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 management fees based primarily 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 SAP, which the Life Subsidiaries are required to use for regulatory reporting purposes.
Amortization of AIF Contracts and Goodwill. The purchase accounting entries related to the acquisition of the Company by B.A.T in December 1988 include goodwill (capitalized at $2.4 billion) and the value of the AIF contracts of the P&C Group (capitalized at $1.7 billion). The amortization of these two items, which is being taken on a straight-line basis over forty years, reduced pretax income by approximately $102.8 million for both 1996 and 1995.
Total Operating Expenses. Total operating expenses as a percentage of operating revenues decreased from 60.1% in 1994 to 58.9% in 1995, a decrease of 1.2%. Although total operating expenses increased by 2.6%, this increase was less than the 3.9% increase in policies-in-force. In particular, the Company controlled its labor costs, reducing salaries and benefits from 30.9% of operating revenues in 1994 to 29.5% of operating revenues in 1995.
Dividends on Preferred Securities of Subsidiary Trusts. As a result of the $500.0 million of QUIPS issued in 1995, dividend expense in 1995 was $10.4 million.
Policyholders' Benefits. Policyholders' benefits expense increased from $276.4 million in 1994 to $316.7 million in 1995, an increase of $40.3 million, or 14.6%. Policy benefits increased $20.0 million over 1994 primarily due to an increase in death claims resulting from higher average insurance-in-force and higher death claims per insurance- in-force. Increase in liability for future benefits expense increased from $6.6 million in 1994 to $9.1 million in 1995, or 37.9%. This increase was primarily due to increases in traditional and AIP provisions for future benefits as a result of higher premiums in 1995. Interest credited to
Net cash provided by operating activities decreased from $803.5 million in 1995, to $761.8 million in 1996, a decrease in cash of $41.7 million, or 5.2%. This decrease in cash was principally due to a $75.7 million decrease in life insurance policy liabilities and a $10.1 million increase in realized gains on sale of assets. The above decreases in cash were partially offset by a $37.2 million increase in consolidated net income.
In December 1988, BATUS Inc. ("BATUS"), a subsidiary of B.A.T Industries p.l.c. ("B.A.T"), acquired 100% ownership of Farmers Group, Inc. (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 transferred to South Western Nominees Limited, a subsidiary of B.A.T.
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.
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.
Expense under these plans was $55,772,000, $55,070,000, and $53,939,000 in 1996, 1995 and 1994, respectively.
The Company follows the provisions of SFAS No. 115. 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 December 31, 1996 and 1995, the Company classified all investments in equity and debt securities as available-for-sale under SFAS No. 115. Correspondingly, these investments are reported on the balance sheet at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a component of stockholder's equity.
The amortized cost and estimated market value of debt securities, including marketable securities, owned by the Company (excluding the Life Subsidiaries) as of December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Rental expense incurred by the Company was $20,121,000, $21,944,000 and $22,104,000 in 1996, 1995 and 1994, respectively.
In 1996, 1995 and 1994, the Life Subsidiaries decreased the DAC asset and increased the Value of Life Business Acquired asset to account for the impact on estimated future gross profits of the net unrealized gains or losses on securities which resulted from the adoption of SFAS No. 115. In addition, the entries made in December 1996 to record the $374,916,000 extraordinary dividend (consisting primarily of common stock investments) paid by Farmers New World Life Insurance Company to its parent company, Farmers Group, Inc., had no effect on cash (see note G).