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 March 31, 1998 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)
(336) 691-3691
(Registrant's telephone number, including area code)
Indicate whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock
outstanding at March 31, 1998 106,385,149
JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
Part I. Financial Information
Consolidated Unaudited Condensed Balance Sheets
- March 31, 1998 and December 31, 1997 3
Consolidated Unaudited Condensed Statements of Income
- Three Months ended March 31, 1998 and 1997 4
Consolidated Unaudited Condensed Statements of Cash Flows
- Three months ended March 31, 1998 and 1997 5
Notes to Consolidated Unaudited Condensed Financial
Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information 21
Signatures 21
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PART I. FINANCIAL INFORMATION
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
(In Millions)
March 31 December 31
1998 1997
------- -------
Debt securities available for sale, at fair value $10,278 $10,155
(amortized cost $9,897 and $9,748)
Debt securities held to maturity, at amortized cost 3,721 3,790
(fair value $3,898 and $3,892)
Equity securities available for sale, at fair value 1,012 892
(cost $80 and $88)
Equity securities trading portfolio, at fair value 1 1
(cost $1 and $1)
Mortgage loans on real estate 1,756 1,716
Other investments 1,540 1,540
Cash and cash equivalents 66 9
------ ------
Total cash and investments 18,374 18,103
Accrued investment income 225 217
Due from reinsurers 1,465 1,526
Deferred policy acquisition costs and value
of business acquired 1,395 1,364
Cost in excess of net assets acquired 236 225
Assets held in separate accounts 1,486 1,282
Other assets 371 414
------ ------
Total assets $23,552 $23,131
====== ======
Policy liabilities $17,505 $17,497
Debt:
Commercial paper and revolving credit borrowings 230 285
Exchangeable Securities and other debt 381 331
Securities sold under repurchase agreements 96 95
Liabilities related to separate accounts 1,486 1,282
Tax liabilities 331 235
Accounts payable, accruals and other liabilities 317 321
------ ------
20,346 20,046
------ ------
Guaranteed preferred beneficial interest in
subordinated debentures ("Capital Securities") 300 300
------ ------
Mandatorily redeemable preferred stock 53 53
------ ------
Stockholders' Equity:
Common stock 97 93
Retained earnings 2,045 1,964
Accumulated other comprehensive income -
net unrealized gains on securities 711 675
------ ------
2,853 2,732
------ ------
Total liabilities and stockholders' equity $23,552 $23,131
====== ======
See Notes to Consolidated Unaudited Condensed Financial Statements
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JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED
STATEMENTS OF INCOME
(In Millions Except Per Share Information)
Three Months Ended
March 31
1998 1997
---- ----
Revenue:
Premiums and other considerations $289 $240
Net investment income 301 238
Realized investment gains 43 61
Communications sales 48 51
Other 16 1
--- ---
Total revenue 697 591
--- ---
Benefits and Expenses:
Insurance and annuity benefits 355 296
Insurance commissions 71 41
General, administrative and other expenses 64 50
Communications operations 31 34
--- ---
Total benefits and expenses 521 421
--- ---
Income before income taxes 176 170
Provision for income taxes 57 57
--- ---
Net income 119 113
Dividends on Capital Securities 6 3
Dividends on mandatorily redeemable
preferred stock 1 1
--- ---
Net income available to common stockholders $112 $109
=== ===
Comprehensive income $148 $ 22
=== ===
Average number of shares outstanding 106.3 106.1
===== =====
Net Income Per Share of Common Stock:
Net income available to common stockholders before
realized investment gains, net of income taxes $0.79 $0.65
Realized investment gains, net of income taxes 0.26 0.37
---- ----
Net income available to common stockholders $1.05 $1.02
==== ====
Net income available to common stockholders -
assuming dilution $1.04 $1.02
==== ====
Dividends declared per common share $.295 $.267
==== ====
See Notes to Consolidated Unaudited Condensed Financial Statements
-4-
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED
STATEMENTS OF CASH FLOWS
(In Millions)
Three months Ended
March 31
1998 1997
---- ----
Net cash provided by operations $313 $ 78
--- ---
Cash Flows from Investing Activities:
Investments sold (purchased), net (75) 117
Other investing activities 2 1
--- ---
Net cash provided by (used in) investing activities (73) 118
--- ---
Cash Flows from Financing Activities:
Issuance of Capital Securities - 300
Net short-term borrowings repayments (54) (228)
Cash dividends paid (38) (30)
Issuance of common shares, net 4 1
Policyholder contract deposits, net (95) 58
--- ---
Net cash provided by (used in) financing activities (183) 101
--- ---
Increase in cash and cash equivalents 57 297
Cash and cash equivalents at beginning of period 9 108
--- ---
Cash and cash equivalents at end of period $ 66 $405
=== ===
Supplemental Cash Flow Information:
Income taxes paid $ 2 $ 1
=== ===
Interest paid $ 9 $ 7
=== ===
See Notes to Consolidated Unaudited Condensed Financial Statements
-5-
JEFFERSON-PILOT CORPORATION
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in millions)
1. Basis of Presentation
The accompanying consolidated unaudited condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. All significant intercompany accounts and transactions have
been eliminated in consolidation. Operating results for the three month
period ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
2. Acquisition of Chubb Life Insurance Company of America
Effective April 30, 1997 for accounting and tax purposes, Jefferson-Pilot
Corporation (JP or the Company) acquired all the outstanding shares of
Chubb Life Insurance Company of America, now named Jefferson Pilot
Financial Insurance Company (JP Financial), from The Chubb Corporation
(Seller). JP Financial's operations, principally universal life,
variable universal life and term insurance, are conducted nationwide
through JP Financial and its life insurance subsidiaries, Chubb Colonial
Life Insurance Company (now named Jefferson Pilot LifeAmerica Insurance
Company) and Chubb Sovereign Life Insurance Company. Hereinafter, JP
Financial and its subsidiaries are collectively referred to as "JP
Financial." Jefferson Pilot Securities Corporation (formerly Chubb
Securities Corporation) is a full service NASD registered broker-dealer.
