FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1999 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 September 30, 1999 104,726,263
JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
[S]
Part I. Financial Information
Consolidated Unaudited Condensed Balance Sheets
- September 30, 1999 and December 31, 1998 3
Consolidated Unaudited Condensed Statements of Income
- Three Months and Nine Months ended September 30, 1999
and 1998 4
Consolidated Unaudited Condensed Statements of Cash Flows
- Nine Months ended September 30, 1999 and 1998 5
Notes to Consolidated Unaudited Condensed Financial
Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information 33
Signatures 33
-2-
PART I. FINANCIAL INFORMATION
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
(In Millions)
September 30 December 31
1999 1998
-------- -----------
Debt securities available for sale, at fair value
(amortized cost $11,259 and $10,500) $11,092 $10,958
Debt securities held to maturity, at amortized cost
(fair value $3,115 and $3,699) 3,149 3,545
Equity securities available for sale, at fair value
(cost $94 and $94) 788 949
Mortgage loans on real estate 2,275 1,969
Other investments 959 1,557
Cash and cash equivalents 40 21
------- -------
Total cash and investments 18,303 18,999
Accrued investment income 243 241
Due from reinsurers 1,456 1,342
Deferred policy acquisition costs and value
of business acquired 1,700 1,412
Cost in excess of net assets acquired 224 229
Assets held in separate accounts 1,888 1,754
Other assets 345 361
------ ------
Total assets $24,159 $24,338
====== ======
Policy liabilities $17,632 $17,667
Debt:
Commercial paper and revolving credit borrowings 297 289
Exchangeable Securities and other debt 297 327
Securities sold under repurchase agreements 345 292
Liabilities related to separate accounts 1,888 1,754
Tax liabilities 190 344
Accounts payable, accruals and other liabilities 324 310
------ ------
20,973 20,983
------ ------
Guaranteed preferred beneficial interest in
subordinated debentures ("Capital Securities") 300 300
------ ------
Mandatorily redeemable preferred stock - 3
------ ------
Stockholders' Equity:
Common stock 137 133
Retained earnings 2,368 2,191
Accumulated other comprehensive income -
net unrealized gains on securities 381 728
------ ------
2,886 3,052
------ ------
Total liabilities and stockholders' equity $24,159 $24,338
====== ======
See Notes to Consolidated Unaudited Condensed Financial Statements
-3-
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
(In Millions Except Per Share Information)
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------ ------
Revenue:
Premiums and other considerations $ 223 $ 255 $ 693 $ 809
Net investment income 317 299 948 901
Realized investment gains 27 33 98 94
Communications sales 50 45 147 141
Other 19 17 59 52
----- ----- ----- -----
Total revenue 636 649 1,945 1,997
----- ----- ----- -----
Benefits and Expenses:
Insurance and annuity benefits 310 321 919 1,007
Insurance commissions, net of deferrals 26 19 78 74
General and administrative expenses,
net of deferrals 44 54 144 174
Amortization of deferred acquisition costs
and value of business acquired 44 46 141 135
Communications operations 28 28 88 88
----- ----- ----- -----
Total benefits and expenses 452 468 1,370 1,478
----- ----- ----- -----
Income before income taxes 184 181 575 519
Provision for income taxes 62 66 196 177
----- ----- ----- -----
Net income 122 115 379 342
Dividends on Capital Securities
and preferred stock 6 6 18 20
----- ----- ----- -----
Net income available to common
stockholders $ 116 $ 109 $ 361 $ 322
===== ===== ===== =====
Net Income $ 122 $ 115 $ 379 $ 342
Other comprehensive income - change in
net unrealized gains on securities (132) 13 (347) 86
----- ----- ----- -----
Comprehensive income $ (10) $ 128 $ 32 $ 428
Average number of shares outstanding 105.3 106.1 105.7 106.2
===== ===== ===== =====
Net Income Per Share of Common Stock:
Net income available to common
stockholders before realized investment
gains, net of income taxes $ 0.94 $ 0.85 $ 2.81 $ 2.49
Realized investment gains, net of income
taxes 0.16 0.18 0.61 0.54
----- ----- ----- -----
Net income available to common
stockholders $ 1.10 $ 1.03 $ 3.42 $ 3.03
===== ===== ===== =====
Net income available to common
stockholders - assuming dilution $ 1.09 $ 1.02 $ 3.38 $ 3.01
===== ===== ===== =====
Dividends declared per common share $0.330 $0.295 $0.990 $0.890
===== ===== ===== =====
See Notes to Consolidated Unaudited Condensed Financial Statements
-4-
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED
STATEMENTS OF CASH FLOWS
(In Millions)
Nine Months Ended
September 30
1999 1998
------ ------
Net cash provided by operations $ 377 $ 319
---- ----
Cash Flows from Investing Activities:
Investments purchased, net (585) (259)
Other investing activities (42) (15)
---- ----
Net cash used in investing activities (627) (274)
---- ----
Cash Flows from Financing Activities:
Policyholder contract deposits, net 1,433 1,151
Policyholder contract withdrawals, net (1,025) (1,083)
Net short-term borrowings 60 92
Repurchase of common shares, net (82) (21)
Cash dividends paid (120) (112)
Redemption of preferred stock (3) (50)
Other financing activities 6 -
---- ----
Net cash provided by financing activities 269 (23)
---- ----
Increase in cash and cash equivalents 19 22
Cash and cash equivalents at beginning of period 21 9
---- ----
Cash and cash equivalents at end of period $ 40 $ 31
==== ====
Supplemental Cash Flow Information:
Income taxes paid $ 156 $ 113
==== ====
Interest paid $ 33 $ 30
==== ====
See Notes to Consolidated Unaudited Condensed Financial Statements
-5-
JEFFERSON-PILOT CORPORATION
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in millions except per share information)
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 nine
month period ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1999.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. Acquisition Summary
On September 20, 1999, the Company entered into an agreement to acquire
The Guarantee Life Companies Inc.(Guarantee) through merger with a newly
formed wholly owned subsidiary of the Company. The transaction is
intended to be a stock election merger, in which shareholders can elect
to receive both cash and Company stock, depending on the price of the
Company stock at the time of closing. Guarantee's operations,
principally Individual life, Annuity products and Employee Benefit
products, are conducted nationwide.
The total purchase price is $296 plus the Company will assume
outstanding debt of $115, bringing the total acquisition price to $411.
The Company intends to finance the transaction through approximately
equal amounts of borrowings and proceeds of securities sales[shortly
before closing].
Closing is subject to the approval of Guarantee Life shareholders at a
meeting expected to take place in late December, 1999. All necessary
state and other regulatory approvals have been obtained, except for SEC
clearance of the merger proxy statement-prospectus to be sent to
Guarantee Life shareholders.
