10-K/A 1 0001.txt 1 ---------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 Commission File Number 33-94670-01 FARMERS GROUP, INC. Incorporated in Nevada I.R.S. Employer Identification No. 4680 Wilshire Boulevard 95-0725935 Los Angeles, California 90010 (323) 932-3200 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered --------------------- ----------------------- 8.45% Cumulative Quarterly Income New York Stock Exchange Preferred Securities, Series A (QUIPS) (liquidation preference $25 per share)* 8.25% Cumulative Quarterly Income New York Stock Exchange Preferred Securities, Series B (QUIPS) (liquidation preference $25 per share)* *Issued by Farmers Group Capital (Series A) and Farmers Group Capital II (Series B) and the payments of trust distributions and payments on liquidation or redemption are guaranteed under certain circumstances by Farmers Group, Inc., the owner of 100% of the common securities issued by Farmers Group Capital and Farmers Group Capital II, Delaware statutory business trusts. Securities registered pursuant to Section 12(g) of the Act: None. 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Registrant's Common Stock outstanding on December 31, 2000 was 1,000 shares. 2 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California on FARMERS GROUP, INC. ___________________________________________ (Registrant) Date: April 5, 2001 By: /s/ Julian R.M. Harvey ___________________________________________ Julian R.M. Harvey, Vice President, Finance 3 ITEM 1. Business The Company General. The Company's principal activities are the provision of management services to the P&C Group and the ownership and operation of the Insurance Subsidiaries. As of December 31, 2000, the Company had total assets of $12.3 billion, stockholders' equity of $6.3 billion and for the period ended December 31, 2000, the Company had consolidated operating revenues of $3.4 billion. As of December 31, 2000, the Insurance Subsidiaries had total assets of $7.2 billion, combined SAP capital and surplus (including asset valuation reserve) of $1.7 billion, life policies-in-force of 1.2 million and for the period ended December 31, 2000, the Insurance Subsidiaries had combined SAP life premiums and deposits received of $0.6 billion and non-life reinsurance premiums of $1.0 billion. The financial results and assets and liabilities of the P&C Group are not reflected in the consolidated financial statements of the Company. In December 1988, B.A.T Industries p.l.c. ("B.A.T") acquired 100% ownership of the Company through its wholly owned subsidiary BATUS Financial Services. Immediately thereafter, BATUS Financial Services was merged into FGI. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded in the Company's consolidated balance sheets based on their estimated market values at December 31, 1988. In September 1998, the financial services businesses of B.A.T, which included the Company, were merged with Zurich Insurance Company ("ZIC"). The businesses of ZIC and the financial services businesses of B.A.T were transferred to Zurich Group Holding ("ZGH"), formerly known as Zurich Financial Services, a Swiss company with headquarters in Zurich, Switzerland. As a result, each two shares of the Company's prior outstanding stock were recapitalized into one share of Class A Common Stock, par value $1.00 per share ("Ordinary Shares"), and one share of Class B Common Stock, par value $1.00 per share ("Income Shares"). Under the merger agreement, all Ordinary Shares became wholly owned by ZGH and all Income Shares became wholly owned by Allied Zurich Holdings Limited, an affiliated company created during the restructuring of B.A.T. This merger was accounted for by ZGH as a pooling of interests under International Accounting Standards. Operating Segments Financial information by operating segment can be found in Note Z. Following are descriptions of the Company's operating segments. Provision of Management Services to the P&C Group; and Other. The Company is attorney-in-fact ("AIF") for the Exchanges, which operate in the property and casualty insurance industry. On March 7, 2000, the Exchanges acquired Foremost Corporation of America and its subsidiaries ("Foremost"), a prominent writer of insurance for manufactured homes, recreational vehicles and other specialty lines. Each policyholder of the Exchanges appoints the Company as the exclusive AIF to provide management services to the P&C Group. For such services, the Company earns management fees based primarily on a percentage of gross premiums earned by the P&C Group. The P&C Group is owned by the policyholders of the Exchanges, FTCM and Foremost County Mutual Insurance Company as well as the underwriters of