The Company's home office is located in Los Angeles and consists of three buildings owned by the Company that occupy approximately 387,940 square feet. In addition, the Company has administrative operations in ten service centers in various locations throughout the country. Nine locations consisting of approximately 929,695 square feet are owned and one location consisting of approximately 263,439 square feet is leased. Furthermore, the Company owns a building in the state of Washington occupying approximately 144,800 square feet in which the operations of Farmers Life are conducted. The Company believes that these properties will be sufficient to serve its needs through 2003.
The following table sets forth summary consolidated income statement data, consolidated balance sheet data and other operating data for the periods indicated. The following consolidated income statement data of the Company for each of the years in the five-year period ended December 31, 2002, and the consolidated balance sheet data of the Company as of December 31, 2002 and as of December 31, for each of the preceding four years have been derived from the Company's audited consolidated financial statements. The following data should be read in conjunction with the Company's Consolidated Financial Statements and related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information appearing elsewhere herein.
- ---------------------------- (1) Includes cash and cash equivalents and marketable securities. (2) On October 23, 2000, a $1,075.0 million special dividend was paid to Allied Zurich in connection with the Zurich capital structure unification in October 2000. (3) The ratio of debt to total capitalization has been determined by dividing the sum of total debt plus QUIPS by stockholders' equity plus QUIPS. (4) The ratio of earnings to fixed charges has been determined by dividing the sum of income before income taxes plus fixed charges by fixed charges. Fixed charges consist of interest, capitalized interest, dividends paid to QUIPS holders, amortization of QUIPS offering expenses and that portion of rent expenses deemed to be interest.
The Company provides management services to the P&C Group Companies and owns and operates the Insurance Subsidiaries. Revenues and expenses relating to these principal business activities are reflected in the Company's Consolidated Financial Statements prepared in accordance with GAAP, which differs from SAP, which the Insurance Subsidiaries are required to use for regulatory reporting purposes.
A description of the Company's major customer and related matters are discussed in Part I, Item 1 of this Report.
Farmers Life, a Washington domiciled insurance company, is a wholly owned subsidiary of FGI. Farmers Life markets a broad line of individual life insurance products, including universal life, term life and whole life insurance and fixed annuity products, predominantly flexible premium deferred annuities as well as variable universal life and variable annuity products. Revenues attributable to traditional life insurance products, such as whole life or term life contracts, as well as structured settlements with life contingencies 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, variable life and variable annuity 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 universal life and annuity policies as well as on variable products include interest credited to policyholder on policy balances as well as benefit claims incurred in excess of policy account balances. Revenues attributable to structured settlements without life contingencies consist of investment income on assets allocated to support the policyholder benefits schedule and expenses consist of interest credited to policyholders on policy balances.
The Company provides reinsurance coverage to the P&C Group Companies through its subsidiary, Farmers Re, which was formed and licensed to conduct business in December 1997. Effective April 1, 2001, the APD reinsurance agreement, which had been in force since January 1998 was cancelled and replaced with a similar APD reinsurance agreement supported by Farmers Re, Zurich affiliates and outside reinsurers. As a result, premiums assumed by Farmers Re, Zurich affiliates and outside reinsurers increased from $1.0 billion to $2.0 billion, with Farmers Re assuming 10%, or $200.0 million. The remaining $1.8 billion is assumed by the Zurich affiliates and outside reinsurance companies identified in the agreement. As a result of this current agreement, on a monthly basis, premiums assumed by Farmers Re decreased from $83.3 million under the old APD agreement to $16.7 million under the current APD agreement. Farmers Re continues to assume a quota share percentage of ultimate net losses sustained by the P&C Group Companies in their APD lines of business. The APD agreement, which can be terminated after 30 days notice by any of the parties, also provides for the P&C Group Companies to receive a ceding commission of 18% of premiums, versus 20% under the old APD agreement, with additional experience commissions that depend on loss experience. Similar to the old APD agreement, this experience commission arrangement limits Farmers Re's potential underwriting gain on the assumed business to 2.5% of premiums assumed. As a result of this APD reinsurance agreement, Farmers Re assumes an underwriting risk.
In addition, effective December 31, 2002, Farmers Re and a Zurich affiliate entered into a 20% Personal Lines Auto Quota Share reinsurance treaty under which they assume a percentage of the personal lines auto business written by the P&C Group of Companies, prospectively. Under this treaty, Farmers Re will assume a 4% quota share of the premiums written and the ultimate net losses sustained in the personal lines auto business written by the P&C Group Companies after all other reinsurance treaties are applied. Underwriting results assumed are subject to a maximum and minimum combined ratio of 112.5% and 97.0%, respectively, and are limited to a pro-rata share of $150.0 million in annual catastrophe losses. The reinsurance agreement, which can be terminated after 60 days notice by any of the parties beginning with the quarter ending December 31, 2003, also provides for the P&C Group Companies to receive a provisional ceding commission of 20% of premiums for acquisition expenses and 17.2% of premiums for other expenses with additional experience commissions that depend on loss experience. As a result of this new quota share reinsurance treaty, Farmers Re assumes an underwriting risk.
Fair Value of Financial Instruments. The fair values of financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, these estimates may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.
Accounting for Internally Developed Software. The Company follows the provisions of Statement of Position No. 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". The Company expenses costs incurred in the preliminary project stage and, thereafter, capitalizes costs incurred in developing or obtaining internal use software. Certain costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized on a straight-line basis over the useful life of the software once it is placed into service. The Company regularly reviews its existing capitalized software assets in order to determine if any should be considered impaired or abandoned.
The following is a summary of recent Financial Accounting Standards Board ("FASB") pronouncements. Please refer to Note 3 for further information related to these pronouncements.
- - In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The provisions of this Statement generally are to be applied prospectively. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements.
- - In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of the Statement are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements.
- - In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock- Based Compensation-Transition and Disclosure". The Company is not impacted by the adoption of this Statement, as it is not involved in stock-based employee compensation.
