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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------------------------
Commission File Number 33-94670-01
-------------------------------------
FARMERS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
95-0725935
(IRS Employer Identification No.)
4680 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices)(Zip Code)
(213) 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, 1996 was 1,000 shares.
2
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3
FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1996
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements
Consolidated Balance Sheets - Assets
September 30, 1996 and December 31, 1995 4
Consolidated Balance Sheets - Liabilities and Stockholder's
Equity
September 30, 1996 and December 31, 1995 5
Consolidated Statements of Income
Nine Month Period ended September 30, 1996 and
September 30, 1995 6
Consolidated Statements of Income
Three Month Period ended September 30, 1996 and
September 30, 1995 7
Consolidated Statement of Stockholder's Equity
Nine Month Period ended September 30, 1996 8
Consolidated Statement of Stockholder's Equity
Nine Month Period ended September 30, 1995 9
Consolidated Statements of Cash Flows
Nine Month Period ended September 30, 1996 and
September 30, 1995 10
Notes to Interim Financial Statements 11
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
PART II. OTHER INFORMATION 30
SIGNATURES 31
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
ASSETS
September 30, December 31,
1996 1995
------------- ------------
Current assets, excluding life subsidiaries:
Cash and cash equivalents $ 588,655 $ 763,212
Marketable securities, at market value 121,938 94,138
Accrued interest 27,532 33,297
Accounts receivable, principally from the exchanges 36,034 16,270
Notes receivable - affiliate 0 135,000
Deferred taxes 21,946 18,935
Prepaid expenses and other 21,073 12,551
------------- ------------
Total current assets 817,178 1,073,403
------------- ------------
Investments, excluding life subsidiaries:
Fixed maturities available for sale, at market value
(cost: $216,488 and $304,863) 219,448 311,594
Certificates in surplus of exchanges 584,380 484,380
Real estate, at cost (net of accumulated depreciation:
$15,526 and $14,843) 49,230 49,809
Joint ventures, at equity 11,442 12,459
------------- ------------
864,500 858,242
------------- ------------
Other assets, excluding life subsidiaries:
Notes receivable - affiliate 342,600 207,600
Goodwill (net of accumulated amortization:
$465,341 and $420,308) 1,936,414 1,981,447
Attorney-in-fact contracts (net of accumulated amortization:
$331,126 and $299,082) 1,377,917 1,409,961
Other assets 320,004 314,423
------------- ------------
3,976,935 3,913,431
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $149,557 and $139,591) 342,379 340,438
------------- ------------
Investments of life subsidiaries:
Fixed maturities available for sale, at market value
(cost: $3,694,250 and $3,342,199) 3,720,906 3,506,572
Mortgage loans on real estate 130,496 148,852
Non-redeemable preferred stocks available for sale, at market
value (cost: $19,330 and $34,127) 15,490 36,305
Common stocks available for sale, at market value
(cost: $292,667 and $271,599) 349,991 333,661
Policy loans 180,961 165,265
Real estate, at cost (net of accumulated depreciation:
$16,948 and $16,240) 63,977 69,379
Joint ventures, at equity 10,395 13,267
------------- ------------
4,472,216 4,273,301
------------- ------------
Other assets of life subsidiaries:
Cash and cash equivalents 81,865 149,794
Accrued investment income 56,782 51,377
Deferred policy acquisition costs and value of life business
acquired 1,012,767 964,861
Notes receivable - affiliate 64,400 64,400
Other assets 302,242 226,603
Assets held in separate account 763,980 714,794
------------- ------------
2,282,036 2,171,829
------------- ------------
Total assets $ 12,755,244 $ 12,630,644
============= ============
The accompanying notes are an integral part of these interim financial statements.
5
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
September 30, December 31,
1996 1995
------------- ------------
Current liabilities, excluding life subsidiaries:
Notes and accounts payable:
Exchanges $ 129 $ 1,748
Other 34,047 228,797
Accrued liabilities:
Profit sharing 39,997 51,274
Income taxes (11,212) 556
Other 16,746 24,821
------------ ------------
Total current liabilities 79,707 307,196
------------ ------------
Other liabilities, excluding life subsidiaries:
Real estate mortgages payable 277 333
Non-current deferred taxes 662,391 674,578
Other 116,830 109,432
------------ ------------
779,498 784,343
------------ ------------
Liabilities of life subsidiaries:
Policy liabilities:
Future policy benefits 3,409,276 3,213,562
Claims 31,979 32,192
Policyholder dividends 13,404 13,594
Other policyholder funds 71,241 73,568
Income taxes (including deferred taxes: $198,941 and $248,717) 197,761 249,349
Unearned investment income 2,166 2,221
Other liabilities 311,971 246,177
Liabilities related to separate account 763,980 714,794
------------ ------------
4,801,778 4,545,457
------------ ------------
Total liabilities 5,660,983 5,636,996
------------ ------------
Commitments and contingencies
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 500,000 500,000
------------ ------------
Stockholder's Equity:
Common stock, $1 par value per share; authorized, issued
and outstanding: as of September 30, 1996 and
December 31, 1995--1,000 shares 1 1
Additional capital 5,212,618 5,212,618
Unrealized gains (net of deferred taxes of $27,086
and $67,545) 49,924 124,962
Retained earnings 1,331,718 1,156,067
------------ ------------
Total stockholder's equity 6,594,261 6,493,648
------------ ------------
Total liabilities and stockholder's equity $ 12,755,244 $ 12,630,644
============ ============
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,
------------------------
1996 1995
----------- -----------
Consolidated operating revenues $ 1,515,789 $ 1,400,935
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 935,970 $ 880,544
----------- -----------
Salaries and employee benefits 254,948 260,093
Buildings and equipment expenses 41,953 43,941
Amortization of AIF contracts and goodwill 77,077 77,077
General and administrative expenses 152,828 138,520
----------- ----------
Total operating expenses 526,806 519,631
----------- ----------
Operating income 409,164 360,913
Net investment income 85,018 53,101
Dividends on preferred securities of subsidiary trusts (31,553) (352)
----------- ----------
Income before provision for taxes 462,629 413,662
Provision for income taxes 187,408 167,776
----------- ----------
Management services income 275,221 245,886
----------- ----------
Life subsidiaries:
Premiums 125,089 117,004
Policy charges 179,951 163,610
Investment income, net of expenses 235,905 219,666
Net realized gains 38,874 20,111
----------- -----------
Total revenues 579,819 520,391
----------- -----------
Policy benefits 110,227 113,106
Increase in liability for future policy benefits 8,127 7,136
Interest credited to policyholders 125,759 114,047
Amortization of deferred policy acquisition costs and
