JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
EXHIBIT 13
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Stockholders
Jefferson-Pilot Corporation
Greensboro, North Carolina
We have audited the accompanying consolidated balance sheets of
Jefferson-Pilot Corporation and subsidiaries as of December 31, 1993 and 1992,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Jefferson-Pilot Corporation and subsidiaries as of December 31, 1993 and 1992,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As disclosed in Note 9 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 by adopting
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes". As disclosed in Note 10 to the consolidated financial statements, the
Company changed its method of accounting for postretirement health care and
life insurance benefits in 1993 by adopting Statement of Financial Accounting
Standards No. 106 "Employers' Accounting for Postretirement Benefits Other
Than Pensions". As disclosed in Note 11 to the consolidated financial
statements, the Company changed its method of reporting the effects of
reinsurance contracts in 1993 by adopting Statement of Financial Accounting
Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts".
McGLADREY & PULLEN
Greensboro, North Carolina
February 4, 1994
F-28
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands Except Per Share Information)
December 31,
ASSETS 1993 1992
Cash and investments:
Cash and cash equivalents $ 31,563 $ 155,669
Short-term investments 3,065 42,248
Debt securities (Note 2) 3,221,878 2,773,826
Equity securities (Note 2) 833,440 837,936
Mortgage loans on real estate (Note 2) 583,645 560,985
Policy loans 214,603 220,666
Real estate, less accumulated depreciation
1993 $21,018; 1992 $20,550 (Note 2) 30,959 28,830
Other investments 29,347 28,976
Total cash and investments 4,948,500 4,649,136
Accrued investment income 69,327 67,478
Accounts receivable and agents' balances 60,526 41,267
Due from reinsurers 25,793 21,009
Property and equipment, less accumulated
depreciation 1993 $102,960; 1992 $91,295 98,434 92,649
Deferred policy acquisition costs, net
of amortization (Note 3) 277,731 260,162
Goodwill and other intangibles related to
communications operations, net of
accumulated amortization 1993 $14,244;
1992 $12,992 39,128 28,445
Assets held in separate account 84,225 67,088
Other assets 36,957 29,528
$5,640,621 $5,256,762
See Notes to Consolidated Financial Statements.
F-29
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992
Policy liabilities:
Future policy benefits (Note 4) $1,378,793 $1,358,540
Policyholder contract deposits (Note 4) 1,575,454 1,372,817
Dividend accumulations and other
policyholder funds on deposit 177,199 173,761
Policy and contract claims 177,807 172,426
Dividends for policyholders 17,779 17,830
Deferred revenue and premiums
collected in advance 21,680 21,280
Casualty insurance unearned premiums
and losses payable 62,793 59,792
Other 42,808 39,815
Total policy liabilities 3,454,313 3,216,261
Notes payable (Note 5) 39,700 -
Currently payable income taxes 15,133 17,974
Deferred income tax liabilities (Note 9) 169,162 184,556
Accounts payable and accrued expenses 40,767 37,456
Unearned investment income 5,020 5,082
Obligation for postretirement benefits
other than pensions (Note 10) 36,127 -
Liabilities related to separate account 84,225 67,088
Other liabilities 63,103 60,135
Total liabilities 3,907,550 3,588,552
Commitments and contingent liabilities
(Notes 11 and 14)
Stockholders' equity (Notes 6, 7 and 8)
Common stock, par value $1.25 per
share, authorized 150,000,000 shares;
issued 1993 49,464,495 shares;
1992 50,438,907 shares 61,831 63,049
Retained earnings 1,339,672 1,270,342
Net unrealized gains on equity securities,
less deferred income taxes 1993 $176,202;
1992 $170,853 (Note 2) 331,568 334,819
1,733,071 1,668,210
$5,640,621 $5,256,762
F-30
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands Except Per Share Information)
Year Ended
December 31,
1993 1992 1991
Revenue:
Life premiums and other considerations $ 240,196 $ 230,034 $ 230,369
Accident and health premiums 386,608 383,552 382,624
Casualty and title premiums 43,044 44,815 45,270
Total premiums and other
considerations 669,848 658,401 658,263
Net investment income (Note 2) 369,575 360,882 352,772
Realized investment gains (Note 2) 56,947 48,170 33,963
Communications operations 144,961 129,734 125,045
Other 5,293 5,142 3,433
1,246,624 1,202,329 1,173,476
Benefits, claims and expenses:
Life benefits and other credits to
policyholders 296,078 279,326 280,377
Accident and health benefits 305,648 317,785 325,497
Casualty and title claims 28,093 30,025 36,657
Total benefits and claims 629,819 627,136 642,531
Insurance commissions 62,247 56,589 57,237
General and administrative 124,592 126,294 124,470
Insurance taxes, licenses and fees 25,404 24,660 24,351
Net (deferral) of policy acquisition
costs (Note 3) (17,569) (11,536) (12,214)
Communications operations 100,100 93,560 92,334
924,593 916,703 928,709
Income before income taxes and
cumulative effect of change in
accounting principle 322,031 285,626 244,767
Income taxes (Note 9) 102,750 82,388 69,080
Income before cumulative effect
of change in accounting principle 219,281 203,238 175,687
Cumulative effect of change in accounting
principle on years prior to 1993, net
of income tax benefit (Note 10) (24,109) - -
Net income $ 195,172 $ 203,238 $ 175,687
Income per share (Note 6):
Income before cumulative effect of
change in accounting principle $ 4.36 $ 3.99 $ 3.42
Cumulative effect of change in
accounting principle (.48) - -
Net income $ 3.88 $ 3.99 $ 3.42
See Notes to Consolidated Financial Statements.
F-31
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar Amounts in Thousands Except Per Share Information)
Net Unreal-
Capital in ized Gains Total
Common Excess of Retained on Equity Stockholders'
Stock Par Value Earnings Securities Equity
Balance, December 31,
1990, as previously
reported $ 43,154 $ - $1,103,047 $ 206,788 $ 1,352,989
Restatement resulting
from change in
accounting principle
applicable to income
taxes (Note 9) - - (18,555) - (18,555)
Balance, December 31,
1990, as restated $ 43,154 $ - $1,084,492 $ 206,788 $ 1,334,434
Net income - - 175,687 - 175,687
Cash dividends
$1.12 per share - - (57,430) - (57,430)
Common stock issued
under stock option
plan 155 4,929 - - 5,084
Common stock reacquired (566) (4,929) (12,203) - (17,698)
Increase during year,
net of deferred
income tax effect - - - 104,384 104,384
Balance, December 31,
1991 $ 42,743 $ - $1,190,546 $ 311,172 $ 1,544,461
Net income - - 203,238 - 203,238
Cash dividends $1.36
per share - - (69,100) - (69,100)
Common stock issued
under stock option
plan 90 2,419 - - 2,509
Common stock reacquired (1,161) (2,419) (32,890) - (36,470)
Three-for-two stock
split (Note 6) 21,377 - (21,452) - (75)
Increase during year,
net of deferred
income tax effect - - - 23,647 23,647
Balance, December 31,
1992 $ 63,049 $ - $1,270,342 $ 334,819 $ 1,668,210
Net income - - 195,172 - 195,172
Cash dividends $1.56
per share - - (78,125) - (78,125)
Common stock issued
under stock option
plan 137 2,982 - - 3,119
Common stock reacquired (1,355) (2,982) (47,717) - (52,054)
Decrease during year,
net of deferred
income tax effect - - - (3,251) (3,251)
Balance, December 31,
1993 $ 61,831 $ - $1,339,672 $ 331,568 $ 1,733,071
See Notes to Consolidated Financial Statements.