- - In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities". This Interpretation provides guidance on the identification of entities for which control is achieved through means other than through voting rights, variable interest entities, and how to determine when and which business enterprises should consolidate variable interest entities. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Based on the current Interpretation, the Company does not believe they have variable interest entities.
Amortization of AIF Relationships and Goodwill. Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142. As a result, the Company ceased recording amortization related to goodwill and the AIF relationships. For the year ended December 31, 2001, amortization of the AIF relationships and goodwill totaled $102.8 million. The amortization resulted from purchase accounting adjustments made as a result of the acquisition of the Company by B.A.T in December 1988.
General and Administrative Expenses. General and administrative expenses increased from $314.5 million in 2001 to $333.9 million in 2002, an increase of $19.4 million, or 6.2%. This increase was due primarily to the $27.5 million write-down of internally developed software in 2002 (see Note 9). Partially offsetting this increase was a decrease in expenses resulting from a continued focus on cost controls.
Impairment Losses on Investments. Impairment losses on investments decreased from $57.2 million in 2001 to $43.6 million in 2002, a decrease of $13.6 million, or 23.8%. This decrease was due primarily to a decrease in equity impairments related to common stock.
Provision for Income Taxes. Provision for income taxes increased from $310.5 million in 2001 to $337.1 million in 2002, an increase of $26.6 million, or 8.6%, due mainly to an increase in pretax income between years.
Farmers Management Services. As a result of the foregoing, Farmers Management Services income increased from $438.7 million for the year ended December 31, 2001 to $557.3 million for the year ended December 31, 2002, an increase of $118.6 million, or 27.0%. Excluding the software write-down and the change in the amortization of intangibles, income increased by $48.9 million or 9.3%, between the years ended December 31, 2002 and 2001.
As a result of the current APD quota share reinsurance agreement, which became effective April 1, 2001, Farmers Re's net assumed premiums decreased from $400.0 million for the year ended December 31, 2001 to $200.0 million for the year ended December 31, 2002, a decrease of $200.0 million, or 50.0%. Losses and loss adjustment expenses incurred decreased $159.3 million, or 56.5%, from $282.0 million in 2001 to $122.7 million in 2002 while non-life reinsurance commissions paid decreased $35.7 million, or 33.1%, from $108.0 million in 2001 to $72.3 million in 2002. Income before taxes decreased from $36.0 million in 2001 to $23.4 million in 2002, a decrease of $12.6 million, or 35.0%. This decrease was due primarily to a $10.9 million increase in impairment losses on investments recorded in 2002. Farmers Re's contribution to net income was $17.0 million and $25.1 million in 2002 and 2001, respectively.
disposals were of holdings of WorldCom, Inc., Qwest Capital Funding, Inc. and other telecommunication industry holdings, resulting in losses totaling $43.4 million in 2002.
Policy Benefits. Policy benefits, which consist primarily of death and surrender benefits on life insurance products, increased from $165.1 million in 2001 to $175.7 million in 2002, an increase of $10.6 million, or 6.4%, due to 11.0% growth in the volume of life insurance in-force.
Increase in Liability for Future Benefits. Increase in liability for future benefits expense decreased from $115.3 million in 2001 to $94.8 million in 2002, a decrease of $20.5 million, or 17.8%. This decrease was primarily attributable to the 31.3% decrease in deposits for structured settlements involving life contingencies compared to 2001. Farmers Life had exited the business of writing structured settlements as of December 31, 2002 due to the recent change in the rating of Farmers Life (see Note 1). The $25.5 million decrease in structured settlements liability was partially offset by a $3.9 million, or 15.0%, increase in traditional reserves as in-force has grown 20.9% over prior year.
General Operating Expenses. General operating expenses decreased from $151.6 million in 2001 to $132.4 million in 2002, a decrease of $19.2 million, or 12.7%.
Life Commissions. Life commissions expense decreased from ($0.9) million in 2001 to ($8.5) million in 2002, a decrease of $7.6 million, due primarily to a $7.1 million, or 33.4% growth in reinsurance activity between years.
Operating Expenses. Operating expenses as a percentage of operating revenues decreased from 56.1% for the year ended December 31, 2000 to 55.5% for the year ended December 31, 2001, a decrease of 0.6 percentage points.
Salaries and Employee Benefits. Salaries and employee benefits increased from $406.3 million in 2000 to $417.4 million in 2001, an increase of $11.1 million, or 2.7%, due to higher expenses incurred as a result of increased levels of business activity between years and an increase in employee pension and postretirement expenses. This increase was partially offset by a decrease in profit sharing expense.
General and Administrative Expenses. General and administrative expenses increased from $278.0 million in 2000 to $314.5 million in 2001, an increase of $36.5 million, or 13.1%. This increase was
primarily due to increased levels of business activity between years, an increase in expenses incurred in connection with providing management services to the business assumed from Foremost as well as increased postage expense resulting from the privacy notice requirements called for by the Gramm-Leach-Bliley Act.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense was $42.1 million in each of the years ended December 31, 2001 and 2000.
Provision for Income Taxes. Provision for income taxes decreased from $348.1 million in 2000 to $310.5 million in 2001, a decrease of $37.6 million, or 10.8%, due mainly to a decrease in pretax income between years.
Total Revenues. Total revenues decreased from $805.0 million in 2000 to $783.7 million in 2001, a decrease of $21.3 million, or 2.6%.
the volume of traditional life insurance in-force, as well as a 113.2% increase in structured settlements with life contingencies premiums issued in 2001.
Life Policy Charges. Life policy charges increased from $214.5 million in 2000 to $218.3 million in 2001, an increase of $3.8 million, or 1.8%, reflecting 1.4% growth in universal life-type insurance in-force.
Net Investment Income. Net investment income increased from $322.0 million in 2000 to $331.4 million in 2001, an increase of $9.4 million, or 2.9%, due primarily to an increase in average invested assets.
Net Realized Gains. Net realized gains decreased from $62.2 million in 2000 to $41.3 million in 2001, a decrease of $20.9 million, or 33.6%, due primarily to unfavorable market conditions experienced in 2001.