value of life business acquired 85,029 79,284
Commissions 15,636 14,678
General and administrative expenses 46,723 45,145
----------- -----------
Total operating expenses 391,501 373,396
----------- -----------
Income before provision for taxes 188,318 146,995
Provision for income taxes 62,963 48,886
----------- -----------
Life subsidiaries income 125,355 98,109
----------- -----------
Consolidated net income $ 400,576 $ 343,995
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
7
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
Three month period
ended September 30,
------------------------
1996 1995
----------- -----------
Consolidated operating revenues $ 517,004 $ 474,994
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 317,708 $ 297,931
----------- -----------
Salaries and employee benefits 83,376 85,752
Buildings and equipment expenses 14,082 15,172
Amortization of AIF contracts and goodwill 25,693 25,693
General and administrative expenses 54,968 44,371
----------- ----------
Total operating expenses 178,119 170,988
----------- ----------
Operating income 139,589 126,943
Net investment income 29,143 18,278
Dividends on preferred securities of subsidiary trusts (10,518) (352)
----------- ----------
Income before provision for taxes 158,214 144,869
Provision for income taxes 64,278 58,409
----------- ----------
Management services income 93,936 86,460
----------- ----------
Life subsidiaries:
Premiums 41,351 39,099
Policy charges 61,141 55,964
Investment income, net of expenses 79,637 75,459
Net realized gains 17,167 6,541
----------- -----------
Total revenues 199,296 177,063
----------- -----------
Policy benefits 36,787 42,390
Increase in liability for future policy benefits 2,579 2,984
Interest credited to policyholders 43,112 39,488
Amortization of deferred policy acquisition costs and
value of life business acquired 28,755 25,654
Commissions 5,037 5,060
General and administrative expenses 15,899 15,288
----------- -----------
Total operating expenses 132,169 130,864
----------- -----------
Income before provision for taxes 67,127 46,199
Provision for income taxes 22,476 15,311
----------- -----------
Life subsidiaries income 44,651 30,888
----------- -----------
Consolidated net income $ 138,587 $ 117,348
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
8
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the nine month period ended September 30, 1996
(Amounts in thousands)
(Unaudited)
Net Unrealized Total
Common Additional Gains/(Losses) Retained Stockholder's
Stock Capital On Investments Earnings Equity
-------- ----------- ------------- ---------- ------------
Balance, December 31, 1995 $ 1 $ 5,212,618 $ 124,962 $1,156,067 $ 6,493,648
Net income 400,576 400,576
Change in net unrealized
gains/(losses) on
investments net
of tax of ($40,459) (75,038) (75,038)
Cash dividends paid (224,925) (224,925)
-------- ----------- ------------- ---------- ------------
Balance, September 30, 1996 $ 1 $ 5,212,618 $ 49,924 $1,331,718 $ 6,594,261
======== =========== ============= ========== ============
The accompanying notes are an integral part of these interim financial statements.
9
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the nine month period ended September 30, 1995
(Amounts in thousands)
(Unaudited)
Net Unrealized Total
Common Additional Gains/(Losses) Retained Stockholder's
Stock Capital On Investments Earnings Equity
-------- ------------ ------------- ---------- ------------
Balance, December 31, 1994 $ 1 $ 5,212,618 $ (35,146) $ 970,537 $ 6,148,010
Net income 343,995 343,995
Change in net unrealized
gains/(losses) on
investments net
of tax of $58,433 108,497 108,497
Cash dividends paid (213,900) (213,900)
-------- ------------ ------------- ---------- ------------
Balance, September 30, 1995 $ 1 $ 5,212,618 $ 73,351 $1,100,632 $ 6,386,602
======== ============ ============= ========== ============
The accompanying notes are an integral part of these interim financial statements.
10
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine month period
ended September 30,
-----------------------
1996 1995
---------- ----------
Cash Flows from Operating Activities:
Consolidated net income $ 400,576 $ 343,995
Non-cash and operating activities adjustments:
Depreciation and amortization 103,293 102,806
Amortization of deferred policy acquisition costs and
value of life business acquired 85,029 79,284
Policy acquisition costs deferred (97,288) (100,790)
Life insurance policy liabilities 192,984 258,985
Equity in earnings of joint ventures 991 151
Gain on sales of assets (42,678) (22,450)
Changes in assets and liabilities:
Current assets and liabilities 6,062 (40,929)
Non-current assets and liabilities (88,334) (85,461)
Other, net (22,068) (8,450)
---------- -----------
Net cash provided by operating activities 538,567 527,141
---------- -----------
Cash Flows from Investing Activities:
Purchases of investments available for sale (928,001) (585,268)
Purchases of investments held to maturity 0 (100,439)
Purchases of properties (33,223) (30,803)
Purchase of surplus certificates of the Exchanges (300,000) (250,000)
Proceeds from sales and maturities of investments
available for sale 666,075 329,897
Proceeds from calls and maturities of investments
held to maturity 0 51,599
Proceeds from sales of properties 17,457 15,726
Proceeds from surplus certificates of the Exchanges 200,000 0
Purchases of mortgage loans 0 (75)
Mortgage loan collections 16,920 14,795
Other, net 5,138 9,047
---------- -----------
Net cash used in investing activities (355,634) (545,521)
---------- -----------
Cash Flows from Financing Activities:
Dividends paid to stockholder (224,925) (213,900)
Proceeds from issuance of cumulative quarterly income
preferred securities 0 375,000
Issuance cost of cumulative quarterly income preferred
securities (438) (12,083)
Payment of long-term notes payable (200,000) 0
Payment of real estate mortgages payable (56) (61)
---------- -----------
Net cash (used)/provided in financing activities (425,419) 148,956
---------- -----------
Increase/(decrease) in cash and cash equivalents (242,486) 130,576
Cash and cash equivalents - at beginning of year 913,006 539,361
---------- -----------
Cash and cash equivalents - at end of period $ 670,520 $ 669,937
========== ===========
The accompanying notes are an integral part of these interim financial statements.
11
FARMERS GROUP, INC.
AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
A. Basis of presentation and summary of significant accounting policies
The accompanying consolidated balance sheet of Farmers Group, Inc. and
subsidiaries (the "Company") as of September 30, 1996, the related
consolidated statements of income, stockholder's equity and cash flows for
the nine month periods ended September 30, 1996 and September 30, 1995, and
the consolidated statements of income for the three months ended
September 30, 1996 and September 30, 1995, have been prepared in accordance
with generally accepted accounting principles ("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 generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
balance sheets of the Company as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1995.
