------------------------------------------
Gross Gross Net
Carrying Carrying Accumulated Carrying
Amount Amount Amortization Amount
-------------------- ------------- ------------- -------------
(Amounts in thousands) (Amounts in thousands)
Unamortized intangible assets:
Farmers Management Services:
Goodwill $ 1,621,183 $ 2,401,755 $ 780,572 $ 1,621,183
AIF relationships 1,153,605 1,709,043 555,438 1,153,605
For the three and nine months ended September 30, 2002, amortization
expense, net of accrued interest, related to the VOLBA asset totaled $3.1
million and $12.1 million, respectively. 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 $ 18,000
2003 20,000
2004 20,000
2005 19,000
2006 18,000
------------
$ 95,000
============
17
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 nine months
ended September 30,
2002 2001
---------- ----------
(Amounts in thousands)
Farmers Management Services:
Reported net income $ 407,946 $ 326,529
Add back: Goodwill amortization 45,033
AIF amortization, net of tax 19,964
---------- ----------
Adjusted net income $ 407,946 $ 391,526
========== ==========
For the three months
ended September 30,
2002 2001
---------- ----------
(Amounts in thousands)
Farmers Management Services:
Reported net income $ 133,458 $ 95,396
Add back: Goodwill amortization 15,011
AIF amortization, net of tax 6,655
---------- ----------
Adjusted net income $ 133,458 $ 117,062
========== ==========
C. Management fees
FGI and its subsidiaries, through their AIF relationships with the
Exchanges, provide non-claims related management services to the P&C Group
Companies and receive management fees for the services rendered. As a result,
the Company received management fees from the P&C Group Companies of $1,256.3
million and $1,177.4 million for the nine month periods ended September 30,
2002 and September 30, 2001, respectively. For the three month periods ended
September 30, 2002 and September 30, 2001, the Company received management fees
from the P&C Group Companies of $428.8 million and $399.9 million, respectively.
D. Texas
On September 24, 2002, Farmers Insurance Exchange and Fire Insurance
Exchange announced that they will not be renewing their current homeowners
insurance policies in the state of Texas beginning in November 2002. This
action was taken in connection with the issuance by the Texas Commissioner
of Insurance of an emergency cease and desist order against Farmers Insurance
Exchange and Fire Insurance Exchange alleging unfair rate-setting practices by
both and will impact approximately 700,000 households in Texas. The decision
to stop providing homeowners insurance in Texas will negatively impact the
revenues received by the Company from Farmers Insurance Exchange and Fire
Insurance Exchange. Farmers Insurance Exchange and Fire Insurance Exchange
have been actively discussing and engaging in negotiations with the Texas
Department of Insurance and other Texas state agencies to resolve these
homeowners insurance issues. As a part of the negotiation process, Farmers
Insurance Exchange and Fire Insurance Exchange announced on November 11, 2002
that they would extend the offering of homeowners insurance to existing
policyholders whose policies were scheduled to renew between November 11, 2002
and December 10, 2002.
For the nine months ended September 30, 2002, the Company earned
approximately $50.4 million in management fees related to the homeowners
business in Texas. As of September 30, 2002, the Company is unable to
determine the impact this decision will have on other insurance provided by
the P&C Group Companies (e.g., automobile, umbrella, flood, commercial) and
Farmers Life.
E. Material Contingencies
FGI is a party to lawsuits arising from its attorney in fact relationship
with Farmers Insurance Exchange and similar relationships involving its
subsidiaries Fire Underwriters Association and Truck Underwriters Association.
The
18
Company is also party to lawsuits arising from its other 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. Related parties
As of September 30, 2002, the Company held a $220.0 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.
Subsequently, on April 9, 2002, $30.0 million of the note receivable was
redeemed. Interest on this note is paid semi-annually. Interest income
totaled $13.0 million and $14.1 million for each of the nine month periods
ended September 30, 2002 and September 30, 2001, respectively. For each of
the three month periods ended September 30, 2002 and September 30, 2001,
interest income totaled $4.1 million and $4.7 million, respectively.
In addition, as of September 30, 2002, the Company held $95.0 million
of notes receivable from Zurich Financial Services (UKISA) Limited ("UKISA"),
a subsidiary of Zurich. On September 3, 2002, $25.0 million of notes
receivable from UKISA, having a fixed coupon rate of 6.80% and $70.0 million
of notes receivable from UKISA bearing interest at a coupon rate of 5.67%
matured. These notes were renewed for short-term notes receivable from UKISA
of $12.5 million, $12.5 million and $70.0 million, each with a 2.75% fixed
coupon rate and a September 2, 2003 maturity date. Interest on the UKISA
notes is paid semi-annually. Interest income totaled $4.0 million and $12.5
million for each of the nine month periods ended September 30, 2002 and
September 30, 2001, respectively. For each of the three month periods ended
September 30, 2002 and September 30, 2001, interest income totaled $1.2 million
and $3.4 million, respectively.
G. 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 supplement 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 September 30, 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.
19
Other certificates of contribution totaling $23.3 million which bear
interest at various rates.
Interest income related to the certificates of contribution and surplus
notes of the P&C Group Companies totaled $53.3 million and $39.7 million for
each of the nine month periods ended September 30, 2002 and September 30,
2001, respectively. For each of the three months ended September 30, 2002
and September 30, 2001, interest income related to the certificates of
contribution and surplus notes of the P&C Group Companies totaled $17.8
million and $13.2 million, respectively.
Conditions governing payment of interest and repayment of principal are
outlined in the certificates of contribution and the surplus note. Generally,
repayment may be made only when the issuer has an appropriate amount of surplus
and then only after approval is granted by the issuer's governing Board
and the appropriate state insurance regulatory department.
H. Supplemental cash flow information
For financial statement purposes, the Company considers all investments
with original maturities of 90 days or less as cash equivalents. Following is
a reconciliation of the balance sheet cash and cash equivalent totals to the
consolidated cash flow total:
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
September 2001 601,023
------------
Cash and cash equivalents -- September 30, 2001 509,244 308,455 $ 817,699
============
Cash and cash equivalents -- December 31, 2001 $ 225,008 $ 172,394 $ 397,402
Activity through
September 2002 204,194
------------
Cash and cash equivalents -- September 30, 2002 439,562 162,034 $ 601,596
============
Cash payments for interest were $2.7 million and $1.8 million for the
nine month periods ended September 30, 2002 and September 30, 2001,
respectively, while the cash payment for dividends to the holders of the
Company's Quarterly Income Preferred Securities ("QUIPS") was $31.6 million
for each of the nine month periods ended September 30, 2002 and September 30,
2001. Cash payments for income taxes were $290.3 million and $229.0 million
for the nine month periods ended September 30, 2002 and September 30, 2001,
respectively.