Policy Benefits. Policy benefits increased from $141.8 million in 2000 to $165.1 million in 2001, an increase of $23.3 million, or 16.4%, due to 9.3% growth in the volume of life insurance in-force in 2001.
Increase in Liability for Future Benefits. Increase in liability for future benefits expense increased from $76.3 million in 2000 to $115.3 million in 2001, an increase of $39.0 million, or 51.1%. This increase was primarily attributable to a 113.2% increase in deposits for structured settlement products.
Amortization of DAC and VOLBA. Amortization expense decreased from $108.8 million in 2000 to $97.4 million in 2001, a decrease of $11.4 million, or 10.5%, due to differences in the mix of business and favorable persistency on the Farmers Flexible Universal Life ("FFUL") product line.
Life Commissions. Life commissions expense decreased from $3.9 million in 2000 to ($0.9) million in 2001, a decrease of $4.8 million, or 123.1%, due to 48.4% growth in reinsurance activity.
Provision for Income Taxes. Provision for income taxes decreased from $90.4 million in 2000 to $56.7 million in 2001, a decrease of $33.7 million, or 37.3% due primarily to a decrease in pretax income between years.
General. As of December 31, 2002 and December 31, 2001, the Company held cash and cash equivalents of $616.7 million and $397.4 million, respectively. In addition, on July 1, 2002, the Company's existing revolving credit agreement expired. On September 26, 2002, the Company entered into a new one-year credit agreement with certain financial institutions. Under this agreement, the Company has an aggregate borrowing facility of $250.0 million in the event such a need should arise (see Note 24). As such, the Company believes that, combined with cash generated from operations, its total invested assets, including cash and short-term investments, are more than sufficient to satisfy the liquidity needs of the Company.
The principal uses of funds by Farmers Management Services are: (i) operating expenses, (ii) dividends to the shareholders of the Company's QUIPS, (iii) capital expenditures and (iv) dividends to its stockholders. In 2002, dividends paid on QUIPS totaled $42.1 million, capital expenditures totaled $123.1 million and cash dividends paid to stockholders totaled $467.0 million.
The principal uses of funds by Farmers Life are: (i) policy benefits and claims, (ii) loans to policyholders, (iii) capital expenditures, (iv) life commissions, (v) operating expenses and (vi) stockholder's dividends. The principal uses of funds by Farmers Re are: (i) the payment of non-life losses and loss adjustment expenses, (ii) the payment of reinsurance commissions and (iii) operating expenses.
In order to maintain the policyholders' surplus of the P&C Group Companies, the Company has, from time to time, purchased surplus notes or certificates of contributions of the P&C Group Companies, receiving certificates of contribution or surplus notes which bear interest at various rates. As of December 31, 2002, the Company held $949.8 million of certificates of contribution and an $87.5 million surplus note of the P&C Group Companies (see Note 11). The Company is under no obligation to purchase these contributions from the P&C Group Companies. However, the Company believes that these purchases of certificates of contribution and surplus notes have helped to support the historical growth in premiums earned by the P&C Group Companies and the related growth in management fees paid to the Company. The Company also believes that it is receiving a fair rate of return on its contributions.
Net cash used in financing activities of the Company decreased from $468.8 million in 2001 to $404.8 million in 2002, resulting in an increase in cash of $64.0 million. This increase was due primarily to a reduction between periods in the net cash outflows associated with Farmers Life's universal life and annuity contracts.
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(2) on page 94 present fairly, in all material respects, the financial position of Farmers Group, Inc. and subsidiaries (the "Company") at December 31, 2002 and 2001, and the results of their operations and their cash flows for the years ended December 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules for the years ended December 31, 2002 and 2001 listed in the index appearing under Item 15(a)(2) on page 94 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data)
FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 2002, 2001 and 2000 (Amounts in thousands)
In December 1988, B.A.T Industries p.l.c. ("B.A.T") acquired 100% ownership of the Company for $5.2 billion 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 fair values at December 31, 1988.
In September 1998, the financial 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 holding company with headquarters in Zurich, Switzerland. This merger was accounted for by ZGH as a pooling of interests under International Accounting Standards ("IAS").
As a result of a unification of the holding structure of the Zurich Financial Services Group in October 2000, Zurich Financial Services was renamed Zurich Group Holding, as noted above, and a new group holding company, Zurich Financial Services, was formed. As such, references to "Zurich" are to the group holding company, Zurich Financial Services ("ZFS").
The Company has AIF relationships with 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. Each policyholder of each Exchange appoints the AIF to provide management services to each Exchange. For such services, the Company earns management fees based primarily on a percentage of gross premiums earned by the Exchanges, their respective subsidiaries, Farmers Texas County Mutual Insurance Company, Foremost County Mutual Insurance Company and Foremost Lloyds of Texas (collectively the "P&C Group Companies"). The P&C Group Companies are owned by the respective policyholders of the Exchanges, Farmers Texas County Mutual Insurance Company 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 Companies.
Farmers Life, a Washington domiciled insurance company, is a wholly owned subsidiary of FGI. Farmers Life markets a broad line of individual life insurance products, including universal life, term life and whole life insurance and fixed annuity products, predominantly flexible premium deferred annuities as well as variable universal life insurance and variable annuity products. These products are sold directly by the Farmers Agency Force. Farmers Life also marketed structured settlement annuities sold by independent brokers. However, as of
Farmers Re, a wholly owned subsidiary of FGI which was formed and licensed to conduct business in December 1997, provides reinsurance coverage to the P&C Group Companies. As of December 31, 2002, Farmers Re participateS in three reinsurance treaties: 1) an auto physical damage ("APD") reinsurance agreement, 2) a 10% All Lines Quota Share reinsurance treaty and 3) a 20% Personal Lines Auto Quota Share reinsurance treaty (See Note 8).
References to the "Insurance Subsidiaries" within the consolidated financial statements are to Farmers Life and Farmers Re. References to "Farmers Management Services" are to the Company excluding the Insurance Subsidiaries.