-6-
3. Segment Reporting
The Company has four reportable segments which are defined based on the
nature of the products and services offered: Life Insurance Products,
Annuity and Investment Products (AIP), Communications, and Corporate and
Other. The Corporate and Other segment includes activities of the
parent company and passive investment affiliates, capital of the life
insurance subsidiaries not otherwise allocated to other reportable
segments including earnings thereon, financing expenses on Corporate
debt and debt securities including Capital Securities and mandatorily
redeemable preferred stock, federal and state income taxes not otherwise
allocated to business segments, and all of the Company's realized gains
and losses. Surplus is allocated to the Life Insurance Products and AIP
reportable segments based on risk-based capital formulae which give
consideration to asset/liability and general business risks, as well as
the Company's strategies for managing those risks. Various distribution
channels and/or product classes related to the Company's life insurance,
annuity and investment products have been aggregated in the Life
Insurance and AIP reporting segments.
The following table summarizes certain financial information regarding
the Company's reportable segments:
September 30 December 31
1999 1998
------- ------
Assets
Life Insurance Products $13,383 $12,579
AIP 6,662 6,495
Communications 210 222
Corporate & other 3,904 5,042
------ ------
Total assets $24,159 $24,338
====== ======
-7-
3. Segment Reporting (continued)
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------- ------- ------ ------
Revenues
Life Insurance Products $ 407 $ 427 $ 1,236 $ 1,323
AIP 125 125 379 382
Communications 49 44 144 137
Corporate & other 28 20 88 61
------ ------ ------ ------
609 616 1,847 1,903
Realized investment gains, before tax 27 33 98 94
------ ------ ------ ------
Total revenues $ 636 $ 649 $ 1,945 $ 1,997
====== ====== ====== ======
Operating income and reconciliation to net
income available to common stockholders
Life Insurance Products $ 62 $ 62 $ 195 $ 180
AIP 17 18 52 53
Communications 9 6 25 21
Corporate & other 11 4 25 11
------ ------ ------ ------
Total operating income 99 90 297 265
Realized investment gains, net of tax 17 19 64 57
------ ------ ------ ------
Net income available to common
stockholders $ 116 $ 109 $ 361 $ 322
====== ====== ====== ======
-8-
4. Income Per Share of Common Stock
The following table sets forth the computation of earnings per share and
earnings per share assuming dilution:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------ ------
Numerator:
Net Income $ 122 $ 115 $ 379 $ 342
Dividends on Capital
Securities and preferred
stock 6 6 18 20
----- ----- ----- -----
Numerator for earnings per
share and earnings per share
- assuming dilution - Net
income available to common
stockholders $ 116 $ 109 $ 361 $ 322
===== ===== ===== =====
Denominator:
Denominator for earnings per
share - weighted-average
shares outstanding 105,337,615 106,060,410 105,680,801 106,214,200
Effect of dilutive
securities:
Employee stock options 1,054,597 894,124 1,096,483 868,472
----------- ----------- ----------- -----------
Denominator for earnings per
share - assuming dilution -
adjusted weighted-average
shares outstanding 106,392,212 106,954,534 106,777,284 107,082,672
=========== =========== =========== ===========
Earnings per share $ 1.10 $ 1.03 $ 3.42 $ 3.03
===== ===== ===== =====
Earnings per share -
assuming dilution $ 1.09 $ 1.02 $ 3.38 $ 3.01
===== ===== ===== =====
-9-
5. Contingent Liabilities
JP Life is a defendant in a proposed class action suit, and AH life is a
defendant in a separate proposed class action suit. Each suit alleges
deceptive practices, fraudulent and negligent misrepresentation and
breach of contract in the sale of certain life insurance policies using
policy illustrations which plaintiffs claim were misleading.
Unspecified compensatory and punitive damages, costs and equitable
relief are sought in each case. While management is unable to make a
meaningful estimate of the amount or range of loss that could result
from an unfavorable outcome in either or both cases, 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, although it could have a
material adverse effect on the results of operations for a specified
period.
6. Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and for Hedging Activities". SFAS 133 requires all
derivatives to be recorded on the balance sheet and establishes
accounting rules for hedging activities. The effect of the hedge
accounting rules is to offset changes in value or cash flows of both the
hedge and hedged item in earnings in the same period. Changes in the
fair value of derivatives that do not qualify for hedge accounting are
reported in earnings in the period of the change. Based on the limited
nature of the Company's use of derivatives and hedging activities,
adoption of this pronouncement is not expected to have a material impact
on the Company's financial position or results of operations.
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133." SFAS 137 defers the effective date of SFAS 133
to be effective for all fiscal quarters for all fiscal years beginning
after June 15, 2000.
-10-
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 September 30, 1999, changes in financial condition for
the nine months then ended, and results of operations for the three
month and nine month periods ended September 30, 1999 as compared to the
same periods of 1998. This discussion supplements Management's
Discussion and Analysis in Form 10-K for the year ended December 31,
1998, 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.
Company Profile
The Company has four business segments: Life Insurance Products, Annuity
and Investment Products (AIP), Communications, and Corporate and Other.
Within the Life Insurance Products segment, JP offers individual life
and group insurance products. Life insurance, accident and health
insurance, and annuities are currently marketed to individuals and
businesses in the United States through the Company's principal life
insurance subsidiaries: Jefferson-Pilot Life Insurance Company (JP
Life), Alexander Hamilton Life Insurance Company of America and its
subsidiary First Alexander Hamilton Life Insurance Company
(collectively, AH Life), and Jefferson Pilot Financial Insurance Company
and its subsidiary, Jefferson Pilot LifeAmerica Insurance Company
(JPLA), collectively referred to as JP Financial.
Communications operations are conducted by Jefferson-Pilot
Communications Company (JPCC) and consist of radio and television
broadcasting properties located in strategically selected markets in the
Southeastern and Western United States, and sports and entertainment
program production.
Corporate and Other contains the activities of the parent company and
passive investment affiliates, capital of the life insurance
subsidiaries not allocated to other reportable segments including
earnings thereon, financing expenses on Corporate debt and debt
securities including Capital Securities and mandatorily redeemable
preferred stock, federal and state income taxes not otherwise allocated
to business segments, and all of the Company's realized gains and
losses.
For the first nine months of 1999, JP's revenues excluding realized
gains were derived 67% from Life Insurance Products, 20% from AIP, 8%
from Communications and 5% from Corporate and Other.
-11-
Acquisition Summary
As reported on September 20, 1999, the Company has agreed to acquire The
Guarantee Life Companies Inc. through merger with a newly formed wholly-
owned subsidiary of the Company. Based on the Guarantee shares now
outstanding, at $32.00 per share, the total purchase price would be
$296. Guarantee Life also has outstanding debt of $115. The
transaction is intended to be a stock election merger so Guarantee Life
shareholders can elect to receive cash of $32.00 per share, or Jefferson-
Pilot Corporation common stock worth $32.00 based on a 10-day average
trading price shortly before closing. However, proration may be
required because only 50% of the merger consideration may be delivered
in stock. Further, the transaction may convert to an all cash merger if
that 10-day average price is above $75.00, or below $65.00 at the
Company's election or under certain other circumstances. The acquisition
will be accounted for using purchase accounting. The acquisition is
expected to be slightly accretive to the Company's earnings in 2000.