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 with the
1996 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 disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
In December 1988, BATUS Inc. ("BATUS"), a subsidiary of B.A.T Industries
p.l.c. ("B.A.T"), acquired 100% ownership of the Company for $5,212,619,000
in cash, including related expenses, through its wholly owned subsidiary
BATUS Financial Services. Immediately thereafter, BATUS Financial Services
was merged into Farmers Group, Inc.. The acquisition was accounted for as a
purchase and, accordingly, the acquired assets and liabilities were recorded
in the Company's consolidated balance sheets based on their estimated fair
values at December 31, 1988. In January 1990, ownership of the Company was
ultimately transferred to South Western Nominees Limited, a subsidiary of
B.A.T.
The Company is attorney-in-fact for three inter-insurance exchanges:
Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance
Exchange (collectively, the "Exchanges"), which operate in the property and
casualty insurance industry. As attorney-in-fact, Farmers Group, Inc., or
its subsidiaries, as applicable, manages the affairs of the Exchanges, their
respective subsidiaries and Farmers Texas County Mutual Insurance Company
12
(collectively, the "P&C Group") and receives compensation based on a
percentage of earned premiums.
The Company's life insurance operations are conducted by three wholly
owned subsidiaries, Farmers New World Life Insurance Company, The Ohio State
Life Insurance Company and Investors Guaranty Life Insurance Company (the
"Life Subsidiaries"). They market a broad line of individual life insurance
products, including universal life, term life and whole life insurance, and
annuity products, predominately flexible premium deferred annuities.
In 1996, the Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
Statement did not have a material impact on the Company's consolidated
financial statements.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". This Statement establishes accounting and disclosure
requirements using a fair value based method of accounting for stock-based
employee compensation plans. Under SFAS No. 123, the Company may either adopt
the new fair value based accounting method or continue to apply the intrinsic
value based method and provide pro forma disclosures of net income and earnings
per share as if the accounting provisions of SFAS No. 123 had been adopted. The
Company adopted only the disclosure requirements of SFAS No. 123; therefore,
the adoption of this Statement had no effect on its consolidated financial
statements.
B. Material contingencies
The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery and
development, and some seek punitive as well as compensatory damages. In the
opinion of management, the Company has not engaged in any conduct which
should warrant the award of any material punitive or compensatory damages.
The Company intends to vigorously defend its position in each case, and
management believes that, while it is not possible to predict the outcome of
such matters with absolute certainty, ultimate disposition of these
proceedings should not have a material adverse effect on the Company's
consolidated results of operations or financial position.
C. Investments
The Company follows the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". This Statement addresses
the accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
As of September 30, 1996 and December 31, 1995, the Company has classified all
13
investments in equity and debt securities as available for sale under SFAS
No. 115. These investments are reported at fair value, with unrealized gains
and losses, net of taxes, excluded from earnings and reported as a component
of stockholder's equity.
On November 15, 1995, the FASB issued a special report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities", in which they discussed a "fresh start" transition
provision that allowed reporting entities to reassess their securities
holdings that were classified pursuant to the provisions in SFAS No. 115.
As a result of this "fresh start", the Company decided to reclassify all of
its debt securities originally classified as held to maturity under SFAS No.
115 to available for sale as of December 31, 1995.
In compliance with a Securities and Exchange Commission ("SEC") staff
announcement, the Company has recorded certain entries to the Deferred Policy
Acquisition Costs ("DAC") asset and Value of Life Business Acquired 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 stockholder's equity.
The sources of investment income on securities owned by the Company
(excluding the Life Subsidiaries) for the three month and the nine month
periods ended September 30 are:
Three month period Nine month period
ended September 30, ended September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Amounts in thousands)
Related parties:
Interest income $ 10,521 $ 9,003 $ 40,490 $ 28,554
---------- ---------- ---------- ----------
Total related parties 10,521 9,003 40,490 28,554
---------- ---------- ---------- ----------
Non-related parties:
Interest income --
fixed income securities 10,631 4,645 33,028 16,539
Dividend income 1,206 1,625 3,822 3,991
Interest income --
short-term instruments 2,649 1,319 8,399 7,693
Realized investment gains, net 258 361 1,984 1,140
Investment expenses (688) (4,125) (8,938) (12,375)
Other 4,566 5,450 6,233 7,559
---------- ---------- ---------- ----------
Total non-related parties 18,622 9,275 44,528 24,547
---------- ---------- ---------- ----------
Total investment income
by component $ 29,143 $ 18,278 $ 85,018 $ 53,101
========== ========== ========== ==========
14
The sources of investment income on securities owned by the Life
Subsidiaries for the three month and the nine month periods ended
September 30 are:
Three month period Nine month period
ended September 30, ended September 30,
--------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Amounts in thousands)
Fixed income securities $ 65,910 $ 59,916 $ 190,543 $ 175,716
Equity securities 6,125 6.862 20,121 20,408
Mortgage loans 3,692 3,941 11,219 12,618
B.A.T Capital Corporation notes 56 747 2,524 3,134
Owned real estate 2,859 2,607 8,003 7,898
Policy loans 3,080 2,688 8,968 7,792
Short-term instruments 963 1,839 3,185 3,487
Other 620 1,486 1,887 1,411
Investment expenses (3,668) (4,627) (10,545) (12,798)
---------- ---------- ----------- ----------
Total investment income by component $ 79,637 $ 75,459 $ 235,905 $ 219,666
========== ========== =========== ==========
Realized gains and losses on sales, redemptions and writedowns of
investments owned by the Company (excluding the Life Subsidiaries) are
determined based on either the cost of the individual securities or the
amortized cost of real estate. Net realized investment gains or losses
for the three month and the nine month periods ended September 30 are:
Three month period Nine month period
ended September 30, ended September 30,
-------------------------- --------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(Amounts in thousands)
Bonds $ 51 $ (28) $ 461 $ (2)
Redeemable preferred stocks 297 20 225 34
Investment real estate (90) 369 1,298 1,108
--------- --------- ---------- ---------