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. In addition, on April 9, 2002, the Company received $30.0 million
from ZGAUS in partial settlement of a $250.0 million note receivable and $0.6
million of accrued interest (see Note F).
I. 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 its AIF relationships with the Exchanges, the Company's
management services segment (Farmers Management Services) is responsible
for providing management services to the P&C Group Companies. Management
fees earned from the P&C Group Companies totaled $1,256.3 million and $1,177.4
million respectively, for the nine months ended September 30, 2002 and
September 30, 2001, which represented 60.8% and 52.4% of the Company's
20
consolidated operating revenues for the same periods. For the three month
period ended September 30, 2002 and September 30, 2001, management fees earned
by the Company as AIF for the Exchanges totaled $428.8 million and $399.9
million, respectively, which represented 61.6% and 60.0% of the Company's
consolidated operating revenue 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 operating performance and financial strength of the P&C
Group Companies. 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.
As of September 30, 2001, the Company recorded amortization for both
goodwill and the AIF relationships on a GAAP basis. As a result, the Company
recorded an IAS adjustment to reverse the GAAP amortization of goodwill on an
IAS basis, under which there is no goodwill. As of September 30, 2002, the
Company no longer records amortization related to goodwill and the AIF
relationships on a GAAP basis due to SFAS 142. As a result, the Company no
longer records an IAS adjustment for the reversal of the GAAP amortization of
goodwill. However, the Company now records an IAS adjustment for the
amortization of the AIF relationships on an IAS basis.
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 nine month and three month periods
ended September 30, 2002 and September 30, 2001.
Information regarding the Company's reportable operating segments follows:
Nine month period ended September 30, 2002
---------------------------------------------------------------------------------------------------------------------
IAS basis Adjustments Consolidated
------------------------------------------------------ ------------------------------------------------
Management Life Management Life GAAP
services insurance Reinsurance Total services insurance Reinsurance Total basis
------------------------------------------------------ ------------------------------------------------ -----------
(Amounts in thousands)
Revenues $ 1,344,446 $ 571,912 (a) $ 170,184 (a) $ 2,086,542 $ 0 $ (16,094) $ (3,074) $(19,168) $2,067,374
Investment
income 51,054 266,765 30,550 348,369 (3,063) (2,287) 0 (5,350) $ 343,019
Investment
expenses 0 (9,673) (187) (9,860) 0 0 0 0 $ (9,860)
Net realized
losses (c) (18,060) (48,028) (10,179) (76,267) (9,630) (13,807) (3,074) (26,511) $ (102,778)
Dividends
on preferred
securities of
subsidiary
trusts (31,553) 0 0 (31,553) 0 0 0 0 $ (31,553)
Depreciation and
amortization 89,173 67,959 0 157,132 (28,982)(b) 2,287 0 (26,695) $ 130,437
Income before
provision for
taxes 640,504 122,894 23,772 787,170 19,803 (b) (15,874) (3,074) 855 $ 788,025
Provision for
income taxes 244,565 43,305 7,004 294,874 7,796 (5,556) (1,076) 1,164 $ 296,038
Net income 395,939 79,589 16,768 492,296 12,007 (10,318) (1,998) (309) $ 491,987
- -----------------------
(a) Revenues for the insurance operating segments include net investment
income, net realized losses and impairment losses on investments.
(b) Amount includes adjustment associated with the amortization of the AIF
relationships ($32.1 million).
(c) Amounts include impairment losses on investments.
21
Nine month period ended September 30, 2001
---------------------------------------------------------------------------------------------------------------------
IAS basis Adjustments Consolidated
------------------------------------------------------ ------------------------------------------------
Management Life Management Life GAAP
services insurance Reinsurance Total services insurance Reinsurance Total basis
------------------------------------------------------ ------------------------------------------------ -----------
(Amounts in thousands)
Revenues $ 1,256,988 $ 640,562 (a) $ 383,791 (a) $ 2,281,341 $ 0 $ (29,217) $ (6,892) $(36,109) $2,245,232
Investment
income 61,844 265,859 32,767 360,470 (1,861) (2,109) 0 (3,970) $ 356,500
Investment
expenses 0 (11,881) (5,532) (17,413) 0 0 0 0 $ (17,413)
Net realized
gains/
(losses) (c) 7,322 21,806 6,556 35,684 (32,418) (27,108) (6,892) (66,418) $ (30,734)
Dividends
on preferred
securities of
subsidiary
trusts (31,553) 0 0 (31,553) 0 0 0 0 $ (31,553)
Depreciation and
amortization 78,281 73,415 0 151,696 46,894 (b) 2,109 0 49,003 $ 200,699
Income before
provision for
taxes 636,485 186,713 42,335 865,533 (80,252)(b) (29,039) (6,892) (116,183) $ 749,350
Provision for
income taxes 242,031 61,546 13,454 317,031 (12,327) (10,164) (2,412) (24,903) $ 292,128
Net income 394,454 125,167 28,881 548,502 (67,925) (18,875) (4,480) (91,280) $ 457,222
- -----------------------
(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
($45.0 million).
(c) Amounts include impairment losses on investments.
Three month period ended September 30, 2002
---------------------------------------------------------------------------------------------------------------------
IAS basis Adjustments Consolidated
------------------------------------------------------ ------------------------------------------------
Management Life Management Life GAAP
services insurance Reinsurance Total services insurance Reinsurance Total basis
------------------------------------------------------ ------------------------------------------------ -----------
(Amounts in thousands)
Revenues $ 459,224 $ 184,938 (a) $ 52,987 (a) $ 697,149 $ 0 $ (2,897) $ 1,561 $ (1,336) $ 695,813
Investment
income 15,916 89,860 10,530 116,306 (1,038) (764) 0 (1,802) $ 114,504
Investment
expenses 0 (2,957) (154) (3,111) 0 0 0 0 $ (3,111)
Net realized
gains/
(losses) (c) (13,640) (27,851) (7,388) (48,879) 2,878 (2,133) 1,561 2,306 $ (46,573)
Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0 0 0 0 $ (10,518)
Depreciation and
amortization 29,277 20,372 0 49,649 (9,644)(b) 764 0 (8,880) $ 40,769
Income before
provision for
taxes 198,046 34,244 4,179 236,469 12,673 (b) (2,892) 1,561 11,342 $ 247,811
Provision for
income taxes 72,539 12,076 983 85,598 4,724 (1,012) 546 4,258 $ 89,856
Net income 125,507 22,168 3,196 150,871 7,949 (1,880) 1,015 7,084 $ 157,955
- -----------------------
(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).
