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 June 30, 1995 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 pre-
ceding 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 June 30, 1995 47,464,216
JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
Part I. Financial Information
Consolidated Condensed Balance Sheets
- June 30, 1995 and December 31, 1994 3
Consolidated Condensed Statements of Income
- Three Months and Six Months Ended
June 30, 1995 and 1994 4
Consolidated Condensed Statements of Changes
in Retained Earnings
- Three Months and Six Months Ended
June 30, 1995 and 1994 5
Consolidated Condensed Statements of Cash
Flows
- Six Months Ended June 30, 1995 and 1994 6
Notes to Consolidated Condensed Financial
Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information 22
Signatures 24
2
PART I. FINANCIAL INFORMATION
JEFFERSON-PILOT CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
June 30 December 31
Assets 1995 1994
(Unaudited) (Note 1)
Cash and investments:
Debt securities available for sale $ 2,617,034 $ 1,606,865
(amortized cost $2,531,426)
Debt securities held to maturity 2,005,845 1,940,046
(fair value $2,049,241)
Equity securities, trading 51,809 0
(cost $49,007)
Equity securities available for sale 761,965 718,023
(cost $248,858)
Mortgage loans 730,229 680,625
Cash and all other investments 327,844 297,884
Accrued investment income 81,624 67,371
Accounts receivable and agents' balances 107,565 64,191
Accounts receivable - reinsurance 30,914 30,036
Property and equipment, net 94,752 100,672
Deferred policy acquisition costs 552,418 329,139
Other assets 83,249 95,259
Separate account assets 248,993 210,225
$ 7,694,241 $ 6,140,336
Liabilities and Stockholders' Equity
Liabilities:
Policy liabilities $ 4,774,595 $ 3,633,763
Income tax liabilities 214,217 122,082
Obligations under repurchase agreements (Note 2) 267,046 266,838
Short-term notes payable 50,300 29,350
Accrued expenses 70,375 82,393
Unearned investment income 4,608 4,959
Other liabilities 130,789 58,183
Separate account liabilities 248,993 210,225
5,760,923 4,407,793
Stockholders' Equity:
Common stock 59,330 60,564
Retained earnings 1,488,096 1,441,132
Net unrealized gains on securities,
net of income tax effect 385,892 230,847
1,933,318 1,732,543
$ 7,694,241 $ 6,140,336
See notes to consolidated condensed financial statements.
3
JEFFERSON-PILOT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Shares Outstanding and Per Share Amounts)
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:
Premiums
Life and annuity $ 52,466 $ 43,547 $ 96,529 $ 87,754
Accident and health 103,354 101,172 203,714 197,790
Other considerations 2,858 4,000 9,599 5,397
Investment income, net of expenses 107,401 94,839 203,499 187,320
Communications 34,281 37,405 76,987 80,390
Other income 27,247 18,649 46,974 36,425
Realized investment gain 1,255 14,855 6,797 26,639
328,862 314,467 644,099 $ 621,715
Benefits and Expenses:
Policy benefits 183,014 159,644 348,010 312,008
Insurance commissions 25,734 17,466 47,849 33,429
Communications operations 23,542 25,020 51,349 55,143
General and administrative 30,554 29,493 60,953 59,387
Taxes, licenses, and fees 6,490 5,743 12,937 11,759
Increase in deferred acquisition
costs, net of amortization ( 14,676) ( 8,751) ( 28,227) ( 15,045)
254,658 228,615 492,871 456,681
Income before income taxes 74,204 85,852 151,228 165,034
Provision for income taxes 23,083 29,568 48,235 56,351
51,121 56,284 102,993 108,683
Discontinued operations, net of
income taxes (Note 3) 13,408 2,087 18,541 3,952
Net Income $ 64,529 $ 58,371 $ 121,534 $ 112,635
Average number of shares
outstanding 47,796,888 48,664,123 48,126,212 48,833,169
Income before gain from sales
of investments:
Continuing operations $ 1.05 $ 0.97 $ 2.02 $ 1.89
Discontinued operations (Note 3) 0.00 0.04 0.05 0.08
Total 1.05 1.01 2.07 1.97
Gain from sales of investments,
net of income taxes:
Continuing operations 0.02 0.19 0.12 0.34
Discontinued operations (Note 3) 0.28 0.00 0.34 0.00
Total 0.30 0.19 0.46 0.34
Net income per share of
Common Stock $ 1.35 $ 1.20 $ 2.53 $ 2.31
See notes to consolidated condensed financial statements.
4
JEFFERSON-PILOT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN RETAINED EARNINGS
(In Thousands)
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Balance at beginning of period $1,475,222 $1,340,451 $1,441,132 $1,339,672
Net income for the period 64,529 58,371 121,534 112,635
1,539,751 1,398,822 1,562,666 1,452,307
Cash dividends declared 60 ( 66) ( 23,147) ( 20,975)
Reacquisition of common stock,
net ( 51,715) ( 21,181) ( 51,423) ( 53,757)
Balance at end of period $1,488,096 $1,377,575 $1,488,096 $1,377,575
See notes to consolidated condensed financial statements.
