The Company owns three buildings in Los Angeles, 15 regional offices and 2 commercial claims centers in which its administrative operations are conducted. In addition, the Company owns a building in Ohio and a building in Washington in which the Life Subsidiaries' operations are conducted.
Premiums. Premiums increased $11.6 million, or 7.3%. This increase is due to growth in renewal and first year business. The increase in renewal premiums is attributable to a 10.3% 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.
Investment Income. Net investment income increased $19.4 million in 1996, or 6.5%, over 1995 due largely to higher bond interest income resulting primarily from a higher invested asset base.
Net Realized Gains. Net realized gains increased by $6.4 million in 1996 due primarily to gains realized on common stock as a result of favorable market conditions.
Total Operating Expenses. Total operating expenses increased from $501.6 million in 1995 to $528.9 million in 1996, an increase of $27.3 million, or 5.4%.
Policyholders' Benefits. Policyholders' benefits expense increased from $316.7 million in 1995 to $335.1 million in 1996, an increase of $18.4 million, or 5.8%. Policy benefits, which consist primarily of death and surrender benefits on life products, increased $2.2 million over 1995 due to an increase in death claims resulting from an increase in average insurance-in-force. Increase in liability for future benefits expense increased from $9.1 million in 1995 to $11.0 million in 1996. This increase was primarily attributable to increases in PWL and other traditional product premiums and to lower terminations in 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 $154.6 million in 1995 to $168.9 million in 1996, or 9.2%, reflecting a 7.0% growth in universal life-type insurance in-force and a 6.0% increase in annuity funds on deposit.
General and Administrative Expenses. General and administrative expenses increased from $61.6 million in 1995 to $64.0 million in 1996, or 3.9%, due to higher salaries and benefits expense.
Provision for Income Taxes. Provision for income taxes increased from $67.5 million in 1995 to $79.2 million in 1996, an increase of $11.7 million. This increase is attributable to the increase in pretax operating income.
Amortization of AIF Contracts and Goodwill. Amortization expense was $102.8 million in both 1995 and 1994. These assets are being amortized on a straight-line basis over forty years.
General and Administrative Expenses. General and administrative expenses decreased from $172.8 million in 1994 to $170.5 million in 1995, a decrease of $2.3 million, or 1.3%.
Net Investment Income. Net investment income increased from $61.8 million in 1994 to $79.5 million in 1995, an increase of $17.7 million, or 28.6%, due to higher yield rates and a larger amount of invested assets in 1995.
Provision for Income Taxes. Provision for income taxes increased from $208.1 million in 1994 to $224.3 million in 1995, an increase of $16.2 million, or 7.8%. This increase was primarily attributable to the increase in pretax operating income between years.
Total Revenues. Total revenues increased from $649.1 million in 1994 to $709.0 million in 1995, an increase of $59.9 million, or 9.2%.
Policy charges. Policy charges increased $23.0 million, or 11.6%, over 1994, reflecting growth in universal life-type insurance-in-force.
Net realized gains. Net realized gains decreased by $15.2 million in 1995 due primarily to lower gains on common stock and bond sales in 1995.
policyholders increased from $136.8 million in 1994 to $154.6 million in 1995, or 13.0%, reflecting a 10.4% growth in universal life-type insurance in-force and a 13.1% increase in annuity funds on deposit.
The principal sources of funds available to the Company are (i) the management fees that it receives for managing the P&C Group, (ii) investment income and (iii) dividends from its subsidiaries. Historically, funds available from the first two of these sources have been sufficient to satisfy the liquidity needs of the Company, and the Company anticipates that such funds will continue to be adequate to satisfy such needs in the future. A portion of the net income of the Life Subsidiaries is available for payment as a dividend to the Company, subject to certain limitations imposed by the insurance laws of the States of California, Ohio and Washington, and additional state taxation. As of December 31, 1996, an aggregate of
Net cash used in financing activities increased $862.4 million, or 437.9%, to $665.5 million in 1996. This decrease in cash was primarily due to the $500.0 million of proceeds received in 1995 as a result of the issuance of the QUIPS. In addition, cash decreased between years due to the repayment of $200.0 million of 8.25% Notes Payable in July 1996 and the fact that cash dividends paid to B.A.T increased $179.7 million, from $285.2 million in 1995 to $464.9 million in 1996.