Net realized investment gains $ 258 $ 361 $ 1,984 $ 1,140
========= ========= ========= =========
Realized gains and losses on sales, redemptions and writedowns of
investments owned by the Life Subsidiaries are determined based on
either the cost of the individual securities or the amortized cost of
real estate. Net realized investment gains or losses for the three month
and the nine month periods ended September 30 are:
Three month period Nine month period
ended September 30, ended September 30,
-------------------------- ---------------------------
1996 1995 1996 1995
--------- --------- --------- ----------
(Amounts in thousands)
Bonds $ 3,536 $ 2,588 $ 3,478 $ 3,725
Redeemable preferred stocks 1,642 50 1,469 (80)
Non-redeemable preferred stocks 59 328 813 819
Common stocks 12,502 3,622 35,418 16,304
Investment real estate (570) (50) (1,604) (658)
Other (2) 3 (700) 1
--------- --------- --------- ----------
Net realized investment gains $ 17,167 $ 6,541 $ 38,874 $ 20,111
========= ========= ========= ==========
15
Gross unrealized gains or losses of the Life Subsidiaries pertaining
to non-redeemable preferred stocks and common stocks stated at quoted market
values as of September 30, 1996 and December 31, 1995 are:
Gains Losses Net
1996 ----------- ----------- ----------
- ---- (Amounts in thousands)
Non-redeemable preferred stocks $ 1,591 $ (5,431) $ (3,840)
Common stocks 71,108 (13,784) 57,324
---------- ----------- ----------
$ 72,699 $ (19,215) 53,484
========== ===========
Less deferred federal income taxes 18,719
----------
$ 34,765
==========
1995
- ----
Non-redeemable preferred stocks $ 4,138 $ (1,960) $ 2,178
Common stocks 81,243 (19,181) 62,062
---------- ----------- ----------
$ 85,381 $ (21,141) 64,240
========== ===========
Less deferred federal income taxes 22,484
----------
$ 41,756
==========
The amortized cost, gross unrealized gains and losses, and estimated
market values of investments in debt securities, including bonds and
redeemable preferred stocks, owned by the Company (excluding the Life
Subsidiaries) are as follows:
As of September 30, 1996
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Amounts in thousands)
Debt Securities Available for Sale,
including Marketable Securities
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 247 $ 2 $ (1) $ 248
Obligations of states and political
subdivisions 257,612 2,413 (124) 259,901
Corporate securities 20,020 0 (4) 20,016
Other debt securities 60,547 1,224 (550) 61,221
--------- ---------- ---------- ---------
Total $ 338,426 $ 3,639 $ (679) $ 341,386
========= ========== ========== =========
As of December 31, 1995
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Amounts in thousands)
Debt Securities Available for Sale,
including Marketable Securities
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 55 $ 5 $ 0 $ 60
Obligations of states and political
subdivisions 304,652 4,439 (27) 309,064
Corporate securities 20,020 0 (20) 20,000
Other debt securities 74,274 2,760 (426) 76,608
--------- ---------- ---------- ---------
Total $ 399,001 $ 7,204 $ (473) $ 405,732
========= ========== ========== =========
16
The amortized cost, gross unrealized gains and losses, and
estimated market values of investments in debt securities, including
bonds and redeemable preferred stocks, owned by the Life Subsidiaries
are as follows:
As of September 30, 1996
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
(Amounts in thousands)
Debt Securities Available for Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 370,263 $ 7,284 $ (4,676) $ 372,871
Obligations of states and political
subdivisions 353,495 7,006 (6,925) 353,576
Debt securities issued by foreign governments 60,109 13,179 0 73,288
Corporate securities 903,639 26,622 (16,846) 913,415
Mortgage-backed securities 1,798,565 34,990 (33,210) 1,800,345
Other debt securities 208,179 5,089 (5,857) 207,411
---------- ---------- ---------- ----------
Total $3,694,250 $ 94,170 $ (67,514) $3,720,906
========== ========== ========== ==========
As of December 31, 1995
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- --------- ---------
(Amounts in thousands)
Debt Securities Available for Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 302,556 $ 19,083 $ (185) $ 321,454
Obligations of states and political
subdivisions 311,482 16,066 (737) 326,811
Debt securities issued by foreign governments 75,708 4,641 (2,778) 77,571
Corporate securities 849,734 57,467 (5,076) 902,125
Mortgage-backed securities 1,558,198 70,134 (5,826) 1,622,506
Other debt securities 244,521 14,018 (2,434) 256,105
---------- ---------- ---------- ----------
Total $3,342,199 $ 181,409 $ (17,036) $3,506,572
========== ========== ========== ==========
Proceeds received by the Company from sales and maturities of securities
available for sale were $666,075,000 and $329,897,000 for the nine months
ended September 30, 1996 and September 30, 1995, respectively. Gross gains
of $26,403,000 and $10,361,000 and gross losses of $8,316,000 and $4,475,000
were realized on sales and writedowns for the three months ended
September 30, 1996 and September 30, 1995, respectively. Gross gains of
$56,128,000 and $27,405,000 and gross losses of $14,264,000 and $7,069,000
were realized on sales and writedowns for the nine months ended
September 30, 1996 and September 30, 1995, respectively.
17
The change in the net unrealized gains or losses of the Company
(excluding the Life Subsidiaries) for the periods ended September 30, 1996
and December 31, 1995 are as follows:
1996 1995
----------- -----------
(Amounts in thousands)
Fixed maturities $ (3,771) $ 10,152
Equity securities 0 0
The change in the net unrealized gains or losses of the Life Subsidiaries
for the periods ended September 30, 1996 and December 31, 1995 are as follows:
1996 1995
----------- -----------
(Amounts in thousands)
Fixed maturities $ (137,717) $ 345,802
Equity securities (10,756) 34,235
D. Security Lending Arrangement
The Life Subsidiaries have security lending agreements with a financial
institution. The agreements in effect as of September 30, 1996 authorize
the institution to lend securities held in the Life Subsidiaries' portfolios
to a list of authorized borrowers. Concurrent with delivery of the securities,
the borrower provides the Life Subsidiaries with cash collateral equal to
at least 102% of the market value of domestic securities and 105% of the
market value of other securities subject to the "loan".
The securities are marked-to-market on a daily basis and the collateral is
increased or decreased on the next business day. The collateral is invested
in highly liquid, fixed income assets with a maturity of less than one year.
The collateral under these agreements was $253,621,000 and $195,377,000 as of
September 30, 1996 and December 31, 1995, respectively, and was recorded in
both Other Assets and Other Liabilities of Life Subsidiaries. For the three
month and the nine month periods ended September 30, 1996 and 1995, income
earned from the security lending arrangement was allocated 60% to the Life
Subsidiaries and 40% to the financial institution. Income earned by the
Life Subsidiaries was $150,000 and $57,000 for the three months ended
September 30, 1996 and 1995, respectively, and $355,000 and $166,000 for the
nine months ended September 30, 1996 and 1995, respectively.