F-32
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Year Ended
December 31,
1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 195,172 $ 203,238 $ 175,687
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in policy liabilities other
than policyholder contract
deposits 35,415 1,944 18,750
Amortization of deferred
acquisition costs 25,083 22,603 23,719
Policy acquisition costs deferred (42,652) (34,138) (35,933)
Depreciation, including amounts
related to real estate investments,
and amortization of intangibles 16,929 14,846 16,290
Change in accrued investment
income, receivables and other
assets (45,063) (6,485) (11,284)
Change in income taxes payable,
accounts payable and accrued
expenses, and other liabilities 11,788 5,698 21,156
Cumulative effect of change in
accounting principle, net of
income tax benefit 24,109 - -
Realized investment gains (56,947) (48,170) (33,963)
Other (3,668) (3,639) 2,263
Net cash provided by
operating activities 160,166 155,897 176,685
CASH FLOWS FROM INVESTING ACTIVITIES
Bonds and other debt instruments
sold, redeemed or matured 940,345 375,378 266,150
Bonds and other debt instruments
purchased (1,377,593) (590,600) (515,746)
Preferred and common stocks sold 111,399 85,685 40,876
Preferred and common stocks purchased (65,246) (37,897) (26,319)
Repayments of mortgage loans
on real estate 63,399 35,334 36,726
Mortgage loans on real estate (85,678) (59,603) (41,142)
Reduction of policy loans, net 6,063 7,279 3,838
Real estate sold 2,265 4,374 3,560
Additions to real estate and property
and equipment (26,244) (7,384) (8,892)
Other investing activities, net 31,741 (33,382) 13,059
Net cash used in investing
activities $ (399,549)$ (220,816)$ (227,890)
F-33
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Year Ended
December 31,
1993 1992 1991
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder contract deposits $ 290,243 $ 254,145 $ 251,055
Withdrawals of policyholder
contract deposits (87,606) (86,294) (84,179)
Proceeds from short-term borrowings 39,700 - -
Cash dividends to stockholders (78,125) (69,100) (57,430)
Common stock reacquired (50,680) (36,125) (17,845)
Common stock issued under stock
option plan 1,745 1,268 1,054
Net cash provided by
financing activities 115,277 63,894 92,655
Net increase (decrease) in cash
and cash equivalents (124,106) (1,025) 41,450
Cash and cash equivalents:
Beginning 155,669 156,694 115,244
Ending $ 31,563 $ 155,669 $ 156,694
Supplemental cash flow information,
cash paid during the year for
income taxes $ 114,000 $ 95,000 $ 70,000
See Notes to Consolidated Financial Statements.
F-34
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
The Company's most significant operations are in the life insurance
industry. Other substantial business activities include property
and casualty insurance, title insurance and communications opera-
tions. Information about reportable business segments is presented
in Note 13 to the consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of
Jefferson-Pilot Corporation and all of its majority-owned
subsidiaries. All material intercompany accounts and transactions
have been eliminated.
Basis of Presentation
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles. The
insurance subsidiaries also submit financial reports to insurance
industry regulatory authorities. Those financial reports are
prepared on the basis of statutory accounting practices and are
significantly different from financial statements prepared in
accordance with generally accepted accounting principles.
A comparison of statutory basis net income and equity capital of
the principal life insurance subsidiary and the nonlife insurance
subsidiaries in the aggregate to the amounts included in the
consolidated financial statements is presented in Note 7.
Cash and Cash Equivalents
The Company includes with cash and cash equivalents its holdings
of highly liquid investments which either mature within three months
of the date of acquisition or contain an investor put option which
can be exercised at par within 90-day intervals. The carrying
amount of cash and cash equivalents approximates fair value due to
their short-term availability or maturity. The Company routinely
maintains cash deposits with financial institutions in amounts that
exceed federally-insured limits, but has not experienced any loss of
principal related to such deposits.
Short-term Investments
Short-term investments consist primarily of debt securities of
certain states and political subdivisions, including special revenue
obligations. Short-term investments are considered to be trading
assets because the Company purchased the securities with the
intention of selling them in the near future. The cost and market
value of short-term investments are approximately equal.
F-35
Investments
Investments in debt securities include bonds, other debt instruments
and redeemable preferred stocks. Debt securities are stated at
aggregate amortized cost reduced by allowances for estimated declines
in value that are considered to be other than temporary, which is less
than the aggregate estimated fair value of the securities. The Company
has generally applied a consistent practice of holding investments in
debt securities until maturity. While ongoing monitoring and evaluation
of individual issues in the portfolio and overall securities market
conditions has, on occasion, resulted in sales of selected debt
securities prior to maturity, such sales did not occur in 1992 or 1991.
During 1993, sales of debt securities prior to maturity consisted
primarily of selected issues for which calls or prepayments were
expected to occur in the near future.
The Company is engaged in a process that is expected to result in
refinement of its investment strategies in response to a continuing
increase in the proportion of interest-sensitive insurance products.
As a part of that process, which is continuing into 1994, the Company
expects that a significant portion of its debt securities portfolio
will be designated as available for sale in response to its asset/
liability management strategies or other factors. If the designation of
debt securities available for sale had been completed during 1993, the
Company believes that the stated amount of those securities as of
December 31, 1993 would have been unaffected.
Equity securities held by insurance subsidiaries include non-redeemable
preferred stocks and common stocks, which are stated at market. Equity
securities held by other companies are stated at the lower of aggregate
cost or aggregate market.
Mortgage loans on real estate are stated at unpaid balances, net of
allowances for unrecoverable amounts. Policy loans are stated at their
unpaid balances. Real estate which was not acquired by foreclosure is
stated at cost less accumulated depreciation. Real estate acquired by
foreclosure is stated at the lower of depreciated cost or fair value
minus estimated costs to sell. Other investments are stated at equity,
or the lower of cost or market, as appropriate.
Unrealized gains and losses on equity securities are included net of
deferred income taxes in a separate stockholders' equity account.
Realized gains and losses on disposal of investments, determined for
debt and equity securities by the specific-identification method,
are included in net income. Allowances for estimated decline in
value that is other than temporary and for estimated unrecoverable
amounts are also included in net income.
F-36
Real estate is depreciated principally by the straight-line method
over estimated useful lives which generally range from 30 to 40
years for buildings. Expenditures for betterments are capitalized
and maintenance and repairs are charged to expense as incurred.
Fair values of the Company's debt and equity securities have been
determined using values supplied by independent pricing services.
Prior to 1993, the valuation approach applied to debt securities
for financial reporting purposes generally used amortized cost to
approximate fair values of infrequently traded and private placement
securities of high quality. The estimated fair values of debt
securities held on December 31, 1992 are presented on a basis
consistent with that applied in 1993.
The fair value of the mortgage loan portfolio has been estimated by
discounting expected future cash flows using the interest rate
currently offered for such loans, which are substantially similar as
to characteristics. The fair value of policy loans approximates
carrying amount, since the average interest rate of the loans
outstanding approximates the rate currently offered. The fair
value of other investments in financial instruments approximates
their carrying amounts.
Property and Equipment
Property and equipment are stated at cost and depreciated
principally by the straight-line method over their estimated
useful lives (generally 30 to 50 years for buildings and
approximately 10 years for other property and equipment).
Deferred Policy Acquisition Costs
The costs of acquiring new business (principally commissions),
certain costs of underwriting and issuing policies (including
medical examinations and inspection reports) and certain agency
office expenses, all of which vary with and are primarily related
to the production of new business, have been deferred.
For traditional life insurance policies, these costs are being
amortized over the premium paying periods of the related contracts
using the same assumptions about anticipated premium revenue that
are used to compute liabilities for future policy benefits. For
universal life and annuity products, these costs are amortized at
a constant rate based on the present value of the estimated future
gross profits to be realized over the terms of the contracts, not
to exceed 25 years.