Independent Auditors' Report 24 Consolidated Financial Statements of Farmers Group, Inc. and Subsidiaries Consolidated Balance Sheets as of December 31, 1996 and 1995 25 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 27 Consolidated Statements of Stockholder's Equity for the years ended December 31, 1996, 1995 and 1994 28 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 29 Notes to Consolidated Financial Statements 30 Quarterly Financial Data (Unaudited) 58
We have audited the consolidated balance sheets of Farmers Group, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, 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, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY Years ended December 31, 1996, 1995 and 1994 (Amounts in thousands)
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). The consolidated financial statements include the Company and its subsidiaries. All material inter-company transactions have been eliminated. Certain amounts applicable to prior years have been reclassified to conform with the 1996 presentation.
Buildings and improvements 10 to 35 years Furniture and equipment 5 to 10 years Data processing equipment and software 5 years
In June 1996, the FASB released SFAS No.125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This Statement, effective for fiscal years beginning after December 31, 1996, establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on a consistent application of a financial-components approach that focuses on the issue of control. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", which delays for one year the effective date of the provisions that apply to certain transactions. These transactions include repurchase agreements, dollar-rolls, securities lending, secured borrowings and collateral. The Company does not expect the adoption of these Statements to have a significant impact on its consolidated financial statements.
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.
Certain policy acquisition costs, principally first-year commissions and other expenses for policy underwriting and issuance (which are primarily related to and vary with the production of new business), are deferred and amortized proportionately over the estimated period during which the related premiums will be recognized as income, based on the same assumptions that are used for computing the liabilities for future policy benefits. Liabilities for future policy benefits are computed principally by means of a net level premium method reflecting estimated future investment yields, mortality, morbidity and withdrawals. Interest rate assumptions range from 2.25% to 9.50%, depending on the year of policy issue. Mortality is calculated principally on select and ultimate tables in common usage in the industry, modified for the Life Subsidiaries' experience, and withdrawals are estimated based primarily on the Life Subsidiaries' experience.
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 $684,380,000 as of December 31, 1996:
of December 31, 1996, an aggregate of $192,219,000 was still available for distribution without approval from the state insurance departments in which the Life Subsidiaries are domiciled.
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 provision 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. This resulted in the transfer of debt securities with an amortized cost of approximately $1.1 billion and net unrealized gains of approximately $51.0 million from held-to-maturity to available-for-sale.
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 years ended December 31 are:
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:
The amortized cost and estimated market value of debt securities owned by 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.
Cash and cash equivalents and short-term marketable securities-The carrying amounts of these items are a reasonable estimate of their fair values.
Fixed maturities, non-redeemable preferred stocks and common stocks-The estimated fair values of bonds, redeemable and non-redeemable preferred stocks and common stocks are based upon quoted market prices, dealer quotes, and prices obtained from independent pricing services.
Notes receivable-affiliate-The fair values are estimated by discounting the future cash flows using the current rates at which similar loans would be made by the Company to borrowers for the same remaining maturities.
Assets held in separate account and liabilities related to separate account-The carrying values are a reasonable estimate of their fair values since assets and liabilities of separate accounts are carried at market value.
Notes payable-The estimated fair values are determined by discounting the estimated future cash flows at a rate which approximates the Company's incremental borrowing rate.
Company obligated manditorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures-The estimated fair values are based on quoted market prices.
Future policy benefits-deferred annuities-The estimated fair values of flexible premium and single premium deferred annuities are based on their cash surrender values.
The securities are marked-to-market on a daily basis and the collateral is adjusted on the next business day. The collateral is invested in highly liquid, fixed income assets with a maturity of less than one year. Income earned from the security lending arrangement was allocated 60% to the Life Subsidiaries and 40% to the institution. Income earned by the Life Subsidiaries was $422,000, $233,000 and $653,000 in 1996, 1995 and 1994, respectively. The collateral under these agreements as of December 31, 1996 and 1995 was $221,216,000 and $195,377,000, respectively, and was recorded in both Other Assets and Other Liabilities of Life Subsidiaries.
Assets of the Regular Plan are held by an independent trustee. Assets and liabilities of the Regular Plan are recorded by Farmers New World Life Insurance Company in Separate Accounts and are not commingled with the general assets and liabilities of that company. Assets held are primarily in fixed maturity and equity investments. The principal liability is for annuity benefit payments of current and future retirees. Assets of the Restoration Plan are considered corporate assets and are held in a grantor trust.