Revenue Recognition. Through its AIF relationships with the Exchanges, the Company provides non-claims related management services to the P&C Group Companies' business and receives management fees for the services rendered. The Company recognizes management fee revenue according to the revenue recognition criteria established by Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".
As the P&C Group Companies earn gross premiums ratably over the life of the underlying insurance policy, the Company receives and recognizes the corresponding AIF fee ratably over the life of the underlying policies for which it is providing services. The risk of uncollectable premiums is borne by the P&C Group Companies and collectability of the premiums does not affect the amount of revenues the Company recognizes in a given period.
administrative charges for equity-indexed annuities. Consideration received for interest-sensitive insurance, SSNILC, and annuity products are recorded as a liability when received. Policy withdrawal and other charges are recognized as revenue when assessed.
Farmers Re reinsures a percentage of the business written by the P&C Group Companies. Under the APD reinsurance agreement, Farmers Re assumes $200.0 million of annual premiums. Under the 10% All Lines Quota Share reinsurance treaty, Farmers Re assumes a 2% quota share of the premiums written in all lines of business written by the P&C Group Companies after the APD contract is applied. Under the 20% Personal Lines Auto Quota Share reinsurance treaty, Farmers Re assumes a 4% quota share of the personal lines auto business written by the P&C Group Companies after all other reinsurance treaties are applied. Premiums assumed by Farmers Re are earned ratably over the life of the underlying insurance policy.
Intangible Assets. The Company's critical accounting policies related to the valuation of intangible assets include the AIF relationships, Goodwill, Value of Life Business Acquired ("VOLBA") and Deferred Policy Acquisition Cost ("DAC").
Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", and identified the AIF relationships as intangible assets with indefinite useful lives. Under SFAS No. 142, intangible assets with indefinite useful lives are no longer amortized, and as such, the Company no longer records $42.8 million of pretax annual amortization relating to the AIF relationships. In addition, SFAS No. 142 requires that intangible assets not subject to amortization be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company performed impairment tests of the AIF relationships balance of $1.2 billion as of January 1, 2002, as part of the implementation of SFAS No. 142, and then as of December 31, 2002, in accordance with the annual impairment test, using discounted future cash flows. Such tests did not indicate any impairment of the recorded AIF relationships.
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142. Under SFAS No. 142, goodwill is no longer amortized, and as such, the Company no longer records $60.0 million of annual amortization relating to goodwill. In addition, SFAS No. 142 requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances (e.g., a significant adverse change in legal factors or the business climate of the Company, an adverse action by a regulator, a loss of key personnel, etc.) using a two-step process. The first step of the goodwill impairment test identifies a potential impairment by comparing the fair value of the intangible asset with its carrying value. The second step measures the amount of the impairment. The Company performed impairment tests of its Goodwill balance of $1.6 billion as of January 1, 2002, as part of the
VOLBA. At the date of B.A.T's acquisition of the Company, a portion of the purchase price ($662.8 million) was assigned to the VOLBA asset, which represented an actuarial determination of the expected profits from the life business in force at that time. The amount so assigned is being amortized over its actuarially determined useful life with the unamortized amount included in the "Value of life business acquired" line in the accompanying consolidated balance sheets, which amounted to $254.5 million and $274.5 million for the year ended December 31, 2002 and 2001, respectively.
Deferred policy acquisition costs for non-participating traditional life and annuity policies with life contingencies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are made at the date of policy issuance or acquisition and are consistently applied during the lives of the contracts. Deviations from estimated experience are included in operations when they occur. For these contracts, the amortization period is typically the estimated life of the policy.
Non-life DAC. Acquisition costs, consisting primarily of commissions incurred on business related to the two new prospective quota share reinsurance treaties, are deferred and amortized over the period in which the related premiums are earned. Anticipated losses and loss adjustment expenses as well as any estimated remaining costs associated with the treaties are considered in determining the acquisition costs to be deferred. Anticipated investment income is not considered in the deferral of acquisition costs.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". However, this Statement retains the fundamental provisions of SFAS No. 121 for a) recognition and measurement of the impairment of long-lived assets to be held and used and b) measurement of long-lived assets to be disposed of by sale. This Statement also supersedes the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for segments of a business to be disposed of. However, this Statement retains the requirements of APB Opinion No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component (rather than a segment of a business) of an entity that either has been disposed of or is classified as held for sale. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The provisions of this Statement generally are to be applied prospectively. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions". This Statement amends SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions", SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method". This Statement provides guidance on the accounting for the acquisitions of a financial institution. The provisions of this Statement are effective for activity on or after October 1, 2002. The Company is not impacted by the adoption of this Statement as it is not involved in the acquisition of banking or thrift institutions.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities". This Interpretation provides guidance on the identification of entities for which control is achieved through means other than through voting rights, variable interest entities, and how to determine when and which business enterprises should consolidate variable interest entities. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Based on the current Interpretation, the Company does not believe they have variable interest entities.
As of December 31, 2002, the Company had three classes of common stock - Class A Common Stock (the "Class A Shares"), Class B Common Stock (the "Class B Shares") and Class C Common Stock (the "Class C Shares"). Prior to a recapitalization of the Company's capital structure which occurred in connection with a private placement of an aggregate of $1,125,000,000 of securities by six Zurich RegCaPS Funding Trusts on February 9, 2001, the Company had 500 shares of Class A Common Stock, par value $1.00 per share, and 500 shares of Class B Common Stock, par value $1.00 per share. All Class A Shares were wholly owned by ZGH and all Class B Shares were wholly owned by Allied Zurich Holdings Limited ("Allied Zurich"), an affiliated company created during the restructuring of B.A.T.