Deferred policy acquisition costs are reviewed to determine that the
unamortized portion does not exceed expected recoverable amounts.
F-37
Goodwill and Other Intangibles
Goodwill and other intangibles related to communications operations
consist principally of the excess of cost over the value of
identifiable net assets obtained in acquisitions of radio and
television properties and electronic data services operations.
Goodwill which arose in acquisitions completed after October 31,
1970 is being amortized on a straight-line basis over periods of
15 to 40 years.
Separate Account
The separate account represents funds for which investment income
and investment gains and losses accrue directly to the policy-
holders. The assets of the separate account are carried at market
value and are not subject to any claims which may arise out of any
other business of the Company.
Recognition of Revenue
Premiums on traditional life insurance products are reported as
revenue when received unless received in advance of the due date.
Benefits and expenses are provided against earned premium revenue
in a manner which recognizes profits over the estimated lives of
the insurance contracts.
Premiums on accident and health insurance and casualty insurance
are reported as earned, over the contract period. A reserve is
provided for the portion of premiums written which relate to
unexpired coverage terms.
Revenue from universal life-type and annuity products consists of
charges for the cost of insurance, for initiation and administration
of the policy, and for surrender of the policy. Revenue from these
products is recognized in the year assessed to the policyholder,
except that any portion of an assessment which relates to services
to be provided in future years is deferred and recognized over the
period during which services are provided, based on the same
assumptions and factors used to amortize deferred policy acquisition
costs.
Future Policy Benefits
Liabilities for future policy benefits on traditional life and
accident and health insurance are computed by the net level premium
valuation method based on assumptions about future investment yield,
mortality, morbidity and termination. Estimates about future
circumstances are based principally on the Company's own historical
experience and provide for possible unfavorable deviations.
F-38
Policyholder Contract Deposits
Policyholder contract deposits consist of policy values that accrue
to holders of universal life-type and other interest-sensitive
products. The liability is determined using the retrospective
deposit method and does not include a provision for possible future
assessments against policyholders.
Annuity contracts issued by the Company do not generally have defined
maturities. Fair values of the Company's liabilities under annuity
contracts, the carrying amounts of which are included with
policyholder contract deposits in the consolidated balance sheets,
have been estimated to equal the cash surrender values of the
underlying contracts as of the consolidated balance sheet dates. The
estimated fair values of liabilities under supplementary contracts
not involving life contingencies, which are included in the
consolidated balance sheets with dividend accumulations and other
policyholder funds on deposit, approximate carrying amount.
Recognition of Benefits and Expenses
Benefits and expenses, other than deferred policy acquisition costs,
related to traditional life and accident and health insurance
products are recognized when incurred in a manner designed to match
them with related premiums and spread income recognition over
expected policy lives. For universal life-type and annuity products,
benefits include interest credited to policyholders' accounts, which
is recognized as it accrues.
Policy and Contract Claims
The liability for policy and contract claims consists of the
estimated amount payable for claims reported but not yet settled,
claims incurred during the year but reported subsequent to the date
of the consolidated balance sheet, and an estimate of claims incurred
but not reported which is based on the Company's historical
experience adjusted for trends and circumstances. Management
believes that the recorded liability is sufficient to provide for
the associated claims adjustment expenses.
Casualty Insurance Losses Payable
The liability for casualty insurance losses payable includes
provisions for individual case estimates for reported losses,
estimated amounts of unreported losses based on historical experience
modified for current trends, and estimated expenses of investigating
and settling claims.
F-39
Reinsurance Balances and Transactions
Reinsurance receivables include amounts related to paid benefits
and claims and estimated amounts related to unpaid benefits, unpaid
claims and future policy benefits that are covered by reinsurance
contracts. The cost of reinsurance is accounted for over the terms
of the underlying reinsured policies using assumptions consistent
with those used to account for the policies.
Participating Policies
Participating life policies approximate the following percentages
of ordinary life insurance in force and ordinary life insurance
premium revenue as of December 31, 1993, 1992 and 1991 and for the
years then ended:
1993 1992 1991
Ordinary life insurance
in force 13% 13% 13%
Ordinary life premium revenue 23% 24% 23%
The amount of dividends to be paid on participating policies is
determined annually by the Board of Directors. Anticipated
dividends are accounted for as a planned contractual benefit in
computing the value of future policy benefits. Estimated amounts
of policy dividends for the succeeding twelve months are based on
the current scale, while estimated dividends applicable to later
years are based on the dividend scale which was in effect when the
policies were issued.
Income Taxes
The parent company and all of its subsidiaries file a consolidated
life/nonlife federal income tax return. Deferred income taxes are
recorded on the differences between the tax bases of assets and
liabilities and the amounts at which they are reported in the
consolidated financial statements. Recorded amounts are adjusted
to reflect changes in income tax rates and other tax law provisions
as they become enacted.
Net Income Per Share of Common Stock
Net income per share of common stock is based on the weighted
average number of common shares outstanding. The weighted average
number of shares outstanding was 50,251,676 in 1993, 50,952,147 in
1992 and 51,319,143 in 1991.
Reclassifications
The Company's policy is to reclassify certain amounts reported in
prior years' consolidated financial statements when necessary for
conformity with classifications adopted in the current year. These
reclassifications do not have a material effect on the prior year
consolidated financial statements.
F-40
Note 2. Investment Information
Aggregate amortized cost, aggregate estimated fair value, and gross
unrealized gains and losses pertaining to debt securities as of
December 31, 1993 and 1992 are as follows (in thousands):
December 31, 1993
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
U. S. Treasury
obligations and
direct obligations
of U. S. Government
corporations $ 892,959 $ 73,107 $ (12)$ 966,054
Mortgage-backed
securities issued
by U. S. Government
corporations 455,947 21,744 (1,143) 476,548
Obligations of states
and political
subdivisions,
including special
revenue obligations 85,267 8,326 (163) 93,430
Corporate obligations
including collateralized
obligations and mortgage
backed securities 1,762,185 132,568 (9,285) 1,885,468
Redeemable preferred
stocks 25,520 1,183 (1,203) 25,500
$3,221,878 $ 236,928 $ (11,806)$3,447,000
December 31, 1992
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
U. S. Treasury
obligations and
direct obligations
of U. S. Government
corporations $ 705,988 $ 58,953 $ - $ 764,941
Mortgage-backed
securities issued
by U. S. Government
corporations 271,492 19,941 - 291,433
Obligations of states
and political
subdivisions,
including special
revenue obligations 83,166 6,164 (311) 89,019
Corporate obligations
including collateralized
obligations and mortgage
backed securities 1,678,827 133,419 (6,639) 1,805,607
Redeemable preferred
stocks 34,353 1,115 (1,468) 34,000
$2,773,826 $ 219,592 $ (8,418)$2,985,000
F-41
Aggregate amortized cost and aggregate estimated fair value of the
portfolio of debt securities as of December 31, 1993, according to
contractual maturity date, are as indicated below (in thousands).
Actual future maturities will differ from the contractual maturities
shown because the issuers of certain of the debt securities have the
right to call or prepay the amounts due the Company, with or without
penalty.