5
JEFFERSON-PILOT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30
1995 1994
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net income $ 121,534 $ 112,634
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in policy liabilities ( 50,736) 19,821
Amortization of deferred acquisition costs 20,493 18,835
Deferred policy acquisition costs ( 42,595) ( 34,536)
Trading investments ( 52,169) 0
Gain from sales of investments ( 22,356) ( 26,724)
Other 52,715 ( 6,121)
Net cash provided from operations 26,886 83,909
Cash Flows from Investing Activities:
Investments purchased and sold ( 277,370) ( 388,979)
Cash received from assumption reinsurance 141,832 0
Other investing activities 1,433 ( 20,375)
Net cash used by investing activities ( 134,105) ( 409,354)
Cash Flows from Financing Activities:
Net short-term borrowings 21,157 272,160
Cash dividends to stockholders ( 43,981) ( 40,265)
Reacquisition of common stock, net ( 52,657) ( 55,000)
Policyholder contract deposits 252,738 181,026
Policyholder contract withdrawals ( 74,756) ( 61,026)
Net cash provided by financing activities 102,501 296,895
Increase (decrease) in cash and cash equivalents ( 4,718) ( 28,550)
Cash and cash equivalents at beginning of period 22,774 31,563
Cash and cash equivalents at end of period $ 18,056 $ 3,013
Supplemental Cash Flow Information:
Income taxes paid $ 41,478 $ 51,076
Interest paid on borrowed money $ 8,746 $ 1,756
Schedule of noncash investing and financing activities:
The Company entered into a reinsurance agreement to acquire the majority of
the life insurance business of Kentucky Central Life. In connection with this
transaction, assets and liabilities were assumed as follows:
Fair value of assets acquired $ 950,168
Cash received from assumption reinsurance 141,832
Liabilities assumed $1,092,000
Values may be subsequently adjusted as a result of opt-out provisions exer-
cised by current Kentucky Central Life policyholders and other post closing
adjustments.
See notes to consolidated condensed financial statements.
6
JEFFERSON-PILOT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated condensed balance sheet as of December 31, 1994
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 June 30, 1995,
the consolidated condensed June 30 statements of income and changes in
retained earnings for the three months and six months ended June 30, 1995 and
1994, and the consolidated condensed statements of cash flows for the six
months ended June 30, 1995 and 1994. 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, 1994. 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. Reverse Repurchase Agreements
During the six months ended June 30, 1995, the Company entered into several
reverse repurchase agreements. The agreements involve U.S. Treasury notes
with a fair value of $276,187,000 at June 30, 1995 and an amortized cost of
$259,850,000. The agreements mature at various dates through December 1995.
The maximum amount of principal outstanding during the period was
$264,698,000. As of June 30, 1995, the maximum amount outstanding with any
one party was $170,329,000 with First Boston. The weighted average interest
rate under the agreements approximated 6.0% for the period.
3. Discontinued Operations
Agreements to sell Jefferson-Pilot Fire and Casualty Company and Jefferson-
Pilot Title Insurance Company were entered into during 1994. These companies
comprise our "other insurance" segment, and their earnings for all periods
shown are labeled "discontinued operations."
7
JEFFERSON-PILOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is management's discussion and analysis of financial condition
as of June 30, 1995, changes in financial condition for the six months then
ended, and results of operations for the quarter and six months ended
June 30, 1995 as compared to June 30, 1994. This discussion supplements
Management's Discussion and Analysis in Form 10-K for the year ended
December 31, 1994. It should be read in conjunction with the interim
financial statements and notes contained herein.
Results of Operations
Jefferson-Pilot Corporation (JP), a holding company, derives its primary
sources of revenue from life insurance operations of Jefferson-Pilot Life
Insurance Company (JP Life), from communications revenues of Jefferson-Pilot
Communications Company (JP Communications), and from investment income on
securities owned by the Corporation. During the fourth quarter of 1994 and
early second quarter of 1995, JP sold two of its subsidiaries, Jefferson-Pilot
Fire & Casualty Company and Jefferson-Pilot Title Insurance Company.
Operating results of these subsidiaries, net of related income taxes, are
reported as "Discontinued Operations". Also, during the first quarter of
1995, JP sold the majority of assets of a subsidiary, Jefferson-Pilot Data
Services, Inc. Earnings from this subsidiary are included in the
Communications segment. Investment income on net sale proceeds of these
subsidiaries is included in earnings on investments held in the parent company
and reported in the "Other" category.
Jefferson-Pilot Life acquired a majority of the life insurance and annuity
business of Kentucky Central Life Insurance Company (Kentucky Central) on
May 31, 1995 in an assumption reinsurance transaction. In connection with
this transaction, Jefferson-Pilot Life assumed assets of $869 million
(excluding the value of business acquired) and recorded liabilities of $1,092
million. One month's operating results are included in the Company's
financial statements.
As stated in the form 8-K which was filed by the Company on June 15, 1995,
several unresolved issues exist as a contingency to final determination of
assets and liabilities recorded. Subsequent resolution of asset valuation
issues may result in differences in fair values of assets assumed; however, it
is not expected that such differences will be material to the Company's
financial position or to the transaction individually. Additionally, further
participation options to be exercised by approximately 4,000 policyholders may
result in adjustments to assets and liabilities assumed, as well as the
Company's enhancement under a guaranty association participation agreement.
Currently, the Company has recorded approximately $78 million as an other
liability relating to the pending resolution of the further participation
option process. Policy reserves of approximately $116 million will be
recorded if 100% of such policyholders elect participation. To the extent
that such options are exercised against the JP Life participation, the Company
will refund policy amounts received plus interest thereon.
Other related events may impact the future results of this block of business.
