FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1994 Commission file number 1-5955
Jefferson-Pilot Corporation
(Exact name of registrant as specified in its charter)
North Carolina 56-0896180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Greene Street, Greensboro, North Carolina 27401
(Address of principal executive offices) (Zip Code)
(910) 691-3441
(Registrant's telephone number, including area code)
Indicate whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes x No
Number of shares of common stock outstanding at September 30, 1994 48,450,448
JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
Part I. Financial Information
Consolidated Condensed Balance Sheets -
September 30, 1994 and December 31, 1993 3
Consolidated Condensed Statements of Income
- Three Months and Nine Months Ended
September 30, 1994 and 1993 4
Consolidated Condensed Statements of Changes
in Retained Earnings - Three Months and Nine
Months Ended September 30, 1994 and 1993 5
Consolidated Condensed Statements of Cash
Flows - Nine Months Ended September 30, 1994
and 1993 6
Notes to Consolidated Condensed Financial
Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II. Other Information 18
Signature 19
2
PART I. FINANCIAL INFORMATION
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
September 30 December 31
Assets 1994 1993
(Unaudited) (Note 1)
Cash and investments:
Debt securities available for sale
(amortized cost $1,785,097) (Note 2) $ 1,722,541 $ 0
Debt securities held to maturity
(fair value $1,774,791) (Note 2) 1,880,772 0
Debt securities (fair value $3,447,000) 0 3,221,878
Equity securities available for sale
(cost $342,128) (Note 2) 835,169 0
Equity securities (cost $325,670) 0 833,440
Mortgage loans on real estate 640,352 583,645
Cash and all other investments 290,274 309,537
Accrued investment income 66,815 69,327
Accounts receivable and agents'
balances 53,520 60,526
Accounts receivable - reinsurance 28,827 25,793
Property and equipment, net 101,975 98,434
Deferred policy acquisition costs 313,530 277,731
Other assets 180,529 160,310
$ 6,114,304 $ 5,640,621
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Policy liabilities $ 3,677,700 $ 3,454,313
Income tax liabilities 149,557 184,295
Obligations under repurchase agreements (Note 4) 266,492 0
Short term notes payable 48,700 39,700
Accrued expenses 76,804 76,894
Unearned investment income 5,029 5,020
Other liabilities 128,898 147,328
4,353,180 3,907,550
Stockholders' Equity:
Common stock 60,563 61,831
Retained earnings 1,414,653 1,339,672
Net unrealized gains on securities,
net of income tax effect (Note 2) 285,908 331,568
1,761,124 1,733,071
$ 6,114,304 $ 5,640,621
=========== ===========
See notes to consolidated condensed financial statements.
3
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Shares Outstanding and Per Share Amounts)
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
Revenue: (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Premiums
Life and annuity $ 42,000 $ 40,607 $ 129,754 $ 130,090
Accident and health 99,967 94,513 297,757 285,758
Other considerations 17,289 13,511 45,791 38,497
Investment income, net of expenses 95,453 92,220 287,057 275,906
Communications 38,476 30,321 118,866 96,404
Other income 18,499 17,210 54,713 51,278
Realized investment gains 15,868 14,290 42,592 39,515
327,552 302,672 976,530 917,448
Benefits and Expenses:
Policy benefits 167,543 152,980 494,965 475,814
Insurance commissions 21,154 15,369 58,883 46,415
Communications operations 26,921 22,844 82,064 69,344
General and administrative 29,966 29,606 92,115 90,196
Taxes, licenses and fees 6,247 6,367 19,035 19,548
Increase in deferred acquisition
costs, net of amortization ( 12,861) ( 3,348) ( 28,561) ( 11,343)
238,970 223,818 718,501 689,974
Income before income taxes 88,582 78,854 258,029 227,474
Provision for income taxes 29,783 26,380 86,596 72,824
58,799 52,474 171,433 154,650
Accumulated post retirement benefit
obligation at 1-1-93 ($37,035 less
deferred income tax of $12,926) 0 0 0 ( 24,109)
Net income $ 58,799 $ 52,474 $ 171,433 $ 130,541
=========== =========== =========== ===========
Average number of shares outstanding 48,450,367 50,320,889 48,705,568 50,397,402
=========== =========== =========== ===========
Income before effect of initial
application of SFAS 106 $ 1.21 $ 1.04 $ 3.52 $ 3.07
Effect of initial application of
SFAS 106 - - - ( 0.48)
Net income per share of common stock $ 1.21 $ 1.04 $ 3.52 $ 2.59
=========== =========== =========== ===========
Cash dividends paid per share of
common stock $ 0.43 $ 0.39 $ 1.25 $ 1.12
=========== =========== =========== ===========
See notes to consolidated condensed financial statements.