The cost of the acquisition consisted of $775 cash paid by JP to Seller,
plus other acquisition costs. In addition, JP Financial paid a $100
special dividend to Seller which was funded through liquidation of short-
term investments. The $775 was financed through the liquidation of
invested assets, various securities offerings and the issuance of
commercial paper.
The acquisition was accounted for using the purchase method. As a
result, JP Financial's results of operations from May 1, 1997 forward are
included in the Company's financial statements. During the first quarter
of 1998, the final allocation of purchase price to JP Financial's
tangible and identifiable intangible assets and liabilities was
completed, based on their respective fair values with the difference,
amounting to $163, allocated to cost in excess of net assets acquired
(i.e., goodwill). Goodwill arising from the acquisition is being
amortized over a period of 35 years.
The following pro-forma financial information has been prepared assuming
that the JP Financial acquisition had taken place at the beginning of
1997. The pro-forma information includes adjustments for interest
expense and foregone investment income that would have resulted from
financing the acquisition, amortization of adjustments to fair value,
amortization of value of business acquired and cost in excess of net
assets acquired, and related tax effects. The pro-forma
-6-
financial information is not necessarily indicative of results of operations
that would have been reported had the transaction actually been completed on
the date assumed.
Three months Ended
March 31, 1997
--------------
Revenue $685
===
Net income available to common stockholders
before realized investment gains, net of income taxes $ 81
Realized investment gains, net of income taxes 11
---
Net income available to common stockholders $ 92
===
Net Income Per Share of Common Stock:
Net income available to common stockholders
before realized investment gains, net of income taxes $0.76
Realized investment gains, net of income taxes 0.10
----
Net income available to common stockholders $0.86
====
On a pro-forma basis, net income available to common stockholders before
realized investment gains, net of income taxes, increased from $69 to $81
for the three months ended March 31, 1997. On a pro-forma basis,
realized investment gains, net of income taxes, are significantly lower
than actual for the three months ended March 31, 1997, because the pro-
forma amounts eliminate the effect of realized gains on invested assets
sold during the first quarter of 1997 to finance the JP Financial
acquisition.
3. Contingent Liabilities
Jefferson-Pilot Life Insurance Company is a defendant in a proposed class
action suit alleging deceptive practices, fraudulent and negligent
misrepresentation and breach of contract in the sale of certain life
insurance policies using policy performance illustrations which used then
current interest or dividend rates and insurance charges and illustrated
that some or all of the future premiums might be paid from policy values
rather than directly by the insured. The claimant's actual policy values
exceeded those illustrated on a guaranteed basis, but were less than
those illustrated on a then current basis due primarily to the interest
crediting rates having declined along with the overall decline in
interest rates in recent years. Unspecified compensatory and punitive
damages, costs and equitable relief are sought. While management is
unable to make a meaningful estimate of the amount or range of loss that
could result from an unfavorable outcome, management believes that it has
made appropriate disclosures to policyholders as a matter of practice,
and intends to vigorously defend its position.
In the normal course of business, the Company and its subsidiaries are
parties to various lawsuits. Because of the considerable uncertainties
that exist, the Company cannot predict the outcome of pending or future
litigation. However, management believes that the resolution of pending
legal proceedings will not have a material adverse effect on the
Company's financial position or liquidity, but could have a material
adverse effect on the results of operations for a specified period.