A surrender moratorium covering the period June 1 through September 30, 1995
restricts surrenders by policyholders under a guaranty association
8
participation agreement. Also, subsidies from participating guaranty
associations intended to mitigate the unfavorable financial impact of
surrenders do not apply prior to February 1, 1996. After that time, the level
of policyholder withdrawals may increase; however, the Company does not expect
the incidence of such withdrawal activity to have a material impact on the
Company's financial position or results of operations. The Company expects to
meet its target of 1% after-tax annual earnings on incremental invested assets
associated with the Kentucky Central reinsurance assumption.
Consolidated Statements of Income
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1995 1994 1995 1994
(In millions)
Income before realized
investment gains:
Continuing operations $ 50.2 $ 47.1 $ 97.2 $ 92.1
Discontinued operations 0 2.1 2.2 3.9
Operating income 50.2 49.2 99.4 96.0
Realized investment gains
(net of income taxes):
Continuing operations .9 9.2 5.7 16.6
Discontinued operations 13.4 0 16.4 0
Realized investment gains 14.3 9.2 22.1 16.6
Net Income:
Continuing operations 51.1 56.3 102.9 108.7
Discontinued operations 13.4 2.1 18.6 3.9
$ 64.5 $ 58.4 $121.5 $ 112.6
Included in Net Income are realized investment gains from sale of investments.
Consolidated Earnings Per Share
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1995 1994 1995 1994
(In millions)
Income before realized
investment gains:
Continuing operations $ 1.05 $ .97 $ 2.02 $ 1.89
Discontinued operations 0 .04 .05 .08
Operating income 1.05 1.01 2.07 1.97
Realized investment gains
(net of income taxes):
Continuing operations .02 .19 .12 .34
Discontinued operations .28 0 .34 0
Realized investment gains .30 .19 .46 .34
Net Income:
Continuing operations 1.07 1.16 2.14 2.23
Discontinued operations .28 .04 .39 .08
$ 1.35 $ 1.20 $ 2.53 $ 2.31
9
Net Realized Investment Gains
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1995 1994 1995 1994
(In millions)
Investment gains from continuing
operations:
Stocks $ 5.1 $12.5 $10.5 $24.0
Bonds and mortgage loans (5.8) 1.7 (23.3) 2.0
JP Data Services assets 0 0 15.7 0
Other 2.0 .6 3.9 .6
Total investment gains from
continuing operations $ 1.3 $14.8 $ 6.8 $26.6
Investment gains from discontinued
operations:
Stocks $ 0 $ .1 $ 1.7 $ .1
Bonds and mortgage loans 0 0 3.0 0
JP Fire & Casualty 15.6 0 15.6 0
Total investment gains from
discontinued operations 15.6 .1 20.3 .1
Total investment gains 16.9 14.9 27.1 26.7
Less applicable federal and state taxes (2.6) (5.7) (5.0) (10.1)
As reported $14.3 $ 9.2 $22.1 $16.6
The cost and fair value of investments classified as "available for sale"
or "trading securities" were as follows:
June 30, 1995 December 31, 1994
(In millions)
Cost of equity securities classified
as "available for sale" $248.8 $290.4
Fair value $762.0 $718.0
Cost of equity securities classified
as "trading" $ 49.0 $ 0
Fair value $ 51.8 $ 0
Amortized cost of "available for
sale" debt securities $2,531.4 $1,692.0
Fair value $2,617.0 $1,606.9
Net Income by Business Segment
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1995 1994 1995 1994
(In millions)
Life insurance:
Individual $ 33.3 $ 31.9 $ 65.7 $ 60.0
Group 10.0 10.6 18.2 21.4
43.3 42.5 83.9 81.4
Communications 4.8 5.0 11.3 10.2
Discontinued Operations 0 2.1 2.2 3.9
Other 2.1 ( .4) 2.0 0.5
Operating Income 50.2 49.2 99.4 96.0
Net realized investment gains 14.3 9.2 22.1 16.6
Net Income $ 64.5 $ 58.4 $ 121.5 $ 112.6
10
Individual Insurance Statements of Income
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1995 1994 1995 1994
Premiums, considerations,
and other income $ 68.4 $ 52.9 $ 124.5 $ 103.6
Net investment income 91.7 81.5 174.2 158.9
Total revenues 160.1 134.4 298.7 262.5
Policy benefits 88.8 68.5 160.2 135.6
Expenses 22.9 18.5 42.0 38.3
Total benefits and expenses 111.7 87.0 202.2 173.9
Operating income before
income taxes 48.4 47.4 96.5 88.6
Provision for income taxes 15.1 15.5 30.8 28.6
Operating income $ 33.3 $ 31.9 $ 65.7 $ 60.0
Group Insurance Statements of Income
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1995 1994 1995 1994
Premiums, considerations,
and other income $ 117.5 $ 114.4 $ 232.3 $ 223.7
Net investment income 11.9 11.5 23.5 22.3
Total revenues 129.4 125.9 255.8 246.0
Policy benefits 94.2 91.1 187.8 176.4
Expenses 20.8 19.2 41.3 38.1
Total benefits and expenses 115.0 110.3 229.1 214.5
Operating income before
income taxes 14.4 15.6 26.7 31.5
Provision for income taxes 4.5 5.0 8.5 10.1
Operating income $ 9.9 $ 10.6 $ 18.2 $ 21.4
Communications Statements of Income
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1995 1994 1995 1994
(In millions)
Communications revenues $ 34.3 $ 37.4 $ 77.0 $ 80.4
Operating costs 23.6 25.1 51.4 55.1
Depreciation and amortization 2.2 2.5 4.7 4.8
General expenses .6 1.4 2.1 2.9
Total expenses 26.4 29.0 58.2 62.8
Operating income before
income taxes 7.9 8.4 18.8 17.6
Provision for income taxes 3.1 3.4 7.5 7.4
Operating income $ 4.8 $ 5.0 $ 11.3 $ 10.2
11
Results for the Six Months
First Six Months of 1995 Compared to the First Six Months of 1994
Consolidated Net income increased 7.9% over the prior year's first six months
to $121.5 million. Income before investment gains (operating income)
increased 3.5% to $99.4 million. Operating income from continuing operations
was 5.5% higher at $97.2 million, and operating income from discontinued
operations decreased 44.1% to $2.2 million due to the completion of the sale
of Jefferson-Pilot Fire and Casualty Company in the second quarter.