Annual corporate wide expense savings related to the acquisition are
expected to reach $30 pretax by 2002.
Integration of the individual life insurance businesses of the Company
and Guarantee Life provides opportunities to employ the Company's proven
expense management capability to achieve significant economies of
operation. Guarantee Life's group operations provide opportunities to
strengthen Jefferson-Pilot's group life insurance and group disability
insurance businesses through Guarantee Life's national sales force and
strong systems capabilities. Additionally, the acquisition provides the
Company with an effective platform for worksite marketing of life
insurance products including variable products.
The Company intends to make open market purchases of its common stock
for possible use in the acquisition. Through November 15, 1999,
approximately 1.9 million shares have been repurchased for this
purpose.
The Company intends to finance the transaction and stock repurchases
through a combination of borrowings, proceeds of securities sales, and
the positive net cash flow of the parent company and passive investment
affiliates.
Closing is subject to the approval of Guarantee Life shareholders at a
meeting now expected to take place in late December 1999. All necessary
state and other regulatory approvals have been obtained, except for SEC
clearance of the merger proxy statement-prospectus to be sent to
Guarantee Life shareholders.
-12-
Results of Operations
In the following discussion "operating income" includes all elements of net
income available to common stockholders except realized gains on sales of
investments net of related income taxes. Management strongly believes that
operating income is relevant and useful information. Operating income is
the basis used by the Company in assessing the performance of its business
segments as well as overall performance. Gains from sale of investments
may be realized in the sole discretion of management and are often realized in
accordance with tax planning strategies. Realized investment gains therefore
do not reflect the Company's ongoing earnings capacity. Operating income as
described above may not be comparable to similarly titled measures reported
by other companies.
The following tables illustrate JP's results before and after the
inclusion of realized investment gains:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------ ------
Consolidated Summary of Income
Operating income (1) $ 99.4 $ 90.5 $296.9 $265.0
Realized investment gains, net 16.6 18.5 64.1 57.3
----- ----- ----- -----
Net income available to
common stockholders $116.0 $109.0 $361.0 $322.3
===== ===== ===== =====
Consolidated Earnings Per Share
Operating income (1) $ 0.94 $ 0.85 $ 2.81 $ 2.49
Realized investment gains, net 0.16 0.18 0.61 0.54
----- ----- ----- -----
Net income available to
common stockholders $ 1.10 $ 1.03 $ 3.42 $ 3.03
===== ===== ===== =====
Net income available to
common stockholders - assuming dilution $ 1.09 $ 1.02 $ 3.38 $ 3.01
===== ===== ===== =====
(1) Operating income includes all elements of net income available
to common stockholders except realized gains on sales of
investments net of related income taxes.
Net income available to common stockholders increased 6.4% from the
third quarter of 1998 and 12.0% from the first nine months of 1998 due
to increases in profitability in the Company's core business.
Operating income increased 9.8% over the third quarter of 1998 due to
increased profitability in the Life Insurance Products, Communications,
and Corporate and Other segments. For the first nine months, operating
income increased 12.0% over the first nine months of 1998 due to
increased profitability in the same segments. Net realized gains
decreased 10.3% from the third quarter of 1998 and increased 11.9% over
the first nine months of 1998, reflecting some opportunistic sales of
Available for Sale debt securities in the second quarter of 1999.
Operating income per share increased 10.6% over the third quarter of
1998 and 12.9% over the first nine months of 1998. Earnings per share
increased 6.8% from the third quarter of 1998 and 12.9% from the first
nine months in 1998. Earnings per share assuming dilution increased
6.9% from the third quarter of 1998 and increased 12.3% from the first
nine months of 1998.
-13-
Operating Earnings by Business Segment
Reportable segments are determined in a manner consistent with the way
management organizes for purposes of making operating decisions and
assessing performance. Invested assets backing insurance liabilities
are assigned to segments in relation to policyholder funds and reserves.
Net deferred acquisition costs incurred or purchased, reinsurance
receivables and communications assets are assigned to segments based on
specific identification. Assets are also assigned to back capital
allocated to each segment in relation to JP's philosophy for managing
business risks, reflecting appropriate conservatism.
A more detailed discussion of operating results by segment follows.
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------ ------
Life Insurance Products $ 62.4 $ 62.1 $195.3 $180.1
Annuity and Investment Products 17.0 17.9 51.5 52.6
Communications 9.6 6.6 25.5 21.2
Corporate and Other 10.4 3.9 24.6 11.0
----- ----- ----- -----
Operating income (1) 99.4 90.5 296.9 264.9
Realized investment gains, net 16.6 18.5 64.1 57.4
----- ----- ----- -----
Net income available to
common stockholders $116.0 $109.0 $361.0 $322.3
===== ===== ===== =====
(1) Operating income includes all elements of net income available
to common stockholders except realized gains on sales of
investments net of related income taxes.
-14-
Life Insurance Products
The Life Insurance Products (Life Insurance) segment offers a wide array
of individual and group insurance policies through a career agency
force, independent agents recruited through independent marketing
organizations and a regional marketing network, home service agents,
financial institutions, Group marketing representatives, and a targeted
marketing division. The individual life insurance product portfolio
includes traditional life and health products, as well as universal life
(UL) and variable universal life (VUL), together referred to as UL-type
products. In 1998, JP announced its intention to cease offering group
medical policies beginning April 1, 1999. These medical policies are
being underwritten by a national managed care company as policy renewal
dates arise during 1999 on an "as-rated" basis, as the Company exits this
activity. This will result in invested capital assigned to these medical
policies being reinvested in other life insurance products or other
reportable segments during 1999 and 2000.
A full line of other group insurance products including life and disability
products are still offered to employers, primarily in the Southeastern U.S.
Operating results were:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------ ------
Premiums, considerations,
and other income $213.8 $249.0 $664.9 $786.9
Net investment income 193.0 178.1 571.1 535.6
----- ----- ----- -----
Total revenues 406.8 427.1 1,236.0 1,322.5
Policy benefits 228.4 244.8 681.6 769.7
Expenses (1) 83.2 86.6 256.3 277.2
----- ----- ----- -----
Total benefits and expenses 311.6 331.4 937.9 1,046.9
----- ----- ----- -----
Operating income before income taxes 95.2 95.7 298.1 275.6
Provision for income taxes 32.8 33.6 102.8 95.5
----- ----- ----- -----
Operating income (2) $ 62.4 $ 62.1 $195.3 $180.1
===== ===== ===== =====
(1) Expenses includes deferrals of deferred acquisition costs and value
of business acquired of $48.3 and $52.0 for the three months ended
September 30, 1999 and 1998 and $157.4 and $156.9 for the nine months
ended September 30, 1999 and 1998, net of amortization of $40.3 and
$38.5 for the three months ended September 30, 1999 and 1998 and
$125.3 and $116.1 for the nine months ended September 30, 1999 and 1998.
