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, 1994 and 1993, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1994.
These consolidated 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, 1994 and
1993, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As disclosed in the notes to consolidated financial statements, the Company
changed its method of accounting for investments in debt and marketable
equity securities effective January 1, 1994 by adopting Statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". As also disclosed in the
notes to consolidated financial statements, the Company adopted the
provisions of SFAS No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" in 1993.
/s/ McGladrey & Pullen, LLP
Greensboro, North Carolina
February 7, 1995, except for Note 19
as to which the date is February 14, 1995
F-43
Jefferson-Pilot Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1994 and 1993
Dollar Amounts in Thousands Except Per Share Information
ASSETS 1994 1993
Cash and investments:
Cash and cash equivalents $ 22,774 $ 31,563
Short-term investments - 3,065
Debt securities available for sale, at fair
value (amortized cost $1,691,974) (Note 2) 1,606,865 -
Debt securities held to maturity, at amortized
cost (fair value $1,798,135) (Note 2) 1,940,046 -
Debt securities, at amortized cost
(fair value $3,447,000) (Note 2) - 3,221,878
Equity securities available for sale, at
market value (cost $290,370) (Note 2) 718,023 -
Equity securities, principally at
market value (cost $325,670) (Note 2) - 833,440
Mortgage loans on real estate (Note 2) 680,625 583,645
Policy loans 206,361 214,603
Real estate, less accumulated depreciation
1994 $21,160; 1993 $21,018 30,888 30,959
Other investments 37,861 29,347
Total cash and investments 5,243,443 4,948,500
Accrued investment income 67,371 69,327
Accounts receivable and agents' balances 64,191 60,526
Due from reinsurers 30,036 25,793
Property and equipment, less accumulated
depreciation 1994 $100,184; 1993 $102,960 100,672 98,434
Deferred policy acquisition costs,
net of amortization (Note 3) 329,139 277,731
Goodwill and other intangibles related to
communications operations, net of accumulated
amortization 1994 $16,411; 1993 $14,244 54,058 39,128
Assets held in separate accounts 210,225 84,225
Other assets 41,201 36,957
$ 6,140,336 $ 5,640,621
See Notes to Consolidated Financial Statements.
F-44
LIABILITIES AND STOCKHOLDERS' EQUITY
1994 1993
Policy liabilities:
Future policy benefits (Note 4) $ 1,278,978 $ 1,378,793
Policyholder contract deposits (Note 4) 1,846,043 1,575,454
Dividend accumulations and other
policyholder funds on deposit 176,519 177,199
Policy and contract claims 172,216 177,807
Dividends for policyholders 18,350 17,779
Deferred revenue and premiums
collected in advance 23,321 21,680
Casualty insurance unearned premiums
and losses payable 70,699 62,793
Other 47,637 42,808
Total policy liabilities 3,633,763 3,454,313
Notes payable (Note 5) 29,350 39,700
Securities sold under repurchase
agreements (Note 6) 266,838 -
Currently payable income taxes - 15,133
Deferred income tax liabilities (Note 10) 122,253 169,162
Accounts payable and accrued expenses 48,515 40,767
Unearned investment income 4,959 5,020
Obligation for postretirement benefits
other than pensions (Note 11) 33,707 36,127
Liabilities related to separate accounts 210,225 84,225
Other liabilities 58,183 63,103
Total liabilities 4,407,793 3,907,550
Commitments and contingent liabilities
(Notes 11, 12 and 17)
Stockholders' equity (Notes 7, 8 and 9):
Common stock, par value $1.25 per share,
authorized 100,000,000 shares; issued 1994
48,450,898 shares; 1993 49,464,495 shares 60,564 61,831
Retained earnings 1,441,132 1,339,672
Net unrealized gains on securities available
for sale, less deferred income taxes
$121,989 (Note 2) 230,847 -
Net unrealized gains on equity securities,
less deferred income taxes $176,202 (Note 2) - 331,568
1,732,543 1,733,071
$ 6,140,336 $ 5,640,621
F-45
Jefferson-Pilot Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1994, 1993 and 1992
Dollar Amounts in Thousands Except Per Share Information
1994 1993 1992
Revenue:
Life premiums and other
considerations $ 256,237 $ 240,996 $ 230,834
Accident and health premiums 399,065 386,608 383,552
Total premiums and
other considerations 655,302 627,604 614,386
Net investment income (Note 2) 375,196 360,800 351,721
Realized investment gains (Note 2) 61,426 54,234 45,726
Communications operations 172,501 144,961 129,734
Other 4,385 4,850 4,411
1,268,810 1,192,449 1,145,978
Benefits and expenses:
Life benefits and other credits
to policyholders 318,913 296,078 279,326
Accident and health benefits 308,949 305,648 317,785
Total benefits 627,862 601,726 597,111
Insurance commissions 71,752 55,189 48,775
General and administrative 117,819 119,029 120,731
Insurance taxes, licenses and fees 23,351 23,474 22,820
Net (deferral) of policy
acquisition costs (Note 3) (40,410) (17,527) (12,381)
Communications operations 120,833 100,100 93,560
921,207 881,991 870,616
Income from continuing
operations before income taxes 347,603 310,458 275,362
Income taxes (Note 10) 117,707 100,897 80,764
Income from continuing operations 229,896 209,561 194,598
Income from discontinued operations,
net of income taxes (Note 16) 9,341 9,720 8,640
Income before cumulative effect
of change in accounting principle 239,237 219,281 203,238
Cumulative effect of change in
accounting principle on years
prior to 1993, net of income tax
benefit (Note 11) - (24,109) -
Net income $ 239,237 $ 195,172 $ 203,238
(Continued)
F-46
Jefferson-Pilot Corporation and Subsidiaries
Consolidated Statements of Income (Continued)
Years Ended December 31, 1994, 1993 and 1992
Dollar Amounts in Thousands Except Per Share Information
1994 1993 1992
Income per share (Note 7):
Income from continuing operations $ 4.73 $ 4.17 $ 3.82
Income from discontinued operations 0.19 0.19 0.17
4.92 4.36 3.99
Cumulative effect of change in
accounting principle - (0.48) -
Net income $ 4.92 $ 3.88 $ 3.99
See Notes to Consolidated Financial Statements.
F-47
Jefferson-Pilot Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1994, 1993 and 1992
Dollar Amounts in Thousands Except Per Share Information
Net Net Unreal-
Unrealized ilized Gains
Capital in Gains on on Securities Total
Common Excess of Retained Equity Available Stockholders'
Stock Par Value Earnings Securities For Sale Equity
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 7) 21,377 - (21,452) - - (75)
Increase during year - - - 23,647 - 23,647
Balance, December 31, 1992 63,049 - 1,270,342 - - 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 - - - (3,251) - (3,251)
Balance, December 31, 1993 61,831 - 1,339,672 331,568 - 1,733,071
Change in accounting principle
effective January 1, 1994 (Note 2) - - - (331,568) 432,972 101,404
Net income 239,237 - - 239,237
Cash dividends, $1.72 per share - - (83,357) - - (83,357)
Common stock issued under stock
option plan 408 7,343 - - - 7,751
Common stock reacquired (1,675) (7,343) (54,420) - - (63,438)
Decrease during year - - - - (202,125) (202,125)
Balance, December 31, 1994 $ 60,564 $ - $ 1,441,132 $ - $ 230,847 $ 1,732,543
See Notes to Consolidated Financial Statements.