-7-
4. Accounting Pronouncements
As of January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income", which sets standards for the reporting and display
of comprehensive income and its components in financial statements.
Adoption had no impact on the Company's net income or stockholders'
equity. Comprehensive income consists of net income plus other
comprehensive income. Currently, the only element of other comprehensive
income applicable to the Company is changes in unrealized gains and
losses on securities classified as available for sale. Prior year
financial statements have been reclassified to conform to the
requirements of SFAS 130.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". This pronouncement is effective for
annual periods beginning after December 15, 1997, and for interim periods
beginning in the following year. SFAS 131 requires disaggregated
disclosures based on internal segments used by a company in managing its
business. Adoption will not impact the Company's financial position or
results of operation, but will require additional footnote disclosures
and may affect the presentation of operating earnings by business
segment.
5. Stock Split
On February 9, 1998, the Board authorized a three-for-two split of the
Company's common stock in the form of a 50% stock dividend distributed on
April 13, 1998 to shareholders of record as of March 20, 1998. All share
and per share amounts have been restated to give retroactive effect to
the stock split.
-8-
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 March 31, 1998, changes in financial condition for the
three months then ended, and results of operations for the three month
period ended March 31, 1998 as compared to the same period of 1997. This
discussion supplements Management's Discussion and Analysis in Form 10-K
for the year ended December 31, 1997, and it should be read in
conjunction with the interim financial statements and notes contained
herein. All dollar amounts are in millions except per share amounts.
All share amounts have been restated to give retroactive effect to the
Company's three-for-two stock split, which was effective in April 1998.
Company Profile
The Company (also referred to as JP) has two business segments: Insurance
and Communications. Within the Insurance segment, JP offers Individual
Life Insurance Products, Annuity and Investment Products, and Group
Insurance Products through the following subsidiaries: Jefferson-Pilot
Life Insurance Company (JP Life), Alexander Hamilton Life Insurance
Company of America (AH Life), First Alexander Hamilton Life Insurance
Company (FAHL), and Chubb Life Insurance Company of America, now named
Jefferson Pilot Financial Insurance Company and referred to as JP
Financial, and its subsidiary Chubb Colonial Life Insurance Company (now
named Jefferson Pilot LifeAmerica and referred to as JPLA), which were
acquired in the second quarter of 1997. Within the Communications
business segment, JP operates television and radio broadcasting stations
and provides sports and entertainment programming. These operations are
conducted through Jefferson-Pilot Communications Company (JPCC) and its
subsidiaries.
Acquisition Summary
In May 1997, the Company acquired JP Financial. The discussion of this
acquisition contained in Note 2 on page 6 is incorporated herein by
reference.
In January 1997, JPCC acquired the assets of KQKS-FM in Denver for $15 in
cash.
-9-
RESULTS OF OPERATIONS
In the following discussion "operating income" means income from
operations before realized investment gains, but after dividends on
Capital Securities and mandatorily redeemable preferred stock, except
where otherwise indicated.
Operating income increased 21.4% over the first quarter of 1997 due to
increased profitability in the Insurance segment. Net income increased
2.8%. The following tables illustrate JP's results and earnings per
share before and after the inclusion of realized investment gains.
Three Months Ended
March 31
1998 1997
------ ------
Consolidated Summary of Income
Operating income $ 83.9 $ 69.1
Realized investment gains, net 27.9 39.7
Net income available to ----- -----
common stockholders $111.8 $108.8
===== =====
Consolidated Earnings Per Share
Operating income $ .79 $ .65
Realized investment gains, net .26 .37
---- ----
Net income available to
common stockholders $1.05 $1.02
==== ====
Net income available to
common stockholders - assuming dilution $1.04 $1.02
==== ====
These results were achieved in spite of declines in earnings in the Group
Products class. Excluding the earnings impact of the JP Financial
acquisition and related financing costs as well as the Group Products
earnings, operating income increased 10.1% over the first three months of
1997.
Operating income per share increased 21.5%, due primarily to improved
operating results in the Insurance segment, including the impact of the
JP Financial acquisition. Total earnings per share increased 2.9%.
Earnings per share - assuming dilution increased 2.0%. Net realized
gains decreased $11.8. The higher level of realized gains in 1997 related
to the funding of the JP Financial acquisition. The effective tax rate
declined in the first quarter of 1998 due to an adjustment related to the
tax effects of an equity method investment.
A more detailed discussion of operating results by segment and product
class follows.
Operating Earnings by Business Segment
Operating income of the Insurance and Communications business segments
includes investment income but excludes net realized investment gains.
-10-
Earnings on investments of the parent company, dividends on preferred
stock and Capital Securities, parent company operating expenses, interest
expense and consolidation entries are included in the "Other" category.