Estimated
Amortized Fair
Cost Value
Amounts due in one year or less $ 14,337 $ 14,993
Amounts due after one year through
five years 384,799 425,714
Amounts due after five years
through ten years 1,616,312 1,733,859
Amounts due after ten years through
twenty years 825,084 877,478
Amounts due after twenty years 355,826 369,456
3,196,358 3,421,500
Redeemable preferred stocks 25,520 25,500
$3,221,878 $3,447,000
Aggregate market value, aggregate cost and gross unrealized
gains and losses pertaining to equity securities held by
insurance subsidiaries, which are stated at market in the
consolidated balance sheets, are as follows (in thousands):
December 31,
1993 1992 1991
Aggregate market value $ 828,786 $ 832,587 $ 778,641
Aggregate cost 321,016 326,915 308,740
Net unrealized gains $ 507,770 $ 505,672 $ 469,901
Gross unrealized gains $ 510,024 $ 512,817 $ 477,625
Gross unrealized losses (2,254) (7,145) (7,724)
Net unrealized gains,
as above $ 507,770 $ 505,672 $ 469,901
Increase in net
unrealized gains
during the year $ 2,098 $ 35,771 $ 158,448
Aggregate market value, aggregate cost and gross unrealized gains
pertaining to equity securities held by the parent company, which
are stated at cost in the consolidated balance sheets, are as follows
(in thousands):
December 31,
1993 1992 1991
Aggregate market value $ 74,754 $ 56,900 $ 42,560
Aggregate cost 4,654 5,349 5,349
Gross unrealized gains $ 70,100 $ 51,551 $ 37,211
F-42
The Company's investments in debt and equity securities consist primarily
of a diversified portfolio which includes approximately 750 issuers, with
only one issuer other than the U.S. Government representing more than one-
percent of the aggregate reported amounts of these investments. Included
with equity securities is common stock of NationsBank Corporation stated
at $256,706,000 (6.3%) and $267,360,000 (7.4%) as of December 31, 1993 and
1992, substantially all of which is at market. Debt securities considered
less than investment grade approximated 3% of aggregate carrying amount as
of December 31, 1993. The stated amount of debt securities considered in
default approximated $14 million, substantially all of which have defaulted
as to scheduled principal payment but not as to interest. Debt securities
stated at $16 million are on deposit with or for states in which sub-
sidiaries conduct insurance operations.
The estimated fair value of mortgage loans on real estate approximated
$645 million and $610 million as of December 31, 1993 and 1992. The loans
consist primarily of traditional real estate mortgages collateralized by
retail, hotel and office properties. Approximately 69% of stated mortgage
loan balances as of December 31, 1993 involve borrowers in South Atlantic
and East South Central states, with another 14% due from borrowers in West
South Central states. As of December 31, 1993, the Company had provided
allowances of $1.5 million against delinquent loans approximating
$10 million. Real estate acquired by foreclosure is stated at
$8.5 million, net of allowances approximating $2.3 million.
The details of consolidated investment income, net of investment expenses,
for the three years ended December 31, 1993 follow (in thousands):
Year Ended December 31,
1993 1992 1991
Interest on bonds and other
debt instruments $243,384 $235,234 $225,333
Dividends on preferred stocks 7,409 9,769 11,324
Dividends on common stocks 26,890 26,229 25,983
Interest on mortgage loans 57,139 54,807 54,886
Interest on policy loans 12,978 13,298 13,493
Real estate income 9,642 8,503 8,292
Other investment income 6,462 8,352 10,270
Investment income for
life insurance companies 363,904 356,192 349,581
Investment income for other
companies 16,616 15,243 13,476
Total investment income 380,520 371,435 363,057
Investment expenses (10,945) (10,553) (10,285)
Net investment income $369,575 $360,882 $352,772
F-43
Investment expenses include salaries, taxes, expenses of
maintaining and operating investment real estate,
depreciation and other allocated costs of investment
management and administration.
The details of realized investment gains (losses) for the
three years ended December 31, 1993 follow (in thousands):
Year Ended December 31,
1993 1992 1991
Bonds and other debt
instruments $ 16,829 $ 6,848 $ 1,920
Preferred stocks 4,574 1,107 563
Common stocks 32,841 43,065 22,753
Other 2,703 (2,850) 8,727
Realized investment gains $ 56,947 $ 48,170 $ 33,963
While the Company generally holds investments in debt securities
to maturity, declining interest rates have increased issuer
calls and prepayments. During 1993, the Company sold selected
debt securities when calls or prepayments were considered likely.
Proceeds from these sales represented $109 million of the
$170 million total proceeds from sales of debt securities during
the year. Most of the realized gains on debt securities in 1993,
and substantially all in 1992 and 1991, represent call premiums.
Realized gains on debt securities for 1993 and 1992 are stated
net of losses approximating $8 million and $1.2 million,
respectively, resulting from declines in value considered other
than temporary.
In 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115)
which will be effective for the Company's 1994 financial
statements. SFAS 115 applies to equity securities having readily
determinable fair values and to debt securities. It will require
securities under its scope to be classified for reporting
purposes as either 1) securities held to maturity and stated at
amortized cost, 2) trading securities stated at fair value with
unrealized gains and losses reflected in income, or 3) securities
available for sale and stated at fair value with net unrealized
gains and losses included in stockholders' equity.
SFAS 115 establishes criteria under which securities should be
classified as trading or held to maturity and states that
securities not otherwise classified should be accounted for as
available for sale. Equity securities within the scope of
SFAS 115 must be classified as either trading or available for
sale. When individual securities classified as either held to
maturity or available for sale experience an other than temporary
decline in fair value below amortized cost, SFAS 115 requires
adjustment to cost basis with a corresponding charge to income.
Upon adoption of SFAS 115 as of January 1, 1994, the carrying
amounts of debt securities classified as available for sale
F-44
and equity securities held by the parent company will be adjusted
to value. Since classification of the Company's debt securities is
not complete, the effect of SFAS 115 on the stated amount of debt
securities and the corresponding effects on deferred income tax
liabilities and stockholders' equity have not yet been determined.
For the same reason, the amounts of any related effects on deferred
policy acquisition costs and policy liabilities have not been
determined. Adoption of SFAS 115 will increase the stated amount of
equity securities held by the parent company as of January 1, 1994 by
$70 million, with corresponding increases of $28 million in deferred
income tax liabilities and $42 million in stockholders' equity.
Also in 1993, the FASB issued SFAS 114 "Accounting by Creditors for
Impairment of a Loan" which will be effective for the Company's 1995
financial statements. SFAS 114 will apply primarily to the Company's
mortgage loans and will require loans for which it is probable that
the Company will not collect all principal and interest due in
accordance with applicable terms to be stated at the present value
of expected future cash flows. The Company does not presently
expect adoption of SFAS 114 to have a material effect on its
consolidated financial statements.
Note 3. Deferred Policy Acquisition Costs
The following reflects the amounts of policy acquisition costs
deferred and amortized, with amounts deferred and amortized by the
nonlife insurance subsidiaries netted (in thousands):
Year Ended December 31,
1993 1992 1991
Balance, beginning $260,162 $248,627 $236,413
Policy acquisition costs
deferred:
Life contracts:
Commissions 26,651 23,606 26,136
Other 14,034 9,705 8,829
40,685 33,311 34,965
Accident and health
and all other 1,967 827 968
42,652 34,138 35,933
Amortization charged to
expenses 25,083 22,603 23,719
Balance, ending $277,731 $260,162 $248,627
======== ======== ========
F-45
Note 4. Policy Liability Information
The liability for future life policy benefits has been determined
using interest rate assumptions which vary by year of issue and
range from 3% to 9.9% for participating individual ordinary life
policies, remaining level for all durations. For nonparticipating
policies, assumed interest rates grade uniformly over 20 to 30
years with initial rates ranging from 3% to 9.75% and ultimate
rates ranging from 3% to 6%. Interest rate assumptions for weekly
premium, monthly debit ordinary and group life insurance generally
fall within the same ranges as those pertaining to individual
ordinary life.