F-48
Jefferson-Pilot Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1994, 1993 and 1992
Dollar Amounts in Thousands
1994 1993 1992
Cash Flows From Operating Activities
Net income $ 239,237 $ 195,172 $ 203,238
Adjustments to reconcile net income to
cash provided by operating activities:
Change in policy liabilities other than
deposits (15,696) 35,415 1,944
Policy acquisition costs deferred, net (41,117) (17,570) (11,535)
Depreciation and amortization 16,222 16,929 14,724
Deferred income taxes (benefit) 7,304 (7,980) (6,501)
Change in receivables and asset accruals (10,350) (45,063) (6,485)
Change in payables and expense accruals (10,065) 19,768 12,199
Cumulative effect of change in accounting
principle, net - 24,109 -
Realized investment gains (61,569) (56,947) (48,170)
Other (6,872) (3,667) (3,517)
Net cash provided by
operating activities 117,094 160,166 155,897
Cash Flows From Investing Activities
Securities available for sale:
Sales 778,976 - -
Maturities, calls and redemptions 98,243 - -
Purchases (817,464) - -
Securities held to maturity:
Sales 7,431 - -
Maturities, calls and redemptions 122,589 - -
Purchases (577,121) - -
Debt securities:
Sales, maturities, calls and redemptions - 951,899 396,613
Purchases - (1,377,593) (595,175)
Equity securities:
Sales - 99,845 64,450
(Continued)
F-49
Jefferson-Pilot Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1994, 1993 and 1992
Dollar Amounts in Thousands
1994 1993 1992
Purchases $ - $ (65,246) $ (33,322)
Repayments of mortgage loans 71,114 63,399 35,334
Mortgage loans originated (173,139) (85,678) (59,603)
Additions to property and equipment (16,847) (20,620) (7,109)
Acquisition of communications intangibles (17,097) (11,934) -
Other investing activities, net 9,399 46,379 (22,004)
Net cash used in
investing activities (513,916) (399,549) (220,816)
Cash Flows From Financing Activities
Policyholder contract deposits 387,191 290,243 254,145
Withdrawals of policyholder contract
deposits (116,602) (87,606) (86,294)
Increase (decrease) in notes payable (10,350) 39,700 -
Proceeds from securities sold under
repurchase agreements 584,225 - -
Payments for securities sold under
repurchase agreements (317,387) - -
Cash dividends to stockholders (83,357) (78,125) (69,100)
Common stock transactions, net (55,687) (48,935) (34,857)
Net cash provided by
financing activities 388,033 115,277 63,894
Net decrease in cash
and cash equivalents (8,789) (124,106) (1,025)
Cash and cash equivalents, beginning 31,563 155,669 156,694
Cash and cash equivalents, ending $ 22,774 $ 31,563 $ 155,669
See Notes to Consolidated Financial Statements.
F-50
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 continuing operations are in the life
insurance and communications industries. Business segment information is
presented in Note 14 to the consolidated financial statements. Consolidated
statements of income for 1993 and 1992 have been restated to present results
of operations of the discontinued other insurance segment as discontinued
operations.
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 consolidated financial statements
have been prepared in accordance with generally accepted accounting principles.
The insurance subsidiaries also submit financial statements to insurance
industry regulatory authorities. Those financial statements 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 capital and surplus of the
principal life insurance subsidiary to the amounts included in the
consolidated financial statements is presented in Note 8.
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 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.
Investments in debt and equity securities: The Company's investments in
debt securities include notes, bonds, collateralized mortgage obligations,
convertible and other debt instruments, and redeemable preferred stocks.
Investments in equity securities include common and nonredeemable preferred
stocks.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" effective January 1, 1994. SFAS 115 applies to equity
securities having readily determinable fair values and to debt securities.
Securities under its scope must be classified for financial reporting
purposes as either 1) securities held to maturity 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 stated at fair
value with net unrealized gains and losses included in a separate component
of stockholders' equity, net of deferred income tax effect.
SFAS 115 establishes criteria for classifying debt securities as held to
maturity or trading and requires debt 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. Individual securities classified as either held to
maturity or available for sale that experience other-than-temporary declines
in value to amounts less than amortized cost must be adjusted to a new cost
basis, with a corresponding charge to earnings.
F-51
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
In connection with the adoption of SFAS 115, the Company classified debt
securities that it has both the positive intent and ability to hold until
maturity as held to maturity. Other debt securities and all holdings of
equity securities were classified as available for sale. Prior to adopting
SFAS 115, all of the Company's debt securities were stated at amortized
cost less allowances for declines in value considered to be other than
temporary. Debt securities classified as available for sale were adjusted
to aggregate fair value as of January 1, 1994 as required by SFAS 115.
Equity securities held by the parent company, which were previously stated
at the lower of aggregate cost or market, were adjusted to market value.
Equity securities held by the insurance subsidiaries were stated at market
prior to adoption of SFAS 115 and therefore were not adjusted.
Amortization of premiums and accrual of discounts on investments in debt
securities are reflected in earnings over the contractual terms of the
investments in a manner that produces a constant effective yield. Realized
gains and losses on dispositions of securities are determined by the
specific-identification method.
Fair values of debt and equity securities have been determined using values
obtained from independent pricing services and discounted cash flow techniques,
as considered appropriate based on consideration of relevant investment
characteristics.
Mortgage and policy loans: Mortgage loans on real estate are stated at
unpaid balances, net of allowances for unrecoverable amounts. Policy loans
are stated at their unpaid balances.
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan" will be effective for the Company's 1995
consolidated financial statements. SFAS 114, as amended by SFAS 118, requires
that certain impaired loans be reported at the net present value of expected
future cash flows, the loan's observable market price or, for collateral
dependent loans, the fair value of the underlying collateral. Adoption of
SFAS 114 is not expected to have a significant effect on the consolidated
financial statements for 1995.
Real estate and other investments: Real estate 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. Real estate is depreciated principally by the
straight-line method over estimated useful lives generally ranging from
30 to 40 years for buildings. Other investments are stated at equity, or
the lower of cost or market, as appropriate.
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,
including commissions, certain costs of underwriting and issuing policies
and certain agency office expenses, all of which vary with and are primarily
related to the production of new business, have been deferred.
F-52
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
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. Effective with the adoption of SFAS 115 as of January 1,
1994, the carrying amount of deferred policy acquisition costs is adjusted
for amounts that would have been recognized if net unrealized holding gains
or losses on debt securities classified as available for sale had actually
been realized.
Deferred policy acquisition costs are reviewed periodically to determine that
the unamortized portion does not exceed expected recoverable amounts.
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 5 to 40 years.