Substantially all corporate capital is allocated to the business
segments.
The following table illustrates JP's results by segment and product
class.
Three Months Ended
March 31
1998 1997
---- ----
Insurance segment:
Individual Products $ 60.3 $ 41.8
Annuity and Investment Products 19.7 19.2
Group Products 4.5 5.6
----- -----
84.5 66.6
Communications segment 7.3 6.9
Other (7.9) (4.4)
----- -----
Operating income 83.9 69.1
Realized investment gains, net 27.9 39.7
----- -----
Net income available to common stockholders $111.8 $108.8
===== =====
Individual Products
The Individual Products distribution system offers a wide array of life
and health insurance through a career agency force, independent agents
recruited through independent marketing organizations and a regional
marketing network, home service agents and financial institutions.
Operating results were:
Three Months Ended
March 31
1998 1997
---- ----
Premiums, considerations, and other income $197.9 $116.9
Net investment income 182.5 119.6
----- -----
Total revenues 380.4 236.5
Policy benefits 207.5 125.7
Expenses 80.7 46.7
----- -----
Total benefits and expenses 288.2 172.4
----- -----
Operating income before income taxes 92.2 64.1
Provision for income taxes 31.9 22.3
----- -----
Operating income $ 60.3 $ 41.8
===== =====
Individual Products operating income increased $18.5 or 44.3% over the
first quarter of 1997, due largely to the JP Financial acquisition.
-11-
Total premiums and receipts for policyholder accounts for life products
increased 90.8% to $335.3 for the first three months of 1998. The
increase is attributable to sales of variable universal life products,
especially through JP Financial's regional marketing distribution
channel.
Net investment income in 1998 increased $62.9 or 52.6% over the first
three months of 1997, consistent with the increase in policyholder fund
balances and the acquisition of JP Financial. Average policyholder fund
balances on interest sensitive products, excluding JP Financial, of
$4,531.6 for the first three months of 1998 represent an 8.8% increase
over the $4,164.0 of average fund balances for the same period in 1997.
Total average fund balances were $6,907.9 for the first quarter of 1998,
up 65.9% from the first quarter of 1997.
Policy benefits, excluding JP Financial, increased $8.0 or 6.4% over the
prior year's three months. Increases in fund balances resulted in
interest credited to policyholder funds increasing $5.2 or 8.5% for the
quarter. Death benefits increased $5.6 or 15.7%, as favorable experience
in the first quarter of 1997 returned to more typical levels in 1998.
Excluding JP Financial, 1998 expenses were down $5.7 or 12.3% for the
three months. Commissions have declined due to changes in product mix
towards lower commission products. General and administrative expenses
have continued to declined due to continued effective cost control.
Annuity and Investment Products
Annuity and Investment Products (also referred to as the AIP business
segment) offers its products through financial institutions, independent
agents, career agents, investment professionals and broker-dealers.
Operating results were:
Three Months Ended
March 31
1998 1997
---- ----
Premiums and other considerations $ 4.3 $ 8.4
Net investment income 112.1 106.1
Other income 15.0 1.2
----- -----
Total revenues 131.4 115.7
Policy benefits 76.3 75.8
Expenses 24.8 10.8
----- -----
Total benefits and expenses 101.1 86.6
----- -----
Operating income before income taxes 30.3 29.1
Provision for income taxes 10.6 9.9
----- -----
Operating income $ 19.7 $ 19.2
===== =====
Operating income increased $0.5 or 2.6% over the first quarter of 1997.
Average assets under management (net of reinsurance) of $5,799.2 for the
first quarter of 1998 represented an increase of 6.2% from the first three
months of 1997 (primarily as a result of the JP Financial acquisition) and
were relatively flat compared to the fourth quarter of 1997.
Fixed annuity receipts for the first three months of 1998 were $96.9
compared to $134.7 for the same period in 1997. This decline was due to
the low interest environment and the relatively flat yield curve, resulting
in increased competition from equity products and bank certificates of
deposit. Fixed annuity benefits and surrenders as a percentage of beginning
fund balances, on an
-12-
annualized basis, were 15.0% and 13.6% in the first three months of 1998
and 1997. Annuity surrenders may increase as the percentage of the business
that can be withdrawn by policyholders without incurring a surrender charge
increases.
Effective spreads represent the yield on the investment portfolio less
interest credited to policyholders, adjusted for net deferral of bonus
interest. The Company has recently refined its methodology for measuring
and reporting spreads. The effective spread for the year ended December
31, 1997 under the refined methodology was 2.12%. The effective spread
for the first quarter of 1998 was 2.11%, up 5 basis points from the fourth
quarter of 1997.