Foremost Lloyds of Texas. Accordingly, the Company has no ownership interest in the P&C Group nor is the Company directly affected by the underwriting results of the P&C Group. This is in contrast to a typical property and casualty insurance holding company which depends on dividends from owned and operated subsidiaries which are subject to fluctuations in underwriting results. The management fees comprise a significant part of the Company's revenue and, as a result, the Company's ongoing financial performance depends on the volume of business written by, and the business efficiency and financial strength of, the P&C Group. As AIF, the Company provides management services to the non-claims side of the P&C Group's business. These management services include selecting risks, preparing and mailing policy forms and invoices, collecting premiums and performing certain other administrative and managerial functions. The P&C Group is responsible for its own claims functions, including the settlement and payment of claims and claims adjustment expenses. The P&C 4 Group is also responsible for the payment of commissions and bonuses for agents and district managers, and its own premium and income taxes. The Company is contractually permitted to receive a management fee based on the gross premiums earned by the P&C Group. The range of fees has varied by line of business over time. During the past five years, aggregate management fees have averaged between 12% and 13% of gross premiums earned by the P&C Group. In order to enable the P&C Group to maintain appropriate capital and surplus while offering competitive insurance rates, the Company has historically charged a lower management fee than the contractually permitted fee of 20% (25% in the case of the Fire Insurance Exchange). The Company has been able to do this while maintaining appropriate profit margins through enhanced operating efficiencies that encompass the use of economies of scale and technology and the standardization of procedures. The P&C Group has reported a growing volume of premiums, which has generated a corresponding rise in management fee income to the Company. Gross premiums earned by the P&C Group on a U.S. GAAP basis were $11.4 billion, $10.8 billion and $10.3 billion for 2000, 1999 and 1998, respectively, giving rise to management fee revenues to the Company of $1.49 billion, $1.40 billion and $1.27 billion, respectively, for the same years. The P&C Group markets personal auto, homeowners, selected commercial and specialty insurance products. For the year ended December 31, 2000, approximately 59.1% of net premiums earned was from auto insurance policies, 22.9% was from homeowner policies and the remainder was primarily from commercial policies. As of December 31, 2000, the P&C Group had total assets of $16.1 billion, surplus as regards policyholders of $3.8 billion, policies-in-force of 17.6 million and for the year ended December 31, 2000, had gross premiums earned of $11.4 billion on a U.S. GAAP basis. The Company, through its wholly owned subsidiary Prematic Service Corporation ("Prematic"), allows individuals and businesses purchasing insurance from one or more members of the P&C Group and Farmers Life to combine, if they so choose, all premiums due into a single payment. In practice, Prematic combines amounts due from a single insured for all policies in-force into a single amount and then bills the insured on a periodic basis. For this service, Prematic collected service fees totaling $81.6 million in 2000 and generated net income of $25.7 million for the year. FGI has certain other nonmaterial subsidiaries, the results of which are included in the Company's consolidated results. Life Insurance. On April 15, 1997, the Company sold two of its life insurance subsidiaries, OSL and IGL, to Great Southern Life Insurance Company, a subsidiary of Americo Life, Inc. These subsidiaries contributed $5.5 million to net income in 1997. The Company's remaining life insurance subsidiary, Farmers Life, markets a broad line of individual life insurance products, including universal life, term life and whole life insurance, structured settlements and annuity products, predominantly flexible premium deferred annuities. In 2000, Farmers Life entered the variable universal life and annuities markets. As of December 31, 2000, Farmers Life provided insurance to nearly 1.2 million people and managed approximately $1.7 billion of annuity funds. Farmers Life's investment philosophy emphasizes long-term fundamental value in the selection of the investment mix for its portfolio. As of December 31, 2000, approximately 77.4% of Farmers Life's portfolio was invested in fixed income securities and cash and 6.4% in