(c) Amounts include impairment losses on investments.
22
Three month period ended September 30, 2001
---------------------------------------------------------------------------------------------------------------------
IAS basis Adjustments Consolidated
------------------------------------------------------ ------------------------------------------------
Management Life Management Life GAAP
services insurance Reinsurance Total services insurance Reinsurance Total basis
------------------------------------------------------ ------------------------------------------------ -----------
(Amounts in thousands)
Revenues $ 428,272 $ 211,502 (a) $ 61,965 (a) $ 701,739 $ 0 $ (28,077) $ (6,892) $(34,969) $ 666,770
Investment
income 17,348 88,115 10,456 115,919 (780) (573) 0 (1,353) $ 114,566
Investment
expenses 0 (4,450) (1,326) (5,776) 0 0 0 0 $ (5,776)
Net realized
gains/
(losses) (c) (5,484) 5,097 2,835 2,448 (32,778) (27,503) (6,892) (67,173) $ (64,725)
Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0 0 0 0 $ (10,518)
Depreciation and
amortization 27,046 22,375 0 49,421 15,791 (b) 573 0 16,364 $ 65,785
Income before
provision for
taxes 213,594 59,511 13,113 286,218 (48,882)(b) (27,878) (6,892) (83,652) $ 202,566
Provision for
income taxes 81,171 21,848 4,193 107,212 (11,855) (9,758) (2,412) (24,025) $ 83,187
Net income 132,423 37,663 8,920 179,006 (37,027) (18,120) (4,480) (59,627) $ 119,379
- -----------------------
(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).
(c) Amounts include impairment losses on investments.
J. Impairment losses on 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, "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 analyzing
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 September 30, 2002
and September 30, 2001 due to unfavorable market and economic conditions.
Accordingly, for the three and nine months ended September 30, 2002, the
Company recorded $28.9 million and $78.8 million, respectively, of impairment
losses on investments in the equity portfolios. Impairment losses were
recorded for each reporting segment and, for the three months ended September
30, 2002, amounted to $11.0 million, $4.0 million and $13.9 million for Farmers
Management Services, Farmers Re and Farmers Life, respectively. For the nine
months ended September 30, 2002, Farmers Management Services, Farmers Re and
Farmers Life recorded $31.9 million, $12.9 million and $34.0 million,
respectively, of impairment losses. For the three and nine months ended
September 30, 2001, the Company recorded $77.8 million and $86.1 million,
respectively, of impairment losses on investments primarily in the equity
portfolios. Impairment losses recorded for each reporting segment for the
three months ended September 30, 2001 amounted to $38.2 million, $7.8 million
and $31.8 million for Farmers Management Services, Farmers Re and Farmers
Life, respectively. For the nine months ended September 30, 2001, Farmers
Management Services, Farmers Re and Farmers Life recorded $38.2 million,
$7.8 million and $40.1 million, respectively, of impairment losses.
K. Software abandonment
On September 4, 2002, the Zurich Board of Directors approved a set of
strategic initiatives which call for Zurich to refocus its strategic direction
on core insurance operations. This replaced Zurich's previous strategy of
increasing product density and customer reach through e-based initiatives.
In light of this new strategy, the Company undertook a review of its existing
capitalized software assets in order to determine which, if any, should be
deemed abandoned. This review resulted in the identification of $27.5 million
of internally developed software that no longer supports the Company's
strategic direction. As a result, the Company wrote down the $27.5 million
of capitalized assets in the quarter ended September 30, 2002, which is
reflected in the general and administrative expense line.
23
L. Other investments
In December 2001, the Company purchased $50.0 million of Endurance
Specialty Insurance Limited ("Endurance") equity securities in a private
placement offering. As non-exchange traded securities, these investments
were carried at cost and were reported on the "Other investments" line in
the Farmers Management Services section of the consolidated balance sheet.
On September 30, 2002, the Company sold the Endurance equity investment at par
for $50.0 million as a result of a share repurchase agreement with Endurance.
M. Revolving credit agreement
On July 1, 2002, the Company's existing $500.0 million revolving credit
agreement expired. On September 26, 2002, the Company entered into a new
revolving credit agreement with certain financial institutions. Under this
one year agreement, the Company has an aggregate borrowing facility of $250.0
million. The proceeds of the facility are available to the Company for
general corporate purposes, including loans to the P&C Group Companies.
Facility fees are payable on the aggregate borrowing facility in the amount of
6 basis points per annum. In the case of a draw on the facility, the Company
has the option to borrow at an annual rate equal to (i) London Interbank
Offered Rate ("LIBOR") plus an Applicable Margin of 19 basis points or (ii)
the Alternate Base Rate (to be defined as the higher of (a) the Bank of
America prime rate or (b) the Federal Funds rate plus 50 basis points).
As of September 30, 2002, the Company did not have any outstanding
borrowings under the revolving credit agreement. Facility fees paid under
the prior agreement for the period ended June 30, 2002 were $0.1 million and
were reimbursed by the P&C Group Companies.
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.
By year end 2002, Farmers Life will exit the business of writing
structured settlements. This decision to exit the structured settlement
market was driven by A.M. Best's recent rating downgrade of Farmers Life
from A+ (superior) to A (excellent) as structured settlements can often
only be written by companies rated A+ or better. For the nine months ended
September 30, 2002, the structured settlement business represented only 1.2%
of Farmers Life's $168.9 million operating income.
24
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. As a result, 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 current agreement, Farmers Re's premiums decreased from $350.0 million for
the nine month period ended September 30, 2001 to $150.0 million for the nine
month period ended September 30, 2002. For each of the three month periods
ended September 30, 2002 and September 30, 2001, Farmers Re assumed premiums
of $50.0 million. 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 current 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. The agreement, which can be terminated after
30 days notice 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.