4
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN RETAINED EARNINGS
(In Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Balance at beginning of period $ 1,377,575 $ 1,321,671 $ 1,339,672 $ 1,270,342
Net income for the period 58,799 52,474 171,433 130,541
1,436,374 1,374,145 1,511,105 1,400,883
Cash dividends declared ( 20,769) ( 19,577) ( 41,743) ( 39,263)
Reacquisition of common stock, net ( 952) 327 ( 54,709) ( 6,725)
Balance at end of period $ 1,414,653 $ 1,354,895 $ 1,414,653 $ 1,354,895
=========== =========== =========== ===========
See notes to consolidated condensed financial statements.
5
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30
1994 1993
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net income $ 171,433 $ 130,541
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in policy liabilities 25,788 23,262
Amortization of deferred acquisition costs 27,958 28,583
Deferred policy acquisition costs ( 56,518) ( 39,926)
Gain from sales of investments ( 42,592) ( 39,515)
Other ( 17,935) ( 13,390)
Net cash provided from operations 108,134 89,555
Cash Flows from Investing Activities:
Investments purchased and sold, net ( 480,652) ( 373,567)
Other investing activities ( 19,858) 29,925
Net cash used by investing activities ( 500,510) ( 343,642)
Cash Flows from Financing Activities:
Net short-term borrowings 275,492 0
Cash dividends to stockholders ( 41,743) ( 39,263)
Reacquisition of common stock, net ( 55,977) ( 6,869)
Policyholder contract deposits 283,884 223,582
Policyholder contract withdrawals ( 86,285) ( 67,612)
Net cash provided by financing activities 375,371 109,838
Increase (decrease) in cash and cash equivalents ( 17,005) ( 144,249)
Cash and cash equivalents at beginning of period 31,563 155,669
Cash and cash equivalents at end of period $ 14,558 $ 11,420
=========== ============
Supplemental Cash Flow Information:
Cash paid during the period for income taxes $ 97,100 $ 86,996
=========== ==========
Interest paid on short-term borrowings $ 6,040 $ 0
=========== ==========
See notes to consolidated condensed financial statements.
6
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated condensed balance sheet as of December 31,
1993 has been derived from the audited consolidated balance sheet as of
that date. The other accompanying consolidated condensed financial
statements of Jefferson-Pilot Corporation and subsidiaries are unaudited;
but, in the opinion of the Company's management, reflect all adjustments
necessary to present fairly the consolidated condensed balance sheet as of
September 30, 1994, the consolidated condensed statements of income and
changes in retained earnings for the three months and nine months ended
September 30, 1994 and 1993, and the consolidated condensed statements of
cash flows for the nine months ended September 30, 1994 and 1993. Aside
from the adoption of new accounting standards disclosed in Notes 2 and 3
below, such adjustments consist only of normal recurring accruals and
adjustments.
These consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and
related notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1993. Consolidated net income and cash
flows for the interim periods reflected in the accompanying consolidated
condensed financial statements are not necessarily indicative of those
to be expected for the entire fiscal year.