Credited interest rates for universal life-type products
approximated 6.5%, 7.0% and 7.8% during 1993, 1992 and 1991,
respectively. Credited rates for annuity products generally ranged
from 5.0% to 6.25% during 1993, 5.5% to 6.75% during 1992 and 5.5%
to 7.75% during 1991.
Assumed mortality rates are generally based on experience multiples
applied to select and ultimate tables commonly used in the
industry.
Withdrawal assumptions for individual life insurance issued from
1948 to 1972 are based on the experience of the principal life
insurance subsidiary and generally range between Linton's A and B
tables. For business issued in 1972 and later, withdrawal rates
are based on experience and vary by issue age, type of coverage and
policy duration.
The stated amount and estimated fair value of the Company's
liability under annuity contracts in the accumulation phase,
exclusive of amounts related to retirement plans sponsored by the
Company and its subsidiaries, totaled $887 million and $853
million, respectively, as of December 31, 1993 ($753 million and
$725 million as of December 31, 1992). The estimated fair value of
the Company's liability under supplementary contracts not involving
life contingencies approximated its carrying amount of $23 million
in 1993 and $21 million in 1992.
Note 5. Notes Payable
Notes payable consist of unsecured borrowings drawn against an
uncommitted bank line of credit established in 1993. The Company
may request aggregate advances of up to $100 million through
October 1994. Interest rates and maturities are bilaterally
determined for each borrowing. The interest rate as of December 31,
1993 was 3.45% and the maximum amount outstanding during the year
approximated the $39.7 million balance on that date. Due to the
short duration of the Company's borrowings, interest expense was
not material.
F-46
Note 6. Stockholders' Equity and Stock Option Plans
On February 10, 1992, the Company's Board of Directors authorized a
three-for-two common stock split which was effected on April 15,
1992 to stockholders of record as of March 27, 1992. The split-
adjusted value of all fractional shares was paid in cash. The par
value of additional shares issued, which totaled $21,377,000, was
reclassified from retained earnings to common stock during 1992.
All share and per share information in the consolidated financial
statements has been adjusted to give retroactive effect to the
stock split.
Changes in the number of shares outstanding during each of the
three years in the period ended December 31, 1993 are as follows:
Year Ended December 31,
1993 1992 1991
Shares outstanding,
beginning 50,438,907 51,291,936 51,784,614
Shares issued under
stock option plan 109,522 78,181 186,233
Shares reacquired (1,083,934)( 931,210)( 678,911)
Shares outstanding,
ending 49,464,495 50,438,907 51,291,936
In May 1989, the Company's stockholders approved a stock option
plan under which 1,223,982 shares of common stock are reserved as
of December 31, 1993. The plan is administered by the Compensation
Committee of the Board of Directors (the Committee). The Committee
determines the participation criteria and approves all grants of
options under the plan. An option granted may be an incentive
stock option or a nonstatutory stock option at the determination of
the Committee. The plan also permits the Committee to grant stock
appreciation rights to eligible employees. All grants of stock
options and stock appreciation rights under the plan are required
to be at option prices which are not less than the market value of
the Company's common stock on the date of grant. The periods
during which stock options and stock appreciation rights are
exercisable is fixed by the Committee at the time of grant, but is
not to exceed ten years from the date of the grant. The plan
permits shares received upon exercise of stock options and those
which are subject to an option that expires or otherwise terminates
without exercise to again be subjected to option under the plan.
Participants are required to pay cash, previously acquired common
stock of the Company, or a combination of both equal to the full
option price of the common stock received upon exercise of options.
During 1989, the Committee approved a grant of options to purchase
the Company's common stock to each employee and full-time life
insurance agent who met certain specified
F-47
requirements. The number of options offered to individual employees and
agents was determined based on current compensation. During 1992, the
Committee approved a grant of options to those employees who met
requirements similar to those applied in the 1989 grant and were not
eligible to participate in the 1989 grant. The employees and agents who
received grants in 1989 and 1992 have established stock purchase savings
accounts with the Company, the proceeds of which are applied to the
option price of stock acquired upon exercise of options. The Committee
also approved grants of options and stock appreciation rights to certain
officers in 1989, 1990, 1992 and 1993.
During 1990, the Company's stockholders approved an amendment to the
stock option plan which authorized the Committee to make grants of the
Company's common stock to selected officers and to make one-time common
stock grants to current and future nonemployee directors. The Committee
granted certain executive officers of the Company an aggregate of 138,000
shares in 1991 and 174,000 shares in 1990. Certain of the officers'
interests in the common stock granted became vested over two years
following the date of grant. As of December 31, 1993, all such grants
were vested or forfeited. Nonemployee directors were granted an
aggregate of 4,500 shares in 1993, 2,250 shares in 1992 and 1991 and
24,750 shares in 1990. The grants to nonemployee directors vest over two
years. Compensation expense related to the grants of common stock was
not material in 1993 and approximated $1,165,000 in 1992 and $4,847,000
in 1991.
Summarized information about outstanding stock options, exercisable
options and shares available for grant under the stock option plan as
amended is as follows:
Average
Option Price Outstanding Exercisable Available
Per Share Options Options Shares
Balances,
January 1, 1991 $23.06 624,702 258,181 941,143
Shares granted - - - (140,250)
Options becoming
exercisable $26.47 - 10,602 -
Options exercised $22.92 (45,982) (45,982) -
Options terminated $22.92 (39,656) (2,100) 39,656
Balances,
December 31, 1991 $23.09 539,064 220,701 840,549
Options granted $40.04 119,820 - (119,820)
Shares granted - - - (2,250)
Options becoming
exercisable $37.03 - 50,438 -
Options exercised $23.04 (71,630) (71,630) 9,637
Options terminated $24.23 (28,524) (750) 28,524
Balances,
December 31, 1992 $26.67 558,730 198,759 756,640
Options granted $51.16 95,000 - (95,000)
F-48
Average
Option Price Outstanding Exercisable Available
Per Share Options Options Shares
Shares granted - - - (4,500)
Options becoming
exercisable $45.14 - 119,299 -
Options exercised $24.12 (105,022) (105,022) 18,134
Options terminated $37.33 (28,521) - 28,521
Balances,
December 31, 1993 $31.07 520,187 213,036 703,795
Of the options that are not yet exercisable, approximately 254,000 become
exercisable in 1994 at $22.92 and approximately 53,000 become exercisable
in 1997 at $40.25. Earlier exercise is permitted only in the event of
termination of employment due to death, disability or retirement. All
stock appreciation rights were exercised during 1992, resulting in the
issuance of 4,300 shares of common stock.
Note 7. Statutory Reporting Information
Net income and stockholder's equity (statutory equity capital) of
Jefferson-Pilot Life Insurance Company on the statutory basis used to
report to regulatory authorities and on the basis of generally accepted
accounting principles included in the consolidated financial statements
follow (in thousands). Amounts related to years prior to 1993 have been
restated, where appropriate, for the effect of the 1993 change in
accounting principle applicable to income taxes.
Statutory Reporting
1993 1992 1991
Net income for the year
ended December 31 $ 138,893 $ 157,753 $ 137,642
Statutory equity
capital at December 31 $ 945,157 $ 926,537 $ 860,577
Generally Accepted
Accounting Principles
1993 1992 1991
Net income for the year
ended December 31 $ 164,199 $ 187,972 $ 165,152
Stockholder's equity
at December 31 $1,435,098 $1,368,818 $1,273,323
Net income of the nonlife insurance subsidiaries, as determined on the
basis of generally accepted accounting principles, approximated $9.2
million in 1993, $8.6 million in 1992 and $3.7 million in 1991.