Major Customer and Related Matters
The P&C Group Companies collectively represent the Company's largest
customer. Management fees earned by the Company as AIF for the Exchanges
totaled $1,256.3 million and $1,177.4 million, respectively, for the nine
months ended September 30, 2002 and September 30, 2001, which represented
60.8% and 52.4% of the Company's consolidated operating revenues for the
same periods. For the three month period ended September 30, 2002 and
September 30, 2001, management fees earned by the Company as AIF for the
Exchanges totaled $428.8 million and $399.9 million, respectively, which
represented 61.6% and 60.0% of the Company's consolidated operating revenue
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 operating
performance and financial strength of the P&C Group Companies.
In 2002, the P&C Group Companies have shown a significant improvement
in their underwriting results. Their combined ratio decreased 10.6 percentage
points from 117.4% for the nine months ended September 30, 2001 to 106.8% for
the nine months ended September 30, 2002. However, the improvement in
underwriting results was offset in part by a deterioration in investment
results due to continuing adverse market conditions. As a result, the P&C
Group Companies' statutory surplus as regards to policyholders decreased from
$3.46 billion as of December 31, 2001 to $3.27 billion as of September 30,
2002 and included a $0.2 billion operating loss, net of tax, in 2002, which
compares favorably to the $0.7 billion operating loss, net of tax, as of
September 30, 2001. This decrease in surplus largely reflects the unfavorable
underwriting cycle and poor investment environment initially experienced by
the P&C Group Companies in 2000. In response to this unfavorable underwriting
cycle, the P&C Group Companies initiated aggressive rate increases in 2001 and
throughout 2002 and tightened underwriting guidelines. Although the full
effect of these actions have not fully been realized as of September 30,
2002, third quarter 2002 results showed signs of continued improvement and
outperformed the results achieved in previous quarters. However, continued
operating losses by the P&C Group Companies and further decline in their
surplus would impact their ability to grow written premiums which, in turn,
would impact the amount of the management fees earned by the Company.
On September 24, 2002, Farmers Insurance Exchange and Fire Insurance
Exchange announced that they will not renew their current homeowners insurance
policies in the state of Texas beginning in November 2002. This decision will
have a negative impact on the revenues received by the Company. Farmers
Insurance Exchange and Fire Insurance Exchange have been actively discussing
and engaging in negotiations with the Texas Department of Insurance and other
Texas state agencies to resolve these homeowners insurance issues. As a part
of the negotiation process, Farmers Insurance Exchange and Fire Insurance
Exchange announced on November 11, 2002 that they would extend the offering of
homeowners insurance to existing policyholders whose policies were scheduled
to renew between November 11, 2002 and December 10, 2002. As of September
30, 2002, the Company is unable to
25
determine the impact this decision will have on other insurance provided by
the P&C Group Companies (e.g., automobile, umbrella, flood, commercial) and
Farmers Life (see Note D to Consolidated Financial Statements, see "Note D").
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.
The Company's critical accounting policies relate to revenue recognition,
valuation of intangible assets, impairment of investments, the fair value of
financial instruments and accounting for software.
Revenue Recognition. Through its AIF relationships with the Exchanges,
the Company provides non-claims related management services to 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 operating performance
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 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 no longer records $42.8 million of pretax annual amortization
relating to the AIF relationships. For the
26
three and nine months ended September 30, 2001 pretax amortization of the AIF
relationships totaled $10.7 million and $32.1 million, respectively.
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. 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 goodwill, the Company no longer records $60.0
million of annual amortization. For the three and nine months ended September
30, 2001, amortization of goodwill totaled $15.0 million and $45.0 million,
respectively.
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, which amounted to $255.3 million as of September
30, 2002.
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, "Accounting for Certain Investments
in Debt and Equity Securities". The Company's review for declines in value
includes analyzing 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 September 30, 2002
and September 30, 2001 due to unfavorable market and economic conditions.
Accordingly, for the three and nine months ended September 30, 2002, the
Company recorded $28.9 million and $78.8 million, respectively, of impairment
losses on investments in the equity portfolios. Impairment losses were
recorded for each reporting segment and, for the three months ended September
30, 2002, amounted to $11.0 million, $4.0 million and $13.9 million for
Farmers Management Services, Farmers Re and Farmers Life, respectively.
Impairment losses recorded for each reporting segment for the nine months
ended September 30, 2002 amounted to $31.9 million, $12.9 million and $34.0
million for Farmers Management Services, Farmers Re and Farmers Life,
respectively. For the three and nine months ended September 30, 2001, the
Company recorded $77.8 million and $86.1 million, respectively, of impairment
losses on investments primarily in the equity portfolios. Impairment losses
recorded for each reporting segment for the three months ended September 30,
2001 amounted to
27
$38.2 million, $7.8 million and $31.8 million for Farmers Management Services,
Farmers Re and Farmers Life, respectively. For the nine months ended
September 30, 2001, Farmers Management Services, Farmers Re and Farmers Life
recorded $38.2 million, $7.8 million and $40.1 million, respectively, of
impairment losses.
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.
Accounting for Software. The Company follows the provisions of Statement
of Position No. 98-1, "Accounting for the Cost of Computer Software Developed
or Obtained for Internal Use". The Company expenses costs incurred in the
preliminary project stage and, thereafter, capitalizes costs incurred in
developing or obtaining internal use software. Certain costs, such as
maintenance and training, are expensed as incurred. Capitalized costs are
amortized on a straight-line basis over the useful life of the software once
it is placed into service. The Company regularly reviews its existing
capitalized software assets in order to determine if any should be considered
impaired or abandoned.
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 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 $30.9 million, or 7.2%,
from $428.3 million for the three months ended September 30, 2001 to $459.2
million for the three months ended September 30, 2002. This growth in
operating revenues was primarily attributable to higher gross premiums earned
by the P&C Group Companies, which benefited from a rising premium rate
environment. Gross premiums earned increased $258.9 million, or 8.5%, to
$3,310.0 million for the three months ended September 30, 2002 due primarily
to increases in premium written driven by significant rate increases taken in
2001 and 2002.
Operating Expenses. Operating expenses as a percentage of operating
revenues decreased from 54.0% for the three months ended September 30, 2001 to
52.7% for the three months ended September 30, 2002, a decrease of 1.3
percentage points. This decrease was partially 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. For
the three months ended September 30, 2001, amortization related to these two
items totaled $25.7 million. Offsetting the above decrease was a $27.5
million write down of internally developed software in the quarter ended
September 30, 2002. Excluding the effects of the software write down and the
amortization of goodwill and the AIF relationships, operating expenses as a
percentage of operating revenues decreased from 48.0% for the three months
ended September 30, 2001 to 46.7% for the three months ended September 30,
2002, a decrease of 1.3 percentage points.