2. Adoption of Accounting Standard Affecting Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS 115). SFAS 115 applies to equity securities
having readily determinable fair values and to debt securities. It
requires securities under its scope to be classified for financial
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 for classifying securities as held to
maturity or trading and requires securities not otherwise classified to
be accounted for as available for sale. Equity securities with readily
determinable fair values are required to be classified as either trading
or available for sale. Whenever an individual security classified as
either held to maturity or available for sale experiences an other-than-
temporary decline in fair value to an amount below amortized cost, SFAS
115 requires an adjustment to the amortized cost of such security with a
corresponding charge to income.
In connection with the adoption of SFAS 115, the Company classified
certain debt securities held as of January 1, 1994 as available for sale
in response to its asset/liability management strategies or other
factors. Prior to adopting SFAS 115, such securities were stated at
amortized cost (reduced by allowances for other-than-temporary declines
in value). The stated amount of debt securities classified as available
for sale was adjusted to aggregate fair value as of January 1, 1994,
as required by
7
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
SFAS 115. Equity securities held by the parent company as of January 1, 1994,
which were previously stated at the lower of aggregate cost or market, were
classified as available for sale with the stated amount thereof increased to
aggregate market value. As a result of the SFAS 115 adjustment to the stated
amount of available-for-sale debt securities, the Company reduced deferred
policy acquisition costs by the amount that would have been recognized if net
unrealized gains pertaining to such securities held by Jefferson-Pilot Life
Insurance Company had actually been realized.
SFAS 115 adoption adjustments as of January 1, 1994 are summarized below
(in thousands):
Debt Equity
Securities Securities Total
Increase in stated amount of securities $ 106,624 $ 70,104 $ 176,728
Reduction of deferred policy
acquisition costs (15,235) 0 (15,235)
Increase in deferred income tax
liabilities (31,986) (28,103) (60,089)
Increase in net unrealized gains,
included in stockholders' equity $ 59,403 $ 42,001 $ 101,404
Aggregate amortized cost, aggregate fair value (stated amount) and gross
unrealized gains and losses pertaining to securities classified as available
for sale as of September 30, 1994 are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Treasury obligations
and direct obligations of
U.S. Government Agencies $ 632,755 $ 13,697 $ (31,429)$ 615,023
Federal agency issued
collateralized mortgage
obligations 398,350 1,963 (18,381) 381,932
Obligations of states and
political subdivisions,
including special revenue
obligations 61,293 1,448 ( 1,940) 60,801
Corporate obligations 583,313 4,161 (30,818) 556,656
Corporate private labeled
collateralized mortgage
obligations 84,931 1,059 ( 1,199) 84,791
Redeemable preferred stocks 24,455 594 ( 1,711) 23,338
Subtotal, debt securities $1,785,097 $ 22,922 $ (85,478)$1,722,541
Equity securities 342,128 498,190 ( 5,149) 835,169
Securities available for sale $2,127,225 $ 521,112 $ (90,627)$2,557,710
8
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
Aggregate amortized cost (stated amount), aggregate fair value and gross
unrealized gains and losses pertaining to debt securities classified as
held to maturity as of September 30, 1994 are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Federal agency
issued collateralized
mortgage obligations $ 509,553 $ 52 $ ( 45,211) $ 464,394
Obligations of states
and political
subdivisions,
including special
revenue obligations 32,121 1,044 ( 1,201) 31,964
Corporate obligations 1,339,098 22,536 ( 83,201) 1,278,433
Debt securities
held to maturity $1,880,772 $ 23,632 $ (129,613) $1,774,791
The effective duration of debt securities classified as available for
sale approximates 5.5 (5.8 for debt securities classified as held to
maturity). Proceeds from sales of securities classified as available
for sale totaled $505.2 million for the nine months ended September 30,
1994. Resulting gross realized gains and losses totaled $48.0 million
and $9.4 million, respectively. Cost of securities sold was determined
by specific identification. There were no material transfers of
securities among classifications during the period and no sales of
securities classified as held to maturity.