The growth in other income is attributable to broker-dealer subsidiaries
acquired with JP Financial and is offset by corresponding increases in
expenses. Net investment income increased $6.0 or 5.7% for the quarter, as
assets under management increased.
Policy benefits increased $0.5 or 0.7% over the first quarter of 1997.
The growth in total expenses is attributable to broker-dealer operations
acquired with JP Financial. General and administrative expenses,
excluding JP Financial, declined 1.5% from 1997.
Group Products
Group Products provides a wide range of group insurance products for
employers and their employees primarily in the Southeast and Southwest.
It offers conventionally-insured and alternatively-funded medical
benefits as well as a variety of life, disability income and dental
plans. Operating results were:
Three Months Ended
March 31
1998 1997
---- ----
Group life premiums and other considerations $16.4 $ 18.9
Group accident & health premiums and other
considerations 71.8 95.8
Investment income, net of expenses 11.1 11.6
---- -----
Total revenues 99.3 126.3
Policy benefits 71.5 94.8
Expenses 21.0 23.1
---- -----
Total benefits and expenses 92.5 117.9
---- -----
Operating income before income taxes 6.8 8.4
Provision for income taxes 2.3 2.8
---- -----
Operating income $ 4.5 $ 5.6
==== =====
Group operating income declined $1.1 or 19.6% in the first quarter of
1998 compared to 1997 primarily as a result of mortality experience.
Favorable life experience in the first quarter of 1997 returned to a
more typical level in 1998. As a percentage of total revenues,
operating income was 4.5% for the first three months in comparison to
4.4% for the same period in 1997.
-13-
Group continues to implement the strategic initiatives adopted in the
fourth quarter of 1997, with an increased emphasis on marketing life and
disability products and efforts to improve the economics of the accident
and health business.
Premiums declined during the first quarter due to the decision to
withdraw from the small group medical market and as a result of policy
lapses, caused primarily by rate increases. Group accident and health
premiums and other considerations of $71.8 for the three months were
down 25.1% from the same period of 1997. Disability premiums of $7.7
increased 11.3% over the first quarter of 1997, but operating results
remain below the prior year due to an increase in the new claims rate
and a decrease in the claims termination rate. Life premiums and other
considerations decreased $2.5 to $16.4 versus $18.9 in the first quarter
of 1997, primarily due to reinsurance ceded effective January 1, 1998
and due to health markets exited during 1997.
For the first three months of 1998, policy benefits as a percentage of
premiums, considerations and other income decreased to 81.1% from 82.7%.
The conventional medical loss ratio for the first quarter of 1998 showed
a marked improvement over that of a year ago, declining to 84.3% from
90.5%.
Communications
JPCC operates television and radio broadcast properties and produces
syndicated sports and entertainment programming. Operating results were:
Three Months Ended
March 31
1997 1998
---- ----
Communications sales and other income $48.5 $51.1
Investment income, net of expenses 0.1 0.2
Financing costs (1.6) (1.7)
---- ----
Total revenues 47.0 49.6
Operating costs 30.8 34.0
Depreciation and amortization 2.9 3.0
General expenses 1.3 1.0
---- ----
Total expenses 35.0 38.0
---- ----
Operating income before income taxes 12.0 11.6
Provision for income taxes 4.7 4.7
---- ----
Operating income $ 7.3 $ 6.9
==== ====
Operating income from the Communications segment increased $0.4 or 5.8%
compared to the first three months of 1997.
The Company's broadcasting properties continued to benefit from the
generally favorable advertising environment and the strong local economies
in which we operate. Combined revenues for Radio and Television for the
first quarter grew 10.8% over the first quarter of 1997. Two of the
television stations are CBS affiliates and benefited from robust winter
Olympic-related advertising. Ratings gains at certain of our radio
properties enhanced revenue growth in that business. Revenues in our
Sports business declined as a result of a non-recurring sporting event held
in the first quarter of 1997 and due to a decrease in collegiate-related
sales.
-14-
Broadcast cashflow grew by 4%, as the strong growth of the broadcast
properties was partially offset by Sports' decline from their strong prior
year results.
Total expenses decreased 7.9% from the first quarter of 1997 primarily
due to decreases in Sports. Expenses as a percent of communications
sales and other income decreased from 74.4% for 1997 to 72.2% for 1998,
which is attributable to the shift away from Sports programming towards
the higher margin Radio and Television broadcast activities.