F-49
Stockholder's equity of the nonlife insurance subsidiaries totaled
approximately $94 million, $87 million and $80 million as of December 31,
1993, 1992 and 1991, respectively. Statutory net income of these
subsidiaries did not differ materially from that determined under
generally accepted accounting principles and their statutory equity
capital exceeded stockholder's equity, primarily because deferred income
taxes are not recorded on unrealized gains for statutory reporting.
The General Statutes of North Carolina contain certain limitations
affecting the amount of dividends that the insurance subsidiaries may pay
to the parent company without the approval of the State's Insurance
Commissioner. The Company's insurance subsidiaries have approximately
$100 million available for distribution to the parent company during 1994
without obtaining approval. The Company believes that neither statutory
dividend limitations nor risk-based capital requirements imposed on life
insurance companies beginning in 1993 present any practical restrictions
on its future dividend payment plans.
Note 8. Stockholders' Rights Plan
During 1988, the Company's Board of Directors declared a dividend of one
common share purchase right for each outstanding share of common stock.
The rights detach and become exercisable ten days after a person or group
publicly announces the acquisition of 20% or more of the Company's common
stock, or ten business days after a person or group announces an offer
which, if consummated, would result in the offeror owning 20% or more of
the common stock.
If and when the rights become exercisable, a holder would be entitled to
buy from the Company one share of common stock for each right held at a
price of $56.67. If the Company is acquired in a merger or other
business combination, or 50% or more of its consolidated assets or
earning power are sold, the rights entitle a holder to buy, at the
exercise price, stock of the acquiring Company having a market value of
twice the exercise price.
In the event that any person or group acquires 30% or more of the
Company's common stock, otherwise than pursuant to a cash tender offer
for all shares in which such person or group increases its holdings of
the common stock from less than 20% to 80% or more of the outstanding
common stock, the holder will be entitled to purchase for each right held
a number of additional shares of the Company's common stock having a
market value of twice the exercise price.
Following an acquisition by any person or group of 30% or more of the
Company's common stock, but only prior to the acquisition by a person or
group of a 50% stake in the common stock, the Board of Directors will
also have the ability to exchange one share of the Company's common stock
for each right held by holders other than the acquiring person or group.
F-50
The rights expire on August 12, 1998 and are redeemable, upon action by
the Board of Directors at a price of $.01 per right any time before they
become exercisable.
Note 9. Income Taxes
In 1993, the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
application of an asset and liability approach to accounting for the
expected future income tax effects of existing differences between the
tax bases of assets and liabilities and the amounts at which they are
reported in financial statements. SFAS 109 requires adjustment of
recorded deferred tax assets and liabilities in response to changes in
tax rates and other changes in applicable tax law in the period those
changes become enacted.
As permitted by SFAS 109, the Company has elected to restate prior year
consolidated financial statements to give retroactive effect to the new
income tax accounting standards. Accordingly, retained earnings as of
December 31, 1990 has been reduced by $18,555,000 in the accompanying
1991 consolidated statement of stockholders' equity. Consolidated
statements of income for 1992 and 1991 have not been restated because the
SFAS 109 standards had negligible effect on net income for those years.
Income taxes as reported in the consolidated statements of income were
comprised of the following components (in thousands):
Year Ended December 31,
1993 1992 1991
Current expense $110,730 $ 88,889 $ 77,839
Deferred benefit (7,980) (6,501) (8,759)
$102,750 $ 82,388 $ 69,080
======== ======== ========
A reconciliation of the maximum federal income tax rates of 35% in 1993
and 34% in 1992 and 1991 to the effective income tax rate for each year
follows:
Percent of Income Before
Income Taxes as Reported in
Consolidated Statements
of Income
1993 1992 1991
Maximum federal income
tax rate 35.0% 34.0% 34.0%
Reconciling items:
Tax exempt interest and
dividends received
deduction (2.9) (3.4) (3.9)
Recoveries and reductions
of amounts previously
provided for prior
years' tax assessments (.4) (2.3) (2.1)
Other increases, net .2 .5 .2
Effective income tax rates 31.9% 28.8% 28.2%
======== ======== ========
F-51
The tax effects of temporary differences that result in
significant deferred tax assets and deferred tax liabilities
as of December 31, 1993 and 1992 are as follows (in thousands):
December 31
1993 1992
Deferred tax assets:
Policy liabilities $ 90,237 $ 81,945
Capitalization of acquisition
costs for income tax purposes,
net of amortization 15,817 10,725
Obligation for postretirement
benefits other than pensions 13,634 -
Total deferred tax assets $ 119,688 $ 92,670
Deferred tax liabilities:
Net unrealized gains on equity
securities $ 176,202 $ 170,853
Deferral of policy acquisition
costs for financial reporting
purposes, net of amortization 97,320 88,566
Other basis differences,
including depreciation 15,328 17,807
Total deferred tax liabilities $ 288,850 $ 277,226
Net deferred tax liabilities
included in consolidated
balance sheets $(169,162) $(184,556)
Federal income tax returns for all years through 1987 have been
examined by the Internal Revenue Service and are closed.
Examinations of the 1988 through 1990 returns are in process, and
management has not been notified of the existence of significant
issues. Settlements and other resolutions during 1993, 1992 and
1991 resulted in the recovery of taxes and interest previously paid
for years through 1987 and reductions of amounts provided for
potential assessments involving subsequent years. In the opinion
of management, recorded income tax liabilities adequately provide
for all open years.
Under prior federal income tax law, one-half of the excess of a
life insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a special tax
account designated as "Policyholders' Surplus". The Company has
approximately $91,000,000 of untaxed "Policyholders' Surplus" on
which no payment of federal income taxes will be required unless it
is distributed as a dividend, or under other specified conditions.
The Company does not believe that any significant portion of the
account will be taxed in the foreseeable future and no related
deferred tax liability has been recognized. If the entire balance
of the account became taxable under the current federal rate the
tax would approximate $32,000,000.
F-52
The Omnibus Budget Reconciliation Act of 1993 increased the Company's
maximum federal income tax rate for 1993 from 34% to 35%. The change
in federal income tax rate increased income taxes charged to 1993
earnings by approximately $3 million, most of which is currently
payable and increased the liability for deferred income taxes on net
unrealized gains on equity securities by approximately $5 million.
Note 10. Retirement Benefit Plans
The Company and its subsidiaries have defined benefit pension plans
covering substantially all employees and full-time life insurance
agents. The plans are noncontributory and are funded through deposit
administration contracts issued by Jefferson-Pilot Life Insurance
Company, the Company's principal life insurance subsidiary.
The plans provide benefits based on annual compensation and years of
service. The funding policy is to contribute annually no more than
the maximum amount that can be deducted for federal income tax
purposes. The assets of the plans are those of the related
contracts, which are deposited in the general accounts of Jefferson-
Pilot Life Insurance Company.
The components of pension expense were as follows (in thousands):
Year Ended December 31,
1993 1992 1991
Service cost, benefits
earned during the year $ 7,259 $ 5,779 $ 8,015
Interest cost on projected
benefit obligation 11,414 11,098 9,905
Actual return on plan assets (11,235) (11,940) (15,525)
Net amortization and deferral (4,947) (2,505) 66
$ 2,491 $ 2,432 $ 2,461
The following table sets forth the funded status of the
plans and amounts recognized in the consolidated balance
sheets (in thousands):
December 31,
1993 1992
Actuarial present value of benefit
obligation:
Vested benefit obligation $196,066 $166,513
Accumulated benefit obligation $199,363 $169,536
Projected benefit obligation $219,236 $193,191
Plan assets at fair value 226,828 220,275
Plan assets in excess of projected
benefit obligation $ 7,592 $ 27,084
Unrecognized net gain (1,295) (19,894)
Unrecognized net asset amount (23,173) (25,363)
Unrecognized prior service cost 10,738 11,710
Accrued pension cost $ (6,138)$ (6,463)
F-53
Certain assumptions used in determining the funded status of the
plans were as follows:
1993 1992 1991
Discount rate 6.50% 6.90% 7.00%
Expected long-term rate of
return on plan assets 8.00% 7.20% 7.50%
Rate of increase in
compensation levels 4.25% 4.00% 5.00%
Benefits provided to retirees by annuity contracts issued by
Jefferson-Pilot Life Insurance Company approximated $10.0 million
in 1993, $8.8 million in 1992 and $8.2 million in 1991.