equity securities and owned real estate. As of December 31, 2000, approximately 93.6% of Farmers Life's fixed income securities were rated investment grade. Farmers Life's ratio of SAP capital and surplus (including asset valuation reserve) to total assets as of December 31, 2000 was 22.3%. Farmers Reinsurance Company. Farmers Re is a wholly owned subsidiary of FGI. On January 1, 1998, Farmers Re entered into an auto physical damage reinsurance treaty with the P&C Group. This treaty provides for monthly premiums of $83.3 million and recoveries of a quota share percentage of ultimate net losses sustained by the P&C Group in its auto physical damage lines of business. This treaty, which will remain in effect until terminated by 5 either party, also provides for the P&C Group to receive a provisional ceding commission of 20% of premiums with additional experience commissions that depend on loss experience. This experience commission arrangement limits Farmers Re's potential underwriting gain on the assumed business to 2.5% of premiums assumed. Under this quota share reinsurance treaty, Farmers Re assumed $1,000.0 million of premiums in 2000, 1999 and 1998. Total losses and loss adjustment expenses paid by Farmers Re were $596.9 million, $554.8 million and $549.2 million in 2000, 1999 and 1998, respectively, while total reinsurance commissions paid were $288.1 million in 2000, $313.7 million in 1999 and $319.9 million in 1998. In March 2000, Farmers Re and the P&C Group commuted $106.4 million of losses and loss adjustment expenses associated with the 1999 accident year. As a result, in May 2000, Farmers Re paid the P&C Group $106.4 million of losses and loss adjustment expenses and $9.0 million of accrued interest in settlement of this commutation. Similarly, in March 1999, Farmers Re and the P&C Group commuted $105.9 million of losses and loss adjustment expenses associated with the 1998 accident year. In order to settle this commutation, in May 1999, Farmers Re paid the P&C Group $105.9 million of losses and loss adjustment expenses and $8.2 million of accrued interest. Employees As of December 31, 2000, the Company had 7,533 employees. Business Environment Strategic Objectives. The Company's strategic objective is to assist the Farmers Insurance Group of Companiesr in providing world-class personal insurance and a full range of financial services solutions to individuals, families and small businesses, thereby earning them the reputation of being first choice in protecting and building people's assets within their chosen markets. The Company intends to achieve this objective by (i) maintaining its long-standing tradition of providing high-quality customer service, (ii) expanding the Company's portfolio of value-added products and services, (iii) cross-selling insurance products and services to the P&C Group's more than 10.5 million existing customers, (iv) investing in technology to improve the efficiency and quality of service, (v) capitalizing on the strong brand name recognition of Farmers Insurance Group of Companies in their 41 state operating territory and (vi) forming strategic alliances to capitalize on the distribution capabilities of the agency force. Marketing and Distribution. The P&C Group and Farmers Life operate using federally registered trade names, including Farmers Insurance Group of Companiesr, Farmers Insurance Groupr and Farmersr, and distribute their respective insurance products in 29 states (primarily in western and midwestern states) through a common network of direct writing agents and district managers. As of December 31, 2000, this network consisted of approximately 15,000 direct writing agents and approximately 500 district managers, each of whom is an independent contractor. The size, efficiency and scope of this agency force have made it a major factor in the Company's growth. Each direct writing agent is required to first submit business to the insurers in the Farmers Insurance Group of Companies within the classes and lines of business written by such insurers. To the extent that such insurers decline such business, or do not underwrite it, the direct writing agents may offer the business to other insurers. Farmers' direct writing agents market to family accounts and small businesses. They leverage these relationships using an extensive portfolio of products to increase the number of policies per household or account. The P&C Group's existing relationships with more than 10.5 million customers provide a potential opportunity for future growth in policies-in-force and life insurance sales. Higher retention rates and profitability are expected to be achieved on business written with households having multiple policies. Farmers