Salaries and Employee Benefits. Salaries and employee benefits
expenses increased $5.2 million, or 4.8%, from $107.4 million for the
three months ended September 30, 2001 to $112.6 million for the three
months ended September 30, 2002 due primarily to an increase in pension,
medical insurance and profit sharing expenses. This increase was offset
in part by a decrease in outside contractors expenses.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $27.6 million for the three months ended September 30,
2001 to $28.1 million for the three months ended September 30, 2002, an
increase of $0.5 million, or 2.0%, due primarily to an increase in the
amortization expense related to internally developed software as well as
increased software maintenance costs.
Amortization of the Attorney-In-Fact Relationships and Goodwill.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142. As a result, the Company ceased recording amortization related to
goodwill and the AIF relationships. For the three months ended September
30, 2001, amortization of the AIF
28
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 increased from $70.7 million for the three months ended
September 30, 2001 to $101.4 million for the three months ended September
30, 2002, an increase of $30.7 million, or 43.4%, due primarily to the
$27.5 million write down of internally developed software in the quarter
ended September 30, 2002 (see Note K).
Net Investment Income. Net investment income decreased from $16.6
million for the three months ended September 30, 2001 to $14.9 million for the
three months ended September 30, 2002, a decrease of $1.7 million, or 10.2%.
This decrease was due mainly to a change in the portfolio mix which resulted
in a larger portion of invested assets held in short term securities earning
lower investment yields, as well as declining market yields.
Net Realized Gains/(Losses). Net realized gains/(losses) increased from
a $0.1 million loss for the three months ended September 30, 2001 to $0.2
million gain for the three months ended September 30, 2002, an increase of
$0.3 million.
Impairment Losses on Investments. Impairment losses on investments
decreased from $38.2 million for the three months ended September 30, 2001 to
$11.0 million for the three months ended September 30, 2002, a decrease of
$27.2 million, or 71.2%, due primarily to a decrease in equity impairments
related to common stock.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense
related to the $500.0 million of QUIPS issued in 1995 was $10.6 million in
each of the three months ended September 30, 2002 and September 30, 2001.
Provision for Income Taxes. Provision for income taxes increased from
$69.3 million for the three months ended September 30, 2001 to $77.3 million
for the three months ended September 30, 2002, an increase of $8.0 million, or
11.5%, 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 $95.4 million for the three months
ended September 30, 2001 to $133.4 million for the three months ended
September 30, 2002, an increase of $38.0 million, or 39.8%. Excluding the
software write down and the change in the amortization of intangibles, income
increased by $33.4 million, or 28.5%, between the three month periods of
September 30, 2001 and September 30, 2002.
FGI Insurance Subsidiaries
Farmers Re
Under the quota share reinsurance treaty, Farmers Re assumed $50.0
million of premiums in each of the three month periods ended September 30,
2002 and September 30, 2001. Losses and loss adjustment expenses incurred
under this treaty were $28.9 million for the three months ended September 30,
2002 and $35.3 million for the three months ended September 30, 2001.
Non-life reinsurance commissions were $19.8 million for the three months ended
September 30, 2002 and $13.5 million for the three months ended September 30,
2001. Income before taxes decreased $0.5 million from $6.2 million for the
three months ended September 30, 2001 to $5.7 million for the three months
ended September 30, 2002. This decrease was due to a $5.5 million decrease in
realized gains offset by a $3.7 million decrease of impairment losses on
investments and a $1.3 million increase in net investment income. For the
three month periods ended September 30, 2002 and September 31, 2001, Farmers
Re's contribution to net income was $4.2 million and $4.4 million,
respectively.
Farmers Life
Total Revenues. Total revenues decreased from $183.5 million for the
three months ended September 30, 2001 to $182.0 million for the three months
ended September 30, 2002 a decrease of $1.5 million, or 0.8%.
29
Life and Annuity Premiums. Life premiums increased from $68.4
million for the three months ended September 30, 2001 to $69.8 million
for the three months ended September 30, 2002, an increase of $1.4
million or 2.0%.
Life Policy Charges. Life policy charges increased from $54.3
million for the three months ended September 30, 2001 to $56.1 million
for the three months ended September 30, 2002, an increase of $1.8
million, or 3.3%, reflecting a growth in universal life-type insurance
in-force.
Net Investment Income. Net investment income increased from $83.1
million for the three months ended September 30, 2001 to $86.1 million
for the three months ended September 30, 2002, an increase of $3.0
million, or 3.6%. This increase was due to growth in mean invested
assets, principally fixed income instruments, partially offset by a
decline of yields on fixed income instruments of 57 basis points.
Net Realized Gains/(Losses). Net realized gains/(losses) decreased
from a $9.5 million gain for the three months ended September 30, 2001 to
a $16.1 million loss for the three months ended September 30, 2002, a
decrease of $25.6 million, or 268.4%. This decrease was due primarily to
losses generated from fixed income sales particularly in the
telecommunications sector made for risk mitigation purposes. The largest
of these sales was the disposal of $25.3 million of securities issued by
Qwest Capital Funding, Inc., resulting in a loss of $11.7 million.
Impairment Losses on Investments. Impairment losses on investments
decreased from $31.9 million for the three months ended September 30,
2001 to $13.9 million for the three months ended September 30, 2002, a
decrease of $18.0 million, or 56.4%, due primarily to timing differences
between periods in loss recognitions related to equity holdings. Due to
the timing of unfavorable market conditions, equity impairments were
initially recorded in September 2001, while in 2002 equity impairments
were taken each quarter.
Total Operating Expenses. Total operating expenses decreased from $151.8
million for the three months ended September 30, 2001 to $150.7 million for
the three months ended September 30, 2002, a decrease of $1.1 million, or 0.7%.
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges increased from $117.0 million for the three
months ended September 30, 2001 to $118.5 million for the three months
ended September 30, 2002, an increase of $1.5 million, or 1.3%.
Policy Benefits. Policy benefits, which consist primarily of
death and surrender benefits on life products, increased from $41.5
million for the three months ended September 30, 2001 to $43.7
million for the three months ended September 30, 2002, an increase
of $2.2 million, or 5.3%, due to growth in the volume of life
insurance in-force.