The Company sponsors contributory health care and life insurance
benefit plans for eligible retired employees, qualifying retired
agents and certain surviving spouses. Substantially all of the
Company's employees and qualifying agents may become eligible for
these benefits if they reach retirement age or become disabled
while employed by the Company and meet certain years-of-service
requirements.
Most of the postretirement health care and life insurance benefits
are provided through Jefferson-Pilot Life Insurance Company and,
until December 1993, were funded as payments were made to retirees
or their beneficiaries. In December 1993, the Company began
contributing to a welfare benefit trust from which future benefits
will be paid.
Prior to 1993, the cost of providing postretirement health care and
life insurance benefits was recognized in the year paid. During
1993, the Company adopted Statement of Financial Accounting
Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106). SFAS 106 requires
accrual of the cost of providing postretirement benefits during the
employees' active service periods and covers all postretirement
benefits other than pensions that an employer expects to provide to
current and former employees.
The Company elected to immediately recognize the accumulated
obligation for postretirement benefits under SFAS 106, which
represents the actuarial present value of future benefits
attributable to the service of eligible employees through January
1, 1993. Accordingly, the consolidated statement of income for
1993 includes a charge in the amount of $24,109,000, representing
initial recognition of the accumulated benefit obligation of
$37,035,000, net of deferred tax benefit of $12,926,000. Aside
from initial recognition of the accumulated benefit obligation,
application of SFAS 106 increased nonpension postretirement benefit
cost for 1993 by approximately $900,000, to $2,161,000. Nonpension
postretirement benefit cost for 1993 as determined under SFAS 106
was comprised primarily of interest cost on the accumulated benefit
obligation. The cost of postretirement health care and life
insurance benefits paid and expensed in 1992 and 1991 approximated
$1.5 million.
F-54
The following table sets forth the funded status of the Company's
postretirement health care and life insurance plans as of December
31, 1993 and 1992 (in thousands):
Health Care Life Insurance
Benefits Benefits
1993 1992 1993 1992
Plan assets at fair
value $ 810 $ - $ 1,035 $ -
Accumulated
postretirement
benefit obligation:
Retirees and
surviving spouses $ 9,777 $ 12,480 $ 8,254 $ 6,740
Fully eligible
active participants 952 3,124 1,462 2,408
Other active
participants 2,584 8,686 1,902 3,597
$ 13,313 $ 24,290 $ 11,618 $ 12,745
Excess of accumulated
benefit obligation
over plan assets $(12,503)$(24,290)$(10,583)$(12,745)
Transition
obligation
recorded in 1993 - 24,290 - 12,745
Unrecognized
negative prior
service cost (10,719) - (3,765) -
Unrecognized net
(gain) loss (547) - 1,990 -
Accrued postretirement
benefit cost $(23,769)$ - $(12,358)$ -
Accumulated postretirement benefit obligations were computed using
assumed discount rates of 7% as of December 31, 1993 and 8.5% as of
December 31, 1992. The expected long-term rate of return on plan
assets as of December 31, 1993 was 7%.
Effective April 1, 1993, the Company changed the eligibility
criteria of its postretirement health care and life insurance plans
to require employees and qualifying agents to complete 15 years of
service after the age of 45 to be eligible for these benefits.
Employees and agents hired before January 1, 1994 who were age 50
or older when hired will continue to be eligible for these benefits
after 10 years of service. Future health care cost trend rates in
excess of 4% have been assumed in determining the related
postretirement benefit obligation as of December 31, 1993.
Effective January 1, 1994 the Company changed its postretirement
health care plan to limit annual benefit increases to a maximum
rate of 4%. Therefore future cost increases exceeding 4% per year
will have no effect on the Company's obligations. The preceding
F-55
changes resulted in the establishment of negative prior service
cost during 1993, which is being amortized on a straight-line basis
over the average remaining period of service to full eligibility of
active employees who are not fully eligible.
Note 11. Reinsurance
The Company generally reinsures with other insurance companies the
portion of an individual life insurance risk that exceeds
$1,000,000, with an additional $250,000 for accidental death
benefits. The Company also attempts to reduce its exposure to
losses that may result from unfavorable events or circumstances by
reinsuring certain levels and types of life, accident and health
and property and casualty risks underwritten. The Company assumes
portions of life and other risks underwritten by certain other
insurers on a limited basis, and amounts related to assumed
reinsurance are not material to the consolidated financial
statements.
Reinsurance contracts do not relieve the Company from its primary
obligation to policyholders and failure of reinsurers to discharge
their obligations could result in losses to the Company. The
Company regularly evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk related to
its reinsurance activities. No significant credit losses resulted
from the Company's reinsurance activities during the three years
presented.
In 1993, the Company adopted Statement of Financial Accounting
Standards No. 113 "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" (SFAS 113). Among
other things, SFAS 113 requires that reinsurance receivables be
reported at gross amounts, which include amounts related to paid
benefits and claims and estimated amounts related to unpaid
benefits and claims and future policy benefits. Prior to 1993,
reinsurance receivables were reported net of the related reserve
liabilities. The consolidated balance sheet as of December 31,
1992 has been restated to conform with SFAS 113.
Aggregate receivables related to life and accident and health
reinsurance contracts totaled $17.5 million and $15 million as of
December 31, 1993 and 1992. Premiums ceded under these contracts
totaled $18 million in 1993, $15 million in 1992 and $16 million in
1991. Reinsurance recoveries related to incurred losses totaled
$9.2 million in 1993, $5.5 million in 1992 and $7.7 million in
1991.
Individual term life insurance approximating $1.5 billion, $1.5
billion, and $1.3 billion, and group insurance approximating $700
million, $500 million, and $500 million had been ceded to other
companies as of December 31, 1993, 1992, and 1991, respectively.
Life insurance ceded represented 5.3%, 4.8%, and 4.7% of life
insurance in force as of December 31, 1993, 1992, and 1991,
respectively, and 4.1%, 3.3%, and 3.9% of life insurance premium
revenue for the years then ended. Accident and health insurance
ceded represented 2.0% of related premium revenue for each of the
three years.
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Aggregate receivables related to short-duration property and
casualty reinsurance contracts totaled $8.3 million and $6 million
as of December 31, 1993 and 1992. As a result of reinsurance
activities, gross property and casualty premiums earned exceeded
net reported premium revenue by approximately $7 million in 1993,
$5 million in 1992 and $4.4 million in 1991. The effect of
reinsurance on written premiums approximated that on earned
premiums. Reinsurance recoveries related to incurred property and
casualty losses totaled $7.6 million in 1993, $2.7 million in 1992
and $5.4 million in 1991.
Note 12. Condensed Separate Company Financial Information
Condensed balance sheets, statements of income and cash flow
information of Jefferson-Pilot Corporation (parent company only)
are presented below (in thousands). Amounts related to years prior
to 1993 have been restated, where appropriate, for the effect of
the 1993 change in accounting principle applicable to income taxes.