promotes its brand name throughout its operating territory through television, radio and print advertising on both a national and local basis. To further assist the direct writing agency force in marketing Farmers' products, they are provided access to the Farmers Agency Information Management System which enables the agent to deliver high-quality consumer focused service at the point of sale. Furthermore, Farmers' formalized policyholder 6 recontact program, the "Farmers Friendly Reviewr", builds customer loyalty and provides a vehicle for enhanced policy retention and future internal growth through the cross-selling of property and casualty and life products. Additionally, in 2000, Farmers completed the rollout of its Agency Dashboard to the entire direct writing agency force in its core 29-state territory. The Agency Dashboard is a secure internet website that the Farmers agency force can use to obtain forms, manuals, sales brochures and online training, as well as the latest news and bulletins they need to efficiently run their businesses. In a rapidly evolving U.S. personal lines market place, the Agency Dashboard gives Farmers' agents a major competitive edge, taking advantage of internet technology. In 1999, the Company and the P&C Group expanded their operations into twelve new eastern states and expanded into new specialty lines of business, such as recreational products. This was a result of the merger with ZIC and was accomplished with the assistance of Zurich Personal Insurance employees, who became employees of either the Company or the P&C Group as of January 1, 2000. The distribution of Farmers' products in these new eastern states is accomplished through a network of approximately 800 independent agents, many of whom have established books of business. Additionally, in 2000, the Exchanges' acquisition of Foremost enabled the P&C Group to increase its presence in the specialty homeowners market and enabled the P&C Group's direct writing agency force to distribute Foremost products. Foremost writes insurance throughout the United States, particularly in southern and southwestern states. Foremost's insurance products are primarily offered through three distribution channels: general and independent agents, mobile home and recreational vehicle dealer agents and direct marketing. Competition. Property and casualty insurance is a very competitive industry with approximately 3,300 insurers operating in the United States. Many property and casualty insurers with a small all-lines national market share have a significant market share within a single state or a specialty market. The P&C Group competes in its selected markets through brand name recognition of the Farmers Insurance Group of Companies, customer service, product features, financial strength, price and the agency force. There is substantial competition among insurance companies seeking customers for the types of products sold by Farmers Life. Approximately 1,500 life insurance companies in the United States offer products similar to those offered by Farmers Life, and many use similar marketing techniques. Farmers Life competes on the basis of customer service, product features, financial strength and price. Many of the products offered by Farmers Life contain significant cash accumulation features; therefore, these products compete with product offerings of banks, mutual funds and other financial institutions as well. Regulatory and Related Matters. The Insurance Subsidiaries and the P&C Group are subject to extensive state regulatory oversight in the jurisdictions in which they do business. The Company and the P&C Group constitute an insurance holding company system as defined by the insurance laws and regulations of various jurisdictions. As such, certain transactions between an insurance company and any other member company of the system, including investments in subsidiaries and distributions by an insurance company to its shareholders, are subject to regulation and oversight by the state of domicile of the applicable insurance company and certain other states where the insurance company writes a substantial amount of insurance business. Insurers having insufficient statutory capital and surplus are subject to varying degrees of regulatory action depending on the level of capital inadequacy. As of December 31, 2000, neither the Insurance Subsidiaries nor the P&C Group were subject to such regulatory actions. Most of the business of Farmers Life and the P&C Group is subject to regulation with respect to policy rates and related matters. In addition, assessments are levied against Farmers Life and the P&C Group as a result of participation in various types of mandatory state