Investment gains for the current six months period, net of income taxes, were
$22.1 million as compared to $16.6 million last year. Included in the $22.1
million gain was an $11.1 million net gain on the sale of Jefferson-Pilot Data
Services' assets and a $13.4 million net gain on the sale of J-P Fire &
Casualty.
Jefferson-Pilot has periodically reacquired shares of its stock and issued
additional shares under incentive option programs. Average shares outstanding
during the first six months of 1995 and 1994 were 48.1 million and 48.8
million. Approximately 995,000 shares were reacquired by JP during the first
six months of 1995, and approximately 9,000 shares were issued in satisfaction
of exercised stock options and as incentive compensation during the same
period.
Earnings per share increased 9.5% during the first six months of 1995, partly
due to improved earnings and partly due to the impact of share repurchases.
Revenues from continuing operations increased 3.6% to $644.1 million over the
same period of the prior year. Excluding realized investment gains, revenues
increased 7.1% to $637.3 million. Total premiums, considerations, and other
income (excluding discontinued operations) increased 9.9%. Receipts on
universal life and most annuity products do not flow through income in the
year of receipt but are included in the liability for policyholder contract
deposits. Policyholder contract deposits increased from $1,846 million at
year end to $2,852 million at June 30, 1995. Approximately $827 million of
the increase came from acquiring Kentucky Central's interest sensitive life
and annuity business, with the balance arising from the excess of deposits
over proceeds returned during the first six months. Accident and health
premiums increased 3.0% to $203.7 million.
Net investment income, which is included in operating income, grew 8.6% over
the same six months period of the prior year to $203.5 million. This includes
investment income generated from assets acquired in the Kentucky Central Life
transaction.
Revenues from the Communications segment declined 4.2% due to the disposal of
JP Data Services operations during the first quarter of 1995.
Total policy benefits and expenses increased 7.9% over the same six months
period of last year to $492.8 million. Life benefits and credits to
policyholder accounts increased 16.6% over the prior year, reflecting the
growth in life business in force. Accident and health benefits including
reserve increases were 6.5% higher in the first six months of 1995 than in the
same period of 1994 primarily due to deteriorating results among disability
coverages.
Insurance commissions were 43.1% higher due to growth in sales. Operating
expenses increased 3.9%. Costs of Communications operations declined 6.9% due
to sale of JP Data Services.
12
Income taxes from continuing operations declined $8.1 million, or 14.4% versus
the same period of the prior year. Effective tax rates declined to 31.9% for
the six months period versus 34.1% for the same period in 1994, due in part,
to higher tax bases than book bases on JP Data Services' asset sales and
capital losses generated by companies which are subject to both federal and
state taxes.
Operating Earnings by Business Segment
JP's continuing business segments include Insurance and Communications.
Operating income of the business segments includes investment income but
excludes net realized investment gains. Operating income and losses of the
parent company, consolidation entries, and net realized investment gains are
included in the "other" category. Currently, all corporate capital is
allocated to the business segments.
Insurance
The Insurance segment is comprised of operations conducted by the Individual
and Group distribution systems.
Individual Insurance Operations
Individual operating income improved 9.5% in the first six months of 1995
versus the first six months of 1994. As a percentage of total revenues,
operating income of the Individual unit was 22.0% in 1995, remaining fairly
stable with the profit margin posted for the same six months period in 1994 of
22.9%. This improvement occurred in spite of continuing market pressures on
interest spreads of interest sensitive life and annuity products. Operating
results of approximately $1.0 million attributable to the block of business
acquired from Kentucky Central were included in the second quarter's results.
New first year life insurance premiums and receipts for policyholder accounts
rose 73.9%, and annuity receipts increased 47.5%.
Policy benefits increased $24.6 million, or 18.1%, reflective of the growth of
business in force. Death benefits were $40.9 million during the first six
months of 1995, an increase of $8.2 million, or 25.1%. This unit had adverse
mortality experience on policies with higher durations. In addition, death
benefits on the newly acquired Kentucky Central business were $3.2 million.
Total commissions and expenses (net of acquisition costs deferred) increased
9.7%. Commissions alone increased 58.2% on higher 1995 sales.
Group Insurance Operations
Group operating income declined 14.6% in the first six months of 1995 when
compared to the same period of the prior year. As a percentage of premiums
and other considerations, operating income for the Group Department was 7.9%
in 1995's first six months and 9.6% in 1994. Group Life results improved
13.6% to $6.4 million as a result of improved mortality from the adverse
levels of 1994. Health and disability results of $11.9 million were 24.6%
lower than the first six months of 1994 due to adverse disability experience
in selected industries, lower earnings on conventional medical coverages
resulting from increased utilization of health care services, primarily
smaller dollar services such as office visits and lab tests, and continued
medical inflation.