Increase in Liability for Future Benefits. Increase in
liability for future benefits expense increased from $29.9 million
for the three months ended September 30, 2001 to $31.0 million for
the three months ended September 30, 2002, an increase of $1.1
million, or 3.7%. This increase was primarily attributable to an
increase in deposits for structured settlements involving life
contingencies compared to the three months ended September 30,
2001. Farmers Life will exit the business of writing structured
settlements by the end of 2002 due to the recent rating downgrade
of Farmers Life (see Note A).
Interest Credited to Policyholders. Interest credited to
policyholders, which represents the amount credited to policyholder
funds on deposit under universal life-type contracts, deferred
annuities and structured settlements not involving life
contingencies, decreased from $45.6 million for the three months
ended September 30, 2001 to $43.8 million for the three months ended
September 30, 2002, a decrease of $1.8 million or 3.9%. This
decrease was primarily due to a reduction in crediting rates
related to the deferred annuity and universal life products, offset
by growth in the structured
30
settlement not involving life contingencies fund balance. Farmers
Life will exit the business of writing structured settlements by the
end of 2002 due to the recent rating downgrade of Farmers Life (see
Note A).
General Operating Expenses. General operating expenses decreased
from $34.8 million for the three months ended September 30, 2001 to $32.2
million for the three months ended September 30, 2002, a decrease of $2.6
million, or 7.4%.
Amortization of DAC and VOLBA. Amortization expense decreased
from $21.8 million for the three months ended September 30, 2001 to
$19.9 million for three months ended September 30, 2002 a decrease
of $1.9 million, or 8.7%. The decrease reflects the $1.0 million
increase, or 16.9%, in DAC unlocking compared to the three months
ended September 30, 2001. DAC unlocking entries are made when
future profit margins are projected to be different than previously
estimated.
Life Commissions. Life commissions decreased from $0.2 million
for the three months ended September 30, 2001 to ($2.5) million for
the three months ended September 30, 2002, a decrease of $2.7
million, due to a 73.3% growth in reinsurance activity between
periods.
General and Administrative Expenses. General and administrative
expenses increased from $12.8 million for the three months ended
September 30, 2001 to $14.8 million for the three months ended
September 30, 2002, an increase of $2.0 million, or 15.6%. This
increase was due to higher premium taxes resulting from an increase
in the effective premium tax rate and increased
pension/postretirement benefit expenses.
Provision for Income Taxes. Provision for income taxes decreased from
$12.1 million for the three months ended September 30, 2001 to $11.0 million
for the three months ended September 31, 2002, a decrease of $1.1 million, or
9.1%, as a result of a decrease in pretax income between periods.
Farmers Life Income. As a result of the foregoing, Farmers Life income
increased from $19.6 million for the three months ended September 30, 2001 to
$20.3 million for the three months ended September 30, 2002, an increase of
$0.7 million, or 3.6%.
Consolidated Net Income
Consolidated net income of the Company increased from $119.4 million for
the three months ended September 30, 2001 to $158.0 million for the three
months ended September 30, 2002, an increase of $38.6 million, or 32.3%.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001
Farmers Management Services
Operating Revenues. Operating revenues increased $87.4 million, or 7.0%,
from $1,257.0 million for the nine months ended September 30, 2001 to $1,344.4
million for the nine months ended September 30, 2002. This growth in
operating revenues was primarily attributable to higher gross premiums earned
by the P&C Group Companies, which increased $730.4 million, or 8.2%, to
$9,672.2 million for the nine months ended September 30, 2002. This increase
in gross premiums earned was driven by continued growth in the auto, fire,
commercial and Farmers Specialty lines of business, which benefited from a
rising premium rate environment.
Operating Expenses. Operating expenses as a percentage of operating
revenues decreased from 56.0% for the nine months ended September 30, 2001 to
50.0% for the nine months ended September 30, 2002, a decrease of 6.0
percentage points. This decrease was partially 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. For
the nine months ended September 30, 2001, amortization related to these two
items totaled $77.1 million. Partially
31
offsetting the above decrease was a $27.5 million write down of internally
developed software in the quarter ended September 30, 2002. Excluding the
effects of the software write down and the amortization of goodwill and the
AIF relationships, operating expenses as a percentage of operating revenues
decreased from 49.9% for the nine months ended September 30, 2001 to 48.0% for
the nine months ended September 30, 2002, a decrease of 1.9 percentage points.
Salaries and Employee Benefits. Salaries and employee benefits
increased from $317.4 million for the nine months ended September 30,
2001 to $332.1 million for the nine months ended September 30, 2002, an
increase of $14.7 million, or 4.6%, due primarily to an increase in
pension, medical insurance and profit sharing expenses. This increase
was offset in part by a decrease in outside contractors expenses.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $79.0 million for the nine months ended September 30, 2001
to $86.4 million for the nine months ended September 30, 2002, an
increase of $7.4 million, or 9.4%, due primarily to an increase in the
amortization expense related to internally developed software, data
processing equipment and software as well as increased hardware and
software maintenance costs.
Amortization of the Attorney-In-Fact Relationships and Goodwill.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142. As a result, the Company ceased recording amortization related to
goodwill and the AIF relationships. For the nine months ended September
30, 2001, amortization of the AIF relationships and goodwill totaled
$77.1 million.
General and Administrative Expenses. General and administrative
expenses increased from $230.6 million for the nine months ended
September 30, 2001 to $254.4 million for the nine months ended September
30, 2002, an increase of $23.8 million, or 10.3%, due primarily to the
$27.5 million write down of internally developed software in the quarter
ended September 30, 2002 (see Note K). This increase was partially
offset by savings from a continued focus on cost controls and delayed
expenses.
Net Investment Income. Net investment income decreased from $60.0
million for the nine months ended September 30, 2001 to $48.0 million for the
nine months ended September 30, 2002, a decrease of $12.0 million, or 20.0%.
This decrease was due mainly to a change in the portfolio mix which resulted
in a larger portion of invested assets held in short term securities earning
lower investment yields, as well as declining market yields.
Net Realized Gains. Net realized gains decreased from $13.1 million for
the nine months ended September 30, 2001 to $4.2 million for the nine months
ended September 30, 2002, a decrease of $8.9 million, or 67.9%. This decrease
was due primarily to unfavorable market conditions experienced during the nine
month period ended September 30, 2002.
Impairment Losses on Investments. Impairment losses on investments
decreased from $38.2 million for the nine months ended September 30, 2001 to
$31.9 million for the nine months ended September 30, 2002, a decrease of $6.3
million, or 16.5%, due primarily to a decrease in equity impairments related
to common stock.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense
was $31.6 million in each of the nine month periods ended September 30, 2002
and September 30, 2001.