Other
Activities of the parent company and passive investment affiliates,
financing expenses on Corporate debt and debt securities including
Capital Securities and mandatorily redeemable preferred stock, and
federal and state income taxes not otherwise allocated to business
segments are reported in the "Other" category. The following table
summarizes the operating results:
Three Months Ended
March 31
1998 1997
------ ------
Earnings on investments and other income $ 5.0 $ 5.2
Interest expense on debt and
Exchangeable Securities (9.0) (3.2)
Operating expenses (4.6) (5.4)
Federal and state income tax benefits 7.8 3.5
---- ----
(0.8) 0.1
Dividends on Capital Securities and
mandatorily redeemable preferred stock (7.1) (4.5)
---- ----
Operating income $(7.9) $(4.4)
==== ====
Earnings on investments declined due to investment sales during the first
six months of 1997 to fund acquisitions. Interest expense and dividends
on Capital Securities and mandatorily redeemable preferred stock
increased due to the issuance of the Capital Securities and Mandatorily
Exchangeable Debt Securities (MEDS) during the first quarter and second
quarter, respectively, of 1997. Operating expenses represent costs
incurred to fund corporate activities and will fluctuate based on the
level of those activities. Federal and state income tax benefits include
the tax benefits of preferred dividends on Capital Securities, which are
recorded gross of related tax effects.
CONSOLIDATED FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
JP's resources consist primarily of investments related to its Insurance
segment, properties and other assets used in its Insurance and
Communications segments and investments backing corporate capital. The
Investments section reviews the Company's investment portfolio and key
strategies.
-15-
Total assets increased $421 or 1.8% during the first three months of
1998. This growth resulted from cash provided by operating activities,
increases in Separate Account assets, increases in the market values of
available for sale investments offset by a decrease in policyholder
contract deposits, net repayment of short term borrowings and payment of
dividends.
The Insurance segment defers the costs of acquiring new business,
including commissions, certain costs of underwriting and issuing
policies, first year bonus interest and agency office expenses. Deferred
acquisition costs were $760 at March 31, 1998, up 2.4% from December 31,
1997.
Value of business acquired (VOBA) represents the actuarially-determined
present value of future gross profits of each business acquired. VOBA
was $635 at March 31, 1998, an increase of 2.1% since year end. The
increase is attributable to deferrals of level commissions on purchased
blocks and adjustments to net realizable values of purchased assets.
Cost in excess of net assets acquired (goodwill) was $236 at March 31,
1998 and $225 at December 31, 1997. The increase was the result of
adjustments in net realizable values of purchased assets. Goodwill as a
percentage of stockholders' equity was 8.3% at March 31, 1998 and 8.2% at
December 31, 1997.
JP had reinsurance receivables of $1,115 and $1,250 at March 31, 1998 and
December 31, 1997 and policy loans of $834 as of each date, which relate
to businesses of AH Life that are 100% coinsured to Household, in
connection with the acquisition of AH Life from Household in 1995.
Household has provided payment, performance and capital maintenance
guarantees with respect to the balances receivable. JP also had a
recoverable of $96 at March 31, 1998 from a single reinsurer related to a
block of business of JP Financial that is 50% reinsured. JP and the
reinsurer are joint and equal owners of $194 in securities which support
the block.
Capital Resources
Stockholders' Equity
JP's capital adequacy is illustrated by the following table:
March 31 December 31
1998 1997
-------- --------
Total assets $23,552 $23,131
Total stockholders' equity 2,853 2,732
Ratio of stockholders' equity to assets 12.1% 11.8%
The Company's ratio of capital to assets increased as a result of
earnings retained and unrealized gains on available for sale securities.
JP considers existing capital resources to be more than adequate to
support the current level of its business activities. The business plan
places priority on redirecting certain capital resources invested in
bonds and stocks into its core businesses, such as the JP Financial
acquisition, which would be expected to produce higher returns over time.
Such available invested resources declined substantially with the JP
Financial acquisition.
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The Insurance segment is subject to regulatory constraints. The
Company's insurance subsidiaries have statutory surplus and risk based
capital levels well above required levels. This has enabled JP Life, AH
Life and JP Financial to attain very strong claims paying ratings. Standard
& Poors has recently reaffirmed "AAA" claims paying ratings for JP Life and
AH Life and has upgraded JP Financial and JPLA from "AA" to "AAA".
Debt and Exchangeable Securities
The ACES and MEDS are carried at fair value, which fluctuates based on
the market value of NationsBank stock. Changes in the carrying value of
these securities (which amounted to year to date increases of $36.7 for
ACES and $12.9 for MEDS), net of deferred income taxes, are recorded to
accumulated other comprehensive income - net unrealized gains on securities
in stockholders' equity.
Mandatorily Redeemable Preferred Stock
Of the $53 of mandatorily redeemable preferred stock outstanding, $50 was
redeemable at the holder's option beginning April 1998 and $3 beginning
April 1999. $50 was redeemed upon request of the holder in April 1998.