CONDENSED BALANCE SHEETS
December 31,
1993 1992
Assets:
Cash and investments other than
subsidiary companies $ 150,015 $ 158,882
Investment in subsidiaries, at
equity 1,606,261 1,527,085
Other assets, including amounts due
from subsidiaries 1993 $38,374;
1992 $3,311 50,024 5,679
$1,806,300 $1,691,646
Liabilities and stockholders' equity:
Notes payable $ 39,700 $ -
Other liabilities 33,529 23,436
Stockholders' equity 1,733,071 1,668,210
$1,806,300 $1,691,646
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
1993 1992 1991
Net investment income,
principally dividends
from subsidiaries $121,343 $133,955 $146,156
Expenses, principally
general and administrative 11,513 17,470 15,226
109,830 116,485 130,930
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Year Ended December 31
1993 1992 1991
Income taxes (benefits) 1,453 (5,492) (3,270)
108,377 121,977 134,200
Equity in undistributed net
income of subsidiaries 86,795 81,261 41,487
Net income $195,172 $203,238 $175,687
The parent company's principal source of cash during all years
presented was dividends from subsidiaries. Its principal uses of
cash during those years included investment acquisitions, payment of
cash dividends to stockholders and purchases of its common stock in
the open market.
The only significant subsidiaries that do not engage in insurance
operations are Jefferson-Pilot Communications Company (JPCC) and
Jefferson-Pilot Data Services, Inc. (JPDS). JPCC is engaged in
radio, television and media services operations. JPDS is a provider
of data processing services to the media industry. Combined
condensed financial statements of JPCC and JPDS are presented below
(in thousands). Amounts related to years prior to 1993 have been
restated, where appropriate, for the effect of the 1993 change in
accounting principle applicable to income taxes.
COMBINED CONDENSED BALANCE SHEETS
December 31,
1993 1992
Assets:
Cash and cash equivalents $ 6,814 $ 11,133
Receivables 33,539 21,970
Property and equipment, net 41,696 33,588
Goodwill and other assets 43,353 33,247
$ 125,402 $ 99,938
Liabilities and stockholder's equity:
Trade obligations $ 32,965 $ 23,555
Debt obligations to affiliate 17,835 4,755
Income taxes 5,217 6,725
Total liabilities 56,017 35,035
Stockholder's equity 69,385 64,903
$ 125,402 $ 99,938
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COMBINED CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
1993 1992 1991
Revenue $144,961 $129,734 $125,045
Expenses 117,379 105,472 107,022
27,582 24,262 18,023
Income taxes 10,246 10,093 7,696
Income before cumulative
effect of change in
accounting principle 17,336 14,169 10,327
Cumulative effect of change
in accounting principle
applicable to postretirement
benefits other than pensions,
net of income tax benefit (3,654) - -
Net income $ 13,682 $ 14,169 $ 10,327
======== ======== ========
Net cash provided by operating activities amounted to $21 million
in 1993, $21 million in 1992 and $23 million in 1991. Net cash of
$29 million in 1993, $4 million in 1992 and $3 million in 1991 was
used in investing activities. Investing activities in 1993
included the acquisition of broadcast properties by JPCC. Other
investing activities during the three years consisted primarily of
the purchase of property and equipment. Net cash of $4 million was
provided by financing activities in 1993. Financing activities
during 1992 and 1991 resulted in net uses of cash amounting to
$13.5 million and $21 million. Financing activities during all
three years related primarily to borrowings from affiliates and
payment of dividends to the parent company.
Note 13. Segment Information
The Company's operations are conducted principally through the
following three business segments:
Life insurance - Life insurance operations include individual
and group life insurance, annuity and accident and health
policies.
Other insurance - Other insurance operations consist of property
and casualty insurance, including commercial and personal lines,
and title insurance.
Communications - Communications operations consist principally
of radio and television broadcasting, televised sports program
production and electronic data processing services.
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Information about each major operating segment for 1993, 1992 and
1991 follows (in thousands). Amounts related to years prior to
1993 have been restated, where appropriate, for the effect of the
1993 change in accounting principle applicable to reinsurance
receivables. All operations which do not constitute reportable
business segments have been combined with consolidating adjustments
and realized investment gains in the line described as "Other,
net".
1993 1992 1991
Revenue:
Life insurance $ 986,972 $ 965,862 $ 956,426
Other insurance 51,462 53,907 53,472
Communications 144,961 129,734 125,045
Other, net 63,229 52,826 38,533
Consolidated $1,246,624 $1,202,329 $1,173,476
Income before income taxes
and cumulative effect
of change in accounting
principle:
Life insurance $ 232,961 $ 217,635 $ 202,349
Other insurance 8,860 7,820 919
Communications 27,582 24,262 18,023
Other, net 52,628 35,909 23,476
Consolidated $ 322,031 $ 285,626 $ 244,767
Identifiable assets at
December 31:
Life insurance $5,194,478 $4,831,189 $4,552,072
Other insurance 175,670 165,959 154,051
Communications 125,402 99,938 102,836
Other, net 145,071 159,676 136,437
Consolidated $5,640,621 $5,256,762 $4,945,396
Depreciation and
amortization:
Life insurance $ 5,940 $ 6,055 $ 5,741
Other insurance 178 194 209
Communications 10,757 8,425 10,013
Other, net 54 172 327
Consolidated $ 16,929 $ 14,846 $ 16,290
The cumulative effect of the 1993 change in accounting principle
applicable to postretirement benefits other than pensions
approximated $37 million on a pretax basis and related primarily to
the life insurance segment ($30 million) and the communications
segment ($6 million). Additions to real estate and property and
equipment approximated $26 million in 1993, $7 million in 1992 and
$9 million in 1991. Included in the preceding amounts are
additions related to the communications industry segment totaling
$17.6 million, $4.7 million and $3.4 million in 1993, 1992 and
1991, respectively. Other additions to real estate and property
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and equipment related primarily to the life insurance segment
during all three years. Expenditures for goodwill and other
intangibles by the communications segment totaled $11.9 million in
1993 and resulted from the acquisition of broadcast properties.
Note 14. Commitments and Contingent Liabilities
The Company routinely enters into commitments to extend credit in
the form of mortgage loans and to purchase certain debt instruments
for its investment portfolio in private placement transactions.
All such commitments outstanding at December 31, 1993 were in the
normal course of the Company's investment activities and pertained
to future investments which are similar in nature to those it
currently holds.
The Company leases electronic data processing equipment and field
office space under noncancelable operating lease agreements. The
lease terms generally range from three to five years. Annual rent
expense approximated $7 million in 1993 and $8 million in 1992 and
1991. Future annual rental commitments are expected to be
consistent with current year expense.
The Company is involved in certain matters of litigation which
arose out of the normal course of its insurance operations. The
Company's practice is to vigorously defend itself against claims
brought by other parties through the efforts of its internal legal
department and outside counsel. Based on consultation with the
Company's legal advisers, management is of the opinion that
adequate provision has been made for all such matters which are
likely to result in the incurrence of a loss, and that resolution
of other pending litigation will not have a material adverse effect
on the Company's financial condition.
The Kentucky Insurance Commissioner has submitted to the Circuit
Court of Franklin County, Kentucky a proposed plan of
rehabilitation for Kentucky Central Life Insurance Company, which
was seized in February 1993. Under the proposed plan, Jefferson-
Pilot Life Insurance Company would assume most of Kentucky
Central's life insurance and annuity business. Kentucky Central
reported statutory basis life reserves and deposit liabilities
totaling approximately $1 billion as of December 31, 1992. While
negotiations are in progress, the outcome of the proposed plan
depends not only upon the Circuit Court ruling, but also upon the
resolution of other significant issues. If a transaction is
completed, the Company would expect returns comparable to those it
realizes on new business sold through its normal distribution
system.
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