Income statement data includes the effect of amortizing the purchase accounting entries related to B.A.T's acquisition of the Company in December 1988. Major items incorporated in the purchase price of the Company include goodwill and the value of the AIF contracts of the P&C Group (see Note A). The amortization of these two items, which is being taken on a straight-line basis over forty years, reduced annual pretax income by approximately $102.8 million in each of the years 1994 through 1998.
Total Expenses. Total expenses as a percentage of operating revenues increased from 55.6% in 1997 to 59.0% in 1998, an increase of 3.4 percentage points. This increase was due to $21.1 million of merger related expenses and a $46.0 million write-off of impaired assets in 1998. Excluding these two items, expenses as a percentage of revenues decreased by 1.5 percentage points between years.
Salaries and Employee Benefits. Salaries and employee benefits decreased from $335.8 million in 1997 to $328.6 million in 1998, a decrease of $7.2 million, or 2.1%, primarily due to a reduction in employee complement due to increased operating efficiency as a result of automation through the greater use of information technology systems.
General and Administrative Expenses. General and administrative expenses increased from $202.6 million in 1997 to $204.1 million in 1998 due to a $2.4 million write-off of impaired assets as well as a $0.8 million increase in Year 2000 Project related expenses. Despite these two items, the Company has held the increase in general and administrative expenses between years to less than one percent as a result of continued attention to cost control and automation through the greater use of information technology systems.
Net Investment Income. Net investment income decreased from $144.2 million in 1997 to $135.1 million in 1998, a decrease of $9.1 million, or 6.3%. Of this decrease, $8.6 million was due to the redemption of certificates of contribution of the P&C Group and the subsequent issuance of the BAFS notes receivable at lower interest rates (see Note T). The remaining decrease was due substantially to lower market yield rates.
Net Realized Gains. Net realized gains decreased from $73.4 million in 1997 to $62.4 million in 1998, a decrease of $11.0 million, due to the fact that significant gains were realized in 1997 in connection with restructuring the equities portfolio.
In 1998, Farmers Re assumed $1.0 billion of premiums, incurred $655.1 million of non-life losses and loss adjustment expenses and incurred $319.9 million of non-life reinsurance commissions expense. For the year ended December 31, 1998, Farmers Re contributed $37.2 million to income before taxes and $25.4 million to net income.
Total Revenues. Total revenues increased from $638.6 million in 1997 to $660.6 million in 1998, an increase of $22.0 million, or 3.4%.
Net Realized Gains/(Losses). Net realized gains/(losses) decreased $23.6 million, from a $10.1 million gain in 1997 to a $13.5 million loss in 1998. This decrease was due mainly to realized losses recognized as a result of a $26.0 million writedown of Russian bond holdings in 1998.
Policy Benefits. Policy benefits, which consist primarily of death and surrender benefits on life products, increased $21.6 million over 1997 to $134.0 million, due to growth in the volume of life insurance in-force and an increase in mortality experience between periods.
General and Administrative Expenses. General and administrative expenses increased from $40.5 million in 1997 to $41.5 million in 1998, an increase of just $1.0 million. This increase resulted mainly from increased premium taxes.
Total Operating Expenses. Total operating expenses as a percentage of operating revenues decreased from 56.0% in 1996 to 55.6% in 1997, a decrease of 0.4 percentage points.
Net Investment Income. Net investment income increased from $112.8 million in 1996 to $144.2 million in 1997, an increase of $31.4 million, or 27.8%. This increase was primarily due to a larger invested asset base as a result of common stock received as part of a $374.9 million dividend from Farmers Life to Farmers Group, Inc. in December 1996 and the reinvestment of cash generated by the sale of OSL and IGL.
Net Realized Gains. Net realized gains increased from $5.1 million in 1996 to $73.4 million in 1997, an increase of $68.3 million, due primarily to gains realized on equities formerly held by Farmers Life that were sold while restructuring the portfolio.
Dividends on Preferred Securities of Subsidiary Trusts. Dividends expense related to the $500.0 million of QUIPS issued in 1995 was $42.1 million in both 1996 and 1997.
Life Policy Charges. Policy charges increased $12.5 million in 1997, or 6.6% over 1996, reflecting a 4.2% growth in universal life-type insurance in-force.
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 Farmers Life's common stock portfolio was transferred to FGI as part of the 1996 dividend.