The carrying amount of goodwill is regularly reviewed for indications of
value impairment, with consideration given to the financial performance of
acquired properties and other relevant factors.
Separate accounts: Separate accounts are assets and liabilities associated
with certain contracts for which investment income and investment gains and
losses accrue directly to the contract holders. The assets of the separate
accounts are stated at 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 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 includes 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-53
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
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.
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.
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 rein-
surance 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, 1994, 1993 and 1992 and for the years then
ended:
1994 1993 1992
Ordinary life insurance in force 12% 13% 13%
Ordinary life premium revenue 22% 23% 24%
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.
F-54
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
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 48,641,880 in 1994,
50,251,676 in 1993 and 50,952,147 in 1992.
Reclassifications: The Company's policy is to reclassify certain amounts
reported in prior years' consolidated financial statements when necessary
to conform with the classifications adopted in the current year. These
reclassifications have no effect on net income or stockholders' equity of
the prior years.
Note 2. Investment Information
The effect of adopting SFAS 115 as of January 1, 1994 and the changes during
1994 in amounts affecting net unrealized gains included in the separate
component of stockholders' equity, reduced by deferred income taxes, are as
follows (in thousands):
Net Unrealized Gains (Losses)
Debt Equity
Securities Securities Total
Effect of adopting SFAS 115 as of January 1, 1994:
Increase in stated amount of securities $ 106,624 $ 70,104 $ 176,728
Reduction of deferred policy acquisition
costs (15,235) - (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
Changes during year ended December 31, 1994:
Decrease in stated amount of securities (191,733) (150,220) (341,953)
Increase in deferred policy acquisition
costs 25,526 - 25,526
Decrease in deferred income tax liabilities 52,022 62,280 114,302
Decrease in net unrealized gains
included in stockholders' equity (54,782) (45,939) (100,721)
Net unrealized gains on equity securities
held by insurance subsidiaries as of
December 31, 1993 - 331,568 331,568
Net unrealized gains (losses) on securities
available for sale as of December 31, 1994 $ (54,782) $ 285,629 $ 230,847
F-55
Note 2. Investment Information (Continued)
Aggregate amortized cost, aggregate fair value (stated amount), and gross
unrealized gains and losses pertaining to securities classified as available
for sale as of December 31, 1994 are as follows (in thousands):
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
U. S. Treasury obligations and
direct obligations of U. S.
Government agencies $ 573,529 $ 8,417 $ (29,851) $ 552,095
Federal agency issued
collateralized mortgage
obligations 394,855 229 (28,310) 366,774
Obligations of states and political
subdivisions, including special
revenue obligations 61,927 1,271 (2,518) 60,680
Corporate obligations 550,204 2,242 (33,758) 518,688
Corporate private-labeled
collateralized mortgage
obligations 87,592 2,385 (3,001) 86,976
Redeemable preferred stocks 23,867 301 (2,516) 21,652
Subtotal, debt securities 1,691,974 14,845 (99,954) 1,606,865
Equity securities 290,370 439,700 (12,047) 718,023
Securities available for sale $ 1,982,344 $ 454,545 $ (112,001) $ 2,324,888
F-56
Note 2. Investment Information (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 December 31, 1994 are as follows (in thousands):
Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
Federal agency issued
collateralized mortgage
obligations $ 509,741 $ - $ (58,027) $ 451,714
Obligations of states and political
subdivisions, including special
revenue obligations 31,705 684 (1,275) 31,114
Corporate obligations 1,398,600 13,524 (96,817) 1,315,307
Debt securities held to maturity $ 1,940,046 $ 14,208 $ (156,119) $ 1,798,135
Aggregate amortized cost (stated amount), aggregate fair value and
gross unrealized gains and losses pertaining to debt securities as
of December 31, 1993 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 $ 892,959 $ 73,107 $ (12) $ 966,054
Federal agency issued
collateralized mortgage
obligations 373,650 15,297 (1,142) 387,805
Obligations of states and political
subdivisions, including special
revenue obligations 85,267 8,653 (163) 93,757
Corporate obligations 1,596,924 121,690 (9,285) 1,709,329
Corporate private-labeled
collateralized mortgage
obligations 165,260 10,879 - 176,139
Mortgage-backed pass-through
securities 60,617 5,110 (1) 65,726
Other debt securities 47,201 2,192 (1,203) 48,190
Debt securities $3,221,878 $ 236,928 $ (11,806) $3,447,000
F-57
Note 2. Investment Information (Continued)
Aggregate amortized cost and aggregate fair value of debt securities as of
December 31, 1994, 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 debt securities
have the right to call or prepay the amounts due the Company, with or without
penalty.
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 34,379 $ 34,896 $ - $ -
Due after one year through
five years 172,489 176,963 3,913 4,060
Due after five years through
ten years 786,929 737,454 162,229 147,161
Due after ten years through
twenty years 186,947 177,070 303,632 261,240
Due after twenty years 4,916 5,079 - -
Amounts not due at single
maturity date 482,447 453,751 1,470,272 1,385,674
1,668,107 1,585,213 1,940,046 1,798,135
Redeemable preferred stocks 23,867 21,652 - -
$1,691,974 $1,606,865 $1,940,046 $1,798,135
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 sheet as of December 31, 1993,
are as follows (in thousands):
Aggregate market value $ 828,786
Aggregate cost 321,016
Net unrealized gains $ 507,770
===============
Gross unrealized gains $ 510,024
Gross unrealized losses (2,254)
Net unrealized gains, as above $ 507,770
===============
Increase in net unrealized gains during the year $ 2,098
===============
F-58
Note 2. Investment Information (Continued)
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 as of December 31, 1993, are as follows
(in thousands):
Aggregate market value $ 74,758
Aggregate cost 4,654
Gross unrealized gains $ 70,104
==============
The Company's investment policy requires it to maintain a diversified,
high average quality debt securities portfolio and imposes limits on
holdings of lower quality securities, including those with heightened
risk-reward exposure. Credit exposure is regularly monitored on an overall
basis and from industry, geographic and individual issuer perspectives.
Exposure limits are reduced as credit quality declines. When credit quality
declines to the extent that limits are violated, the affected holdings must
be promptly conformed to limits or Finance Committee approval must be sought.
Current investment policy limits Jefferson-Pilot Life Insurance Company's
investments in equity securities and real estate to a prescribed percentage
of statutory surplus plus asset valuation reserve. Duration/cash flow
characteristics of fixed income investments are compared with those of
insurance liabilities to ascertain that durations are prudently managed.
Only fixed income investments back the Company's life insurance liabilities
and cash flow tests are regularly performed.
While the Company's investment policy permits the use of derivative financial
instruments such as futures contracts and interest rate swaps in conjunction
with specific direct investments, the Company does not generally employ such
instruments to alter investment or liability positions. The Company's
investment policy with respect to collateralized mortgage obligations (CMOs)
focuses on actively traded, less volatile issues that produce relatively
stable cash flows. CMO holdings as of December 31, 1994 consist predominately
of the least volatile PAC and sequential tranches of federal agency issues.