Provision for Income Taxes. Provision for income taxes increased from
$229.7 million for the nine months ended September 30, 2001 to $252.4 million
for the nine months ended September 30, 2002, an increase of $22.7 million, or
9.9%, due mainly to an increase in pretax income between periods.
Farmers Management Services. As a result of the foregoing, management
services income increased from $326.5 million for the nine months ended
September 30, 2001 to $407.9 million for the nine months ended
September 30, 2002, an increase of $81.4 million, or 24.9%. Excluding the
software write down and the change in the amortization of intangibles, income
increased by $33.4 million, or 8.5%, between the nine months periods ended
September 30, 2001 and September 30, 2002.
32
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 $350.0
million for the nine months ended September 30, 2001 to $150.0 million for the
nine months ended September 30, 2002, a decrease of $200.0 million, or 57.1%.
Losses and loss adjustment expenses incurred were $96.3 million for the nine
months ended September 30, 2002 and $248.0 million for the nine months ended
September 30, 2001 and non-life reinsurance commissions paid were $49.9
million for the nine months ended September 30, 2002 and $93.2 million for the
nine months ended September 30, 2001. Income before taxes decreased $14.7
million from $35.4 million for the nine months ended September 30, 2001 to
$20.7 million for the nine months ended September 30, 2002. This decrease was
due primarily to a $7.8 million decrease in realized gains and a $5.2 million
increase of impairment losses on investments. For the nine month periods
ended September 30, 2002 and September 30, 2001, Farmers Re's contribution to
net income was $14.8 million and $24.4 million, respectively.
Farmers Life
Total Revenues. Total revenues decreased from $611.4 million for the
nine months ended September 30, 2001 to $555.8 million for the nine months
ended September 30, 2002, a decrease of $55.6 million, or 9.1%.
Life and Annuity Premiums. Life and annuity premiums decreased from
$201.7 million for the nine months ended September 30, 2001 to $195.5
million for the nine months ended September 30, 2002, a decrease of $6.2
million, or 3.1%. This decrease was primarily due to a 12.0% decrease in
premiums for structured settlements involving life contingencies compared
to the nine months ended September 30, 2001. Farmers Life will exit the
business of writing structured settlements by the end of 2002 due to the
recent rating downgrade of Farmers Life (see Note A).
Life Policy Charges. Life policy charges increased from $163.0
million for the nine months ended September 30, 2001 to $167.3 million
for the nine months ended September 30, 2002, an increase of $4.3
million, or 2.6%, reflecting a 1.5% growth in universal life-type
insurance in-force.
Net Investment Income. Net investment income increased from $251.9
million for the nine months ended September 30, 2001 to $254.8 million
for the nine months ended September 30, 2002, an increase of $2.9
million, or 1.2%, due to growth in mean bond assets partially offset by
the decline of fixed income yields (53 basis points).
Net Realized Gains/(Losses). Net realized gains/(losses) decreased
from a $34.9 million gain for the nine months ended September 30, 2001 to
a $27.8 million loss for the nine months ended September 30, 2002, a
decrease of $62.7 million, or 179.7%. This decrease was due primarily to
losses generated from fixed income sales made for risk mitigation
purposes. The most significant disposals were of holding of WorldCom,
Inc. and Qwest Capital Funding, Inc., resulting in losses totaling $36.7
million.
Impairment Losses on Investments. Impairment losses on investments
decreased from $40.1 million for the nine months ended September 30, 2001
to $34.0 million for the nine months ended September 30, 2002, a decrease
of $6.1 million, or 15.2%, due primarily to the fact that impairment
losses were recognized on the Indah Kiat International Finance holdings in
2001. Partially offsetting this decrease was an increase in impairment
losses related to common stock.
Total Operating Expenses. Total operating expenses decreased from $453.7
million for the nine months ended September 30, 2001 to $448.8 million for the
nine months ended September 30, 2002, a decrease of $4.9 million, or 1.1%.
33
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges increased from $341.1 million for the nine
months ended September 30, 2001 to $342.6 million for the nine months
ended September 30, 2002, an increase of $1.5 million, or 0.4%.
Policy Benefits. Policy benefits increased from $122.6 million
for the nine months ended September 30, 2001 to $128.0 million for
the nine months ended September 30, 2002, an increase of $5.4
million, or 4.4%, due to a 9.7% growth in the volume of life
insurance in-force.
Increase in Liability for Future Benefits. Increase in
liability for future benefits expense decreased from $85.1 million
for the nine months ended September 30, 2001 to $80.0 million for
the nine months ended September 30, 2002, a decrease of $5.1
million, or 6.0%. This decrease was attributable to the 12.0%
decrease in deposits for structured settlements involving life
contingencies compared to the nine months ended September 30, 2001.
Farmers Life will exit the business of writing structured
settlements by the end of 2002 due to recent rating downgrade of
Farmers Life (see Note A).
Interest Credited to Policyholders. Interest credited to
policyholders increased from $133.4 million for the nine months
ended September 30, 2001 to $134.6 million for the nine months ended
September 30, 2002, an increase of $1.2 million, or 0.9%. This
increase is attributable to a 7.1% increase in Farmers Life's
interest sensitive fund balances, offset by a reduction in crediting
rates related to the deferred annuity and universal life products.
General Operating Expenses. General operating expenses decreased
from $112.6 million for the nine months ended September 30, 2001 to
$106.2 million for the nine months ended September 30, 2002, a decrease
of $6.4 million, or 5.7%.
Amortization of DAC and VOLBA. Amortization expense decreased
from $72.1 million for the nine months ended September 30, 2001 to
$66.6 million for the nine months ended September 30, 2002, a
decrease of $5.5 million, or 7.6%, reflecting a $4.3 million
increase in DAC unlocking compared to September 30, 2001. DAC
unlocking entries are made when future profit margins are projected
to be different than previously estimated.
Life Commissions. Life commissions decreased from ($0.1)
million for the nine months ended September 30, 2001 to ($5.5)
million for the nine months ended September 30, 2002, a decrease of
$5.4 million, due to a 48.4% growth in reinsurance activity between
periods.