13
Premiums and equivalents, which include the equivalent premiums on cases
administered by the Group Department on an uninsured basis, were $380.1
million for the first six months, a modest increase over the same period of
the prior year. Policy benefits including reserve increases on fully-insured
health coverages increased 7.5% while premium income on these same cases only
increased 3.6%. Death benefits in 1995 were 3.3% higher than the prior year
while premium income on life insurance coverages increased 5.1%. Expenses
increased 8.3%. This increase reflects greater costs related to managed care
efforts and greater commissions from sales growth in non-medical coverages.
Communications
Operating income from the Communications segment increased 10.8% compared to
the same period of the prior year. Excluding the operations of JP Data
Services, operating income also increased 10.8%. Profit improvement was
attributable to both radio and television properties. Recently acquired radio
properties experienced revenue gains and lower promotional costs. Stronger
than expected demand in established television markets also contributed to the
improved operating income.
Revenues for the first six months declined 4.2% from the first six months of
1994. Excluding the operations of JP Data Services, communication revenues
grew 9.9%. Television, radio, and sports and entertainment contributed to
this growth, improving 9.4%, 5.8%, and 27.0% respectively. Most of the
television growth was due to strong local and national advertising demand at
the Charlotte and Charleston stations. Radio growth was also attributable to
strong local and national advertising demand and improvements in recently
acquired stations. The majority of the six months growth experienced by
sports and entertainment was due to the acquisition of a motor sports
programming operation in the fall of 1994 and the production of two network
television ice skating events.
Total expenses declined $4.6 million, or 7.3%. Excluding JP Data Services,
Communications expenses increased $6.5 million, or 12.7%. The increase is
primarily attributable to costs associated with the increased revenues, the
two ice skating productions, and recently acquired properties. Total expenses
and costs of sales, as a percentage of revenues, remained relatively constant
at 77.8% at June 30, 1995 and 77.2% at June 30, 1994.
Discontinued Operations
Discontinued operations include the operations of Jefferson-Pilot Fire &
Casualty (JP F & C) and Jefferson-Pilot Title Insurance Company (JP Title).
On December 23, 1994, JP agreed to sell the stock of JP F & C, subject to
regulatory approval. Such approval was subsequently received and closing
occurred on April 3, 1995. Prior to closing, JP F & C paid a dividend in
partial liquidation in the amount of $36.2 million. At closing, the stock of
JP F & C was sold for $55 million. A gain was reported in the second quarter
financial statements of $13.4 million, net of taxes. JP Title was sold during
the fourth quarter of 1994.
The operations of both subsidiaries are segregated as "Discontinued
Operations" in the accompanying financial statements. Due to the completed
sale transaction, operating income attributable to Discontinued Operations
decreased 44.1% to $2.2 million for the first six months of 1995 as compared
to 1994.
14
It is expected that the reinvestment of net proceeds from sale of these
subsidiaries will replace the operating income included as a component of
Discontinued Operations.
Other
Operating results categorized as "other" include earnings on investments held
in the parent company as reduced by expenses of the Corporation. These
results increased to $2.0 million for the first six months of 1995 versus $0.5
million for the same period of the prior year due to earnings on sale proceeds
of discontinued operations.
Second Quarter of 1995 Compared to Second Quarter of 1994
Consolidated Net income increased 10.5% over the prior year's second quarter
to $64.5 million. Income before investment gains (operating income) increased
2.0% to $50.2 million. Operating income from continuing operations was 6.6%
higher at $50.2 million and operating income from discontinued operations
decreased to $0 due to the completion of the sale of Jefferson-Pilot Fire and
Casualty Company (JP F&C) in the second quarter.
Realized investment gains of $14.3 million for the second quarter of 1995
include gains on sale of JP F&C of $13.4 million. Investment gains of $9.2
million for 1994's second quarter were primarily related to sales of
"available for sale" securities.
Average shares outstanding during the second quarters of 1995 and 1994 were
47.8 million and 48.7 million. Approximately 995,000 shares were reacquired
by JP during the second quarter of 1995, and approximately 2,000 shares were
issued in satisfaction of exercised stock options during the second quarter of
1995.
Earnings per share increased 12.5% during the second quarter of 1995, partly
due to improved earnings and partly due to the impact of share repurchases.
Revenues increased 4.6% to $328.9 million over the same quarter of the prior
year. Excluding realized investment gains, revenues increased 9.3% to $327.6
million. Total premiums, considerations, and other income (excluding
discontinued operations) increased 11.1%. Policyholder contract deposits
increased 47.2% during the second quarter of 1995 to $2,852 million due in
large part to the acquisition of Kentucky Central Life. Accident and health
premiums increased 2.2% to $103.4 million.
Net investment income, which is included in operating income, grew 13.2% over
the same quarter of the prior year to $107.4 million.
Revenues from the Communications segment declined 8.3% due to the disposal of
JP Data Services operations during the first quarter of 1995.
Total policy benefits and expenses increased 11.4% over the second quarter of
last year to $254.7 million. Life benefits and credits to policyholder
accounts increased 26.7% over the prior year, reflecting the growth in life
business in force. Accident and health benefits including reserve increases
were 2.9% higher in the second quarter of 1995 than in the second quarter of
1994.
Commissions increased 47.3%, in line with sales results. Operating expenses
were flat when compared to the same quarter of the prior year. Costs of
Communication's operations declined 5.9%.