Subsequently, on February 9, 2001, in connection with the private placement of the $1,125,000,000 of securities, ZGH exchanged 50 Class A Shares for 50 shares of Class C Common Stock, par value $1.00 per share. The Class C Shares were issued in six series (C-1 through C-6). ZGH subsequently contributed each respective series of the Class C Shares to one of six Zurich RegCaPS Funding Limited Partnerships (collectively, the "Partnerships"), which are controlled by ZIC. As a result, upon completion of the recapitalization, 450 Class A Shares were owned by ZGH, 500 Class B Shares were owned by Allied Zurich and 50 Class C Shares were owned by the Partnerships.
The holders of the Class A Shares are entitled to 1.0694444 votes per share and the holders of Class B Shares are entitled to .1111111 of a vote per share (each subject to adjustment in the event of any stock dividend, stock split, stock distribution or combination with respect to any shares of capital stock of the Company) upon the election of directors and on all other matters upon which stockholders generally are entitled to vote. In the event of a liquidation, dissolution or winding up of the Company, the holders of Class A Shares are entitled to share equally and ratably with the holders of Class C Shares in the assets of the Company, if any, remaining after payment of all liabilities of the Company and the Class C Share liquidation preference, to the exclusion of the holders of Class B Shares.
Subject to the rights of the holders of Class C Shares, the holders of Class A Shares and the holders of Class B Shares shall be entitled to receive dividends, when and if declared by the Board of Directors, out of funds legally available therefor.
The holders of Class C Shares are entitled to receive non-cumulative dividends when, as and if declared by the Board of Directors out of funds legally available therefor. No cash dividends may be declared or paid on any Class A Shares, Class B Shares or any other shares of common stock that rank junior to the Class C Shares with respect to payment of dividends, unless (i) full dividends have been declared for payment on the Class C Shares in
an amount at least equal to the greater of (A) the dividends payable or set apart during the dividend period during which such cash dividends are paid at the respective Class C Share indicative rate (as defined in the Certificates of Designations of Class C-1 through Class C-6 Shares) or (B) 7.4503311% (as adjusted as set forth above) of the amount of dividends paid or set apart for payment by the Company on its common shares (including the Class C Shares) during any relevant dividend period, (ii) the Partnerships have set apart or paid the full amount of cash remittances (the "RegCaPS Payments") payable to the holders of the regulatory capital preferred securities (the "RegCaPS") issued by the Partnerships during any RegCaPS Payments period, (iii) the six Zurich RegCaPS Funding LLCs (collectively, the "LLC") who hold the RegCaPS, have set apart or paid certain cash payments during any LLC payment period on the LLC preferred interests issued by each LLC, and (iv) such dividend does not cause the net worth of the Company to be less than $3 billion (as adjusted from time to time).
As of December 31, 2002, the Company held the following amortized intangible assets:
As of December 31, 2002, the Company held the following unamortized intangible assets:
For the year ended December 31, 2002, amortization expense, net of accrued Interest, related to the VOLBA asset totaled $13.9 million. The discount rate used to determine the amortization rate of the VOLBA asset ranged from 3.5% to 9.0%. Estimated amortization, net of accrued interest, related to the VOLBA asset for each of the years in the five-year period ended December 31, 2007 follows:
Revenues associated with universal life products consist of policy charges for the cost of insurance, policy administration fees, surrender charges and investment income on assets allocated to support policyholder account balances. Revenues for deferred annuity products consist of surrender charges and investment income on assets allocated to support policyholder account balances. Expenses include interest credited to policyholder account balances, benefit claims incurred in excess of policyholder account balances and other general expenses. Revenues and expenses related to structured settlements not involving life contingencies are recorded consistent with guidelines for investment contracts, which are not subject to mortality risks. Liabilities for future policy benefits on universal life and deferred annuity products are determined under the retrospective deposit method.
In compliance with a SEC staff announcement, the Company has recorded certain entries to the DAC and VOLBA lines 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. Accordingly, DAC and VOLBA are increased or decreased to reflect what would have been the impact on current and estimated future gross profits, had net unrealized gains or losses on securities been realized at the balance sheet date. Net unrealized gains or losses on securities, within stockholders' equity, also reflect this impact. These entries decreased the DAC and VOLBA assets by $69.5 million and $24.9 million as of December 31, 2002 and 2001, respectively.
Farmers Re, a wholly owned subsidiary of FGI, reinsures a percentage of the business written by the P&C Group Companies. Effective April 1, 2001, the APD reinsurance agreement, which had been in force since January 1998 was cancelled and replaced with a similar APD reinsurance agreement supported by Farmers Re, Zurich affiliates and outside re-insurers. As a result, premiums assumed by Farmers Re, Zurich affiliates and outside re-insurers increased from $1.0 billion to $2.0 billion, with Farmers Re assuming 10%, or $200.0 million. The remaining $1.8 billion is assumed by the Zurich affiliates and outside reinsurance companies identified in the agreement. Additionally, on a monthly basis, premiums assumed by Farmers Re decreased from $83.3 million under the old APD agreement to $16.7 million under the current APD agreement. Farmers Re continues to assume a quota share percentage of ultimate net losses sustained by the P&C Group Companies in their APD lines of business. The agreement, which can be terminated after 30 days notice by any of the parties, also provides for the P&C Group Companies to receive a ceding commission of 18% of premiums, versus 20% under the old APD agreement, with additional experience commissions that depend on loss experience. Similar to the old APD agreement, this experience commission arrangement limits Farmers Re's potential underwriting gain on the assumed business to 2.5% of premiums assumed. As a result of this APD reinsurance agreement, Farmers Re assumes an underwriting risk.
In December 2002, Farmers Re paid the P&C Group Companies $44.8 million in settlement of losses and loss adjustment reserves and $0.4 million of accrued interest as an estimate of a commutation related to the 2002 accident year. A final commutation of the 2002 accident year losses and loss adjustment expenses will be made in May 2003.
In December 2001, Farmers Re paid the P&C Group Companies $19.3 million in settlement of losses and loss adjustment reserves and $0.3 million of accrued interest as an estimate of a commutation related to the 2001 accident year. In May 2002, a final commutation of the 2001 accident year losses and loss adjustment expenses was made. Under this commutation, Farmers Re and the P&C Group Companies ultimately commuted $18.9 million of losses and loss adjustment expenses related to the 2001 accident year.