A summary of the changes in net unrealized gains on securities (which
is included in the consolidated condensed balance sheets as a separate
component of stockholders' equity) during the nine months ended
September 30, 1994 follows (in thousands):
9
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
Net Deferred Stockholders'
Unrealized Income Equity
Gains Taxes Component
Balances as of December 31,
1993 on equity securities
held by insurance
subsidiaries $ 507,770 $ (176,202) $ 331,568
Effect of adopting
SFAS 115 as of
January 1, 1994 161,493 (60,089) 101,404
Decrease during period (231,541) 84,477 (147,064)
Balances as of September
30, 1994 on debt and
equity securities
classified as available
for sale $ 437,722 $ (151,814) $ 285,908
3. Adoption of Accounting Standard Affecting Postretirement Benefits
During the nine months ended September 30, 1993, the Company adopted
Statement of Financial Accounting Standards No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106).
As permitted by SFAS 106, the Company recognized its initial liability
for postretirement health care and life insurance benefits by means of
a one-time "cumulative effect" charge to income during the first quarter
of 1993. Aside from the one-time charge, adoption of SFAS 106 reduced
consolidated net income for the nine months ended September 30, 1993 by
less than $.01 per share.
4. Reverse Repurchase Agreements
During the nine months ended September 30, 1994, the Company entered
into several reverse repurchase agreements. The agreements involve
U.S. Treasury notes with aggregate fair value of $266,957,000 at
September 30, 1994 and amortized cost of $278,404,000. The agreements
mature at various dates through January, 1995. The maximum amount
outstanding during the period was $264,797,000. As of September 30,
1994 the maximum amount outstanding with any one party was $170.3
million with JP Morgan Securities. The weighted average interest rate
under the agreements approximated 4.5% for the period.
10
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
5. Subsequent Events
At its meeting on November 7, 1994 the Corporation's Board of Directors
took actions that included the following:
1. Declared two quarterly dividends of $0.43 per share of common stock,
payable December 3, 1994 with a November 18, 1994 record date, and
payable March 3, 1995 with a record date of February 10, 1995.
2. Amended and restated the Corporation's Shareholder Rights Plan to
reset the exercise price for the Rights to $185, extend the duration
to November 7, 2004, lower to 15% from 20% the share ownership
threshold that triggers exercisability of the Rights, and otherwise
update the Plan to reflect developments in the law and practices by
many U.S. public corporations since the Plan was first adopted in
1988.
3. Authorized the repurchase from time to time of up to 2 million shares
of the Registrant's common stock, replacing an earlier authorization.
11
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table illustrates the components of net income for the
first nine months and third quarter of 1994 and 1993:
Nine Months Ended
Sept. 30, 1994 Sept 30, 1993
Amount Per Share Amount Per Share
(Amounts in millions, except per share data)
Operating income before
effect of initial
application of FAS 106 $ 144.9 $ 2.98 $ 128.6 $ 2.55
Realized investment
gains, net of
income taxes 26.5 .54 26.0 .52
Effect of initial
application of FAS 106 0.0 0.00 (24.1) (.48)
Net income $ 171.4 $ 3.52 $ 130.5 $ 2.59
======== ======== ======== ========
Three Months Ended
Sept. 30, 1994 Sept 30, 1993
Amount Per Share Amount Per Share
(Amounts in millions, except per share data)
Operating income before
effect of initial
application of FAS 106 $ 48.9 $ 1.01 $ 42.6 $ 0.85
Realized investment
gains, net of
income taxes 9.9 0.20 9.9 0.19
Effect of initial
application of FAS 106 0.0 0.00 0.0 0.00
Net income $ 58.8 $ 1.21 $ 52.5 $ 1.04
======== ======== ======== ========
12
First nine months of 1994 compared to first nine months of 1993:
Consolidated net income for the first nine months of 1994 was $171.4 million
compared to $154.7 million before the cumulative effect of adopting a new
accounting standard for the same period of 1993. Effective January 1, 1993,
Jefferson-Pilot Corporation and Subsidiaries (the Company) adopted Statement
of Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other than Pensions", and in connection therewith,
recorded a net-of-tax charge to earnings of $24.1 million, resulting in net
income for the first nine months of 1993 of $130.5 million after such charge.