(2) Operating income includes all elements of net income available to
common stockholders except realized gains on sales of investments
net of related income taxes.
-15-
Life Insurance operating income increased 0.5% over the third quarter of
1998 and 8.4% over the nine months of 1998. Operating results for
Individual life insurance products increased 2.0% over the third quarter
of 1998 and increased 8.6% from the first nine months of 1998. The
third quarter results were impacted by a $2.6 after tax charge related
to a closed individual disability insurance product line. Group
operating income declined 12.3% from the third quarter of 1998 due to the
decision to non-renew group medical policies. Operating income for
Group improved 7.1% over the first nine months of 1998 due to aggressive
rate increases and expense management that took place in the first two
quarters of 1999. The following table summarizes operating income for each
category:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------ ------
Individual $ 56.7 $ 55.6 $177.2 $163.2
Group 5.7 6.5 18.1 16.9
----- ----- ----- -----
Total Life Insurance Products $ 62.4 $ 62.1 $195.3 $180.1
===== ===== ===== =====
The following table summarizes key information for Life Insurance Products:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------ ------
Annualized Individual life
insurance sales $ 38.2 $ 38.0 $127.8 $119.8
Annualized Group insurance sales 2.0 1.7 10.8 10.3
Individual traditional insurance
premium income 48.0 54.0 145.2 158.0
Individual commissionable premium
receipts 294.6 303.3 939.8 894.4
Group premium income and equivalents 33.7 101.8 154.8 363.5
Average UL policyholder fund balances 7,830.6 7,081.0 7,713.6 6,976.5
Average VUL separate account assets 1,011.7 709.2 943.7 695.3
Average face amount insurance in
force - UL-type policies 101,467.3 98,232.5 100,856.2 97,177.3
Average assets - Individual products 12,923.9 11,660.3 12,655.4 11,547.9
Average assets - Group products 379.4 474.4 395.1 492.5
-16-
Life Insurance revenues (excluding realized gains) declined 4.8% from
the third quarter of 1998 and declined 6.5% from the first nine months
of 1998 primarily because of declines in Group medical premiums from
the decision not to renew group medical policies in 1999. Revenues
include traditional insurance premiums, policy charges and investment
income. Individual revenues declined 1.9% from the third quarter of
1998 to $371.1 and 2.0% from the first nine months of 1998 to $1,103.0,
while average policyholder funds and average separate accounts grew 13.5%
over the third quarter of 1998 and 12.8% over the first nine months of
1998. This decline in individual revenues is primarily attributed to
the runoff of closed blocks of traditional term business acquired in
previous acquisitions and changes in the reinsurance program in JP
Financial which, while having no effect on net income, do adversely
affect gross revenues by $5 for the nine months of 1999 and positively
affect benefits in the same amount. Individual commissionable premium
receipts (which exclude premium deposits in excess of target or
commissionable premiums) decreased 2.9% from the third quarter of 1998
but increased 5.1% over the first nine months of 1998 as the second
quarter of 1999 included the commissionable portion of certain single
premium receipts related to several significant bank owned life insurance
contracts. Group revenues declined 47.4% from the third quarter of 1998
and 47.5% from the first nine months of 1998 due to the Company's decision
not to renew the block of Group medical policies previously mentioned and
because the medical rate increases implemented resulted in non-renewals
by many customers.
Life insurance traditional insurance premium income declined 31.6% from
the third quarter of 1998 and 33.3% from the first nine months of 1998
primarily due to decline in premiums of the previously mentioned Group
medical products. Individual traditional premium income declined 11.1%
from the third quarter of 1998 and 8.4% from the first nine months of 1998
as recent sales have been more concentrated among UL-type products coupled
with the aforementioned runoff of closed blocks acquired in previous
acquisitions. Group traditional premium income declined 51.0% from the
third quarter of 1998 and 51.3% from the first nine months of 1998.
Including equivalent premiums on self-insured health policies, group
premiums were down 66.9% from the third quarter of 1998 and 57.4% from
the first nine months of 1998. These declines were again attributable to
the decision not to renew group medical policies in 1999. Including the
previously mentioned changes in the reinsurance program of JP Financial
that reduced revenues, policy charges on UL-type products improved 1.1%
over the third quarter of 1998 and 1.6% over the first nine months of 1998.
Without the influence of such a change, policy charges on UL-type products
increased 2.4% for the quarter and 2.8% year to date in 1999.
Investment income on invested assets assigned to the Life Insurance
segment increased 8.4% over the third quarter of 1998 and 6.6% over the
first nine months of 1998 following the growth in segment assets. Total
portfolio yields improved as a result of higher credit spreads on new
investment opportunities. The portfolio yield on Individual traditional
assets increased 1 basis point from the first nine months of 1998. Due
to effective spread management, the average investment spread
(calculated as the difference between portfolio yields earned on
invested assets less interest credited to policyholder funds, assuming
the same level of invested assets) on UL-type products increased to
1.91%, 13 basis points over the first nine months of 1998. In addition
to being impacted by portfolio yields and crediting rates, investment
spreads may vary over time due to competitive strategies and changes in
product design.
-17-
Policy benefits declined 6.7% from the third quarter of 1998 and 11.4%
from the first nine months of 1998 primarily due to Group medical.
Traditional policy benefits were 83.7% of premiums in the third quarter
of 1999 compared to 86.7% in the third quarter of 1998 reflecting a one
time charge in closed block individual disability reserves of $2.6
after tax in this quarter. Traditional policy benefits were 92.6% of
premiums in the first nine months of 1999 compared to 86.7% during the
same period of 1998 again reflecting the same charge to disability
reserves. The Group health incurred loss ratio improved to 47.7% in the
third quarter of 1999 versus 73.9% in the third quarter of 1998 and
improved to 56.9% for the first nine months of 1999 versus 74.5% in the
first nine months of 1998 due to the aggressive rate increases and the
decision to exit the Group medical block of business. Policy benefits on
UL-type products (annualized) improved to 6.9% of average policyholder
funds and separate accounts for the first nine months of 1999 compared
to 7.7% in the first nine months of 1998. The improvement is due to
lower credited rates on policyholder accounts and an increase in VUL
separate account assets as a percentage of total policy liabilities for
UL-type products.
Total expenses (including the net deferral and amortization of policy
acquisition costs) decreased 3.9% from the third quarter of 1998 and
7.5% from the first nine months of 1998 due to continued aggressive
expense management. General and administrative expenses on Individual
products were 8.8% of commissionable premiums in the third quarter of
1999 versus 9.5% in 1998. For the first nine months, these expenses
were 8.3% of commissionable premiums in 1999 compared to 9.9% in 1998.
