Net Realized Gains. Net realized gains decreased by $20.1 million, from $30.2 million in 1996 to $10.1 million in 1997 due to the fact that FNWL's common stock portfolio was transferred to Farmers Group, Inc. as part of the 1996 dividend.
million of which were purchased in 1986 and repaid in 1996, see Note D). In addition, in 1991, the Company arranged for two subsidiaries of B.A.T to purchase an aggregate of $400.0 million of surplus notes of two subsidiaries of the Exchanges. The Company has, from time to time, made other surplus contributions to the Exchanges totaling approximately $34.4 million, receiving certificates of contribution which bear interest at various rates. The Company believes that these purchases of surplus certificates and notes have helped to support the historical growth in premiums earned and the related growth in management fees paid to the Company.
Net cash used in investing activities decreased from $532.1 million in 1996 to $351.9 million in 1997, an increase in cash of $180.2 million, or 33.9%, between years. This increase in cash was principally due to $336.7 million of proceeds received from the sale of OSL and IGL and a $200.0 million net decrease in the purchase of surplus certificates of the Exchanges between years ($0 in 1997 versus a net $200.0 million purchase in 1996). Partially offsetting this increase in cash was an increase in net purchases of investments available-for-sale of $381.5 million.
The excess of the purchase price over the fair value of the net assets ("Goodwill") of the Company at the date of acquisition ($2,401,755,000) is being amortized on a straight-line basis over forty years. The carrying amount of the Goodwill is regularly reviewed for indications of impairment in value which in the view of management are other than temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which the Company operates, (2) profitability analyses and (3) cashflow analyses. As of December 31, 1997, the reported value and the remaining life of Goodwill are considered appropriate.
In 1997, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This Statement 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. This Statement was amended by SFAS No. 127, "The 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 adoption of these Statements did not have a material impact on the Company's consolidated financial statements.
In February 1997, the FASB released SFAS No. 128, "Earnings per Share". This Statement, effective for financial statements issued for periods ending after December 15, 1997, establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The Company does not have any publicly held common stock and, therefore, is not subject to the requirements of this Statement.
Hedge accounting is used to account for the call options as FNWL believes that the options reduce the risks associated with increases in the account value of the annuities that result from increases in the S&P 500 Index. The call options effectively hedge the annuity contracts since they are both purchased and sold with identical parameters. Periodically, the value of the assets (S&P 500 call options) are matched to the potential liability (annuity contracts) to ensure the hedge has remained effective. The annuities were written based on a seven year investment term, absent early termination by participants. Therefore, the anticipated hedged transaction (i.e., payment of interest to the policyholder at the end of the investment term and maturity of the call option) for each annuity is generally expected to occur in seven years or less. For the year ended December 31, 1997, the amount of unrealized hedging losses deferred was $151,000.
The Company has two noncontributory defined benefit pension plans (the Regular Plan and the Restoration Plan). The Regular Plan covers substantially all employees of the Company and the Exchanges who have reached age 21 and have rendered one year of service. Benefits are based on years of service and the employee's compensation during the last five years of employment. The Restoration Plan provides supplemental retirement benefits for certain key employees of the Company.