On March 31, 2001, Farmers Re and the P&C Group Companies commuted $89.9 million of losses and loss adjustment expenses associated with the 2000 accident year. As a result, in May 2001, Farmers Re paid the P&C Group Companies $89.9 million of losses and loss adjustment expenses and $8.8 million of accrued interest in settlement of this commutation. Additionally, on August 15, 2001, Farmers Re and the P&C Group Companies commuted $100.8 million of losses and loss adjustment expenses due to the cancellation of the original APD reinsurance agreement. As a result, Farmers Re paid the P&C Group Companies $100.8 million of losses and loss adjustment expenses and $1.0 million of accrued interest in settlement of this commutation.
As a result of the two new prospective quota share reinsurance treaties, unearned premiums totaling $160.3 million were transferred from the P&C Group Companies to Farmers Re effective December 31, 2002, $90.2 million of which related to the 10% All Lines Quota Share reinsurance treaty and $70.1 million of which
related to the 20% Personal Lines Auto Quota Share reinsurance treaty. On the same date, Farmers Re remitted $33.9 million of reinsurance commissions for acquisition expenses to the P&C Group Companies, $19.9 million for the 10% All Lines Quota Share reinsurance treaty and $14.0 million for the 20% Personal Lines Auto Quota Share reinsurance treaty. Since both reinsurance treaties are prospective and the reinsurance commissions remitted to the P&C Group Companies relate to unearned premiums, Farmers Re capitalized them as deferred acquisition costs at December 31, 2002. Finally, $137.3 million of cash was transferred from the P&C Group Companies to Farmers Re for assuming an estimate of unearned premiums from the new quota share reinsurance agreements, net of reinsurance commissions. This cash transfer included a $10.9 million overpayment which will be held as a liability by Farmers Re until the next cash settlement with the P&C Group Companies, scheduled for May 2003.
Total losses paid by Farmers Re were $121.7 million, $260.2 million and $590.2 million in 2002, 2001 and 2000, respectively, while total loss adjustment expenses were $1.0 million, $2.9 million and $6.7 million in 2002, 2001 and 2000, respectively. Additionally, reinsurance commissions were $72.3 million in 2002, $108.0 million in 2001 and $288.1 million in 2000. Farmers Re had loss reserves of $19.0 million and $18.9 million as of December 31, 2002 and 2001, respectively. As of December 31, 2002, unearned premiums were $160.3 million and non-life DAC was $33.9 million. The decreases between 2001 and 2000 results were due to Farmers Re's reduced retention under the new APD reinsurance agreement. All reinsurance receivables and payables were settled as of December 31, 2002.
The Company follows the provisions of SOP No. 98-1. The Company expenses costs incurred in the preliminary project stage and, thereafter, capitalizes costs incurred in developing or obtaining internal use software. Certain costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized on a straight-line basis over the useful life of the software once it is placed into service.
On September 4, 2002, the Zurich Board of Directors approved a set of strategic initiatives which call for Zurich to refocus its strategic direction on core insurance operations. This replaced Zurich's previous strategy of increasing product density and customer reach through e-based initiatives. In light of this new strategy, the Company undertook a review of its existing capitalized software assets in order to determine which, if any, should be deemed abandoned. This review resulted in the identification of $27.5 million of internally developed software
As of December 31, 2002, the Company held the following notes receivable from related parties:
As a result, as of December 31, 2002, the Company held $95.0 million of notes receivable from UKISA, each with a maturity date of September 2003 and a fixed coupon rate of 2.75%. Interest on the UKISA notes is paid semi-annually and, for the years ended December 31, 2002, 2001 and 2000, income earned totaled $4.7 million, $14.6 million and $45.4 million, respectively.
From time to time, the Company has purchased certificates of contribution or surplus notes of the P&C Group Companies in order to supplement the policyholders' surplus of the P&C Group Companies. Effective December 2001, Farmers Life redeemed a $119.0 million surplus note of the P&C Group Companies and subsequently purchased $107.0 million of certificates of contribution of the P&C Group Companies. These transactions were settled in January 2002.
- An $87.5 million surplus note, issued in March 2000, bearing interest at 8.50% annually and maturing in February 2005.
- $370.0 million of certificates of contribution, issued in March 2000, bearing interest at 7.85% annually and maturing in March 2010.
- $350.0 million of certificates of contribution, issued in November 2001, bearing interest at 6.00% annually and maturing in September 2006.
- Other certificates of contribution totaling $23.3 million which bear interest at various rates.
Interest income related to the certificates of contribution and surplus notes of the P&C Group Companies totaled $71.1 million in 2002, $54.3 million in 2001 and $45.4 million in 2000.
12. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinate Debentures
The Company has two profit sharing plans providing for cash payment to all eligible employees of the Company. The two plans, Deferred Profit Sharing and Cash Profit Sharing, provide for a maximum aggregate expense of 15% of the Company's consolidated annual pretax earnings, as adjusted. The Deferred Profit Sharing Plan, limited to 10% of pretax earnings, as adjusted, or 15% of the salary or wage paid or accrued to eligible employees, provides for an annual contribution by the Company to a trust for eventual payment to employees as provided in the Plan. The Cash Profit Sharing Plan provides for annual cash distributions to eligible employees if certain criteria are met. The Cash Profit Sharing Plan is limited to 5% of pretax earnings, as adjusted, or 5% of eligible employee salaries or wages paid or accrued.
Expense under these plans was $57.5 million, $49.1 million and $55.3 million in 2002, 2001 and 2000, respectively.
There are certain statutory limitations on the distribution of surplus. As of December 31, 2002 and 2001, an aggregate of $215.9 million and $213.0 million, respectively, was available for distribution as dividends by the Insurance Subsidiaries without the approval of the state insurance departments in which they are domiciled. Farmers Life paid a dividend to Farmers Management Services in January 2002 and 2001 of $115.0 million and $112.0 million, 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 market values and for all investments in debt securities. The Company classified all investments in equity and debt securities as available-for-sale under SFAS No. 115, with the exception of an investment held as of December 31, 2001 in Endurance Specialty Insurance Limited ("Endurance") as well as investments held as of December 31, 2002 and 2001 related to the grantor trusts. 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.