15
Income taxes from continuing operations declined $6.5 million, or 21.9%,
versus the same quarter of the prior year, primarily due to the decline in
such income for the quarter only. Also, effective tax rates declined to 31.1%
for the second quarter of 1995 compared to 34.4% in the 1994 period. This is
due in part to significant 1994 capital gains generated in companies subject
to state income tax in addition to federal income tax.
Insurance
Individual Operations
Individual operating income improved 4.4% in the second quarter of 1995 versus
the second quarter of 1994 on the strength of expense efficiencies and
profitable growth of this book of business. As a percentage of total
revenues, operating income for the Individual unit was 20.8% in 1995, and was
23.7% in 1994. The 1994 operating margin was higher because of very favorable
mortality. New first-year life insurance premiums and receipts for
policyholder accounts rose 92.7% while annuity receipts increased 30.3%.
Policy benefits increased 29.4% in 1995's second quarter, reflective of the
growth of business in force. Death benefits in the second quarter of 1995
were $21.5 million, or 44.0% higher than the same quarter of the prior year.
This unit had adverse mortality experience on policies with higher durations.
Also, death benefits of $3.2 million from the Kentucky Central block of
business are included in the second quarter of 1995. Total commissions and
expenses (net of acquisition costs deferred) increased 23.8%. Commissions
alone increased 62.6% on increased sales.
Group Operations
Group earnings for the second quarter of 1995 were almost $10.0 million,
compared to $10.6 million in the second quarter of last year, a decrease of
5.4%. As a percentage of premiums, considerations and other income, operating
income was 8.5% in 1995's second quarter, compared to 9.2% in 1994. Group
life results decreased 3.3%, to $3.3 million, while health and disability
results of $6.7 million were 6.5%, or $0.5 million lower as a consequence of
increased use of health care services in conventional medical markets and poor
experience in disability coverages; however, there was an improvement in long
term disability results over the first quarter of 1995.
Communications
Operating income from the Communications segment decreased 4.0% compared to
the same quarter of the prior year due to the sale of JP Data Services in the
first quarter of 1995. Excluding the operations of JP Data Services,
operating income increased 8.1% over the same quarter in 1994. Profit
improvement was attributable to both radio and television properties.
Recently acquired radio properties experienced revenue gains and lower
promotional costs. Stronger than expected demand in established television
markets also contributed to the improved operating income.
Revenues for the quarter declined 8.3% from the second quarter of 1994.
Excluding the operations of JP Data Services, communication revenues grew $4.1
million, or 13.5%. Television, radio, and sports and entertainment contributed
to this growth, improving $1.0 million, $0.5 million, and $2.4 million
16
respectively. The significant growth in sports and entertainment was due to
the acquisition of a motor sports programming operation in the fall of 1994
and the production of two network television ice skating events. Most of the
television growth was due to strong local and national advertising demand at
the Charlotte and Charleston stations. Radio growth was also attributable to
strong local and national advertising demand and improvements in recently
acquired stations.
Total expenses declined $2.6 million, or 9.0%. Excluding JP Data Services,
Communications expenses increased $3.5 million, or 15.4%. The increase is
primarily attributable to costs associated with the increased revenues and
recently acquired properties. Total expenses and costs of sales, as a
percentage of revenues, remained relatively constant at 77.1% at
June 30, 1995, and 75.8% at June 30, 1994.
Other
Other results increased to $2.1 million for the second quarter of 1995 versus
($0.4) million for the same period of the prior year on earnings of sales
proceeds from discontinued operations.
CONSOLIDATED FINANCIAL POSITION, CAPITAL RESOURCES, AND LIQUIDITY
Total assets were $7,694 million at June 30, 1995 and $6,140 million at
December 31, 1994, an increase of $1,554 million, or 25.3%. The primary
source of asset growth is the assumption of a majority of Kentucky Central's
life and annuity business on May 31, 1995. In connection with assuming
liabilities of almost $1,092 million, JP Life received assets valued at $869
million. This included bonds valued at $613 million, policy loans at $36
million, cash and short term investments amounting to $142 million, stocks
amounting to $6 million, and other assets of $72 million. In addition, JP
Life recorded $223 million as the value of business acquired which is recorded
as deferred acquisition costs. Additional asset increases relate to increases
in policyholder contract deposits (primarily annuities and universal life
contracts) of $178.0 million and increases in fair values of securities
"available for sale" and "trading" of $259.1 million.
The $223 million recorded as the value of Kentucky Central business acquired
primarily relates to interest sensitive products. The value of the interest
sensitive business will be amortized as a constant percentage of future gross
profits using the contractual interest rate. It is expected that approximately
51% of the $223 million will be amortized through 1999. Approximately 7.9% is
expected to be amortized during 1995 with 11.8%, 10.6%, 10.2%, and 10.1% for
the years 1996-1999 respectively. The value of the business acquired is
expected to change to reflect additional participation through the pending
opt-in process. The amortization is subject to change as actual experience
emerges.
Total liabilities were $5,761 million compared to $4,408 million at
December 31, 1994. The assumption of Kentucky Central's life and annuity
policies caused a significant increase in policy liabilities of $1,014
million.
The Insurance segment defers the costs of acquiring new business including
commissions, certain costs of underwriting and issuing policies, and certain
agency office expenses. Such amounts deferred were $552.4 million at
June 30, 1995 and $329.1 million at December 31, 1994, an increase of $223.3
million or 67.9%. The increase is primarily related to the Kentucky Central
transaction and Individual first year premiums which have grown significantly
17
in recent years. Deferred policy acquisition costs are reviewed periodically
to determine that the unamortized portion does not exceed expected recoverable
amounts.