Without realized investment gains and FAS 106 charges, operating income
increased $16.3 million or 12.7% to $144.9 million. The increase is primarily
due to improvements in the Life insurance and Communication segments, as well
as higher parent company earnings on invested assets. Operating income per
share improved 16.9% to $2.98, partly on the strength of improved earnings and
partly due to the effect of reacquiring approximately 1.3 million of the
Company's shares during the first nine months. Average shares outstanding of
48.7 million were 3.4% less than 50.4 million average outstanding during the
first nine months of the prior year.
Earnings from the Life insurance segment increased 8.8% to $123.7 million
from $113.7 million last year. Individual insurance improved 7.2% to $91.2
million and Group insurance improved 13.5% to $32.6 million. Individual
results benefited from a significant improvement in total expenses, net of
deferral of acquisition costs, due to field expense savings and a larger
portion of premium receipts arising from new business sales. Investment
income of the Individual line increased on a larger base of assets backing
policies in force. Death benefits increased $2.9 million, as individual life
mortality experience worsened somewhat over the prior year. However,
mortality experience is still within management expectations. Group insurance
results improved due to heightened profitability of conventionally-insured
health policies. In total, Group health earnings improved 26.7% to $24.3
million over the prior year's nine months. Group life results declined 13.0%
to $8.3 million due to an increase in death benefits which were $2.5 million
higher than in the prior year's nine months.
Earnings from the Communications segment were $3.9 million higher, an
improvement of 36.8% over the prior year's nine months. The improvement
primarily relates to enhanced profitability of established radio and
television properties. Radio contributed $2.4 million and television $0.5
million to improved results. Sports production contributed $0.8 million.
Revenues from the Communications segment increased $22.4 million or 23.3% due
to increased advertising receipts and recent acquisitions of radio and
television properties.
Earnings of the Other insurance segment, consisting of casualty and title
operations, amounted to $5.8 million, and were slightly less than the
$6.0 million earned in the first nine months of the prior year.
Non-operating units earned $0.8 million in the first nine months of 1994,
an increase of $2.6 million over the comparable period in 1993 which
resulted from improved investment results and expense reductions.
13
Third quarter of 1994 compared to third quarter of 1993:
Net income for the third quarter was $58.8 million compared to $52.5 million
for the same quarter of the prior year, an increase of 12.1%. Earnings per
share increased 16.3%, partly due to stock reacquisitions. Excluding the
effect of realized investment gains, operating income increased 14.9% to
$48.9 million.
The Company's policy benefits for the third quarter were $167.5 million, up
9.5% over the same period last year. Much of the increase came from the Life
insurance segment. The increase in policy reserves was $6.2 million greater
than the third quarter of 1993, death benefits were up $4.4 million and
interest credited to policyholders on universal life type policies and certain
annuity policies increased by $1.5 million. Insurance commissions increased
by 37.6% to $21.5 million. Most of this increase was from commissions on new
business in the Life insurance segment.
Operating income for the Life insurance segment improved $3.8 million or
9.8% to $42.4 million. Individual results comprised $3.0 million of the
improvement while Group results represented $0.8 million. Individual
expenses exhibited a marked improvement, declining 24.9% from last year's
third quarter while Individual death benefits continued to worsen, up 9.4%
or $1.3 million over the third quarter of the prior year. Group life earnings
declined $1.1 million compared to the same quarter of last year while Group
health earnings improved $1.9 million. Death claims paid in the Group life
line increased $3.1 million when compared to a favorable third quarter of the
prior year. Group health claims improved to 76.7% of premiums in the third
quarter of 1994 as compared to 80.5% of premiums for the same quarter of 1993.
Operating income of the Communications segment improved 70.3% over the same
quarter of last year to $4.4 million, an increase of $1.8 million. Increased
market shares and advertising revenues of recently-acquired radio and
television properties contributed to the third quarter improvement.
Operating income for the Other insurance segment was flat when compared to
the same quarter of the prior year at $1.9 million.
Earnings from the non-operating units were $0.7 million higher for the
quarter, as compared to the prior year, continuing a trend of improved
expense and investment results noted during the prior quarters of this year.