18
E. Supplemental cash flow information
For financial statement purposes, the Company considers all investments
with original maturities of 90 days or less as cash equivalents. Following
is a reconciliation of the individual balance sheet cash and cash equivalent
totals to the consolidated cash flow total.
Excluding
Life Life
Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------
(Amounts in thousands)
Cash and cash equivalents -- December 31, 1994 $ 415,064 $ 124,297 $ 539,361
Activity through September 1995 130,576
---------
Cash and cash equivalents -- September 30, 1995 572,984 96,953 $ 669,937
=========
Cash and cash equivalents -- December 31, 1995 763,212 149,794 $ 913,006
Activity through September 1996 (242,486)
---------
Cash and cash equivalents -- September 30, 1996 588,655 81,865 $ 670,520
=========
Cash payments for interest were $16,750,000 and $17,924,000, while cash
payments for income taxes were $297,423,000 and $253,618,000, for the nine
month periods ended September 30, 1996 and September 30, 1995, respectively.
F. Related parties
The Company received management fees from the Exchanges of $297,986,000
and $279,344,000 for the three months ended September 30, 1996 and
September 30, 1995, respectively, and $877,988,000 and $825,493,000 for the
nine months ended September 30, 1996 and September 30, 1995, respectively.
As of September 30, 1996, the Company had $407,000,000 in notes
receivable related to loans made to B.A.T Capital Corporation, a subsidiary
of B.A.T Industries. These notes are fixed rate medium-term notes with
maturity dates as follows: $135,000,000 in October 1996 (see note K),
$135,000,000 in October 1997, and $137,000,000 in October 1998. Interest on
these notes is paid semi-annually at coupon rates of 4.76%, 5.10% and 5.35%,
respectively. Income earned on these notes was $5,160,000 for the three months
ended September 30, 1996 and September 30, 1995, and was $15,480,000 and
$15,536,000 for the nine months ended September 30, 1996 and
September 30, 1995, respectively.
As of September 30, 1996, the Company had revolving credit agreements
with certain financial institutions with an aggregate borrowing facility
of $500,000,000 which was available for five years. The proceeds of the
facility were available to the Company for general corporate purposes,
including loans to the Exchanges. Facility fees were payable on the aggregate
borrowing facility in the amount of 9 basis points per annum and were
reimbursable to the Company by the Exchanges. In the case of a draw on the
facility, the Company has the option to borrow at annual rates equal to the
prime rate, the banks' certificate of deposit rate plus 1%, the federal
funds effective rate plus 1/2 of 1% or the London Interbank Offered Rate
("LIBOR") rate plus certain percentages. As of September 30, 1996, the Company
did not have any outstanding borrowings under the revolving credit agreements.
19
Facility fees were $208,000 for the three month period ended
September 30, 1996 and $477,000 for the nine month period ended
September 30, 1996. These facility fees were reimbursed by the Exchanges.
The revolving credit agreements expire in April 2001.
As of September 30, 1995, the Company had revolving credit agreements
with certain financial institutions and had an aggregate borrowing facility
of $500,000,000. The proceeds of the facility were available to the Company
for general corporate purposes, including loans to the Exchanges. Facility
fees were payable on the aggregate borrowing facility in the amount of 10
basis points per annum and were reimbursable to the Company by the Exchanges.
In the case of a draw on the facility, interest for the relevant borrowing
period was payable periodically at an annual rate equal to LIBOR, plus 20
basis points. As of September 30, 1995, the Company did not have any
outstanding borrowings under the revolving credit agreements. Facility fees
were $167,000 for the three month period ended September 30, 1995 and
$418,000 for the nine month period ended September 30, 1995. These facility
fees were reimbursed by the Exchanges.
G. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures
In 1995, Farmers Group Capital and Farmers Group Capital II (the
"Subsidiary Trusts"), consolidated wholly owned subsidiaries of Farmers
Group, Inc., issued $410 million of 8.45% Cumulative Quarterly Income
Preferred Securities ("QUIPS"), Series A and $90 million of 8.25% QUIPS,
Series B, respectively. In connection with the Subsidiary Trusts' issuance
of the QUIPS and the related purchase by Farmers Group, Inc. of all of the
Subsidiary Trusts' Common Securities ("Common Securities"), Farmers Group,
Inc. issued to Farmers Group Capital $422,680,399 principal amount of its
8.45% Junior Subordinated Debentures, Series A due on December 31, 2025,
(the "Junior Subordinated Debentures, Series A") and issued to Farmers Group
Capital II $92,783,505 principal amount of its 8.25% Junior Subordinated
Debentures, Series B due on December 31, 2025 (the "Junior Subordinated
Debentures, Series B" and, together with the Junior Subordinated Debentures,
Series A, the "Junior Subordinated Debentures"). The sole assets of Farmers
Group Capital are the Junior Subordinated Debentures, Series A. The sole
assets of Farmers Group Capital II are the Junior Subordinated Debentures,
Series B. In addition, these arrangements are governed by various agreements
between Farmers Group, Inc. and the Subsidiary Trusts (the Guarantee
Agreements, the Trust Agreements, the Expense Agreements, the Indentures and
the Junior Subordinated Debentures) which considered together constitute a
full and unconditional guarantee by Farmers Group, Inc. of the Subsidiary
Trusts' obligations under the Preferred Securities.
Under certain circumstances, the Junior Subordinated Debentures may be
distributed to holders of the QUIPS and holders of the Common Securities in
liquidation of the Subsidiary Trusts. The QUIPS are subject to mandatory
redemption upon repayment of the Junior Subordinated Debentures at maturity,
or upon their earlier redemption, at a redemption price of $25 per Preferred
Security, plus accrued and unpaid distributions thereon to the date fixed
for redemption. Farmers Group, Inc. will have the option at any time on or
after September 27, 2000 to redeem, in whole or part, the Junior Subordinated
Debentures.
As of September 30, 1996, a total of 20,000,000 shares of QUIPS were
outstanding.
20
H. Certificates in surplus of exchanges
The Company, as attorney-in-fact for the Exchanges, has made surplus
contributions to the Exchanges from time to time. In return, the Company
has received the following certificates of contribution totaling $584,380,000
as of September 30, 1996:
a $135,000,000 certificate of contribution, issued on
September 30, 1996, bearing interest at 8.95% annually.
a $165,000,000 certificate of contribution, issued on
June 27, 1996, bearing interest at 8.95% annually.
a $250,000,000 certificate of contribution, issued in 1995,
bearing interest at 8.95% annually.
miscellaneous other certificates of contribution totaling
$34,380,000 which bear interest at various rates.