During 1994, the Company liquidated its holdings of mortgage-backed pass-
through securities and reinvested the proceeds into less volatile CMOs with
longer durations. Due to the high quality and liquid nature of the CMO
portfolio, the Company believes the impairment risks associated with these
securities are no greater than those applicable to direct agency or corporate
issues.
Investments in debt and equity securities include approximately 775 issuers,
with only one corporate issuer 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 value of
$236.6 million (5.5%) and $256.7 million (6.3%) as of December 31, 1994
and 1993. Debt securities considered less than investment grade approximated
3.5% of the debt securities portfolio as of December 31, 1994. Debt securities
with fair value approximating $16 million are on deposit with or for states in
which subsidiaries conduct insurance operations.
F-59
Note 2. Investment Information (Continued)
The Company's mortgage loan portfolio is comprised primarily of conventional
real estate mortgages collateralized by retail, hotel and office properties.
Mortgage loan underwriting standards emphasize the credit status of a
prospective borrower, quality of the underlying collateral and conservative
loan-to-value relationships. Speculative lending arrangements presenting
heightened risk-reward exposure comprise an insignificant percentage of the
portfolio. About 69% of stated mortgage loan balances as of December 31,
1994 are due from borrowers in South Atlantic and East South Central states,
with another 14% due from borrowers in West South Central states. Delinquent
loans outstanding as of December 31, 1994 approximated $900 thousand and the
Company has provided a valuation allowance of $1.7 million against the
portfolio. Real estate acquired by foreclosure is carried at $8 million,
net of allowances of $2 million.
The details of investment income, net of investment expenses, for the three
years ended December 31, 1994 follow (in thousands):
Year Ended December 31
1994 1993 1992
Interest on bonds and other
debt instruments $ 260,130 $ 243,384 $ 235,234
Dividends on preferred stocks 5,050 7,409 9,769
Dividends on common stocks 28,025 26,890 26,229
Interest on mortgage loans 62,599 57,139 54,807
Interest on policy loans 12,498 12,978 13,298
Real estate income 9,099 9,642 8,503
Other investment income 8,563 6,462 8,352
Investment income of life
insurance operations 385,964 363,904 356,192
Investment income of other companies 12,149 7,793 6,033
Total investment income 398,113 371,697 362,225
Investment expenses (22,917) (10,897) (10,504)
Net investment income $ 375,196 $ 360,800 $ 351,721
Investment expenses include salaries, taxes, interest, expenses of maintaining
and operating investment real estate, 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, 1994 follow (in thousands):
Year Ended December 31
1994 1993 1992
Bonds and other debt instruments $ (9,478) $ 16,786 $ 6,840
Preferred stocks 834 1,904 931
Common stocks 65,671 32,841 40,770
Other 4,399 2,703 (2,815)
Realized investment gains $ 61,426 $ 54,234 $ 45,726
F-60
Note 2. Investment Information (Continued)
Information about proceeds and gross realized gains and losses
on securities transactions during 1994 follows (in thousands):
Available Held to
for Sale Maturity
Proceeds:
From sales $ 778,976 $ 7,431
From maturities, calls and redemptions 98,243 122,589
$ 877,219 $ 130,020
=========== ===========
Gross realized:
Gains $ 60,860 $ 1,709
Losses (23,520) (329)
Net realized gains $ 37,340 $ 1,380
=========== ===========
Held to maturity securities with amortized cost of $7.76 million were sold
at a loss of $329 thousand during 1994 due to significant declines in the
creditworthiness of the issuers. Realized gains on held to maturity
securities represent call premiums. During 1994, Jefferson-Pilot Life
Insurance Company transferred securities classified as available for sale
to the Company's defined benefit pension plans. The transfer included
debt securities with amortized cost of $48.9 million and equity securities
with cost of $7.8 million. The securities transferred had an aggregate value
of $75 million on the date of transfer and therefore a gain of $18.3 million
was recognized. There were no significant transfers of securities between
SFAS 115 classifications during 1994.
During 1993, the Company sold selected debt securities when calls or
prepayments were considered likely. Proceeds from such sales represented
$109 million of the $170 million total proceeds from sales of debt securities
during 1993. Most of the realized gains on debt securities in 1993, and
substantially all in 1992, 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, related to declines in value considered other
than temporary.
F-61
Note 3. Deferred Policy Acquisition Costs
Information about deferred policy acquisition costs and their effect on
income and stockholders' equity for the three years ended December 31, 1994
follows (in thousands):
Year Ended December 31
1994 1993 1992
Beginning balance, life
insurance operations $ 272,314 $ 254,787 $ 242,406
Policy acquisition costs deferred:
Commissions 43,369 27,737 24,020
Other 19,306 14,873 10,118
62,675 42,610 34,138
Policy acquisition costs amortized (22,265) (25,083) (21,757)
Net deferral of policy acquisition
costs reflected in current income 40,410 17,527 12,381
Adjustment related to application
of SFAS 115 reflected in stock-
holders' equity (Note 2) 10,291 - -
Ending balance, life insurance operations 323,015 272,314 254,787
Amounts related to discontinued
property and casualty insurance
operations 6,124 5,417 5,374
Ending balance, consolidated $ 329,139 $ 277,731 $ 260,161
Note 4. Policy Liabilities 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% during 1994 and 1993 and 7.0% during 1992.
Credited rates for annuity products generally ranged from 5.0% to 6.5%
during 1994, 5.0% to 6.25% during 1993 and 5.5% to 6.75% during 1992.
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 Company's experience and generally range between Linton's A and B
tables. For business issued in 1972 and later, withdrawal rates are based
on Company experience and vary by issue age, type of coverage and policy
duration.
F-62
Note 4. Policy Liabilities Information (Continued)
Policy and contract claims liabilities totaled $172.2 million, $177.8 million,
$172.4 million and $179.8 million as of December 31, 1994, 1993, 1992 and
1991, respectively. Related reinsurance recoverables were not material.
Amounts incurred for life and accident and health claims totaled $427.2
million in 1994, $412.4 million in 1993 and $430.1 million in 1992. No
significant adjustments in the provision for insured events of prior fiscal
years is reflected in the incurred amounts. Payments for life and accident
and health claims amounted to $434.2 million in 1994, $408 million in 1993
and $435.9 million in 1992. Payments related to incurred claims of prior
fiscal years approximated $100 million in 1994, $92.5 million in 1993 and
$102 million in 1992.
Note 5. Notes Payable
Notes payable consist of borrowings under unsecured bank lines of
credit providing a maximum combined availability of $375 million as
of December 31, 1994 at interest rates and maturities bilaterally
determined at the time of an advance. Weighted average interest rates
were 6.23% on borrowings outstanding as of December 31, 1994 and 4.5%
on borrowings during 1994. The maximum amount outstanding during 1994
approximated $90 million ($40 million during 1993). Interest expense
totaled $1.7 million on average outstanding borrowing of $37.7 million
in 1994 and was not significant in 1993.
Note 6. Securities Sold Under Repurchase Agreements
During 1994, Jefferson-Pilot Life Insurance Company sold U.S. Treasury
obligations under repurchase agreements involving various counterparties.