Life Policyholders' Benefits and Charges. Life policyholders' benefits expense and charges increased from $260.3 million in 1996 to $274.5 million in 1997, an increase of $14.2 million, or 5.5%.
Increase in Liability for Future Benefits. Increase in liability for future benefits expense increased from $11.4 million in 1996 to $15.7 million in 1997. This increase was primarily attributable to lower terminations on older whole life business carrying higher future benefit provisions and increased PWL sales in 1997 and 1996.
Amortization of DAC and VOLBA. Amortization expense increased from $80.8 million in 1996 to $94.7 million in 1997. This increase reflects the continued growth in the volume of universal life-type and traditional business in-force.
Commissions. Commissions decreased from $18.3 million in 1996 to $17.3 million in 1997, or 5.5%. The decrease results from IGL's commutation, in the third quarter of 1997, of the block of business ceded to Farmers Life under a reinsurance treaty.
Many computer systems in use today were designed and developed using two digits, rather than four, to specify the year. As a result, such systems will recognize "00" as the year 1900 rather than the year 2000. This could cause many computer applications to fail completely or to create erroneous results unless corrective measures are taken. As early as 1995, the Company's management recognized that its information systems were at risk to produce erroneous results due to the effect of the century rollover. Significant efforts have been expended to gain a complete understanding of Year 2000 implications and to develop a strategy to make the Company's and the P&C Group's systems Year 2000 compliant. The costs associated with the Year 2000 Project are being expensed as incurred. The cumulative costs through December 31, 1998 totaled $17.3 million, of which $3.5 million was allocated to the P&C Group. Total costs of the project are expected to be approximately $23.2 million, of which approximately $5.4 million is expected to be allocated to the P&C Group.
To remedy the Year 2000 issue, management has devised a three-phase plan:
Phase I -"Awareness and Initial Impact Assessment". This phase was completed in May 1996. During this phase, Year 2000 "Impact Assessment" was performed using a mainframe analysis tool to determine which areas were at risk.
Phase II -"Year 2000 Workpackage and Development Blueprint Project". This phase was completed in November 1996 and consisted of creating a comprehensive master plan which included establishing and prioritizing clusters (groups of similar computer programs) and agreeing upon a definition of what would be acceptable Year 2000 compliance. In addition, a timeframe was established for the conversion, compliance testing and the implementation of Year 2000 compliant programs into production.
Phase III -"Year 2000 Conversion and Implementation". The Company is currently in the process of converting, implementing and testing these Year 2000 conversion programs. Management expects this phase to be completed by mid-1999.
The Year 2000 issue may not only affect the Company's information technology ("IT") systems but also its non-IT systems. The Company has assessed the readiness of its non-IT systems and believes that in the event of an interruption of these systems, contingency plans have been established such that no major disruptions will occur.
The first drafts of the Company's Year 2000 contingency plans have been completed. These plans will be reviewed and updated as more information becomes available. In the event that the Company's vendors do not expect to be Year 2000 compliant, the Company's contingency plans may include replacing such vendors. The operations of the Company and the P&C Group are such that in the event all electronic communications are down, the Company and the P&C Group could continue to operate until an alternative communication source is acquired.
The principal sources of funds available to the Company are (i) the management fees that it receives for providing management services to the P&C Group, (ii) investment income and (iii) dividends from its subsidiaries. Historically, funds available from the first two of these sources have been sufficient to satisfy the liquidity needs of the Company, and the Company anticipates that such funds will continue to be adequate to satisfy such needs in the future. A portion of the net income of Farmers Life is available for payment as a dividend to the Company, subject to certain limitations imposed by the insurance laws of the State of Washington and additional state taxation. As of December 31, 1998, an aggregate of $115.9 million is available for distribution as a dividend without approval of the state insurance department (see Note I). Additionally, as of December 31, 1998, the Company had available revolving credit facilities enabling it to borrow up to $500.0 million in the event such a need should arise (see Note V).
Farmers Life. The principal uses of funds by Farmers Life are (i) policy benefits and claims, (ii) loans to policyholders, (iii) capital expenditures, (iv) operating expenses and (v) stockholder's dividends. The principal sources of funds available to Farmers Life are premiums and amounts earned from the investment of premiums and deposits. These sources of funds have historically satisfied the liquidity needs of Farmers Life.