Conditions governing repayment of these amounts are outlined in the
certificates. Generally, repayment may be made only when the surplus balance
of the appropriate Exchange reaches a certain specified level, and then only
after approval is granted by the Exchange Board of Governors and the
California Insurance Commissioner.
On July 1, 1996, the Company received $200,000,000 from the Exchanges in
repayment of a surplus contribution made by the Company in 1986 (see note I).
I. Notes payable
In July 1996, the Company used the $200,000,000 of proceeds it received
from the Exchanges in connection with the repayment of the 1986 surplus
contribution (see note H) to extinguish the $200,000,000 of 8.25% Notes
Payable the Company issued in July 1986.
J. Sale of life insurance subsidiaries
Upon review of its strategic plans, the Company has made the decision
to sell The Ohio State Life Insurance Company and Investors Guaranty Life
Insurance Company. The combined revenues, which include premiums, policy
charges, investment income and capital gains, of these subsidiaries for the
three months ended September 1996 are $38,900,00 and for the nine months
ended September 1996 are $115,800,000. The combined total assets as
of September 30, 1996 are $1,109,200,000. Farmers' management expects that
no material gain or loss will be realized from this transaction.
21
K. Subsequent events
On October 7, 1996, the $135,000,000 of notes receivable from B.A.T
Capital Corporation (see note F) matured and new notes were subsequently
issued. The new notes receivable are fixed rate medium-term notes which
pay interest semi-annually at a coupon rate of 6.68% and have a maturity
date of October 1999.
22
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is engaged in the management of property and casualty
insurance companies and the underwriting of life insurance and annuity
products. The Company does not own any property and casualty insurers, but
rather serves as the manager of the P&C Group. The Company receives a
management fee based on the gross premiums earned by the P&C Group. Revenues
and expenses relating to both of these principal business activities are
reflected in the Company's Consolidated Financial Statements prepared in
accordance with GAAP, which differs from the statutory accounting practices
("SAP"), which the Life Subsidiaries are required to use for regulatory
reporting purposes.
The Company underwrites life insurance and annuity products through its
three life insurance subsidiaries. Revenues attributable to traditional life
insurance products, such as whole life or term insurance contracts, are
classified as premiums as they become due. Future benefits are associated
with such premiums (through increases in liabilities for future policy
benefits), and prior period capitalized costs are amortized (through
amortization of DAC) so that profits are generally recognized over the same
period as revenue income. Revenues attributable to Universal Life ("UL")
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
UL and annuity policies include interest credited to policyholders on policy
balances as well as benefit claims incurred in excess of policy account
balances.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $297.9 million for
the three months ended September 30, 1995 to $317.7 million for the three
months ended September 30, 1996, an increase of $19.8 million, or 6.6%.
Operating revenues primarily consist of management fees paid to the Company
as a percentage of gross premiums earned by the P&C Group. Such premiums
increased from $2,264.5 million in the third quarter of 1995 to $2,407.5
million in the third quarter of 1996 due primarily to strong growth in the
Auto lines of business as a result of higher average premiums and an increase
in the number of policies-in-force.
Total Operating Expenses. Total operating expenses as a percentage of
operating revenues decreased from 57.4% for the three months ended
September 30, 1995 to 56.1% for the three months ended September 30, 1996,
a decrease of 1.3%. The Company continues to realize savings as a result
of automation, consolidation efforts and greater use of information
23
technology systems. In particular, labor costs (salaries and benefits),
fell from 28.8% of operating revenues for the three months ended
September 30, 1995 to 26.2% of operating revenues for the three months
ended September 30, 1996.
Salaries and Employee Benefits. Salaries and employee benefits
decreased from $85.7 million for the three months ended September 30, 1995
to $83.4 million for the three months ended September 30, 1996, a decrease
of $2.3 million, or 2.7%, primarily due to a reduction in employee
complement.
Buildings and Equipment Expenses. Buildings and equipment expenses
decreased from $15.2 million for the three months ended September 30, 1995
to $14.1 million for the three months ended September 30, 1996, a decrease
of $1.1 million, or 7.2%. A decrease in computer mainframe related
expenses was offset by an increase in software related expenses.
Amortization of Attorney-In-Fact Contracts and Goodwill. Purchase
accounting entries related to the acquisition of the Company by B.A.T
Industries p.l.c. in December 1988 include goodwill (capitalized at $2.4
billion) and the value of the attorney-in-fact contracts of the P&C Group
(capitalized at $1.7 billion). Amortization of these two items, which is
being taken on a straight-line basis over forty years, reduced pretax
income by approximately $25.7 million in each of the three month periods
ended September 30, 1996 and September 30, 1995.
General and Administrative Expenses. General and administrative
expenses increased from $44.4 million for the three months ended
September 30, 1995 to $54.9 million for the three months ended
September 30, 1996, an increase of $10.5 million, or 23.6%. This increase
is attributable to the amortization of new information technology systems
software and to increased levels of business activity.
Net Investment Income. Net investment income increased from $18.3
million for the three months ended September 30, 1995 to $29.1 million for
the three months ended September 30, 1996 primarily due to a larger invested
asset base in 1996.
Dividends on Preferred Securities of Subsidiary Trusts. As a result of
the $500.0 million of Cumulative Quarterly Income Preferred Securities
("QUIPS") issued in 1995, dividend expense increased from $0.4
million for the three months ended September 30, 1995 to $10.5 million for
the three months ended September 30, 1996.
Provision for Income Taxes. Provision for income taxes increased from
$58.4 million for the three months ended September 30, 1995 to $64.3 million
for the three months ended September 30, 1996, an increase of $5.9 million,
or 10.1%. This increase is primarily attributable to the increase in pretax
operating income between years.
Management Services Income. As a result of the foregoing, management
services income increased from $86.4 million for the three months ended
September 30, 1995 to $93.9 million for the three months ended
September 30, 1996, an increase of $7.5 million, or 8.7%.
24
Life Subsidiaries
Total Revenues. Total revenues increased from $177.1 million for the
three months ended September 30, 1995 to $199.3 million for the three months
ended September 30, 1996, an increase of $22.2 million, or 12.5%.
Premiums. Premiums increased $2.3 million for the three months
ended September 30, 1996, or 5.9%, over the three months ended
September 30, 1995. This increase is due to growth in renewal and first
year business, offset in part by a decrease in Single Premiums Immediate
Annuity ("SPIA") and Annuity in Payment ("AIP") premiums. The increase
in renewal premiums is attributable to growth in traditional life
insurance in-force resulting from improved persistency and an increase
in average policy size. The higher first year premiums are due primarily
to growth in Premier Whole Life ("PWL") and Mortgage Protection Plan
products.