The repurchase agreements are accounted for as financing transactions and
the related obligations, together with accrued interest, have been included
with liabilities in the 1994 consolidated balance sheet.
As of December 31, 1994, securities carried at fair value of $266 million
(amortized cost approximating $273 million) were subject to open repurchase
agreements having initial maturities of 120 days and weighted average
remaining maturities of 68 days. The maximum repurchase liability at any
month-end during 1994 approximated the year-end balance. The weighted average
interest rate on repurchase liabilities as of December 31, 1994 was 5.8%.
Interest expense totaled $9.6 million on average month-end repurchase
liabilities of $221 million.
Note 7. 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 for 1992 gives retroactive effect to the stock split.
F-63
Note 7. Stockholders' Equity and Stock Option Plans (Continued)
Changes in the number of shares outstanding during each of the three years
in the period ended December 31, 1994 are as follows:
Year Ended December 31
1994 1993 1992
Shares outstanding, beginning 49,464,495 50,438,907 51,291,936
Shares issued under stock option plan 326,159 109,522 78,181
Shares reacquired (1,339,756) (1,083,934) (931,210)
Shares outstanding, ending 48,450,898 49,464,495 50,438,907
In May 1989, the Company's stockholders approved a stock option plan under
which 908,000 shares of common stock are reserved as of December 31, 1994.
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 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 approved
grants of options and stock appreciation rights to certain officers in 1989
and grants of options to certain officers in 1990 and each of the years
1992 through 1994.
F-64
Note 7. Stockholders' Equity and Stock Option Plans (Continued)
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
senior 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 vested over two years. 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 common stock grants approximated $1,165,000
in 1992.
Summarized information about outstanding stock options, exercisable options
and shares available for grant under the stock option plan is as follows:
Option Price Outstanding Exercisable Available
Per Share Options Options Shares
Balances, January 1, 1992 $22.92 - $28.50 539,064 220,701 840,549
Options granted $39.25 - $40.25 119,820 - (119,820)
Shares granted - - - (2,250)
Options becoming exercisable $22.92 - $40.25 - 50,438 -
Options exercised $22.92 - $25.17 (71,630) (71,630) 9,637
Options terminated $22.92 - $40.25 (28,524) (750) 28,524
Balances, December 31, 1992 $22.92 - $40.25 558,730 198,759 756,640
Options granted $48.25 - $56.00 95,000 - (95,000)
Shares granted - - - (4,500)
Options becoming exercisable $22.92 - $56.00 - 119,299 -
Options exercised $22.92 - $40.25 (105,022) (105,022) 18,134
Options terminated $22.92 - $40.25 (28,521) - 28,521
Balances, December 31, 1993 $22.92 - $56.00 520,187 213,036 703,795
Options granted $45.13 - $52.13 129,000 - (129,000)
Options becoming exercisable $22.92 - $45.13 - 329,659 -
Options exercised $22.92 - $40.25 (326,159) (326,159) 10,416
Options terminated $22.92 - $40.25 (13,841) - 13,841
Balances, December 31, 1994 $25.67 - $56.00 309,187 216,536 599,052
F-65
Note 7. Stockholders' Equity and Stock Option Plan (Continued)
Of the options that are not yet exercisable, 23,666 become exercisable in
1995 and 1996 at $45.13, and 44,667 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. Stock appreciation rights granted in
1989 were exercised during 1992, resulting in the issuance of 4,300 shares of
common stock.
Note 8. Statutory Reporting Information
Net income and stockholder's equity (statutory capital and surplus) of
Jefferson-Pilot Life Insurance Company on the basis of accounting practices
prescribed by regulatory authorities and on the basis of generally accepted
accounting principles included in the consolidated financial statements follow
(in thousands):
Statutory Reporting
1994 1993 1992
Net income for the year ended December 31 $ 158,298 $ 138,893 $ 157,753
Statutory capital and surplus at December 31 $ 971,553 $ 945,157 $ 926,537
Generally Accepted Accounting Principles
1994 1993 1992
Net income for the year ended December 31 $ 194,502 $ 64,199 $ 187,972
Stockholder's equity at December 31 $1,429,541 $1,435,098 $1,368,818
The General Statutes of North Carolina contain certain limitations affecting
the amount of dividends that insurance companies may pay without first obtain-
ing the approval of the State's Insurance Commissioner. Jefferson-Pilot Life
Insurance Company has approximately $97 million available for distribution to
the parent company during 1995 without obtaining approval. The Company believes
that statutory dividend limitations present no practical restrictions on its
future dividend payment plans.
Risk-based capital (RBC) requirements promulgated by the National Association
of Insurance Commissioners became effective for life insurance companies in
1993. RBC requires life insurers to maintain minimum capitalization levels
that are determined based on formulas incorporating credit risk pertaining to
its investments, insurance risk, interest rate risk and general business risk.
As of December 31, 1994, the Company's adjusted capital and surplus
substantially exceeded its authorized control level RBC. The Company does not
expect RBC requirements to present practical restrictions on the ability of
Jefferson-Pilot Life Insurance Company to pay dividends to the parent company.
F-66
Note 9. Stockholders' Rights Plan
Under a stockholders' rights plan established in 1988 (the plan), the
Company's Board of Directors declared a dividend of one common share purchase
right for each outstanding share of the Company's common stock. The plan was
amended and restated during 1994. Under the amended and restated plan, the
rights detach and become exercisable ten days after a person or group publicly
announces the acquisition of 15% 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 15% or more of the common
stock. In the event that a person or group inadvertently exceeds the 15%
threshold and promptly reduces its holdings to less than 15% of the common
stock, the Board of Directors is authorized to exempt such an occurrence
from triggering the plan's provisions. If and when the rights become
exercisable, a holder would be entitled to purchase from the Company one
share of common stock for each right held at a price of $185 per share.
The exercise price, number of shares covered by each right and number of
rights outstanding are subject to adjustment upon the occurrence of certain
events described in the amended and restated plan.
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 (other than the acquiring person or group) 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 15% or
more of the Company's common stock, a holder (other than the acquiring person
or group) 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 15%
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 may
also authorize the exchange of one share of the Company's common stock for each
right held by holders other than the acquiring person or group.
The rights expire on November 7, 2004 and are redeemable upon action by the
Board of Directors at a price of $.01 per right at any time before they become
exercisable.
