DAC. The Company recognizes traditional life product premiums 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 DAC. 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.
Salaries and Employee Benefits. Salaries and employee benefits increased from $406.3 million in 2000 to $417.4 million in 2001, a change 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. For additional information regarding the Company's pension plans, please see Note R.
As a result of the new quota share reinsurance agreement which became effective April 1, 2001, Farmers Re's assumed premiums decreased from $1,000.0 million for the year ended December 31, 2000 to $400.0 million for the year ended December 31, 2001, a decrease of $600.0 million, or 60.0%. Losses and loss adjustment expenses incurred were $282.0 million in 2001 and $686.9 million in 2000 and non-life reinsurance commissions paid were $108.0 million in 2001 and $288.1 million in 2000. Income before taxes decreased from $77.3 million in 2000 to $36.0 million in 2001, a decrease of $41.3 million, or 53.4%. This decrease was due primarily to the decrease in underwriting gains between years resulting from the new reinsurance agreement, a $20.9 million decrease in realized gains due to unfavorable market conditions experienced during 2001 and the $11.0 million of impairment losses on investments recorded in 2001. Farmers Re's contribution to net income was $25.1 million and $52.6 million in 2001 and 2000, respectively.
General and Administrative Expenses. General and administrative expenses increased from $266.3 million in 1999 to $278.0 million in 2000, an increase of $11.7 million, or 4.4%. This increase was a result of expenses incurred in connection with providing management services to the business assumed from Foremost. Partially offsetting this increase in expense between years was $3.7 million of Year 2000 Project related expenses incurred in 1999. No similar expenses were incurred in 2000.
Life Policy Charges. Life policy charges increased $3.9 million in 2000, or 1.8%, over 1999, reflecting growth in universal life-type insurance in-force.
Net Realized Gains. Net realized gains increased $38.0 million, or 157.0%, from $24.2 million in 1999 to $62.2 million in 2000 due primarily to an increase in gains realized on stock sales.
Life Net Commissions. Life net commissions expense decreased from $13.5 million in 1999 to $3.9 million in 2000 due to higher reinsurance activity.
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 Companies, (ii) investment income and (iii) dividends from its subsidiaries. A portion of the net income of the Insurance Subsidiaries is available for payment as a dividend to Farmers Management Services. In January 2001, Farmers Life paid a $112.0 million dividend to Farmers Management Services. There are certain statutory limitations on the distribution of surplus. As of December 31, 2001, an aggregate of $213.0 million was available for distribution as a dividend without the approval of the state insurance departments in which the Insurance Subsidiaries are domiciled. Additionally, as of December 31, 2001,
FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 2001, 2000 and 1999 (Amounts in thousands)
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 Companies. 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 relationships. As of December 31, 2001, the value so assigned is being amortized on a straight-line basis over forty years. The carrying amount of the AIF relationships is regularly reviewed for indications of impairment in value which in the view of management are other than temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which the Company operates, (2) profitability analyses and (3) cashflow analyses. As of December 31, 2001, management believes that the reported value related to the AIF relationships is recoverable.
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.
As of December 31, 2001, 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
The S&P 500 call options are carried at estimated fair value. Unrealized gains and losses resulting from changes in the estimated fair value of the call options are recorded as an adjustment to the interest credited to policyholders. In addition, realized gains and losses from maturity or termination of the call options are offset against the interest credited to policyholders during the period incurred. Premiums paid on call options are amortized to net investment income over the term of the contracts. There were no early terminations by annuity participants, or maturities or sales of the S&P 500 call options during 2001.
The Company, through its AIF relationships with the Exchanges, is AIF for the Exchanges. As such, the management services segment (Farmers Management Services) is primarily responsible for providing management services to the P&C Group Companies. Management fees earned from the P&C Group Companies totaled $1,582,200,000, $1,492,217,000 and $1,402,107,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The life insurance segment provides individual life insurance products, including universal life, term life and whole life insurance and structured settlement and annuity products, as well as variable universal life and annuity products. Finally, the reinsurance segment provides reinsurance coverage to a percentage of the APD business written by the P&C Group Companies.
(d) Amount includes PGAAP adjustments associated with the amortization of the VOLBA asset and the reversal of amortization associated with the pre-1988 DAC asset.