General and Administrative Expenses. General and administrative
expenses increased from $40.6 million for the nine months ended
September 30, 2001 to $45.1 million for the nine months ended
September 30, 2002, an increase of $4.5 million, or 11.1%. The
increase was due to higher premium taxes resulting from an increase
in the effective premium tax rate and increased pension/postretirement
benefit expenses.
Provision for Income Taxes. Provision for income taxes decreased from
$51.4 million for the nine months ended September 30, 2001 to $37.7 million
for the nine months September 30, 2002, a decrease of $13.7 million, or 26.7%.
Farmers Life Income. As a result of the foregoing, Farmers Life income
decreased from $106.3 million for the nine months ended September 30, 2001 to
$69.3 million for the nine months ended September 30, 2002, a decrease of
$37.0 million, or 34.8%.
33
Consolidated Net Income
Consolidated net income of the Company increased from $457.2 million for
the nine months ended September 30, 2001 to $492.0 million for the nine months
ended September 30, 2002, an increase of $34.8 million, or 7.6%.
Liquidity and Capital Resources
As of September 30, 2002 and September 30, 2001, the Company held cash
and cash equivalents of $601.6 million and $817.7 million, respectively. In
addition, on July 1, 2002, the Company's existing revolving credit agreement
expired. On September 26, 2002, the Company entered into a new revolving
credit agreement with certain financial institutions. Under this agreement,
the Company has an aggregate borrowing facility of $250.0 million in the event
such a need should arise (see Note M).
Net cash provided by operating activities increased from $795.5 million
for the nine months ended September 30, 2001 to $963.0 million for the nine
months ended September 30, 2002, an increase of $167.5 million, or 21.1%.
This increase is due partially to a $55.8 million increase in deferred taxes
between periods as well as a $45.1 million increase between periods in the
reserves for non-life losses and loss adjustment liability. Furthermore, the
increase in net cash provided by operating activities resulted in part from a
$22.2 million decrease between periods in development costs for internally
developed software. Although consolidated net income increased by $34.8
million between periods, this increase was impacted by the following non-cash
items: a $93.3 million decrease in gains on the sale of assets between
periods partially offset by a $70.1 million decrease in amortization expense
between periods as the result of the adoption of SFAS No. 142 and a $7.3
million decrease in impairment losses between periods.
Net cash used in investing activities increased from $170.6 million of
cash provided for the nine months ended September 30, 2001 to $449.3 million
of cash used for the nine months ended September 30, 2002, resulting in a
decrease in cash of $619.9 million or 363.4%. This decrease in cash was the
result of a $966.9 million decrease in proceeds of investments
available-for-sale in the nine month period ended September 30, 2002, compared
to the same period in 2001. In addition, proceeds from the redemption of
notes receivable affiliate decreased by $177.0 million between periods.
Partially offsetting this decrease was a $413.6 million decrease in cash used
for the purchases of investments available-for-sale between the nine month
periods ended September 30, 2001 and 2002 and a $50.0 million cash increase
resulting from the September 30, 2002 sale of the Endurance common stock.
Net cash used in financing activities decreased from $365.1 million for
the nine months ended September 30, 2001 to $309.5 million for the nine months
ended September 30, 2002, resulting in an increase in cash of $55.6 million
between periods. 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.
ITEM 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date , the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating
to the Company (including its consolidated subsidiaries) required to be
included in the Company's reports filed or submitted under the Exchange Act.
35
(b) Changes in Internal Controls. Since the Evaluation Date , there have
not been any significant changes in the Company's internal controls or in
other factors that could significantly affect such controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
FGI is a party to lawsuits arising from its attorney in fact relationship
with Farmers Insurance Exchange and similar relationships involving its
subsidiaries Fire Underwriters Association and Truck Underwriters Association.
The Company is also party to lawsuits arising from its other normal business
activities. These actions are in various stages of discovery and development,
and some seek punitive as well as compensatory damages. In the opinion of
management, the Company has not engaged in any conduct which should warrant the
award of any material punitive or compensatory damages. The Company intends to
vigorously defend its position in each case, and management believes that,
while it is not possible to predict the outcome of such matters with absolute
certainty, ultimate disposition of these proceedings should not have a material
adverse effect on the Company's consolidated results of operations or
financial position. In addition, the Company is, from time to time, involved
as a party to various governmental and administrative proceedings.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
Election of Board of Directors - Incorporated by reference to
FGI's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2002.
Item 5. Other Information.
Changes in Board of Directors - Incorporated by reference to
FGI's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2002.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.2 Bylaws of FGI - Incorporated by reference to FGI's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2002.
99.2 Certification of CEO and CFO Pursuant to 18 U.S.C. Section
1350
(b) Reports on Form 8-K.
On October 4, 2002, FGI filed a report on Form 8-K announcing
that Farmers Insurance Exchange and Fire Insurance Exchange will
not be renewing their current homeowners insurance policies in
Texas beginning in November 2002.
36
FARMERS GROUP, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Farmers Group, Inc.
(Registrant)
November 13, 2002 /s/ Martin D. Feinstein
---------------------------------------------
Date Martin D. Feinstein
Chairman of the Board,
President and Chief Executive Officer
November 13, 2002 /s/ Pierre Wauthier
---------------------------------------------
Date Pierre Wauthier
Senior Vice President,
Chief Financial Officer
and Director
37
SARBANES-OXLEY
Section 302 Certification
I, Martin D. Feinstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farmers Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
38
Date: November 13, 2002
/s/ Martin D. Feinstein
- -----------------------------
Martin D. Feinstein
Chairman of the Board
President and Chief Executive Officer
* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14.
The required certification must be in the exact form set forth above.
39
SARBANES-OXLEY
Section 302 Certification
I, Pierre Wauthier, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farmers Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
40
Date: November 13, 2002
/s/ Pierre Wauthier
- --------------------------
Pierre Wauthier
Senior Vice President
Chief Financial Officer
and Director
* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14.
The required certification must be in the exact form set forth above.
Exhibit 99.2
1
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Farmers Group, Inc. (the "Company")
on Form 10-Q for the period ending September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Martin
D. Feinstein, as Chief Executive Officer of the Company, and Pierre Wauthier,
as Chief Financial Officer of the Company, each hereby certifies, pursuant to
18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1) The Report fully complies with the requirements of section 13(a)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Martin D. Feinstein
- ------------------------
Martin D. Feinstein
Chief Executive Officer
November 13, 2002
/s/ Pierre Wauthier
- -----------------------
Pierre Wauthier
Chief Financial Officer
November 13, 2002
This certification accompanies this Report pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.