FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Amendment No. 1
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 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 March 31, 1999 105,976,307
JEFFERSON-PILOT CORPORATION
INDEX
Note: this amended 10-Q/A, Amendment No. 1, is being filed at the request of
reviewers at the SEC in connection with a proposed S-4 filing to clarify
wording and presentation from the original Form 10-Q previously filed May 14,
1999.
- Page No. -
[S]
Part I. Financial Information
Consolidated Unaudited Condensed Balance Sheets
- March 31, 1999 and December 31, 1998 3
Consolidated Unaudited Condensed Statements of Income
- Three Months ended March 31, 1999 and 1998 4
Consolidated Unaudited Condensed Statements of Cash Flows
- Three Months ended March 31, 1999 and 1998 5
Notes to Consolidated Unaudited Condensed Financial
Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information 26
Signatures 27
-2-
PART I. FINANCIAL INFORMATION
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
(In Millions)
March 31 December 31
1999 1998
-------- -----------
Debt securities available for sale, at fair value
(amortized cost $10,775 and $10,500) $11,025 $10,958
Debt securities held to maturity, at amortized cost
(fair value $3,541 and $3,699) 3,463 3,545
Equity securities available for sale, at fair value
(cost $95 and $94) 957 949
Mortgage loans on real estate 2,096 1,969
Other investments 1,176 1,557
Cash and cash equivalents 31 21
------- -------
Total cash and investments 18,748 18,999
Accrued investment income 239 241
Due from reinsurers 1,477 1,342
Deferred policy acquisition costs and value
of business acquired 1,486 1,412
Cost in excess of net assets acquired 227 229
Assets held in separate accounts 1,751 1,754
Other assets 356 361
------ ------
Total assets $24,284 $24,338
====== ======
Policy liabilities $17,533 $17,667
Debt:
Commercial paper and revolving credit borrowings 324 289
Exchangeable Securities and other debt 370 327
Securities sold under repurchase agreements 291 292
Liabilities related to separate accounts 1,751 1,754
Tax liabilities 346 344
Accounts payable, accruals and other liabilities 338 310
------ ------
20,953 20,983
------ ------
Guaranteed preferred beneficial interest in
subordinated debentures ("Capital Securities") 300 300
------ ------
Mandatorily redeemable preferred stock - 3
------ ------
Stockholders' Equity:
Common stock 139 133
Retained earnings 2,283 2,191
Accumulated other comprehensive income -
net unrealized gains on securities 609 728
------ ------
3,031 3,052
------ ------
Total liabilities and stockholders' equity $24,284 $24,338
====== ======
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
1999 1998
------ ------
Revenue:
Premiums and other considerations $ 241 $ 289
Net investment income 316 301
Realized investment gains 44 43
Communications sales 51 48
Other 18 16
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Total revenue 670 697
----- -----
Benefits and Expenses:
Insurance and annuity benefits 306 355
Insurance commissions, net of deferrals 22 20
General and administrative expenses,
net of deferrals 56 62
Amortization of deferred acquistion costs and
value of business acquired 49 53
Communications operations 33 31
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Total benefits and expenses 466 521
----- -----
Income before income taxes 204 176
Provision for income taxes 71 57
----- -----
Net income 133 119
Dividends on Capital Securities and preferre 6 7
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Net income available to common stockholders $ 127 $ 112
===== =====
Comprehensive income $ 14 $ 155
===== =====
Average number of shares outstanding 105.9 106.3
===== =====
Net Income Per Share of Common Stock:
Net income available to common stockholders
before realized investment gains, net
of income taxes $ 0.93 $ 0.79
Realized investment gains, net of income tax 0.27 0.26
----- -----
Net income available to common stockholders $ 1.20 $ 1.05
===== =====
Net income available to common stockholders -
assuming dilution $ 1.19 $ 1.04
===== =====
Dividends declared per common share $0.330 $0.295
===== =====
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
1999 1998
----- -----
Net cash provided by operations $ 215 $ 154
---- ----
Cash Flows from Investing Activities:
Investments sold (purchased), net (275) (75)
Other investing activities (30) 1
---- ----
Net cash used in investing activities (305) (74)
---- ----
Cash Flows from Financing Activities:
Policyholder contract deposits, net 422 427
Policyholder contract withdrawls, net (316) (362)
Net short-term borrowings (repayments) 34 (54)
Issuance (repurchase) of common shares, net 2 4
Cash dividends paid (44) (38)
Other financing activities 2 -
---- ----
Net cash provided by financing activities 100 (23)
---- ----
Increase in cash and cash equivalents 10 57
Cash and cash equivalents at beginning of period 21 9
---- ----
Cash and cash equivalents at end of period $ 31 $ 66
==== ====
Supplemental Cash Flow Information:
Income taxes paid $ 1 $ 2
==== ====
Interest paid $ 12 $ 9
==== ====
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,
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. Segment Reporting
The following table summarizes certain financial information regarding the
Company's reportable segments:
March 31
1999 1998
------- -------
Assets
Life Insurance Products $12,947 $12,086
AIP 6,504 6,548
Communications 222 214
Corporate & Other 4,611 4,704
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Total assets $24,284 $23,552
====== ======
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Three Months Ended