Independent Auditors' Report 23 Consolidated Financial Statements of Farmers Group, Inc. and Subsidiaries Consolidated Balance Sheets as of December 31, 1998 and 1997 24 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 26 Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997 and 1996 27 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 28 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 29 Notes to Consolidated Financial Statements 30 Quarterly Financial Data (Unaudited) 61
We have audited the accompanying consolidated balance sheets of Farmers Group, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the Table of Contents at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands)
FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
The accompanying consolidated financial statements of Farmers Group, Inc. ("FGI") and its subsidiaries (together "the Company") have been prepared in accordance with generally accepted accounting principles ("GAAP"). All material inter-company transactions have been eliminated. Certain amounts applicable to prior years have been reclassified to conform with the 1998 presentation. The preparation of the Company's financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The Company is attorney-in-fact ("AIF") for 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. As AIF, FGI, or its subsidiaries, as applicable, provides certain management services to the Exchanges, their respective subsidiaries and Farmers Texas County Mutual Insurance Company (collectively the "P&C Group") and receives compensation based on a percentage of gross earned premiums. The management services generate a substantial portion of the Company's revenue and profits and, as a result, the Company's ongoing financial performance depends on the volume of business written by, and the efficiency and financial strength of, the P&C Group. A portion of the purchase price ($1,709,043,000) associated with B.A.T's acquisition of the Company was assigned to these AIF contract relationships. The value so assigned is being amortized on a straight-line basis over forty years.
Prior to April 15, 1997 the Company's life insurance operations were conducted by its three wholly owned subsidiaries. A portion of the purchase price ($662,778,000) was assigned to the "Value of Life Business Acquired" ("VOLBA"), which represented an actuarial determination of the expected profits from the business in force at the date of B.A.T's acquisition of the Company. The amount so assigned is being amortized over its actuarially determined useful life with the unamortized amount included in "Deferred Policy Acquisition Costs and Value of Life Business Acquired" in the accompanying consolidated balance sheets.
On April 15, 1997, upon receipt of regulatory approval, the Company sold two of its life insurance subsidiaries, The Ohio State Life Insurance Company ("OSL") and Investors Guaranty Life Insurance Company ("IGL"), to Great Southern Life Insurance Company, a subsidiary of Americo Life, Inc.. The sale of these subsidiaries resulted in a $19,019,000 gain and was reported on the "Gain on sale of subsidiaries" line of the income statement. In addition, taxes
associated with the sale increased 1997 tax expense by $26,826,000 and were reflected on the "Provision for income taxes" line. Both of these amounts were reflected in the "Management services to property and casualty insurance companies; and other" section of the Company's consolidated income statement for the year ended December 31, 1997. The decision to sell these subsidiaries was part of the Company's strategic plan to focus its life insurance efforts on the growth of its remaining life insurance subsidiary, Farmers New World Life Insurance Company ("Farmers Life"), by far its largest life insurance company, through increased sales to the P&C Group's customer base. Farmers Life markets a broad line of individual life insurance products, including universal life, term life and whole life insurance, and annuity products, predominately flexible premium deferred annuities. These products and services are sold directly by the P&C Group's agents.
On December 22, 1997, a definitive agreement was reached to merge B.A.T's Financial Services Businesses, which included the Company, with Zurich Insurance Company ("Zurich"). In June 1998, the merger was approved by the shareholders of B.A.T and Zurich. In September 1998, this merger was completed and the businesses of Zurich and B.A.T's Financial Services Businesses were transferred to Zurich Financial Services ("ZFS"), a new Swiss company with headquarters in Zurich. 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 Share"), and one share of Class B Common Stock, par value $1.00 per share ("Income Share"). Under the merger agreement, all Ordinary Shares became wholly owned by ZFS 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 ZFS as a pooling of interests and, therefore, no purchase accounting adjustments were made to the Company's assets and liabilities.
The Company's properties are depreciated over the following estimated useful lives:
Buildings and improvements 10 to 35 years Furniture and equipment 5 to 10 years Data processing equipment and software 5 to 10 years
In February 1997, the Financial Accounting Standards Board ("FASB") released Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This Statement, effective for financial statements issued for periods ending after December 15, 1997, established 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.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This Statement, effective for fiscal periods beginning after December 15, 1997, established standards for reporting and displaying comprehensive income and its components. This Statement mandated that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement with the same prominence as
other financial statements. As a result of adopting this Statement, the components of comprehensive income are now stated in the consolidated statements of comprehensive income.