Information regarding the Regular Plan's funded status is not developed separately for the Company and the Exchanges. Information regarding the Restoration Plan pertains only to the Company. The funded status of the Plans for the Company and the Exchanges as of December 1, 1996 and 1995 (the latest date for which information is available) was as follows:
The Company follows the provisions of SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and deferred tax liabilities are recorded to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and the corresponding bases used for financial statements. In September 1996, the Company filed an amended 1994 consolidated federal income tax return which included a "deemed dividend election" for all of its subsidiary companies. The 1994 tax year was the last year the IRS allowed companies to make such an election. This election resulted in a substantial step-up in the tax basis of the stock of each subsidiary. For the Life Subsidiaries, it also triggered a $14.2 million "Policyholders' Surplus Account" distribution for tax purposes (Phase III tax). However, upon acquisition of the Company by B.A.T in 1988, a tax reserve was established for this liability and, as a result, the "Phase III tax" had no effect on the Company's current year net income.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1996 and 1995 are presented in the following tables:
Cash payments for interest were $18,674,000, $18,995,000, and $18,276,000 in 1996, 1995, and 1994, respectively, while cash payments for dividends to the holders of the Company's QUIPS were $42,070,000, $10,414,000, and $0 in 1996, 1995 and 1994, respectively. Cash payments for income taxes were $379,455,000, $315,603,000 and $299,993,000 in 1996, 1995 and 1994, respectively.
As attorney-in-fact, the Company, or its subsidiaries, as applicable, manages the affairs of the P&C Group and receives management fees for the services rendered to the Exchanges. As a result, the Company received management fees from the Exchanges of $1,167,704,000, $1,109,425,000 and $1,058,492,000 in 1996, 1995 and 1994, respectively.
In 1996, a law firm, of which a director of the Company was a partner, received fees for legal services from the Company and the Exchanges totaling $1,853,000. In 1995 and 1994, two law firms, of which directors of the Company were partners, received fees for legal services from the Company and the Exchanges totaling $2,231,000 and $2,192,000, respectively.
As of December 31, 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 1997, $137,000,000 in October 1998 and $135,000,000 in October 1999. Interest on these notes is paid semi-annually at coupon rates of 5.10%, 5.35% and 6.68%, respectively. On October 7, 1996, a three year $135,000,000 note with an interest rate of 4.76% matured and the $135,000,000 note, maturing in October 1999, was subsequently issued at an interest rate of 6.68%. Income earned on the notes outstanding during 1996, 1995 and 1994 was $21,245,000, $20,697,000 and $20,584,000, respectively.
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 December 31, 1995, the Company did not have any outstanding borrowings under the revolving credit agreements. Facility fees were $526,000 for the year ended December 31, 1995 and were reimbursed by the Exchanges. The revolving credit agreements expired in 1996.
As of December 31, 1996, the Company, excluding the Life Subsidiaries, was liable for two mortgages, one with an interest rate of 6.92% maturing in June 1998 and one with an interest rate of 7.11% maturing in June 2004. The amount of principal due within one year is approximately $125,000. As of December 31, 1996, there were no real estate mortgage notes payable by the Life Subsidiaries.
The assets and liabilities held in Separate Accounts relate to the Company's and the Exchanges' employees pension plan. Assets consist primarily of fixed maturity and equity investments. The principal liability is the liability for annuity benefit payments.
Participating business comprises approximately 7.5% of the Life Subsidiaries' total insurance-in-force as of December 31, 1996 and 6.9% of the total insurance-in-force as of December 31, 1995. In addition, participating business represents 2.2% of premium income for the years ended December 31, 1996 and 1995 and 2.3% for the year ended December 31, 1994.
The amount of dividends is determined by the appropriate life company Board of Directors and is paid annually on the policyholder's anniversary date. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales.
On January 23, 1997, the Company announced an agreement to sell The Ohio State Life Insurance Company and Investors Guaranty Life Insurance Company to Great Southern Life Insurance Company, a subsidiary of Americo Life, Inc.. The sale is expected to be completed by April 1, 1997, subject to regulatory approval. The contribution to net income of these subsidiaries for the year ended December 31, 1996 was $25,423,000. The combined net assets of these subsidiaries as of December 31, 1996 was $385,330,000.