As of December 31, 2001, the Company held $50.0 million of common stock of Endurance. The Company purchased the Endurance equity securities in a private placement offer in December 2001. As non-exchange traded securities, these investments were carried at cost as of December 31, 2001 and were reported on the "Other investments" line in the Farmers Management Services section of the consolidated balance sheet. On September 30, 2002, the Company sold the Endurance equity investment at cost for $50.0 million as a result of a
Real estate investments are accounted for on a depreciated cost basis. Real estate acquired in foreclosure and held for sale is carried at the lower of market value or depreciated cost less a valuation allowance. Marketable securities are carried at market. The Standard & Poor's 500 Composite Stock Price Index ("S&P 500") call options are carried at estimated fair value. Other investments, which consist primarily of certificates of contribution of the P&C Group Companies, surplus notes of the P&C Group Companies, policy loans and notes receivable from affiliates, which include the UKISA notes, ZGAUS note and the ZIC note, are carried at the unpaid principal balances.
In compliance with a SEC staff announcement, the Company has recorded certain entries to the DAC and VOLBA lines of the consolidated balance sheets 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.
The sources of investment income on securities owned by Farmers Management Services for the years ended December 31 are:
* Includes $6.0 million, $3.7 million and $1.8 million in 2002, 2001 and 2000, respectively, of unrealized losses associated with the trading securities reported on the "Other assets" line of the consolidated balance sheets.
The Company regularly reviews its investment portfolio to determine whether declines in the value of investments are other than temporary as defined by SFAS No. 115. The Company's review for declines in value includes analyzing historical and forecasted financial information as well as reviewing the market performance of similar types of investments. As a result of the Company's review, the Company determined that some of its investments had declines in value that were other than temporary as of December 31, 2002, 2001 and 2000 due to unfavorable market and economic conditions. Accordingly, for the year ended December 31, 2002 and December
31, 2001, the Company recorded $119.9 million and $151.0 million, respectively, of impairment losses on investments primarily in the equity portfolios. For the year ended December 31, 2000, Farmers Life recorded $22.4 million of impairment losses on fixed income securities. Impairment losses were recorded for each reporting segment and, for the year ended December 31, 2002, amounted to $43.6 million, $21.9 million and $54.4 million for Farmers Management Services, Farmers Re and Farmers Life, respectively, primarily in the equity portfolios. For the year ended December 31, 2001, the Company recorded $57.2 million, $11.0 million and $82.8 million for Farmers Management Services, Farmers Re and Farmers Life, respectively, of impairment losses on investments primarily in the equity portfolios.
Impairment losses on investments owned by Farmers Management Services are determined based on the market value of those investments on the date impairment is determined to be other than temporary. Impairment losses on investments for the years ended December 31 are:
The amortized cost, gross unrealized gains and losses and estimated market values of investments in equity securities pertaining to non-redeemable preferred stocks and common stocks owned by the Insurance Subsidiaries are as follows:
Proceeds from sales of available-for-sale securities received by the Company were $1.4 billion, $2.5 billion and $2.1 billion in 2002, 2001 and 2000, respectively. Gross gains of $56.5 million, $100.4 million and $174.9 million and gross losses of $190.4 million, $196.1 million and $54.6 million were realized on sales and write-downs during 2002, 2001 and 2000, respectively.
The Company sells an equity-indexed annuity product. At the end of its seven-year term, this product credits interest to the annuitant at a rate based on a specified portion of the change in the value of the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), subject to a guaranteed annual minimum return.
The cash requirement of the S&P 500 call options consist of the initial premium paid to purchase the call options. Should a liability exist to the annuitant at maturity of the annuity policy, the termination or maturity of the option contracts will generate positive cash flow to the Company. The appropriate amount of cash flow will then be remitted to the annuitant based on the respective participation rate. The S&P 500 call options are generally expected to be held for a seven-year term, but can be terminated at any time.
There are certain risks associated with the S&P 500 call options, primarily with respect to significant movements in the United States stock market and counterparty non-performance. The Company believes that the counterparties to its S&P 500 call option agreements are financially responsible and that the counterparty risk associated with these transactions is minimal.
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.
Certificates of contribution and surplus notes of the P&C Group Companies. The carrying amounts of these items are a reasonable estimate of their fair values.
Notes receivable - affiliates. 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.
Policy loans. The carrying amounts of these items are a reasonable estimate of their fair market value because interest rates are generally variable and based on current market rates.
The Company follows the principles of SFAS No. 118, "Accounting by Creditors for Impairment of a Loan". This Statement requires that an impaired loan be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral, if the loan is collateral dependent. For the years ended December 31, 2002 and 2001, no loans were considered to be impaired, and no impaired loan allowance was recorded.
The Company has security lending arrangements with a securities lending provider. The arrangements in effect as of December 31, 2002 authorize the lending provider to lend securities held in the Company's portfolio to a list of authorized borrowers. Concurrent with delivery of the securities, the borrower provides the Company's lending provider with cash collateral equal to 102% of the market value of securities subject to the "loan".
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 arrangements was allocated 75% to the Company and 25% to the lending provider for the years ended December 31, 2002, 2001 and 2000. Income earned by the Company was $0.3 million in 2002 and 2001 and $0.7 million in 2000. The collateral under these arrangements as of December 31, 2002 and 2001 was $219.2 million and $45.5 million, respectively.
The Company's policy is to fund the amount determined under the aggregate cost method, provided it does not exceed funding limitations. There has been no change in funding policy from prior years, and in 2002, a contribution of $71.6 million was made to the Regular Plan. The Company's share of this contribution was $34.9 million.