Traditional product premiums are recognized as revenues when they become due and future benefits and expenses are matched with such premiums so that the majority of profits are recognized over the premium-paying period of the policy. This matching of revenues and expenses is accomplished through the provision for future policy benefits and the amortization of deferred policy acquisition costs ("DAC").
Certain policy acquisition costs, principally first-year commissions and other expenses for policy underwriting and issuance (which are primarily related to and vary with the production of new business), are deferred and amortized proportionately over the estimated period during which the related premiums will be recognized as income, based on the
same assumptions that are used for computing the liabilities for future policy benefits. Liabilities for future policy benefits are computed principally by means of a net level premium method reflecting estimated future investment yields, mortality, morbidity and withdrawals. Interest rate assumptions range from 2.25% to 9.00%, depending on the year of policy issue. Mortality is calculated principally on select and ultimate tables in common usage in the industry, modified for actual experience, and withdrawals are estimated based primarily on experience.
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 and benefit claims incurred in excess of policyholder account balances. Liabilities for future policy benefits on universal life and deferred annuity products are determined under the retrospective deposit method. DAC is amortized in relation to the present value of expected gross profit margins on the policies, after giving recognition to differences between actual and expected gross profit margins to date. DAC and VOLBA also include amounts associated with the unrealized gains and losses recorded as a component of stockholders' equity in accordance with the application of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, DAC and VOLBA are increased or decreased to reflect what would have been the impact on 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 $49,015,000 and $43,447,000 as of December 31, 1998 and 1997, respectively.
Farmers Re is a wholly owned subsidiary of the Company. On January 1, 1998, Farmers Re entered into an auto physical damage reinsurance agreement with the P&C Group. This agreement provided 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 agreement also provided 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.
As a result of the merger between B.A.T's Financial Services Businesses and Zurich in 1998, the Company recorded various merger related expenses totaling $21,056,000, of which $16,545,000 related to losses the Company will incur in connection with taking over the management of Zurich's United States personal lines business. In addition, $2,728,000 related to the write-off of redundant capitalized software and $1,783,000 related to miscellaneous audit, legal and travel expenses incurred by the Company in connection with the merger.
F. Certificates of contribution and surplus note of the P&C Group
Conditions governing repayment of these amounts are outlined in the certificates of contribution and the surplus note. Generally, repayment may be made only when the surplus balance of the issuer reaches a certain specified level, and then only after approval is granted by the issuer's governing Board and the appropriate Department of Insurance.
On July 10, 1998, the Company received $675,647,000 from the P&C Group as follows:
- Redemption of a $100,000,000 certificate of contribution, issued on December 20, 1996, bearing interest at 8.95% annually.
- Redemption of a $135,000,000 certificate of contribution, issued on September 30, 1996, bearing interest at 8.95% annually.
Statutory capital and surplus of Farmers Life was $922,426,000 and $817,588,000 as of December 31, 1998 and 1997, respectively. Statutory net income for the year ended December 31, 1998 was $98,796,000, while statutory net income for the year ended December 31, 1997 was $128,461,000, reflecting the results of Farmers Life for the year and the results of OSL and IGL through April 15, 1997. Combined statutory net income of the Life Insurance Subsidiaries was $167,517,000 for the year ended December 31, 1996.
There are certain statutory limitations on the distribution of surplus. As of December 31, 1998, $115,923,000 is available for distribution without approval from the Washington State Department of Insurance, the state in which Farmers Life is domiciled.
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. As of December 31, 1998 and 1997, the Company classified all investments in equity and debt securities as available-for-sale under SFAS No. 115 with the exception of $53.0 million in 1998 and $47.0 million in 1997 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 investments classified as 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. 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 cost. The Standard & Poor's 500 Composite Stock Price Index
The sources of investment income on securities owned by the Company (excluding the Insurance Subsidiaries) for the years ended December 31 are:
The sources of investment income on securities owned by the Insurance Subsidiaries for the years ended December 31 are:
Hedge accounting is used to account for the call options as Farmers Life 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. 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. The amount of unrealized hedging gains/(losses) was $3,511,000 and ($151,000) in 1998 and 1997, respectively.
The following methods and assumptions were used to estimate the fair value of financial instruments as of December 31, 1998 and 1997:
Notes receivable-affiliate. The fair values are estimated by discounting the future cash flows using the current rates at which similar loans would be made by the Company to borrowers for the same remaining maturities.
The Company follows the principles of SFAS No. 118, "Accounting by Creditors for Impairment of a Loan" (which amends SFAS No. 114). 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.