Capital Resources
Consolidated shareholders' equity was $1,933 million at June 30, 1995 and
$1,733 million at December 31, 1994 with no long-term debt outstanding at
either date. Shareholders' equity includes net unrealized gains on securities
available for sale of $385.9 million at June 30, 1995 and $230.8 million at
December 31, 1994. During the first six months of 1995 and 1994, fair values
of securities classified as available for sale, net of deferred taxes,
increased $155.0 million and decreased $23.2 million.
JP considers existing capital resources to be more than adequate to support
the current level of its business activities. Currently, the Company does not
have any long-term debt outstanding and, while it has made no commitments for
obtaining such financing, limited amounts of long-term debt may be used to
finance acquisitions or for other corporate purposes in the future. Its
capital adequacy is illustrated by the following table (in millions):
June 30, 1995 December 31, 1994
(In millions)
Total assets $7,694 $6,140
Total shareholders' equity $1,933 $1,733
Ratio of shareholders' equity to assets 25.1% 28.2%
Liquidity
JP's liquidity requirements are met primarily by cash flows from the
operations of JP Life and other consolidated subsidiaries. The Company has
historically posted positive cash flows from operating activities of its
Insurance and Communications segments. Management believes that its overall
sources of liquidity will continue to be sufficient to satisfy its operating
requirements.
Net cash provided by operations for the first six months of 1995 and 1994 was
$26.9 million and $83.9 million. Cash flows provided from increases in
policyholder contract deposits were $178.0 million and $120.0 million for the
first six months of 1995 and 1994. Net borrowings under short-term facilities
and securities sold under repurchase agreements were $21.2 million and $272.2
million for the first six months of 1995 and 1994. Cash acquired in the
Kentucky Central transaction was $141.8 million in the second quarter of 1995.
These sources of funds were used to purchase net investments of $275.9 million
and $409.4 million, to pay dividends to shareholders of $44.0 million and
$40.3 million, and to make net acquisitions of shares outstanding of $52.7 and
$55.0 million during the first six months of 1995 and 1994.
Dividends paid to the parent company from its subsidiaries were $37.5 million
and $40.2 million during the first six months of 1995 and 1994. JP Life is
the primary source of dividends to the parent company. JP Life is subject to
North Carolina laws which limit the amount of dividends that may be paid
without first obtaining the approval of the State's Insurance Commissioner.
JP Life has approximately $97 million available for distribution to the parent
company during 1995 without obtaining prior approval.
During 1994 and the first six months of 1995, the Company utilized uncommitted
bank lines of credit to manage parent company cash flows, primarily due to
timing differences between receipt of dividends from subsidiaries versus
dividends paid to shareholders and purchase of its outstanding shares. The
18
maximum amounts outstanding at any time approximated $90.0 million during 1994
and $50.3 million during the first six months of 1995. The maximum combined
availability of all uncommitted lines as of June 30, 1995 is $375.0 million.
Additionally, since the second quarter of 1994, the Company entered into
obligations under repurchase agreements involving various counterparties.
Proceeds from such sales were used to purchase securities with longer
durations as an asset/liability management strategy. The repurchase
agreements were accounted for as financing arrangements. The maximum amount
outstanding including accrued interest during the second quarter of 1995 and
1994 approximated the liability at June 30, 1995 of $267.0 million.
Cash and cash equivalents on hand were $18.1 million at June 30, 1995 and
$22.8 million at December 31, 1994. Additionally, debt and equity securities
of the parent company and passive investment subsidiaries with carrying
amounts of $308.4 million and $188.0 million at June 30, 1995 and
December 31, 1994 are considered to be sources of liquidity to support the
Company's strategies. Total debt and equity securities available for sale at
June 30, 1995 and December 31, 1994 are $3,379.0 million and $2,324.9 million.
INVESTMENTS
JP's strategy for managing its investment portfolio is to dependably meet its
pricing assumptions while achieving the highest possible after-tax returns
over the long term. Operating structures are in place to require that credit
and interest rate risks are prudently managed and that sufficient liquidity is
maintained.
The Company monitors investments which are considered to be "higher risk" for
compliance with its Investment Policy Statement and for proper valuation.
Securities that experience other than temporary declines in value are adjusted
to net realizable values through a charge to earnings. Commercial mortgage
loans in default are carried at the net present value of expected future cash
flows in accordance with SFAS 114 and SFAS 118.
Carrying amounts of investments categorized as "higher risk" assets were as
follows:
6-30-95 % 12-31-94 %
(In millions)
Bonds, near or in default $ - - $ - -
Bonds below investment grade 122.7 1.9 122.3 2.3
Mortgage loans 61 days delinquent
or in foreclosure 0.3 - 0.9 -
Mortgage loans restructured 13.9 0.2 13.5 0.3
Foreclosed properties 9.6 0.1 7.8 0.2
Subtotal, "higher risk assets" 146.5 2.2 144.5 2.8
All other investments 6,348.2 97.8 5,098.9 97.2
Total cash and investments $6,494.7 100.0 $5,243.4 100.0
The Company's investment guidelines allow investments in below investment
grade bonds up to a stated percentage of adjusted statutory capital and
surplus which amount currently approximates $200 million. In making
acquisitions of this nature, the Company attempts to identify well structured
private placements offering enhanced yields. Also, the highest tier of public
noninvestment grade bonds which have the potential to be upgraded ("crossover
credits") are considered for acquisition. It is expected that the level of
noninvestment grade bonds may increase; however, the Company will continue to
manage its credit risks in a prudent fashion with due regard to regulatory
constraints and efficient utilization of surplus.