guaranty associations. Existing federal laws and regulations affect the taxation of life insurance products and insurance companies. Investments During the years ended December 31, 2000, 1999 and 1998, the Insurance Subsidiaries had pretax net investment income and realized investment gains/ (losses) of $414.5 million, $360.4 million and $292.6 million, 7 respectively, and the Company other than the Insurance Subsidiaries (collectively, the "Noninsurance investment portfolio") had pretax net investment income and realized investment gains of $195.6 million, $192.7 million and $197.5 million, respectively. As of December 31, 2000, the book value of the Insurance Subsidiaries investment portfolio was approximately $5.6 billion and the book value of the Noninsurance investment portfolio was approximately $1.5 billion. The Board of Directors of the Company is responsible for developing investment policies and the Investment Committee, which is comprised of eleven officers of the Company who are appointed by the Board of Directors, is responsible for administering such policies. During 1998, Zurich Scudder Investments, Inc., formerly known as Scudder Kemper Investments, Inc., took over management of the Insurance Subsidiaries investment portfolio and the Noninsurance investment portfolio in accordance with these policies. Prior to that, the Company's investment department managed these portfolios. The investment philosophy for both the Insurance Subsidiaries investment portfolio and the Noninsurance investment portfolio emphasizes long-term fundamental value in the selection of the investment mix. For the Insurance Subsidiaries, the assets backing the Farmers Life interest sensitive investment portfolio are internally segregated along product lines in order to closely match the funding assets with the underlying liabilities to policyholders. The asset/liability matching system is the basis by which credited interest rates are determined. In the Noninsurance investment portfolio, excluding certificates of contribution and surplus notes of the P&C Group and notes from affiliates, relatively short maturities are maintained to ensure liquidity. The Insurance Subsidiaries investment portfolio and the Noninsurance investment portfolio are both comprised of a broad range of assets, including corporate fixed income securities, mortgage-backed securities, taxable and tax-exempt government securities, preferred stock, common stock, owned real estate, mortgage loans and short-term instruments. The Insurance Subsidiaries investment portfolio also includes policy loans and Standard & Poor's 500 Composite Stock Price Index ("S&P 500") call options. Approximately 20.3% of the Noninsurance investment portfolio consists of notes issued by Zurich Financial Services (UKISA) Limited, formerly known as British American Financial Services (UK and International), Ltd., ("UKISA"), a subsidiary of ZGH, and 16.8% consists of a note issued by Orange Stone (Delaware) Holdings Limited, formerly known as Old Stone (Delaware) Holdings Limited, ("OSDH"), also a subsidiary of ZGH. Approximately 12.5% and 8.9% of the Noninsurance investment portfolio and the Insurance Subsidiaries investment portfolio, respectively, consists of certificates of contribution and surplus notes of the P&C Group. See Item 13 and Notes F and G. Approximately 94.2% of the fixed income securities in the Insurance Subsidiaries investment portfolio are rated investment grade and approximately 96.3% of the fixed income securities in the Noninsurance investment portfolio are rated investment grade. Approximately 59.1% of the mortgage-backed securities in the Insurance Subsidiaries investment portfolio are guaranteed by the Government National Mortgage Association ("GNMA"), Federal Housing Authority ("FHA"), Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC"), and approximately 87.1% of the remaining 40.9% are rated "AAA". Approximately 36.1% of the mortgage-backed securities in the Noninsurance investment portfolio are guaranteed by GNMA, FHA, FNMA or FHLMC, and the remaining 63.9% are rated "AAA". 8 The following table sets forth the book value of each portfolio, by asset category, as of December 31, 2000 and 1999. Book Value of Invested Assets (Amounts in millions)