Policy charges. Policy charges increased $5.1 million for the three
months ended September 30, 1996, or 9.1%, over the three months ended
September 30, 1995, reflecting continued growth in universal life-type
insurance in-force.
Investment Income. Net investment income increased $4.1 million in
the three months ended September 30, 1996, or 5.4%, over the three months
ended September 30, 1995 due largely to higher bond interest income
resulting primarily from a higher invested asset base.
Net Realized Gains. Net realized gains increased by $10.7 million,
from $6.5 million in the three months ended September 30, 1995 to $17.2
million in the three months ended September 30, 1996. This increase is
the result of higher gains realized on common stock sales in the three
months ended September 30, 1996 than in the three months ended
September 30, 1995.
Total Operating Expenses. Total operating expenses increased from
$130.9 million for the three months ended September 30, 1995 to $132.2
million for the three months ended September 30, 1996, an increase of
$1.3 million, or 1.0%.
Policyholders' Benefits. Policyholders' benefits expense decreased
from $84.9 million for the three months ended September 30, 1995 to $82.5
million for the three months ended September 30, 1996, a decrease of
$2.4 million, or 2.8%. Policy benefits, which consist primarily of death
and surrender benefits on life products, decreased $5.6 million from
September 30, 1995 to $36.8 million, due to favorable death claims
experienced in the three months ended September 30, 1996. Increase in
liability for future benefits expense decreased from $3.0 million in the
three months ended September 30, 1995 to $2.6 million for the three months
ended September 30, 1996 due to decreases in SPIA and AIP premiums.
Interest credited to policyholders, which represents the amount credited
under universal life-type contracts and deferred annuities for
policyholder funds on deposit, increased from $39.5 million for the three
months ended September 30, 1995 to $43.1 million for the three months
ended September 30, 1996, or 9.1%, reflecting the growth in universal
life-type insurance in-force and increased annuity funds on deposit.
25
Amortization of DAC and Value of Life Business Acquired. Amortization
expense increased from $25.7 million for the three months ended
September 30, 1995 to $28.8 million for the three months ended
September 30, 1996, or 12.1%. This increase reflects the continued growth
in universal life-type and traditional business for the three months ended
September 30, 1996.
Commissions. Commissions totaled $5.0 million for both the three
months ended September 30, 1996 and the three months ended
September 30, 1995.
General and Administrative Expenses. General and administrative
expenses increased from $15.3 million for the three months ended
September 30, 1995 to $15.9 million for the three months ended
September 30, 1996, or 3.9%. This increase results mainly from higher
salaries and benefits expense.
Provision for Income Taxes. Provision for income taxes increased from
$15.3 million for the three months ended September 30, 1995 to $22.4 million
for the three months ended September 30, 1996, an increase of $7.1 million.
This increase is attributable to the increase in pretax operating income.
Life Subsidiaries Income. As a result of the foregoing, Life Subsidiaries
income increased from $30.9 million for the three months ended
September 30, 1995 to $44.7 million for the three months ended
September 30, 1996, an increase of $13.8 million, or 44.7%.
Consolidated Net Income
Consolidated net income of the Company increased from $117.3 million for
the three months ended September 30, 1995 to $138.6 million for the three
months ended September 30, 1996, an increase of $21.3 million, or 18.2%.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $880.5 million for
the nine months ended September 30, 1995 to $936.0 million for the nine months
ended September 30, 1996, an increase of $55.5 million, or 6.3%. This growth
reflects higher gross premiums earned by the P&C Group, which increased from
$6,710.3 million in the first nine months of 1995 to $7,091.4 million in the
first nine months of 1996 due primarily to continued growth in Personal lines
premiums as a result of higher average premiums and an increase in the number
of policies-in-force.
Total Operating Expenses. Total operating expenses as a percentage of
operating revenues decreased from 59.0% for the nine months ended
September 30, 1995 to 56.3% for the nine months ended September 30, 1996,
a decrease of 2.7%. Through greater use of information technology systems,
consolidation efforts and automation, the Company has continued to control
its labor costs, reducing salaries and benefits from 29.5% of operating
revenues for the nine
26
months ended September 30, 1995 to 27.2% of operating revenues for the nine
months ended September 30, 1996.
Salaries and Employee Benefits. Salaries and employee benefits
decreased from $260.1 million for the nine months ended September 30, 1995
to $254.9 million for the nine months ended September 30, 1996, a decrease
of $5.2 million, or 2.0%, primarily due to a reduction in employee
complement.
Buildings and Equipment Expenses. Buildings and equipment expenses
decreased from $43.9 million for the nine months ended September 30, 1995
to $42.0 million for the nine months ended September 30, 1996, a decrease
of $1.9 million, or 4.3%. This decrease is attributable to a decrease in
computer mainframe related expenses offset in part by an increase in
software related expense.
Amortization of Attorney-In-Fact Contracts and Goodwill. Amortization
expense was $77.1 million in each of the nine month periods ended
September 30, 1996 and September 30, 1995. These assets are being
amortized on a straight-line basis over forty years.
General and Administrative Expenses. General and administrative
expenses increased from $138.5 million for the nine months ended
September 30, 1995 to $152.8 million for the nine months ended
September 30, 1996, an increase of $14.3 million, or 10.3%. This increase
is primarily due to the amortization of new information technology systems
software and to increased levels of business activity.
Net Investment Income. Net investment income increased from $53.1 million
for the nine months ended September 30, 1995 to $85.0 million for the nine
months ended September 30, 1996 primarily due to a larger invested asset base
in 1996.
Dividends on Preferred Securities of Subsidiary Trusts. As a result of
the $500.0 million of Cumulative Quarterly Income Preferred Securities (QUIPS)
issued in 1995, dividend expense increased from $0.4 million for the nine
months ended September 30, 1995 to $31.6 million for the nine months ended
September 30, 1996.
Provision for Income Taxes. Provision for income taxes increased from
$167.7 million for the nine months ended September 30, 1995 to $187.4 million
for the nine months ended September 30, 1996, an increase of $19.7 million,
or 11.7%. This increase is primarily attributable to the increase in pretax
operating income between years.
Management Services Income. As a result of the foregoing, management
services income increased from $245.9 million for the nine months ended
September 30, 1995 to $275.2 million for the nine months ended September 30,
1996, an increase of $29.3 million, or 11.9%.
27
Life Subsidiaries
Total Revenues. Total revenues increased from $520.4 million for the
nine months ended September 30, 1995 to $579.8 million for the nine months
ended September 30, 1996, an increase of $59.4 million, or 11.4%.