Note 10. Income Taxes
Income taxes as reported in the consolidated statements of income are
comprised of the following components (in thousands):
Years Ended December 31
1994 1993 1992
Current expense $ 109,794 $ 108,738 $ 86,324
Deferred expense (benefit) 7,913 (7,841) (5,560)
Income taxes $ 117,707 $ 100,897 $ 80,764
========== ========== ==========
F-67
Note 10. Income Taxes (Continued)
A reconciliation of the federal income tax rate to the Company's effective
tax rate for each year follows:
Percent of Income From Continuing Operations
Before Income Taxes as Reported in
Consolidated Statements of Income
1994 1993 1992
Federal income tax rate 35.0 % 35.0 % 34.0 %
Reconciling items:
Tax exempt interest and
dividends received deduction (1.9) (2.3) (2.8)
Recoveries and reductions of
amounts provided for prior
years' tax assessments - (0.5) (2.4)
Other increases, net 0.8 0.3 0.5
Effective income tax rates 33.9 % 32.5 % 29.3 %
The tax effects of temporary differences that result in significant deferred
tax assets and deferred tax liabilities are as follows (in thousands):
December 31
1994 1993
Deferred tax assets:
Policy liabilities $ 101,534 $ 90,237
Capitalization of acquisition costs
for income tax purposes,
net of amortization 20,353 15,817
Obligation for postretirement
benefits other than pensions 12,021 13,634
Total deferred tax assets 133,908 119,688
Deferred tax liabilities:
Net unrealized gains on securities
available for sale 121,989 -
Net unrealized gains on equity securities - 176,202
Deferral of policy acquisition costs for
financial reporting purposes, net of
amortization 111,656 97,320
Other basis adjustments, including depreciation 22,516 15,328
Total deferred tax liabilities 256,161 288,850
Net deferred tax liabilities included
in consolidated balance sheets $ (122,253) $ (169,162)
========== ==========
F-68
Note 10. Income Taxes (Continued)
Federal income tax returns for all years through 1990 have been examined by
the Internal Revenue Service and are closed. Settlements and other resolutions
during 1993 and 1992 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 remaining 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 million 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 recog-
nized. If the entire balance of the account became taxable under the current
federal rate the tax would approximate $32 million.
Note 11. 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 group annuity contracts with
Jefferson-Pilot Life Insurance Company. 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 deductible for federal income tax
purposes. The assets of the plans are those of the related contracts,
approximately $105 million of which are on deposit in the general accounts of
Jefferson-Pilot Life Insurance Company as of December 31, 1994. Plan assets
approximating $127 million are held in separate accounts established by
Jefferson-Pilot Life Insurance Company in 1994 by the transfer of cash and
debt and equity securities.
The components of pension expense were as follows (in thousands):
Year Ended December 31
1994 1993 1992
Service cost, benefits earned during the year $ 6,320 $ 7,259 $ 5,779
Interest cost on projected benefit obligation 12,557 11,414 11,098
Actual return on plan assets (13,135) (11,235) (11,940)
Net amortization and deferral (3,697) (4,947) (2,505)
Pension expense $ 2,045 $ 2,491 $ 2,432
======== ======== =========
F-69
Note 11. Retirement Benefit Plans (Continued)
The following table sets forth the funded status of the plans and amounts
recognized in the consolidated balance sheets (in thousands):
December 31
1994 1993
Actuarial present value of benefit obligation:
Vested benefit obligation $ 186,405 $ 196,066
========== ==========
Accumulated benefit obligation $ 188,681 $ 199,363
========== ==========
Projected benefit obligation $ 207,403 $ 219,236
Plan assets at fair value 231,943 226,828
Plan assets in excess of projected
benefit obligation 24,540 7,592
Unrecognized net gain (17,836) (1,295)
Unrecognized net asset (20,984) (23,173)
Unrecognized prior service cost 10,176 10,738
Accrued pension cost $ (4,104) $ (6,138)
========== ==========
Certain assumptions used in determining the funded status of the plans were
as follows:
1994 1993 1992
Discount rate 7.75% 6.50% 6.90%
Expected long-term rate of return on plan assets 8.00% 8.00% 7.20%
Rate of increase in compensation levels 5.75% 4.25% 4.00%
Benefits provided to retirees by annuity contracts issued by Jefferson-Pilot
Life Insurance Company approximated $11.2 million in 1994, $10.0 million in
1993 and $8.8 million in 1992.
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.
F-70
Note 11. Retirement Benefit Plans (Continued)
Prior to 1993, the cost of providing postretirement health care and life
insurance benefits was recognized in the year paid. The cost of postretirement
health care and life insurance benefits paid and expensed in 1992 approximated
$1.5 million. During 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions". 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 to January 1, 1993.
Accordingly, the consolidated statement of income for 1993 includes a charge
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.
The components of nonpension postretirement benefits expense for 1994 and 1993
were as follows (in thousands):
Health Care Life Insurance
Benefits Benefits
1994 1993 1994 1993
Service cost, benefits earned
during the year $ 433 $ 492 $ 320 $ 402
Interest cost on accumulated
benefit obligation 892 1,314 789 890
Actual return on plan assets (57) - (72) -
Net amortization and deferral (1,023) (768) (293) (173)
Nonpension benefits expense $ 245 $ 1,038 $ 744 $ 1,119
======= ======= ======= =======
F-71
Note 11. Retirement Benefit Plans (Continued)
The following table sets forth the funded status of the Company's post-
retirement health care and life insurance plans as of December 31, 1994
and 1993 (in thousands):
Health Care Life Insurance
Benefits Benefits
1994 1993 1994 1993
Plan assets at fair value $ 1,557 $ 810 $ 2,053 $ 1,035
Accumulated postretirement
benefit obligation:
Retirees and surviving spouses 8,656 9,777 7,465 8,254
Fully eligible active participants 650 952 1,055 1,462
Other active participants 2,851 2,584 1,720 1,902
12,157 13,313 10,240 11,618
Accumulated postretirement
benefit obligation in excess
of plan assets (10,600) (12,503) (8,187) (10,583)
Unrecognized negative prior
service cost (9,696) (10,719) (3,403) (3,765)
Unrecognized net (gain) loss (2,061) (547) 240 1,990
Accrued postretirement
benefit cost $(22,357) $(23,769) $(11,350) $(12,358)
======== ======== ======== ========
Accumulated postretirement benefit obligations were computed using assumed
discount rates of 8% as of December 31, 1994, 7% as of December 31, 1993
and 8.5% as of January 1, 1993. The expected long-term rate of return on
plan assets was 9% as of December 31, 1994 and 7% as of December 31, 1993.
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 be permitted to quality for
these benefits at age 65 with 10 years of service. Effective January 1, 1994
the Company changed its postretirement health care plan to limit annual benefit
increases to a maximum rate of 4%. Since future health care cost trend rates
in excess of 4% have been assumed in determining the accumulated postretirement
benefit obligation as of December 31, 1994, future health care cost increases
exceeding 4% per year will have no effect on the Company's obligation. The
preceding 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.
F-72
Note 12. 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 and accident and health risks
underwritten. The Company assumes portions of life and accident and health
risks underwritten by certain other insurers on a limited basis, but 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.
Aggregate receivables related to life and accident and health reinsurance
contracts totaled $20.1 million and $17.5 million as of December 31, 1994 and
1993. Premiums ceded under these contracts totaled $15 million in 1994,
$18 million in 1993 and $15 million in 1992. Reinsurance recoveries related
to incurred losses totaled $13.9 million in 1994, $9.2 million in 1993 and
$5.5 million in 1992.