While the Company has made no commitments for additional financing,
additional securities may be issued to finance acquisitions or for other
corporate purposes.
Liquidity
Liquidity requirements are met primarily by positive cash flows from the
operations of insurance subsidiaries and other consolidated subsidiaries.
Overall sources of liquidity are sufficient to satisfy operating
requirements. Primary sources of cash from the Insurance segment are
premiums, other insurance considerations, receipts for policyholder
accounts, investment sales and maturities and investment income. Primary
uses of cash include purchase of investments, payment of insurance
benefits, operating expenses, withdrawals from policyholder accounts,
costs related to acquiring new business, and income taxes. Primary
sources of cash from the Communications segment are revenues from
advertising and sports and entertainment production. Primary uses of
cash include payment of agency commissions, cost of sales, operating
expenses and income taxes.
Cash provided by operations was $313 and $78 for the first quarter of
1998 and 1997. Changes in reinsurance receivables and tax liabilities
contributed to the increase, along with earnings growth.
Net cash provided/(used) in investing activities was $(73) and $118 for
the first three months of 1998 and 1997. The variation in the amounts
reflects the 1997 liquidation of investments in the months preceding the
JP Financial acquisition, with the proceeds used to partially fund the
acquisition. The majority of the liquidation process was completed
during 1997's first quarter.
Proceeds from the issuance of securities of $300 and repayments of short-
term borrowings of $228 during first quarter 1997 reflect proceeds from
the Capital Securities which were used to pay down short-term borrowings
during the period preceding the JP Financial acquisition. Cash
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inflows/(outflows) from changes in policyholder contract deposits were
$(95) and $58 for the first quarter of 1998 and 1997. The decrease is a
result of lower sales and higher withdrawals of policyholder funds in a
period of declining interest rates. However, excluding a $(122) net
withdrawal in the AH Life COLI block, which is 100% coinsured to
Household, the Company experienced net policyholder deposits of $27 for
the first quarter of 1998.
In order to meet the parent company's dividend payments, debt servicing
obligations and other expenses, internal dividends are received from the
subsidiary companies. Total internal cash dividends paid to the parent
company from its subsidiaries during the first three months were $51 in
1998 and $48 in 1997. JP Life and AH Life were the primary sources of
these dividends in 1998. The Company's life insurance subsidiaries are
subject to laws in the states of domicile that limit the amount of
dividends that can be paid without the prior approval of the respective
State's Insurance Commissioner. A portion of the remaining dividends
planned from life subsidiaries for 1998 will require regulatory approval.
The Company has no reason to believe that such approval will be withheld.
Cash and short-term investments were $66 and $9 at March 31, 1998 and
December 31, 1997. The increase reflects preparations for the redemption
of $50 of AH Life's preferred stock, which occurred in early April.
Fixed income and equity securities held by the parent company and non-
regulated subsidiaries were $637 and $564 at March 31, 1998 and December
31, 1997. These securities, less the $377 (at March 31, 1998) of
NationsBank stock which supports the Exchangeable Securities, are
considered to be sources of liquidity to support the Company's
strategies.
Total trading securities and debt and equity securities available for
sale at March 31, 1998 were $11,291.
Investments
JP's strategy for managing the insurance investment portfolio is to
dependably meet pricing assumptions while achieving the highest possible
after-tax returns over the long term. Cash flows are invested primarily
in fixed income securities. The nature and quality of the various types
of investments held by insurance subsidiaries must comply with state
regulatory requirements. The Company has a formal investment policy that
governs overall quality and diversification.
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JP held the following carrying amounts of investments:
March 31 December 31
1998 1997
-------------- --------------
Publicly-issued bonds $11,109 60.4% $11,088 61.3%
Privately-placed bonds 2,868 15.6 2,832 15.6
Commercial mortgage loans 1,756 9.6 1,716 9.5
Common stock 1,011 5.5 893 4.9
Policy loans 1,426 7.8 1,422 7.9
Preferred stock 24 0.1 25 0.1
Real estate 74 0.4 75 0.4
Other investments 40 0.2 43 0.2
Cash and cash equivalents 66 0.4 9 0.1
------ ----- ------ -----
Total $18,374 100.0% $18,103 100.0%
====== ===== ====== =====
The strategy of identifying market sectors and niches that provide
investment opportunities to meet the portfolios' growth, quality and
yield requirements is expected to continue to result in increasing
percentages of private placements and commercial mortgage loans, which as
a percentage of total investments declined in 1997 due to the JP
Financial acquisition.
JP's Investment Policy Statement (Policy) requires an average quality
fixed income portfolio (excluding mortgage loans) of "A" or higher.
Currently, the average quality is "A+", excluding mortgage loans.