Premiums. Premiums increased $8.1 million for the nine months ended
September 30, 1996, or 6.9%, over the nine months ended September 30,
1995. The increase in renewal premiums is attributable to a 9.2% growth
in traditional life insurance in-force resulting from improved persistency
and an increase in average policy size. The higher first year premiums
are due primarily to growth in PWL and Mortgage Protection Plan products.
Policy Charges. Policy charges increased $16.3 million for the nine
months ended September 30, 1996, or 10.0%, over the nine months ended
September 30, 1995, reflecting continued growth in universal life-type
insurance in-force.
Investment Income. Net investment income increased $16.2 million for
the nine months ended September 30, 1996, or 7.4%, over the nine months
ended September 30, 1995 due largely to higher bond interest income
resulting primarily from a higher invested asset base.
Net Realized Gains. Net realized gains increased by $18.8 million,
from $20.1 million for the nine months ended September 30, 1995 to $38.9
million for the nine months ended September 30, 1996, due primarily to
gains realized on common stock as a result of favorable market conditions.
Total Operating Expenses. Total operating expenses increased from $373.4
million for the nine months ended September 30, 1995 to $391.5 million for
the nine months ended September 30, 1996, an increase of $18.1 million, or
4.8%.
Policyholders' Benefits. Policyholders' benefits expense increased
from $234.3 million for the nine months ended September 30, 1995 to
$244.1 million for the nine months ended September 30, 1996, an increase
of $9.8 million, or 4.2%. Policy benefits, which consist primarily of
death and surrender benefits on life products, decreased from $113.1
million for the nine months ended September 30, 1995 to $110.2 million
for the nine months ended September 30, 1996 due to favorable death claims
experience between years. Increase in liability for future benefits
expense increased from $7.1 million for the nine months ended
September 30, 1995 to $8.1 million for the nine months ended
September 30, 1996. This increase is primarily attributable to increases
in PWL and other traditional product premiums in the nine months ended
September 30, 1996. Interest credited to policyholders, which represents
the amount credited under universal life-type contracts and deferred
annuities for policyholder funds on deposit, increased from $114.1 million
for the nine months ended September 30, 1995 to $125.8 million for the
nine months ended September 30, 1996, or 10.3%, reflecting an 8.1% growth
in universal life-type insurance in-force and a 7.1% increase in annuity
funds on deposit.
28
Amortization of DAC and Value of Life Business Acquired. Amortization
expense increased from $79.3 million for the nine months ended
September 30, 1995 to $85.0 million for the nine months ended
September 30, 1996, or 7.2%. This increase reflects the continued growth
in universal life-type business and lower traditional terminations for the
nine months ended September 30, 1996.
Commissions. Commissions increased from $14.7 million for the nine
months ended September 30, 1995 to $15.6 million for the nine months ended
September 30, 1996, reflecting increased renewal premiums from universal
life products.
General and Administrative Expenses. General and administrative
expenses increased from $45.1 million for the nine months ended
September 30, 1995 to $46.8 million for the nine months ended
September 30, 1996, or 3.8%. This increase results mainly from higher
salaries and benefits expense and higher state premium taxes in 1996.
Provision for Income Taxes. Provision for income taxes increased from
$48.9 million for the nine months ended September 30, 1995 to $62.9 million
for the nine months ended September 30, 1996, an increase of $14.0 million.
This increase is attributable to the increase in pretax operating income.
Life Subsidiaries Income. As a result of the foregoing, Life Subsidiaries
income increased from $98.1 million for the nine months ended
September 30, 1995 to $125.4 million for the nine months ended
September 30, 1996, an increase of $27.3 million, or 27.8%.
Consolidated Net Income
Consolidated net income of the Company increased from $344.0 million for
the nine months ended September 30, 1995 to $400.6 million for the nine months
ended September 30, 1996, an increase of $56.6 million, or 16.5%.
Liquidity and Capital Resources
As of September 30, 1996 and September 30, 1995, the Company held cash
and cash equivalents of $670.5 million and $669.9 million, respectively.
In addition, as of September 30, 1996, the Company had available revolving
credit facilities enabling it to borrow up to $500.0 million in the event
such a need should arise.
Net cash provided by operating activities increased from $527.1 million
for the nine months ended September 30, 1995 to $538.6 million for the nine
months ended September 30, 1996, an increase of $11.5 million, or 2.2%.
Contributing to this increase was a $56.6 million increase in consolidated
net income. In addition, net cash provided by operating activities increased
$44.1 million due primarily to increases in accounts payable and accrued
liabilities. These increases were offset in part by a $66.0 million decrease
in life insurance policy liabilities and a $20.2 million increase in gains
on sales of assets.
29
Net cash used in investing activities decreased from $545.5 million for
the nine months ended September 30, 1995 to $355.6 million for the nine
months ended September 30, 1996, a decrease of $189.9 million, or 34.8%.
This decrease is due to the July 1996 repayment of the $200.0 million
certificate of contribution issued to the Exchanges in 1986. Partially
offsetting the above decrease is a $50.0 million increase in the purchase
of surplus certificates of the Exchanges. The Company has purchased $300.0
million of surplus certificates of the Exchanges in 1996, compared to $250.0
million in 1995.
Net cash used in financing activities increased $574.4 million, or 385.5%
between years to $425.4 million for the nine months ended September 30, 1996.
This increase is due in part to the July 1996 repayment of the $200.0 million
of 8.25% Notes Payable the Company issued in July 1986. Also contributing to
the increase in cash used between years is the fact that $375.0 million of
proceeds were received in 1995 as a result of the issuance of Cumulative
Quarterly Preferred Securities ("QUIPS") in September of that year.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery
and development, and some seek punitive as well as compensatory damages.
In the opinion of management, the Company has not engaged in any conduct
which should warrant the award of any material punitive or compensatory
damages. The Company intends to vigorously defend its position in each
case, and management believes that, while it is not possible to predict
the outcome of such matters with absolute certainty, ultimate disposition
of these proceedings should not have a material adverse effect on the
Company's consolidated results of operations or financial position. In
addition, the Company is, from time to time, involved as a party to
various governmental and administrative proceedings.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K. None.
31
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 12, 1996 /s/ Leo E. Denlea, Jr.
---------------------------------------------
Date Leo E. Denlea, Jr.
Chairman of the Board
and Chief Executive Officer
November 12, 1996 /s/ Anthony L.R. Clark
---------------------------------------------
Date Anthony L.R. Clark
Senior Vice President and
Chief Financial Officer