Realized investment gains, net of income taxes, were flat at $9.9 million
for the third quarter of both years.
The Company's effective corporate income tax rate on operating earnings was
32.7% for the third quarter of 1994 as compared to 34.0% for the third quarter
of 1993. The higher tax rate in the prior year is primarily attributable to
the Revenue Reconciliation Act of 1993, which became effective during the
third quarter of 1993 and increased the Company's marginal tax rate on fully-
taxable income from 34% to 35%, retroactive to January 1, 1993.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements are met primarily by cash flows from
the operations of Jefferson-Pilot Life Insurance Company (J-P Life) and
other consolidated subsidiaries. Primary sources of cash of subsidiary
operations are premiums, other insurance considerations, investment income,
and communications revenue. Primary uses of cash in the subsidiaries'
operations include payment of insurance benefits, operating expenses, and
policy acquisition costs.
Primary sources of cash from investing activities are proceeds from maturities
and redemptions of debt securities, proceeds from disposition of securities
that are available for sale and mortgage loan repayments. Uses of cash in
investing activities include reinvestment of proceeds from investment
transactions, investment of proceeds from J-P Life's policyholder contract
deposits, funds acquired through external financing arrangements and
investment of the excess of net cash provided by operations over that used to
pay dividends and reacquire the Company's common stock.
During 1994, the Company entered into securities repurchase agreements in
accordance with the established asset/liability management practices to
improve duration match of its assets and insurance liabilities. Under these
agreements, the Company received and invested funds which approximated as much
as $265 million at any one time during the first nine months. Transactions
related to the securities repurchase agreements resulted in substantial
increases in cash provided by financing activities and cash used in investing
activities for the nine months over the amounts reported for the first nine
months of 1993. The purpose and effects of these agreements were to obtain
additional funds for investment in securities with longer durations than the
related liability. These agreements are accounted for as financing
arrangements in the accompanying financial statements. The Company also
continued to utilize uncommitted bank lines of credit in management of its
cash flow.
The Company continues to reacquire its own common stock whenever management
considers it prudent. During the nine months ended September 30, 1994 the
Company used cash totaling $63.4 million to reacquire 1.3 million shares.
During the same period, the Company issued 0.3 million shares as a result
of the exercise of employee stock options and received cash totaling
$7.5 million.
The Company's Investment Policy requires a high average quality fixed income
portfolio ("A" is the minimum required but currently, the average is "Aa3",
excluding mortgage loans). The Policy also imposes limits on the amount of
lower quality investments and requires diversification by issuer and asset
type. The amortized cost and market value of bonds classified as below
investment grade (rated below Baa3/BBB-) amounted to $109.0 million and
$108.1 million, respectively at September 30, 1994 as compared to $101.0
million and $106.6 million at December 31, 1993. The carrying value of
nonperforming mortgage loans totaled $3.7 million at September 30, 1994
compared to $9.8 million at December 31, 1993. It is the Company's practice
to record nonperforming loans at the present value of expected future cash
flows, using each loan's effective yield. Below-investment grade bonds and
problem mortgage loans remain below industry averages.
15
The fair value of the Company's mortgage backed securities amounted to
$931.1 million at September 30, 1994 and $653.9 million at December 31, 1993.
During the first nine months, the Company reduced its exposure in mortgage-
backed "pass-through" securities in favor of collateralized mortgage
obligations (CMO's). Approximately 83% of the CMO's owned are invested in
preferred amortization certificates (PAC'S) and targeted amortization
certificates (TAC'S) where the risks of prepayment or extension are controlled
in an effort to match the interest rate risk of the Company's underlying
insurance liabilities.
The Company's policy is to invest in high quality securities and to duration-
match investments with underlying insurance liabilities. Only fixed interest
investments, including commercial mortgage loans, are used to back the
Company's insurance liabilities. Additionally, the Company regularly compares
projected cash flows under varying interest rate scenarios to measure the
sensitivity of asset and liability cash flows to changes in market interest
rates. At September 30, 1994, the weighted average book yield on bonds and
mortgage loans backing insurance liabilities and required surplus was 8.1%.