Carrying amounts of investments categorized as "higher risk" assets were:
March 31, 1998 December 31, 1997
--------------- -----------------
Bonds near or in default $ 2 0.0% $ 2 0.0%
Bonds below investment grade 733 4.0 766 4.2
Mortgage loans 60 days
delinquent or in foreclosure 4 - 7 0.1
Mortgage loans restructured 13 0.1 13 0.1
Foreclosed properties 2 - 4 -
Sub-total, higher risk assets 754 4.1 792 4.4
All other investments 17,620 95.9 17,311 95.6
------ ----- ------ -----
Total cash and investments $18,374 100.0% $18,103 100.0%
====== ===== ====== =====
The level of below investment grade bonds, which has decreased slightly
during 1998, is within guidelines authorized by the Finance Committee.
The Company's use of derivative financial instruments has been limited,
using them to manage well-defined interest rate risks. Interest rate
swaps with a notional value of $200 were open as of March 31, 1998 and
December 31, 1997. Termination of these arrangements under then current
interest rates would result in a potential gain of $6. The periodic cash
settlements under these arrangements are reflected as an adjustment to
investment income.
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Collateralized Mortgage Obligations (CMO's), which are included in debt
securities available for sale, were:
March 31 December 31
1998 1997
------ ------
Federal agency issued CMO's $2,395 $2,398
Corporate private-labeled CMO's 1,473 1,485
----- -----
Total $3,868 $3,883
===== =====
The Company's investment strategy with respect to CMO's focuses on
actively-traded, less volatile issues that produce relatively stable cash
flows. The majority of CMO holdings are sequential tranches of federal
agency issuers. The CMO portfolio has been constructed with underlying
mortgage collateral characteristics and structure in order to lower cash
flow volatility over a range of interest rate levels.
Year 2000 Conversion Costs
Failure to alleviate Year 2000 systems problems could result in a
material disruption to the Company's operations in the year 2000.
Several of the Company's information systems have been brought into Year
2000 compliance. All significant policyholder administration systems are
scheduled to be compliant by the end of 1998. Since inception of the
project, the Company has incurred external costs of $4. The remainder of
this effort is expected to be completed by the third quarter of 1999
utilizing internal and external resources, with remaining external costs
estimated at approximately $8. However, there can be no guarantee that these
results will be achieved and actual results could differ materially. All
costs associated with this effort are being expensed as incurred.
MARKET RISK EXPOSURES
With respect to the Company's exposure to market risks, see management's
comments in the 1997 Form 10-K.
EXTERNAL TRENDS AND FORWARD LOOKING INFORMATION
With respect to economic trends, inflation and interest rate risks,
environmental liabilities and the regulatory and legal environment, see
management's comments in the 1997 Form 10-K.
With respect to accounting pronouncements, see Note 4 on page 8, which is
incorporated herein by reference.
Forward-looking information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information contained
herein or in any other written or oral statements made by, or on behalf
of JP are or may be viewed as forward looking. Although the Company has
used appropriate care in developing any such forward looking information,
forward looking information involves risks and uncertainties that could
significantly impact actual results. These risks and uncertainties
include, but are not limited to, the matters discussed in "Market Risk
Exposures", "External Trends and Forwarding Looking Information" and
other risks detailed from time to time in the Company's SEC filings; to
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the risks that the business and/or operations of JP Financial may
deteriorate due to the acquisition, and that JP might fail to
successfully complete synergistic strategies for cost reductions and for
growth in sales of products of JP Financial and other insurance
subsidiaries through all existing and acquired distribution channels; and
more generally, to: general economic conditions; competitive factors,
including pricing pressures, technological developments, new product
offerings and the emergence of new competitors; interest rate trends and
fluctuations; and changes in federal and state laws and regulations,
including, without limitation, changes in financial services industry or
tax laws and regulations. The Company undertakes no obligation to
publicly update or revise any forward looking statements, whether as a
result of new information, future developments or otherwise.
PART II. OTHER INFORMATION
JEFFERSON-PILOT CORPORATION
Item 1. Legal Proceedings
The registrant is involved in various claims and lawsuits incidental to
and in the ordinary course of its business. In the opinion of
management, the ultimate liability will not have a material effect on the
financial condition or liquidity of the Company, but could have a
material adverse effect on the results of operations for a specified
period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports of Form 8-K
No reports on Form 8-K were filed during the first quarter of 1998.
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) /s/Dennis R. Glass
(Name and Title) Dennis R. Glass, Executive Vice President,
Chief Financial Officer and Treasurer
Date May 14, 1998
By (Signature) /s/Reggie D. Adamson
(Name and Title) Reggie D. Adamson, Senior Vice President - Finance
(Principal Accounting Officer)
Date May 14, 1998
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