As of December 31, ------------------------------------------------------------- 2000 1999 ------------------------- --------------------------- Book Value % Book Value % ---------- --------- ---------- ---------- Insurance Subsidiaries Fixed income securities $ 4,375.3 77.5 % $ 4,376.3 85.0 % Mortgage loans 37.0 0.6 35.9 0.7 Equity securities 304.9 5.4 213.4 4.2 Owned real estate 89.4 1.6 66.7 1.3 Cash and cash equivalents 84.4 1.5 96.0 1.9 Certificates of contribution and surplus notes of the P&C Group 502.5 8.9 119.0 2.3 Policy loans 218.2 3.8 201.7 3.9 S&P 500 call options 26.3 0.5 32.7 0.6 Other 9.9 0.2 6.7 0.1 --------- ------- ---------- ---------- Total $ 5,647.9 100.0 % $ 5,148.4 100.0 % ========= ======= ========== ========== Noninsurance Fixed income securities $ 302.2 20.3 % $ 578.3 23.0 % Mortgage loans 0.1 0.0 0.1 0.0 Equity securities 242.1 16.3 334.2 13.3 Owned real estate 69.7 4.7 49.5 2.0 Cash and cash equivalents 132.3 8.9 217.5 8.7 Certificates of contribution and surplus notes of the P&C Group 184.8 12.5 23.3 0.9 UKISA notes 302.0 20.3 1,057.0 42.1 OSDH note 250.0 16.8 250.0 10.0 Other 3.3 0.2 0.8 0.0 --------- ------- ---------- ---------- Total $ 1,486.5 100.0 % $ 2,510.7 100.0 % ========= ======= ========== ==========
Investment Accounting Policies. The Company follows the provisions of Statement of Financial Accounting Standards ("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 market values and for all investments in debt securities. As of December 31, 2000 and 1999,the Company classified all investments in equity and debt securities as available-for-sale under SFAS No. 115, with the exception of $61.1 million in 2000 and $59.7 million in 1999 which relate to a grantor trust and are classified as trading securities under SFAS No. 115. The available-for-sale investments are reported on the balance sheet at market value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a component of stockholders' equity. The trading investments are reported on the "Other assets" line of the consolidated balance sheet at market value with both realized and unrealized gains and losses included in earnings, net of tax, in the year in which they occur. In compliance with a Securities and Exchange Commission ("SEC") staff announcement, the Company has recorded certain entries to the Deferred Policy Acquisition Costs ("DAC") and Value of Life Business Acquired ("VOLBA") line of the consolidated balance sheet in connection with SFAS No. 115. The SEC requires that companies record entries to those assets and liabilities that would have been adjusted had the unrealized investment gains or losses from securities classified as available-for-sale actually been realized, with corresponding credits or charges reported directly to stockholders' equity. 9 Real estate held for investment is accounted for on a depreciated cost basis. Real estate held for sale is carried at the lower of fair value less selling costs or depreciated cost less a valuation allowance. Marketable securities are carried at market. Other investments, which consist primarily of the UKISA notes receivable, the OSDH note receivable, certificates of contribution of the P&C Group, surplus notes of the P&C Group and policy loans, are carried at the unpaid principal balances. S&P 500 call options, which are held by Farmers Life, are carried at estimated fair value. Unrealized gains and losses resulting from changes in the estimated fair value of the call options are recorded as an adjustment to the interest liability credited to policyholders. In addition, realized gains and losses from maturity or termination of the call options are offset against the interest credited to policyholders during the period incurred. Premiums paid on call options are amortized to net investment income over the term of the contracts. Fixed Income Securities. As of December 31, 2000, approximately 77.5% of the Insurance Subsidiaries investment portfolio and 20.3% of the Noninsurance investment portfolio were invested in fixed income securities. These investments included taxable and tax-exempt government securities, domestic and foreign corporate bonds, redeemable preferred stock and mortgage-backed securities. Approximately 94.2% and 96.3% of the fixed income securities in the Insurance Subsidiaries investment portfolio and Noninsurance investment portfolio, respectively, were rated investment grade. The following table sets forth the market values of the various categories of fixed income securities included within the portfolios as of December 31, 2000. Value of Fixed Income Securities (Amounts in millions)
Insurance Subsidiaries Noninsurance Total ---------------------- ----------------------- ----------------------- Market Market Market Value % Value % Value % ----------- -------- ----------- --------- ----------- --------- Mortgage-backed $ 2,002.1 45.8 % $ 103.1 34.1 % $ 2,105.2 45.0 % Corporate 1,851.3 42.3 28.5 9.4 1,879.8 40.2 U.S. Government 262.5 6.0 0.4 0.1 262.9 5.6 Municipal 165.7 3.8 159.5 52.8 325.2 7.0 Foreign 63.1 1.4 0.0 0.0 63.1 1.3 Redeemable preferred stock 30.6 0.7 10.7 3.6 41.3 0.9 --------- ------- -------- ------- --------- ------- Total $ 4,375.3 100.0 % $ 302.2 100.0 % $ 4,677.5 100.0 % ========= ======= ======== ======= ========= =======