These declines resulted from increases in commissionable premium
receipts in 1999 combined with continued expense savings. For Group
policies, total expenses were 20.4% of premiums and equivalents in the
third quarter of 1999 versus 13.3% in the third quarter of 1998. For
the first nine months, total expenses were 17.0% of premiums and
equivalents versus 14.8% in the prior year due to severance payments
made in the first quarter of 1999 related to the decision to exit Group
medical activity coupled with the decline in premiums and equivalents
mentioned previously. Group expenses declined 49.3% in the third
quarter compared to the third quarter of last year, and declined 51.1%
compared to the first nine months of 1998 as the Company exits Group
medical activities.
Average Life Insurance assets grew 9.6% over the third quarter of 1998
and 8.4% over the first nine months of 1998 primarily due to sales of UL-
type products, and growth in existing policyholder funds from interest
credited and equity returns. The Life Insurance Products annualized
return on average assets was 1.9% and 2.0% for the third quarter and the
first nine months of 1999 compared to 2.0% and 2.0% for the same periods
in 1998. The relative flatness of the annualized return on average
assets indicates that asset growth is fueling continuing profitable
operating results. The decrease in the third quarter of 1999 is
attributable to the decrease in group operating income.
-18-
Annuity and Investment Products
Annuity and Investment Products (also referred to as AIP) offers its
products through financial institutions, independent agents, career
agents, investment professionals and broker-dealers. Operating results
were:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------ ------
Policy charges, premiums
and other considerations $ 4.2 $ 3.8 $ 13.6 $ 13.6
Net investment income 104.0 104.9 310.9 320.0
Other income 17.5 15.8 54.8 48.2
------ ------ ------ ------
Total revenues 125.7 124.5 379.3 381.8
Policy benefits 79.1 74.4 228.3 227.0
Expenses (1) 20.4 22.8 71.4 74.0
------ ------ ------ ------
Total benefits and expenses 99.5 97.2 299.7 301.0
------ ------ ------ ------
Operating income before income taxes 26.2 27.3 79.6 80.8
Provision for income taxes 9.2 9.4 28.1 28.2
------ ------ ------ ------
Operating income (2) $ 17.0 $ 17.9 $ 51.5 $ 52.6
====== ====== ====== ======
(1) Expenses includes deferrals of deferred acquisition costs and value
of business acquired of $20.2 and $11.0 for the three months ended
September 30, 1999 and 1998 and $40.2 and $29.1 for the nine months
ended September 30, 1999 and 1998, net of amortization of $3.7 and
$5.6 for the three months ended September 30, 1999 and 1998 and
$15.2 and $19.1 for the nine months ended September 30, 1999 and 1998.
(2) Operating income includes all elements of net income available to
common stockholders except realized gains on sales of investments
net of related income taxes.
-19-
Operating income declined 5.0% from the 1998 third quarter and 2.1% for
the first nine months of 1999. The following table summarizes key
information for AIP:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
-------- -------- -------- --------
Fixed annuity receipts $ 280.1 $ 92.0 $ 503.7 $ 285.0
Variable annuity receipts 25.2 27.6 86.8 69.4
Average general account
policyholder fund balances 5,614.3 5,652.3 5,631.7 5,730.3
Average separate account
policyholder fund balances 596.6 441.6 551.6 385.1
Investment product sales 488.8 416.9 1,739.8 1,235.4
Average assets 6,604.8 6,503.3 6,541.0 6,519.4
Revenues increased 1.0% from the third quarter of 1998 yet declined 0.7%
from the first nine months of 1998 as the increase in policyholder fund
balances in the third quarter is not yet fully reflected in the nine
month average assets or investment income on those assets. Annuity
revenues are derived from policy charges, investment income on segment
assets and concession income earned on investment product sales by
Jefferson Pilot Securities Corporation, a full service registered broker-
dealer, and related entities (collectively referred to as JPSC). The
decrease in average general account policyholder fund balances
represents the net result of interest credited and new receipts less
benefits paid and withdrawals. Although average general account
policyholder fund balances have declined for 1999, ending policyholder
fund balances at September 30 increased 1.4% to $5,681.9 from $5,604.0
in 1998. Fixed annuity receipts increased 204.5% over last year's third
quarter and 76.7% over the first nine months of 1998, due to significant
sales increases through independent and career agents and financial
institutions in the second and third quarters of 1999. The growth in
fixed annuity receipts was generated through new and existing products.
The leading products generating these receipts feature lower commissions
and offer an enhanced crediting rate that compares favorably to current
CD rates. In total, fixed and variable annuity receipts increased by
155.2% over the third quarter of 1998 and 66.6% over the first nine
months of 1998.
-20-
Total AIP benefits and expenses increased 2.4% from the
third quarter of 1998 and dropped 0.4% for the first nine months of 1999
versus the same period in 1998. This increase for the quarter in
benefits and expenses reflects a nonrecurring reserve correction
partially offset by a related true-up of AIP deferred acquisition costs
netting to $1 in the second and third quarters of 1999. Fixed annuity
benefits and surrenders as a percentage of beginning fund balances
increased to 16.8% for the third quarter of 1999 compared to 15.3% for
the third quarter of 1998, and decreased to 15.2% for the first nine
months of 1999, compared to 16.2% for the same period of 1998. Annuity
surrenders may increase as the portion of the business that can be
withdrawn by policyholders without incurring a surrender charge grows.
Other income, which primarily represents concession income earned by
JPSC, increased 10.8% over the third quarter of 1998 and 13.7% over the
first nine months of 1998, due to higher sales of the Company's variable
products and others' products such as mutual funds.
Effective spreads, which represent the yield on the investment portfolio
less interest credited to policyholders, adjusted for net deferral of
bonus interest and assuming the same level of assets, were 2.15% and
2.08% for third quarters 1999 and 1998, and 2.14% and 2.09% for the
first nine months of 1999 and 1998. The increase represents continued
effective management of investment spreads.
Total AIP insurance expenses annualized as a percentage of average
policyholder fund balances including separate accounts were 1.3% and
1.5% for the third quarter and first nine months of 1999 compared to
1.5% and 1.6% for the same periods of 1998. General and administrative
expenses as a percentage of average invested assets for fixed annuities
improved to 0.24% during third quarter 1999 versus 0.25% in 1998, and
improved to 0.22% for the first nine months of 1999 versus 0.25% in
1998. The decreases in AIP expenses of 10.5% for the third quarter of
1999 compared to the third quarter of 1998 and 3.5% for the nine months
compared to the 1998 nine months were due to continued aggressive
expense management and the deferred acquisition costs effect of the one-
time reserve correction.
Average AIP assets increased 1.6% for the third quarter of 1999 and 0.3%
for the nine months. AIP posted annualized returns on average assets of
1.0% for the third quarter and 1.0% for the first nine months of 1999
compared to 1.1% and 1.1% for the same period of 1998. This decline in
annualized returns is attributable to the previously mentioned
nonrecurring reserve correction. The combined earnings of JPSC included
in operating income were $0.9 and $3.3 for the third quarter and the
first nine months of 1999, and $1.1 and $3.0 for the same periods of
1998.