Individual term life insurance approximating $1.9 billion, $1.5 billion and
$1.5 billion, and group insurance approximating $850 million, $700 million and
$500 million was ceded to other companies as of December 31, 1994, 1993, and
1992, respectively. Life insurance ceded represented 6.1%, 5.3% and 4.8% of
life insurance in force as of December 31, 1994, 1993, and 1992, respectively,
and 4.1%, 4.1% and 3.3% of life insurance premium revenue for the years then
ended. Accident and health insurance ceded represented 1.4%, 2.3% and 2.0%
of related premium revenue for the years ended December 31, 1994, 1993 and
1992, respectively.
The Company also used reinsurance in management of the risks associated with
its discontinued property and casualty insurance operations. Aggregate
receivables related to property and casualty reinsurance contracts totaled
$9.9 million and $8.3 million as of December 31, 1994 and 1993. Gross
property and casualty premiums earned exceeded net premium revenue by approx-
imately $9 million in 1994, $7 million in 1993 and $5 million in 1992, with
the effect on written premiums approximating that on earned premiums.
Reinsurance recoveries on incurred property and casualty losses totaled
$6.5 million in 1994, $7.6 million in 1993 and $2.7 million in 1992.
F-73
Note 13. 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):
CONDENSED BALANCE SHEETS
December 31
1994 1993
Assets:
Cash and short-term investments $ 1,864 $ 3,075
Debt securities available for sale,
at fair value (amortized cost $151,126) 135,952 -
Debt securities, at amortized cost
(fair value $139,000) - 140,661
Equity securities available for sale,
at market value (cost $10,210) 52,094 -
Equity securities, at cost
(market value $74,758) - 4,654
Investment in continuing subsidiaries,
at equity 1,522,393 1,512,263
Investment in discontinued subsidiaries,
at equity 65,040 93,998
Other investments 1,981 1,626
Total cash and investments 1,779,324 1,756,277
Due from subsidiaries 8,480 38,374
Other assets 11,276 11,649
$ 1,799,080 $ 1,806,300
=========== ===========
Liabilities and Stockholders' Equity:
Notes payable $ 29,350 $ 39,700
Other liabilities 37,187 33,529
Stockholders' equity 1,732,543 1,733,071
$ 1,799,080 $ 1,806,300
=========== ===========
F-74
Note 13. Condensed Separate Company Financial Information (Continued)
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
1994 1993 1992
Revenue, principally dividends
from subsidiaries $ 159,824 $ 121,343 $ 133,955
Expenses, principally general
and administrative 11,183 11,513 17,470
148,641 109,830 116,485
Income taxes (benefit) 7,518 1,453 (5,492)
141,123 108,377 121,977
Equity in undistributed net
income of subsidiaries 98,114 86,795 81,261
Net income $ 239,237 $ 195,172 $ 203,238
========== ========= ==========
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 parent company's
stockholders' equity as of December 31, 1994 includes $1.318 billion of equity
in undistributed net income of subsidiaries ($1.22 billion as of December 31,
1993) and $215 million of equity in net unrealized gains on subsidiaries'
securities available for sale, after deferred income tax effect.
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):
COMBINED CONDENSED BALANCE SHEETS
December 31
1994 1993
Assets:
Cash and cash equivalents $ 9,647 $ 6,814
Receivables 35,325 33,539
Property and equipment, net 45,591 41,696
Goodwill and other assets 58,115 43,353
$ 148,678 $ 125,402
========== ==========
Liabilities and Stockholder's Equity:
Trade obligations $ 35,693 $ 32,965
Debt obligations to affiliate 25,405 17,835
Income taxes 4,209 5,217
Total liabilities 65,307 56,017
Stockholder's equity 83,371 69,385
$ 148,678 $ 125,402
========== ==========
F-75
Note 13. Condensed Separate Company Financial Information (Continued)
COMBINED CONDENSED STATEMENTS OF INCOME
Year Ended December 31
1994 1993 1992
Revenue $ 172,501 $ 144,961 $ 129,734
Expenses 136,269 117,379 105,472
36,232 27,582 24,262
Income taxes 14,246 10,247 10,093
Income before cumulative effect of
change in accounting principle 21,986 17,335 14,169
Cumulative effect of change in accounting
principle applicable to postretirement
benefits other than pensions, net of
income tax benefit - (3,653) -
Net income $ 21,986 $ 13,682 $ 14,169
========== ========== ==========
Net cash provided by operating activities approximated $31.6 million in 1994,
$21 million in 1993 and $21 million in 1992. Net cash of $28.3 million in
1994, $29 million in 1993 and $4 million in 1992 was used in investing
activities. Investing activities in 1994 and 1993 reflect acquisitions of
broadcast properties by JPCC. Other investing activities during the three
years consisted primarily of the purchase of property and equipment and
related expenditures. Net cash used in financing activities approximated
$0.5 million in 1994 and $13.5 million in 1992. Net cash approximating
$4 million was provided by financing activities in 1993. In connection with
its acquisitions of broadcast properties, JPCC obtained term financing from
Jefferson-Pilot Life Insurance Company in amounts totaling $10 million in
1994 and $16.6 million in 1993. Repayments to Jefferson-Pilot Life
Insurance Company approximated $2.5 million in 1994 and $3.5 million in
1993 and 1992. JPCC and JPDS paid cash dividends to the parent company
totaling $8 million in 1994, $5 million in 1993 and $10 million in 1992.
JPDS redeemed preferred stock from the parent company in 1993 at a cost
of $4.2 million.
Note 14. Segment Information
The Company's continuing operations are conducted principally through the
following business segments:
Life insurance - Life insurance operations include individual and group life
insurance, annuity and accident and health policies.
Communications - Communications operations consist principally of radio and
television broadcasting, televised sports program production and electronic
data processing services.
F-76
Note 14. Segment Information (Continued)
Information about each major operating segment for 1994, 1993 and 1992
follows (in thousands). Amounts related to the Company's discontinued
insurance operations are not included in segment information pertaining
to results of operations. All operations which do not constitute report-
able business segments have been combined with consolidating adjustments
and realized investment gains in the lines described as "Other, net".
1994 1993 1992
Revenue
Life insurance $ 1,025,672 $ 986,971 $ 965,862
Communications 172,501 144,961 129,734
Other, net 70,637 60,517 50,382
Consolidated $ 1,268,810 $ 1,192,449 $ 1,145,978
Income from continuing operations
before income taxes and cumulative
effect of change in accounting
principle
Life insurance $ 250,189 $ 232,961 $ 217,635
Communications 36,232 27,582 24,262
Other, net 61,182 49,915 33,465
Consolidated $ 347,603 $ 310,458 $ 275,362
Identifiable assets at December 31
Life insurance $ 5,654,372 $ 5,194,478 $ 4,831,189
Communications 148,678 125,402 99,938
Discontinued operations 146,444 175,670 165,959
Other, net 190,842 145,071 159,676
Consolidated $ 6,140,336 $ 5,640,621 $ 5,256,762
Depreciation and amortization
Life insurance $ 5,811 $ 5,940 $ 6,055
Communications 10,139 10,757 8,303
Other, net 88 54 172
Consolidated $ 16,038 $ 16,751 $ 14,530
F-77
Note 14. Segment Information (Continued)
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 property and
equipment approximated $17 million in 1994, $21 million in 1993 and $7 million
in 1992. Included in the preceding amounts are additions related to the
communications industry segment totaling $13.6 million, $17.6 million and
$4.7 million in 1994, 1993 and 1992, respectively. Other additions to property
and equipment related primarily to the life insurance segment. Expenditures
for goodwill and other intangibles by the communications segment totaled
$17.1 million in 1994 and $11.9 million in 1993 and resulted from acquisitions
of broadcast properties.