The effective duration of these assets was approximately 5.4 and the estimated
weighted duration of the liabilities was 6.1.
At the present time, the Company does not alter investment or liability
positions through the use of derivative instruments. Other than the CMO's
mentioned above and certain covered call options written on the equity
portfolio, the Company does not currently invest in derivative instruments.
The Company has not invested in volatile CMO's, such as interest-only (I/O) or
principal-only (P/0) instruments and accordingly, the Company does not believe
that its investments are disproportionately affected by changes in the
interest rate environment.
Consolidated stockholders' equity as of September 30, 1994 amounted to
$1.761 billion, compared to $1.733 billion as of December 31, 1993.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). The effects of adopting SFAS 115 are discussed
in Note 2 to the consolidated condensed financial statements. Interest rates
have risen approximately 200 basis points since the beginning of the current
year, causing a decline in the fair value of the fixed-interest portfolio
classifed as available for sale and contributing to a decline in the market
value of the equity securities portfolio. These declines have resulted in
charges to the separate component of stockholders' equity since January 1,
1994 (the date of adoption of SFAS 115) amounting to $169.2 million for debt
securities and $84.8 million for equity securities, reduced by the
corresponding effects on deferred policy acquisition costs of $22.4 million
and deferred income taxes of $84.5 million.
The increase in stockholders' equity from December 31, 1993 through
September 30, 1994 results from net income of $171.4 million, less dividends
to stockholders of $41.7 million, the net cost of reacquiring stock of
$56.0 million, and the change in unrealized investment gains of $45.7 million,
net of taxes (See Note 2 to the consolidated condensed financial statements).
The General Statutes of the State 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. Additionally, the Company is required to maintain statutory
surplus levels exceeding risk-based capital requirements. The Company regards
the regulatory capital status of its insurance subsidiaries, with due
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consideration to the risk-based capital requirements which became effective
for life insurers in 1993, to be extremely strong. Regulatory restrictions
and capital resource requirements are not expected to restrict future dividend
payments to shareholders.
On August 18, 1994 the Franklin Kentucky Circuit Court entered a final but
appealable order that approved the Kentucky Insurance Commissioner's proposed
plan to liquidate Kentucky Central Life Insurance Company. The plan will
permit Jefferson-Pilot Life to acquire the life insurance operations of
Kentucky Central Life. The closing is expected to take place in 1995, after
the appeal of the Court's ruling is resolved. There will be no impact on the
Company's 1994 Financial Statements.
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JEFFERSON-PILOT CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The registrant is involved in various claims and lawsuits incidental to its
business. In the opinion of management, the ultimate liability will not have
a material effect on the financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Page No.
(2) Plan of acquisition - Life and Health
Agreement in Connection with the
Rehabilitation of Kentucky Central
Life Insurance Company with Exhibit 2.1
(Transfer and Assignment Agreement) and
Exhibit 2.2 (Assumption Reimbursement
Agreement) attached. All schedules to
the Agreement have been omitted. A list
of the schedules appears at the end of
the Agreement. The Registrant agrees
to furnish a copy of any omitted schedule
to the Commission upon request. 20 - 167
(3)(ii) By-laws as amended November 7, 1994
(incorporated by reference to Exhibit 3 to
Report on Form 8-K dated November 14, 1994). -
(4) Rights Agreement as amended November 7, 1994
(incorporated by reference to Exhibit 4 to
Report on Form 8-K dated November 14, 1994). -
(27) Financial Data Schedule 168
(b) Reports on Form 8-K: A report on Form 8-K was filed on November 14, 1994
to report the amendment and restatement of the Shareholders Rights Plan and to
report the amendment of the Corporation's By-laws.
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JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERSON-PILOT CORPORATION
By (Signature) Dennis R. Glass
(Name and Title) Dennis R. Glass, Senior Vice
President and Treasurer
(Principal Financial Officer)
Date November 14, 1994
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