-21-
Communications
JPCC operates television and radio broadcast properties and produces
syndicated
sports and entertainment programming. Operating results were:
Three Months Ended Nine Months Ended
September 30 September 30 March 31
1999 1998 1999 1998
---- ---- ---- ----
Communications revenues $49.7 $45.3 $147.2 $141.3
Operating costs and expenses 28.2 28.0 88.2 88.2
---- ---- ---- ----
Broadcast cash flow 21.5 17.3 59.0 53.1
Depreciation and amortization 2.9 2.9 8.8 8.7
Corporate general and administrative expenses 1.4 1.1 3.8 3.8
Net interest expense 1.3 1.4 3.8 4.4
---- ---- ---- ----
Operating revenue before income taxes 15.9 11.9 42.6 36.2
Provision for income taxes 6.3 5.3 17.1 15.0
---- ---- ---- ----
Operating income (1) $ 9.6 $ 6.6 $25.5 $21.2
==== ==== ==== ====
(1) Operating income includes all elements of net income available
to common stockholders except realized gains on sales of
investments net of related income taxes.
Operating income from the Communications segment increased $3.0 or 45.5%
compared to the third quarter of 1998. For the first nine months,
operating income increased $4.3 or 20.3% compared to 1998.
Combined revenues for Radio and Television grew 7.8% and 3.4% over the
third quarter and first nine months of 1998, respectively. The Company's
radio broadcasting properties continued to benefit from the generally
favorable advertising environment and the strong local economies in
which they operate. Radio experienced strong revenue growth in all
three quarters of 1999, resulting from programming changes made in 1997
and increased demand for local advertising. Two of the television
stations are CBS affiliates and benefited from robust winter Olympic-
related advertising during the first quarter of 1998. However,
Television was unable to replace the Olympic revenue in the first
quarter of 1999 and political revenue in the second quarter of 1999, and
national television sales continue to be sluggish in 1999, as they have
been for several quarters industry-wide.
-22-
Third quarter revenues in the Sports division increased $1.3 or 39.7%
from the 1998 quarter and year-to-date revenues increased $2.0 or 11.4%.
The year-to-date increase is attributable to several first quarter 1999
special events and improved collegiate basketball sales. The third
quarter results with the current year were positively impacted by a
Southeastern Conference football game which was shifted forward from the
fourth quarter.
Broadcast cash flow grew by 24.3% and 11.1% for the third quarter and
the nine months of 1999 as the strong growth of the Radio properties and
the improved Sports results were partially offset by TV's decline from
the prior year Olympic and political-influenced results.
Total JPCC expenses (operating costs and expenses, depreciation and
amortization, and corporate general and administrative expenses)
increased 1.6% for the third quarter and have remained flat for the
first nine months of 1999. On a year-to-date basis, expenses as a
percent of Communications revenues decreased to 68.4% for 1999 from
71.3% for 1998, reflecting the shift from Sports programming towards the
higher margin Radio and Television broadcast activities and strong cost
control efforts in all divisions to counteract the softness in
television revenues.
Corporate and Other
Activities of the parent company and passive investment affiliates,
surplus of the life insurance subsidiaries not allocated to other
reportable segments including earnings thereon, 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 this
segment. The following table summarizes the operating results.
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------- -------
Earnings on investments and
other income $28.7 $26.0 $90.7 $74.8
Interest expense on debt and
Exchangeable Securities (7.3) (8.1) (21.7) (25.4)
Operating expenses (2.2) (4.6) (12.5) (16.8)
Federal and state income
(tax) benefit (2.7) (3.2) (13.5) (2.1)
---- ---- ---- ----
16.5 10.1 43.0 30.5
Dividends on Capital Securities
and mandatorily redeemable
preferred stock (6.1) (6.2) (18.4) (19.5)
---- ---- ---- ----
Operating income (1) $10.4 $ 3.9 $24.6 $11.0
==== ==== ==== ====
(1) Operating income includes all elements of net available
to common stockholders except realized gains on sales of
investments net of related income taxes.
-23-
The following table summarizes assets assigned to this segment.
September 30
------------ June 30
1999 1998
------ ------
Parent company, passive investment companies and
Corporate line assets of insurance subsidiaries $1,529 $1,025
Co-insurance receivables on acquired blocks 1,584 2,315
Net SFAS 115 adjustments 123 678
Employee benefit plan assets 332 401
Goodwill arising from insurance acquisitions 187 194
Other 149 185
----- -----
Total $3,904 $4,798
===== =====
Total assets for the Corporate and Other segment declined 18.6% compared
to the third quarter of 1998 primarily due to surrenders of 100% co-
insured COLI policies. Invested assets assigned to this segment
decreased $420.8 due to a decline in market values of Available for Sale
securities. Excluding such changes, invested assets increased $429.2 or
26.9% due to an accumulation of retained earnings, an increase in
reverse repurchase obligations, and changes in segment allocations
(primarily related to exiting the Group medical business).
Operating income increased $6.5 compared to the third quarter of 1998,
and increased $13.6 compared to the first nine months of 1998.
Investment earnings improved due to the accumulation of corporate
capital and increased income on equity method investments. A one-time
adjustment to an equity method investment resulted in $2.0 additional
operating income in the first quarter of 1999. Net interest expense
decreased during the third quarter and year-to-date as the level of
short-term borrowings, net of loans to subsidiaries, declined. The
decline occurred as cash flow in the parent company was used to reduce
outstanding short-term borrowings. Operating expenses may vary with the
level of Corporate activities. Expenses declined $2.4 or 52.2% during
the third quarter and $4.3 or 25.6% year-to-date. Federal and state
income taxes increased during the first nine months due to increased
operating results as well as increases in effective tax rates on assets
assigned to this segment. During the third quarter however, income
taxes declined as a result of a true-up of the previous year end tax
provision of $1.6 and reductions in effective tax rates on equity
method investments. Dividends on preferred stock remained flat for the
third quarter, but improved for the first nine months of 1999 due to the
retirement of $50 preferred shares early in 1998.
-24-
Financial Position, Capital Resources And Liquidity
JP's resources consist primarily of investments related to its Life
Insurance Products and AIP segments, properties and other assets used
in all segments and investments backing corporate capital. The
Investments section reviews the Company's investment portfolio and key
strategies.
Total assets decreased $179 or 0.7% during the first nine months of
1999. Excluding a $651 decrease related to business 100% coinsured to
an affiliate of Household International, total assets increased $472.
This increase resulted from cash provided from operating activities,
increased policyholder contract deposits, and lower policyholder
contract withdrawals, partially offset by payment of dividends and
declines in market values of Available for Sale securities.
The Life Insurance Products and AIP segments defer 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 $1,005 at September
30, 1999, up 19.1% from December 31, 1998. Value of business acquired
(VOBA) represents the actuarially-determined present value of future
gross profits of each business acquired. VOBA was $695 at September 30,
1999, an increase of 22.3% since year end. The increase is
attributable to the decline in unrealized gains on Available for Sale
securities underlying purchased insurance blocks. Goodwill
(representing the cost of acquired businesses in excess of the fair
value of net assets) was $224 at September 30, 1999 and $229 at December
31, 1998, declining by the amount of amortization for the period.