Credit Ratings. The National Association of Insurance Commissioners ("NAIC") maintains a valuation system that assigns quality ratings known as "NAIC designations" to publicly traded and privately placed fixed income securities. The NAIC designations range from 1 to 6, with categories 1 (highest) and 2 considered investment grade and categories 3 through 6 (lowest) considered non-investment grade. As of December 31, 2000, the Insurance Subsidiaries held $253.8 million in below investment grade bonds, representing 4.5% of total invested assets, and the Noninsurance investment portfolio held $10.7 million in below investment grade bonds, representing 0.7% of total invested assets. Mortgage-backed Securities. Mortgage-backed securities ("MBS") are the largest component of the Insurance Subsidiaries fixed income portfolio, representing approximately 45.8% of its fixed income portfolio, as of December 31, 2000. The Noninsurance investment portfolio's MBS represented approximately 34.1% of its fixed income portfolio as of December 31, 2000. Approximately 59.1% of the MBS in the Insurance Subsidiaries investment portfolio are guaranteed by various government agencies and government sponsored entities, including the GNMA, FHA, FNMA or FHLMC, and 87.1% of the remaining 40.9% are rated "AAA". Approximately 36.1% of the MBS in the Noninsurance investment portfolio are guaranteed by GNMA, FHA, FNMA or FHLMC, and the remaining 63.9% are rated "AAA". The primary risk in holding MBS is the cash flow uncertainty that arises from changes to prepayment speeds as interest rates fluctuate. To reduce the uncertainties surrounding the cash flows of MBS, the Insurance Subsidiaries investment portfolio held significant MBS investments in collateralized mortgage obligations ("CMOs") including $704.4 million of planned amortization classes ("PACs") and $18.0 million of 10 targeted amortization classes ("TACs"), and the Noninsurance investment portfolio held $5.0 million of PACs. These securities provide protection by passing a substantial portion of the risk of prepayment uncertainty to other tranches. Mortgage Loans. As of December 31, 2000, the Insurance Subsidiaries investment portfolio included mortgage loans with an aggregate book value of approximately $37.0 million, or 0.6%, of total invested assets, and the Noninsurance investment portfolio included mortgage loans of $0.1 million. All mortgage loans included in the Insurance Subsidiaries investment portfolio are secured by first mortgages. The majority of the mortgage loan portfolio consists of loans secured by office buildings, light industrial properties and retail properties located primarily in unanchored shopping centers. Exposure to potential losses from future mortgage loan foreclosures and the operation or sale of properties acquired through foreclosures is limited because the Insurance Subsidiaries have not issued any mortgage loans since 1989, and the majority of the individual remaining mortgage loan balances are less than $1.0 million. Equity Securities. In order to diversify and to limit its exposure in any single market sector, the Company's common stock portfolio is invested in the equities of many of the 3,000 largest United States Companies, which represent approximately 98% of the investable United States equity market. Owned Real Estate. As of December 31, 2000, the Insurance Subsidiaries investment portfolio included owned real estate investments with a book value of $89.4 million, or 1.6% of total invested assets, and the Noninsurance investment portfolio included owned real estate investments with a book value of $69.7 million, or 4.7% of total invested assets. The Insurance Subsidiaries real estate holdings fall into two categories: real property assets that were acquired directly as an equity investment and foreclosed equity real estate properties. The Noninsurance investment portfolio owned real estate holdings were all acquired directly as equity investments. Problem Investments-Fixed Income Securities. In 2000, the Company wrote down approximately $22.4 million in fixed income securities held in the Insurance Subsidiaries investment portfolio. As of December 31, 2000, none of the fixed income securities held in the Noninsurance investment portfolio or the Insurance Subsidiaries investment portfolio were classified as "problem" or "potential problem" assets. Problem Investments-Mortgage Loan Investments. As of December 31, 2000, none of the mortgage loans held by the Insurance Subsidiaries investment portfolio or the Noninsurance investment portfolio were classified as "troubled loans".