The weighted average interest rate used in the above benefit computations was 7.00% in 2002, 7.25% in 2001, and 7.75% in 2000. Beginning in 2003, the initial medical inflation rate is assumed to be 9.00% and will be graded over a 4-year period to 6.00% and level thereafter, and contribution levels from retirees were the same as applicable medical cost increases where defined benefits exist. The weighted average rate of increase in future compensation levels used in determining the actuarial present value of the accumulated benefit obligation was 4.80% in 2002 and 4.70% in 2001 and 2000.
Rental expense incurred by the Company was $33.6 million, $36.1 million and $33.6 million in 2002, 2001 and 2000, respectively.
On August 5, 2002, the Texas Attorney General and Texas Department of Insurance initiated a legal action against Farmers Insurance Exchange, Fire Insurance Exchange and certain of their affiliates which alleged certain improprieties in the pricing of a portion of their homeowners insurance policies written in the state of Texas. FGI and certain of its subsidiaries were also named as parties in that action. On December 18, 2002, the parties executed a Settlement Agreement respecting this litigation, which, when approved by the court, will provide for certain rate reductions and refunds to Texas policyholders. No fines or penalties are included, and there is no admission of wrongdoing. The settlement has also allowed Farmers Insurance Exchange and Fire Insurance Exchange, which had previously sent notices terminating all of their homeowner policies, to continue operating in the homeowners insurance market in Texas. Although it was a defendant in the initial lawsuit, the settlement imposes no direct financial burdens on FGI. There is a possible indirect financial burden on FGI which will depend upon renewal rates subsequent to the Settlement.
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:
In 2002, the Company received $30.0 million from ZGAUS in partial settlement of a $250.0 million note receivable (see Note 10). Also, in 2002, the Company issued a $100.0 million note receivable with ZIC (see Note 10). In addition in 2002, $137.3 million of cash was transferred from the P&C Group Companies to Farmers Re for assuming the unearned premiums from the new quota share reinsurance agreements, net of reinsurance commissions (see Note 8).
In 2000, the Company used $580.0 million of proceeds received from the sale of the notes receivable from UKISA (see Note 10) to help fund the payment of the $1,075.0 million special dividend associated with the Zurich capital structure unification in October 2000. Also, in 2000, the Company purchased $370.0 million of certificates of contribution of the P&C Group Companies to help fund the Exchanges' acquisition of Foremost.
As of December 31, 2002 and 2001, the Company did not have any outstanding borrowings under the current or former revolving credit agreements. Facility fees were $0.2 million, $0.3 million and $0.4 million for years ended December 31, 2002, 2001 and 2000, respectively, and were fully reimbursed by the P&C Group Companies.
The assets and liabilities held in Separate Accounts relate to the variable universal life insurance and variable annuity products offered by Farmers Life. The assets and liabilities held in the Separate Accounts are legally segregated from the general assets and liabilities of the Company. The assets of the Separate Accounts are carried at fair market value. The Separate Accounts liabilities represent the contract holders' claims to the related assets and are carried at the fair market value of the assets. Investment income and realized capital gains and losses of the Separate Accounts accrue directly to the contract holders and therefore are not included in the Company's consolidated statements of income and comprehensive income. Revenues to the Company from the Separate Accounts generally consist of policy administration, surrender and mortality fees.
Participating business, which consists of group business, comprised approximately 9.6% of Farmers Life's total insurance in-force as of December 31, 2002 and 10.4% of the total insurance in-force as of December 31, 2001. In addition, participating business represented 2.8% of Farmers Life's premium income for the year ended December 31, 2002, 2.2% for the year ended December December 31, 2001 and 2.0% for the year ended December 31, 2000.
Farmers Life has retention limits for new policy issuances ceded which set the maximum retention on new issues at $2.0 million per life for the Farmers Flexible Universal Life policy; $1.5 million per life for all Traditional policies except Farmers Yearly Renewable Term; and $0.8 million per life for Farmers Yearly Renewable Term. The excess is reinsured with a third party reinsurer. In addition, beginning in January 2000, Farmers Life entered into a co-insurance agreement with a third party insurer to reinsure the Farmers Level Term 2000 5, 10 and 20 year products, which replaced the Farmers Premier 5, 10 and 20 year products. Premiums ceded under all reinsurance agreements totaled $83.3 million in 2002, $61.2 million in 2001 and $33.5 million in 2000. Life reinsurance receivables totaled $99.1 million and $65.2 million at December 31, 2002 and 2001, respectively.
The Company provides management services to the P&C Group Companies and owns and operates the life and reinsurance subsidiaries. These activities are managed separately as each offers a unique set of services. As a result, the Company is comprised of the following three reportable operating segments as defined in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information": the management services segment, the life insurance segment and the reinsurance segment.
Through its AIF relationships with the Exchanges, the Company's management services segment (Farmers Management Services) is responsible for providing non-claims related management services to the P&C Group Companies. The P&C Group Companies collectively represent the Company's largest customer. Management fees
The Company's management uses an IAS basis of accounting for evaluating segment performance and determining how resources should be allocated. This differs from the basis used in preparing the Company's financial statements included in the SEC Form 10-K and 10-Q reports, which is based on GAAP and therefore excludes the effects of all IAS adjustments.
As of December 31, 2001, the Company recorded amortization for both goodwill and the AIF relationships on a GAAP basis. As a result, the Company recorded an IAS adjustment to reverse the GAAP amortization of goodwill on an IAS basis, under which there is no goodwill. As of December 31, 2002, the Company no longer records amortization related to goodwill and the AIF relationships on a GAAP basis due to SFAS 142. As a result, the Company no longer records an IAS adjustment for the reversal of the GAAP amortization of goodwill. However, the Company now records an IAS adjustment for the amortization of the AIF relationships on an IAS basis.
The Company accounts for intersegment transactions as if they were to third parties and, as such, records the transactions at current market prices. There were no reportable intersegment revenues among the Company's three reportable operating segments for the years ended December 31, 2002, 2001 and 2000.
The Company operates throughout the U.S. and does not earn revenues or hold assets in any foreign countries.