The total recorded investment in impaired mortgage loans and the amount of recorded investment for which an allowance for credit losses exists as of December 31 follows:
Upon B.A.T's purchase of the Company in 1988, the Company allocated part of the purchase price to its portion of the Regular Plan assets in excess of the projected benefit obligation at the date of acquisition. The asset is being amortized for the difference between the Company's net pension cost and amounts contributed to the Plan. The unamortized balance as of December 31, 1998 and 1997 was $20,622,000 and $24,304,000, respectively.
The Company uses the projected unit credit cost actuarial method for attribution of expense for financial reporting purposes. The interest cost and the actuarial present value of benefit obligations were computed using a weighted average interest rate of 6.75% in 1998 and 7.25% in 1997 and 1996, while the expected return on plan assets was computed using a weighted average interest rate of 9.25% in 1998 and 9.00% in 1997 and 1996. The weighted average rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 4.50% in 1998 and 5.00% in 1997 and 1996.
The funded status of the entire plan, which includes the Company and the P&C Group, as of December 1, 1998 and 1997 (the latest date for which information is available), was as follows:
The Company has long-term operating lease commitments on equipment and buildings, with options to renew at the end of the lease periods. As of December 31, 1998, the remaining commitments payable over the next five years under these leases were:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1998 and 1997 are presented in the following tables:
As AIF, the Company, or its subsidiaries, as applicable, manages the affairs of the P&C Group and receives management fees for the services rendered. As a result, the Company received management fees from the P&C Group of $1,271,763,000, $1,241,153,000 and $1,167,704,000 in 1998, 1997 and 1996, respectively.
Certain directors of the Company are partners in legal firms that received fees for legal services from the Company and the P&C Group. These fees totaled $6,544,000, $5,208,000 and $1,853,000 in 1998, 1997 and 1996, respectively.
In addition, on September 3, 1998, the Company, using $407,000,000 of proceeds from the B.A.T notes redemption and $650,000,000 of proceeds from the redemption of the certificates of contribution of the P&C Group (see Note F), issued $1,057,000,000 of notes receivable to BAFS. These notes are fixed rate medium-term notes with maturity dates as follows: $200,000,000 in September 2000, $207,000,000 in September 2001, $200,000,000 in September 2002, $200,000,000 in September 2003 and $250,000,000 in September 2004. Interest on these notes is paid semi-annually at coupon rates of 5.44%, 5.48%, 5.67%, 5.71% and 5.78%, respectively. Income earned on these notes through December 31, 1998 was $19,481,000.
Cash payments for interest were $2,671,000, $2,247,000 and $17,305,000 in 1998, 1997 and 1996, respectively, while cash payments for dividends to the holders of the Company's QUIPS were $42,070,000 in 1998, 1997 and 1996. Cash payments for income taxes were $423,803,000, $430,588,000 and $379,455,000 in 1998, 1997 and 1996, respectively.
In July 1996, the Company used $200,000,000 of proceeds it received from the P&C Group in connection with the redemption of $200,000,000 of certificates of contribution of the P&C Group, made in 1986, to extinguish $200,000,000 of 8.25% Notes Payable the Company issued in July 1986.
As a result of the adoption of SFAS No. 115, Farmers Life decreased the DAC asset and increased the VOLBA asset to account for the impact on estimated future gross profits of the net unrealized gains or losses on securities.
As the Company is the exclusive AIF of the P&C Group, the management services segment is primarily responsible for providing management services to the P&C Group. Management fees earned from the P&C Group totaled $1,271,763,000, $1,241,153,000 and $1,167,704,000 for the years ended 1998, 1997 and 1996, respectively. The life insurance segment provides individual life insurance products, including universal life, term life and whole life insurance and annuity products. Finally, the reinsurance segment provides reinsurance coverage to a percentage of the auto physical damage business written by the P&C Group.
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 intersegment revenues among the Company's three reportable operating segments for the years ended 1998, 1997 or 1996.
(g) Amount includes PGAAP adjustments related to the amortization of the DAC (($20.2) million) and VOLBA ($23.9 million) assets.
(d) Amount includes PGAAP adjustments associated with the AIF contracts ($1,367.2 million) and goodwill ($1,921.4 million).
(g) Amount includes PGAAP adjustments related to the amortization of the DAC (($25.2) million) and VOLBA ($28.1 million) assets.