19
Beginning with the first quarter of 1995, JP Life entered into a common stock
Buy/Write program as an additional source of investment returns. Holdings are
maintained in a trading account, and option premiums received are recorded as
investment income as earned. The Company also writes covered call options in
expectation of enhanced total returns from option premiums, market
appreciation, and dividends received. Balances of portfolios classified as
"Trading securities" had a cost of $49.0 million and a carrying value of $51.8
million at June 30, 1995. Total option premiums received were $2.5 million
and $0.6 million during the second quarter of 1995 and 1994 and $5.4 million
and $2.4 million during the first six months of 1995 and 1994.
The Company has not utilized derivative financial instruments other than
covered call options and has no current plans to do so. JP Life has a
substantial CMO portfolio which contains liquid, less volatile issues that
produce relatively stable cash flows. CMO holdings for the periods under
report consist predominately of the least volatile Planned Amortization
Classes and sequential tranches of federal agency issuers. JP Life held the
following CMO's at the dates reported:
6-30-95 12-31-94
(In millions)
Available for sale, at fair value:
Federal agency issued CMO's $ 544.2 $ 366.8
Corporate private-labeled CMO's 158.1 87.0
Held to maturity at amortized cost:
Federal agency issued CMO's 510.1 509.7
Total $1,212.4 $ 963.5
As discussed in the Liquidity section, the Company sold securities under
repurchase agreements as an asset/liability management strategy. The
asset/liability management process focuses primarily on the management of
interest rate risk. JP monitors the durations of insurance liabilities for
comparison to the durations of assets backing the insurance lines. The
Company also considers the timing of the cash flows arising from the assets
and liabilities under different interest rate scenarios. It is the intention
of management that option-adjusted durations for interest sensitive portfolios
such as universal life and annuities remain closely matched. A wider
tolerance is permissible for the noninterest sensitive (traditional)
portfolios. At June 30, 1995 and December 31, 1994, respectively, 57.0% and
39.7% of JP Life's invested assets at amortized cost were held for interest
sensitive portfolios, and 43.0% and 60.3% were held for traditional portfolios
and corporate capital and surplus.
Accounting Pronouncements
SFAS 114," Accounting by Creditors for Impairment of a Loan" is 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 the
fair value of the underlying collateral. The Company adopted the provisions
of SFAS 114 as of January 1, 1995; however, no significant effect on the
consolidated financial statements resulted from the adoption of SFAS 114.
20
Current Developments
On August 10, 1995, the Company announced that it signed a definitive
agreement to acquire the Alexander Hamilton Life Insurance Company (AHLIC), a
wholly-owned subsidiary of Household International, for a purchase price of
$575 million. The Company will acquire the Individual insurance and annuity
business of AHLIC and a subsidiary, First Alexander Hamilton Life Insurance
Company of New York. Credit insurance sold through affiliates of Household
International will not be acquired. The transaction, which is subject to
regulatory approvals, is expected to close by year end. The Company expects
to finance the purchase initially through internally available resources and
an interim bank credit facility.
21
PART II. OTHER INFORMATION
JEFFERSON-PILOT CORPORATION
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 4. Submission of Matters to a Vote of Security Holders
(a) The information hereinafter reported relates to the Registrant's Annual
Meeting of Shareholders held on May 1, 1995.
(c) The following matters were voted upon at the meeting:
(1) Election of Directors
Class III: Term Votes For Withheld
Robert G. Greer 3 years 39,450,541 1,435,230
George W. Henderson III 3 years 40,704,427 181,344
Hugh L. McColl, Jr. 3 years 39,394,476 1,491,295
Martha A. Walls 3 years 40,711,933 173,838
(2) A proposal by the Registrant's board of directors to amend the
Articles of Incorporation to increase the authorized common stock:
For: 36,784,800
Against: 3,916,765
Abstain: 184,206
(3) A proposal by the Registrant's board of directors to amend the
Articles of Incorporation to add preferred stock:
For: 26,024,569
Against: 11,209,380
Abstain: 273,293
Broker Nonvotes: 3,378,529
(4) A proposal by the Registrant's board of directors to approve
amendment and reinstatement of the Long Term Stock Incentive Plan:
For: 31,392,342
Against: 5,823,530
Abstain: 291,370
Broker Nonvotes: 3,378,529
(5) A proposal by the Registrant's board of directors to approve the
1995 Nonemployee Directors' Stock Option Plan:
For: 33,047,754
Against: 4,107,815
Abstain: 351,673
Broker Nonvotes: 3,378,529
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(i) Articles of Incorporation, reflecting amendments to
Article IV adopted May 1, 1995 with shareholder
approval to increase the authorized common stock
and to add a class of preferred stock
(27) Financial Data Schedule
(b) A report on Form 8-K was filed to report the completion of the
assumption reinsurance transaction under which Jefferson-Pilot Life
Insurance Company assumed most of the life insurance and annuity
liabilities of Kentucky Central Life Insurance Company.
23
SIGNATURES
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) ________________________________
(Name and Title) Dennis R. Glass, Treasurer
Date August 14, 1995
________________________________
(Name and Title) Reggie D. Adamson,
Senior Vice President
(Principal Accounting Officer)
Date August 14, 1995
24