Goodwill as a percentage of stockholders' equity was 7.8% at September
30, 1999 and 7.5% at December 31, 1998 resulting primarily from a
repurchase of common shares and decline in unrealized gains lowering
stockholders' equity.
Carrying amounts of goodwill, VOBA and DAC are regularly reviewed for
indications of value impairment, with consideration given to the
financial performance of acquired properties, future gross profits of
insurance in force and other factors. No such adjustments were
necessary for any of the periods presented herein.
JP had reinsurance receivables of $1,060 and $1,072 at September 30,
1999 and December 31, 1998 and policy loans of $192 and $831 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.
Because these blocks are 100% coinsured, changes do not impact JP's
operations. Household has provided payment, performance and capital
maintenance guarantees with respect to the balances receivable. JP also
had a recoverable of $89 at September 30, 1999 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 $192 in securities
which support the block.
-25-
Capital Resources
Stockholders' Equity
JP's capital adequacy is illustrated by the following table:
September 30 December 31
1999 1998
------- -------
Total assets $24,159 $24,338
Total stockholders' equity 2,886 3,052
Ratio of stockholders' equity to assets 11.9% 12.5%
Stockholders' equity declined for the first nine months of 1999 due to
the change in the market value of Available for Sale securities and the
acquisition of 2.6 million shares of its common stock at an average
price of $65 per share. 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
which would be expected to produce higher returns over time.
The Life Insurance and AIP segments are subject to regulatory
constraints. The Company's insurance subsidiaries have statutory
surplus and risk based capital levels well above required levels. These
capital levels together with the rating agencies' assessments of the
Company's business strategies have enabled JP Life, AH Life and JP
Financial to attain very strong claims paying ratings.
Debt and Exchangeable Securities
The ACES and MEDS are carried at fair value, which fluctuates based on
the market value of BankAmerica common stock. Changes in the carrying
value of these securities (which amounted to year to date decreases in
1999 of $13 for ACES and $16 for MEDS) are recorded to accumulated other
comprehensive income - net unrealized gains on securities in
stockholders' equity, net of deferred income taxes. The ACES which had
a September 30, 1999 value of $168 are due January 21, 2000, and may be
redeemed thirty days prior to this date at the Company's option. The
ACES are mandatorily exchangeable into shares of BankAmerica Corporation
common stock or, in whole or part, cash, also at the Company's option.
The Company has sufficient sources of liquidity to settle the ACES
either through existing resources or by obtaining additional financing.
While the Company has made no commitments for additional financing,
additional debt may be incurred to finance acquisitions or for other
corporate purposes.
-26-
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
operations are premiums, other insurance considerations, receipts for
policyholder accounts, investment sales and maturities and investment
income. Primary uses of cash include purchases 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 operations 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 $377 and $319 for the first nine months
of 1999 and 1998. This increase was attributable to increased net
income and increases in accounts payable and liability accruals.
The decline in other investments from December 31, 1998 to September
30, 1999 of $598 was attributable to a decrease in policy loans relating
to a block of business of AH Life that is 100% coinsured to Household.
Household has reimbursed the Company all cash disbursed as required
by the coinsurance agreement and therefore this decline had no effect on
liquidity during these nine months.
Net cash used in investing activities was $(627) and $(274) for the
first nine months of 1999 and 1998. The variance in the 1999 amounts
reflects the purchase of $2,254 of securities categorized as Available
for Sale, partially offset by the sale of $1,587 of Available for Sale
securities.
Net cash provided by (used in) financing activities was $269 and ($23)
for the first nine months of 1999 and 1998. The Company made net short-
term borrowings of $60 in 1999 versus net short-term borrowings of $92
in 1998. The net short-term borrowings in 1999 were increased to take
advantage of investment opportunities in the Company insurance
subsidiaries. In 1998, the Company expanded its repurchase program
(which is an asset/liability management strategy), causing the increase
in net borrowings for that year. Cash inflows from changes in
policyholder contract deposits were $408 and $68 for the first nine
months of 1999 and 1998. The increase is a result of higher annuity
sales, lower withdrawals of policyholder funds in 1999, and increased
policyholder contract deposits as sales are focusing more on UL-type
products.
In order to meet the parent company's dividend payments, debt servicing
obligations and other expenses, internal dividends are received from
subsidiaries. Total internal cash dividends paid to the parent from its
subsidiaries during the first nine months were $195 in 1999 and $162 in
1998. JP Life and AH Life were the primary sources of these dividends.
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 major portion of the remaining dividends planned from
life subsidiaries for 1999 will require regulatory approval. The
Company has no reason to believe that such approval will be withheld.
-27-
Fixed income and equity securities held by the parent company and non-
regulated subsidiaries were $484 and $538 at September 30, 1999 and
December 31, 1998. These securities, which include the $295 (at
September 30, 1999) of BankAmerica Corporation common stock which
supports the Exchangeable Securities, are considered to be sources of
liquidity to support the Company's strategies.
Total debt and equity securities Available for Sale at September 30,
1999 were $11,880.
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.
JP held the following carrying amounts of investments:
September 30 December 31
1999 1998
------------- --------------
Publicly-issued bonds $10,954 59.9% $11,356 59.8%
Privately-placed bonds 3,273 17.9 3,131 16.4
Commercial mortgage loans 2,275 12.4 1,969 10.4
Common stock 767 4.2 931 4.9
Policy loans 822 4.5 1,439 7.6
Preferred stock 35 0.2 34 0.2
Real estate 118 0.6 86 0.4
Cash and other invested assets 59 0.3 53 0.3
------ ----- ------ -----
Total $18,303 100.0% $18,999 100.0%
====== ===== ====== =====
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.
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 "A1", excluding mortgage loans. The
Policy also imposes limits on the amount of lower quality investments
and requires diversification by issuer and asset type. The Company monitors
"higher risk" investments for compliance with the Policy and for proper
valuation.
-28-
Carrying amounts of investments categorized as "higher risk" assets
were:
September 30 December 31
1999 1998
------------- --------------
Bonds near or in default $ 5 - % $ 5 - %
Bonds below investment grade 668 3.6 659 3.5
Mortgage loans 60 days
delinquent or in foreclosure - - 3 -
Mortgage loans restructured 9 0.1 10 0.1
Foreclosed properties 3 - 3 -
------ ----- ------ -----
Sub-total, higher risk assets 685 3.7 680 3.6
All other investments 17,618 96.3 18,319 96.4
------ ----- ------ -----
Total cash and investments $18,303 100.0% $18,999 100.0%
====== ===== ====== =====
The Policy permits the use of derivative financial instruments such as
futures contracts and interest rate swaps in conjunction with specific
direct investments. The Company's actual 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 $183 and $186
were open as of September 30, 1999 and December 31, 1998. There have
been no terminations of derivative financial instruments in 1999 or 1998.