Note 15. Disclosures About Fair Value of Financial Instruments
The fair values of cash, cash equivalents, short-term investments and balances
due on account from agents, reinsurers and others approximate their carrying
amounts as reflected in the consolidated balance sheets due to their short-term
availability or maturity.
The fair values of debt and equity securities have been determined using values
supplied by independent pricing services and discounted cash flow techniques
and are disclosed together with carrying amounts in Note 2.
The fair value of the mortgage loan portfolio, carried at $680.6 million
and $583.6 million as of December 31, 1994 and 1993, has been estimated by
discounting expected future cash flows using the interest rate currently
offered for similar loans. The estimated fair value of mortgage loans
approximated $698 million and $645 million as of December 31, 1994 and 1993.
The fair value of policy loans outstanding as of December 31, 1994, carried
at $206.4 million, has been estimated as approximately $190 million, using a
current risk-free interest rate applied to expected future loan repayments
projected based on historical repayment patterns. As of December 31, 1993,
the fair value of policy loans approximated their carrying amount of $214.6
million since the average interest rate of outstanding loans was approximately
equal to the current interest rate on that date.
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, are estimated to equal the cash surrender
values of the underlying contracts. The stated amount and estimated fair
value of the Company's liability under annuity contracts in the accumulation
phase totaled $1.081 billion and $1.039 billion as of December 31, 1994
($887 million and $853 million as of December 31, 1993).
The fair values of dividend accumulations, experience-rated refund liabilities
and other policyholder funds on deposit approximate their aggregate carrying
amount of $202 million and $197 million as of December 31, 1994 and 1993 since
they are either subject to current withdrawal or are of a relatively short-term
nature. The estimated fair value of liabilities under supplementary contracts
not involving life contingencies, which are combined with dividend accumula-
tions and other policyholder funds on deposit, are estimated to approximate
carrying amount of $22 million in 1994 and $23 million in 1993.
F-78
Note 15. Disclosures About Fair Value of Financial Instruments (Continued)
The fair values of notes payable approximate their carrying amounts of
$29.35 million and $39.7 million as of December 31, 1994 and 1993 due to
their short-term nature and interest rates approximating those currently
available. Similarly, the fair value of the liability for securities sold
under repurchase agreements approximates its carrying amount of $266.8 million,
which includes accrued interest, as of December 31, 1994.
The fair value of outstanding commitments to fund mortgage loans and to acquire
debt securities in private placement transactions as of December 31, 1994,
which are not reflected in the consolidated balance sheet, approximates the
$65 million aggregate amount of the commitments.
Note 16.Discontinued Operations
Discontinued operations include the property and casualty and title insurance
subsidiaries which formerly comprised the Company's other insurance business
segment.
On December 30, 1994, Jefferson-Pilot Title Insurance Company (JPT) entered
into a reinsurance agreement with First American Title Insurance Company
(First American) under which JPT ceded to First American its obligations and
liabilities on all policies issued through that date. After the reinsurance
agreement became effective, substantially all of JPT's cash and investments
were transferred to the parent company and the parent company then sold 100%
of JPT's common stock to First American for cash and a note totaling
approximately $1.3 million. No material gain was realized on the transactions
which resulted in the disposition of JPT.
On December 23, 1994, the Company signed a definitive agreement to sell 100%
of the common stock of Jefferson-Pilot Fire & Casualty Company (JPF&C) to
Southern Guaranty Insurance Company, a subsidiary of Winterthur U.S. Holdings.
The proposed transaction is subject to regulatory approval, but is expected
to close during the first half of 1995. The Company expects JPF&C to transfer
a substantial amount of its investments to the parent company immediately
before the closing. The amounts to be transferred are subject to adjustment
based on statutory surplus as of the closing date. A gain is expected to
result from the subsequent stock sale.
F-79
Note 16. Discontinued Operations (Continued)
Financial information relative to discontinued operations follows (in
thousands). Asset and liability information as of December 31, 1994
relates entirely to JPF&C.
December 31
1994 1993
Assets
Cash and cash equivalents $ 2,857 $ 4,652
Investments available for sale 108,870 140,190
Receivables and other 34,717 30,943
146,444 175,785
Liabilities
Losses payable 42,595 38,131
Unearned premiums 28,104 24,662
Deferred income taxes and other 10,705 18,994
81,404 81,787
Net assets $ 65,040 $ 93,998
========= ========
Year Ended December 31
1994 1993 1992
Revenue $ 64,862 $ 54,175 $ 56,351
Income, net of tax before
cumulative effect of change
in accounting principle 9,341 9,720 8,640
Cumulative effect of change in
accounting principle, net of
tax benefit - 510 -
Net income 9,341 9,210 8,640
Dividends to parent company 25,331 6,100 1,500
Aggregate income taxes reflected
in net income 1,603 1,590 1,624
Note 17. 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, 1994 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.
F-80
Note 17. Commitments and Contingent Liabilities (Continued)
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
$6 million in 1994 and $8 million in 1993 and 1992. Future rental commitments
are expected to be consistent with current year amounts.
The Company is involved in certain litigation which arose out of the normal
course of its business. 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 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 insurance reserves and deposit liabilities totaling approximately
$1 billion as of December 31, 1993. On August 18, 1994, the Circuit Court
entered a final but appealable order that approved the plan. The Circuit
Court's order was subsequently appealed by Kentucky Central's stockholders.
The outcome of the proposed plan is dependent upon resolution of the appeal
of the Circuit Court's order.
Note 18. Supplemental Cash Flow Information
Cash payments for interest on financing arrangements totaled $9,140,000 in
1994 and $90,000 in 1993. Cash payments for income taxes totaled $127 million,
$114 million and $95 million in 1994, 1993 and 1992, respectively.
Note 19. Subsequent Event
On February 14, 1995, substantially all of the assets and the media services
operations of Jefferson-Pilot Data Services, Inc. (JPDS) were sold. Aggregate
consideration, which is subject to adjustment based on a determination of
working capital as of the closing date, is expected to approximate $33 million.
The Company expects to realize an after-tax gain approximating $11.5 million
as a result of the sale. Net income of JPDS amounting to $2,625,000 in 1994,
$2,010,000 in 1993 and $2,505,000 in 1992 is included in the consolidated
statements of income. Net income of JPDS for 1993 reflects a net-of-tax charge
of $575,000 resulting from the adoption of SFAS 106 (see Note 11).
F-81