Potential termination of these arrangements as of September 30, 1999
under then current interest rates would result in a potential gain of $2,
which would be amortized over the remaining life of the hedged asset or
liability.
Collateralized Mortgage Obligations (CMO's), which are included in debt
securities Available for Sale, were as follows:
September 30 December 31
1999 1998
------ ------
Federal agency issued CMO's $2,358 $2,729
Corporate private-labeled CMO's 1,813 1,705
----- -----
Total $4,171 $4,434
===== =====
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 and PAC
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.
-29-
Year 2000 Issue
Like most if not all companies, JP faces certain risks associated with
the coming of the year 2000. The year 2000 issue relates to the way
computer systems and programs define calendar dates. By using only two
digit dates, they could fail or make miscalculations due to the
inability to distinguish between dates in the 1900's and in the 2000's.
Also, many systems and equipment that are not typically thought of as
"computer-related"(referred to as "non-IT") contain embedded hardware or
software that must handle dates and may not properly perform with dates
after 1999.
The Company began work on the Year 2000 compliance issue in 1995. The
scope of the project includes: ensuring the compliance of all
applications, operating systems and hardware on mainframe, PC and LAN
platforms; addressing issues related to non-IT embedded software and
equipment; addressing the compliance of key vendors and service
providers to the Company (business partners); and business contingency
planning.
The project for platforms and non-IT software and equipment had four
phases: assessment of systems and equipment affected by the Year 2000
issue; definition of strategies to address affected systems and
equipment; remediation of affected systems and equipment; and
certification that each is Year 2000 compliant. To certify that all IT
systems (internally developed or purchased) were Year 2000 compliant,
each system was tested using a standard testing methodology which
includes regression testing, millennium testing, millennium leap year
testing and cross over year testing. Certification testing was
performed on each system as soon as remediation was completed.
All phases of this project are now complete.
All of the Company's policyholder systems and other mainframe systems
have been certified as Year 2000 compliant. For PC and LAN systems, the
Company has certified all of the PC and LAN infrastructure, and
completed certification testing of all critical PC business
applications.
For the majority of the Company's non-IT related systems and equipment,
the Company has been advised by vendors that the systems and equipment
are currently Year 2000 compliant. Written documentation regarding
compliance has been obtained. Some systems and equipment, such as
electrical power supply, are not feasible for the Company to certify.
The most significant category of key business partners is financial
institutions. Their critical functions include safeguarding and
managing investment portfolios, processing of the Company's operating
bank accounts, and sales/distribution. All of the Company's business
partner financial institutions have responded to the Company's inquiries
and have indicated they either are already compliant or are on schedule
for Year 2000 compliance. Other partner categories include insurance
agents and marketing organizations, and suppliers of communication
services, utilities, materials and supplies. The Company has conducted
surveys of all its software and hardware vendors, and have certified all
software and hardware that will be running in 2000. In addition to
financial institutions, other critical business partners have been
identified and surveys completed. All have responded with 90%
indicating they are already compliant and the remaining 10% on schedule
for compliance.
-30-
The Company has not had an independent review of its overall Year 2000
risks or estimates. However, experts have been engaged to assist in
developing estimates and to complete remediation work on specific
portions of the project. Further, JPLA's readiness was examined by an
independent firm at the request of state regulators and JP Life's
readiness is now being similarly examined.
From inception of the project through September 30, 1999, the Company
has incurred external costs of $10.7 and internal costs of $9.9. The
current estimate, based on actual experience to date, of total project
expense is $23.0, with remaining external costs of $1.7 and internal
costs of $0.7. Estimated remaining costs are for the testing of the
previously developed contingency plan in the fourth quarter as well as
expected year end costs to monitor and implement contingency plans if
these become necessary. Costs are charged to specific business
segments and expensed as incurred. Expected total costs are less than
earlier estimates due in part to refinements in estimates as more
projects near completion. Total third quarter 1999 costs were $ 1.6.
There has not been a material adverse impact on the Company's operations
as a result of IT projects being deferred due to resource constraints
caused by the Year 2000 project.
The Company has investments in publicly and privately placed securities
and loans. The Company may be exposed to credit risk to the extent that
related borrowers are materially adversely impacted by the Year 2000
issue. Portfolio diversification reduces the overall risk. The Company
is in compliance with the NAIC Securities Valuation Office's Due
Diligence Guidelines for analyzing these risks.
While the Company has completed certification of all of its internal
systems and non-IT equipment, disruptions could still occur. Specific
factors that give rise to this uncertainty include a possible loss of
technical resources to monitor and to implement any contingency plan as
may be needed, failure to identify all susceptible systems, non-
compliance by third parties whose systems and operations impact the
Company, and other similar uncertainties.
Specifically, from Year 2000 problems, the Company could experience an
interruption in its ability to collect and process premiums, process
claim payments, safeguard and manage its invested assets and operating
cash accounts, accurately maintain policyholder information, accurately
maintain accounting records, issue new policies and/or perform adequate
customer service. JPCC could experience an inability to broadcast
commercial spots and invoice them, or to receive TV network programming.
While the Company believes the occurrence of such a situation is
unlikely, a possible worst case scenario might include one or more of
the Company's significant policyholder systems or broadcasting inventory
management systems being non-compliant. Such an event could result in a
material disruption to the Company's or JPCC's operations. Should the
worst case scenario occur (except in JPCC), it could, depending on its
duration, have a material impact on the Company's results of operations
and liquidity and ultimately on its financial position.
-31-
Although the Company has completed certification of all internal systems
and non-IT equipment well in advance of January 1, 2000, the Company
recognizes the need to plan for unanticipated problems resulting from
failure of internal systems or equipment or from failures by the
Company's business partners, providers, suppliers or other critical
third parties. The Company has completed work on contingency plans for
all mission critical and mission essential functions. Testing of
contingency plans will continue throughout the fourth quarter.
Market Risk Exposures
With respect to the Company's exposure to market risks, see management's
comments in the 1998 Form 10-K. Management believes that the plus or
minus 100 basis points utilized in the sensitivity analysis in the 1998
Form 10-K continue to reflect reasonably possible near term changes in
interest rates.
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 1998 Form 10-K.
With respect to accounting pronouncements, see Note 5 on page 9, 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 "Year 2000 Issue", "Market Risk Exposures", "External
Trends and Forward Looking Information" and other risks detailed from
time to time in the Company's SEC filings; to the risks that JP might
fail to successfully complete strategies for cost reductions and for
growth in sales of products through all distribution channels in general
or related to acquisitions; to business interruption risks if the
Company or a critical business partner experiences a Year 2000 systems
or other problems; 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 stock
markets; 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.
-32-
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
A report on Form 8-K was filed on September 20, 1999 to report the
agreement to acquire The Guarantee Life Companies Inc.
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 November 15, 1999
By (Signature) /s/Reggie D. Adamson
(Name and Title) Reggie D. Adamson, Senior Vice President - Finance
(Principal Accounting Officer)
Date November 15, 1999
-33-