March 31
1999 1998
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Revenues
Life Insurance Products $ 418 $ 461
AIP 124 128
Communications 51 47
Corporate & other 33 18
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626 654
Realized investment gains, before tax 44 43
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Total revenues $ 670 $ 697
====== ======
Operating income and reconciliation to net
income available to common stockholders
Life Insurance Products $ 65 $ 57
AIP 17 18
Communications 8 7
Corporate & other 9 2
------ ------
Total operating income 99 84
Realized investment gains, net of tax 28 28
------ ------
Net income available to common
stockholders $ 127 $ 112
====== ======
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3. 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
March 31
1999 1998
----------- -----------
Numerator:
Net Income $ 133 $ 119
Dividends on Capital Securities
and preferred stock 6 7
----------- -----------
Numerator for earnings per share and
earnings per share - assuming dilution
- Net income available to common
stockholders $ 127 $ 112
=========== ===========
Denominator:
Denominator for earnings per share -
weighted-average shares
outstanding 105,924,886 106,321,424
Effect of dilutive securities:
Employee stock options 1,178,916 808,656
----------- -----------
Denominator for earnings per
share - assuming dilution -
adjusted weighted-average shares
outstanding and assumed conversions 107,103,802 107,130,080
=========== ===========
Earnings per share $ 1.20 $ 1.05
=========== ===========
Earnings per share - assuming dilution $ 1.19 $ 1.04
=========== ===========
4. 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
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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.
5. Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and for Hedging Activities". This pronouncement is effective
for annual periods beginning after June 15, 1999. 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.
-9-
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, 1999, changes in financial condition for the
three months then ended, and results of operations for the three month
period ended March 31, 1999 as compared to the same period 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 (formerly named Chubb Life Insurance Company of
America) and its subsidiary, Jefferson Pilot LifeAmerica Insurance Company
(JPLA, formerly named Chubb Colonial Life Insurance Company), 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 program production.
Corporate and Other contains the 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.
In the first quarter 1999, JP's revenues were derived 67% from Life
Insurance Products, 20% from AIP, 8% from Communications and 5% from
Corporate and Other, excluding realized gains.
Results of Operations
- ---------------------
In the following discussion "total reportable segment results" includes all
elements of net income available to common stockholders except realized gains
on sales of investments net of related income taxes (realized investment
gains). Management believes that reportable segment results is relevant and
useful information. Reportable segment results is the basis used by the
Company in assessing the performance of its business segments as well as
overall performance. Gains from sales may be realized in the sole discretion
of management and are often realized in accordance with tax planning
strategies. Reportable segment results as described above may not be
comparable to similarly titled measures reported by other companies.
-10-
The following tables illustrate JP's results before and after the inclusion
of realized investment gains.
Three Months Ended
March 31
1999 1998
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Consolidated Summary of Income
Total reportable segment results (1) $ 98.7 $ 83.9
Realized investment gains, net 28.5 27.9
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Net income available to
common stockholders $127.2 $111.8
===== =====
Consolidated Earnings Per Share
Total reportable segment results (1) $ .93 $ .79
Realized investment gains, net .27 .26
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Net income available to
common stockholders $ 1.20 $ 1.05
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Net income available to
common stockholders - assuming dilution $ 1.19 $ 1.04
===== =====
(1) Total reportable segment results includes all elements of net income
available to common stockholders except realized investment gains on
sales of investments net of related income taxes.
Net income available to common stockholders increased 13.8% from the first
quarter of 1998 due to increases in profitability in the Company's core
business. Total reportable segment results increased 17.6% over the first
quarter of 1998 due to increased profitability in the Life Insurance Products,
Communications and Corporate and Other segments. Net realized gains were
relatively flat between years. Earnings per share increased 14.3% and
earnings per share assuming dilution increased 14.4%. Operating income per
share increased 17.7%.
Results 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.
-11-
A more detailed discussion of operating results by segment follows.
Three Months Ended
March 31
1999 1998
---- ----
Life Insurance Products $ 65.1 $ 56.8
Annuity and Investment Products 17.3 17.6
Communications 8.0 7.3
Corporate and Other 8.3 2.2
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Total reportable segment results (1) 98.7 83.9
Realized investment gains, net 28.5 27.9
----- -----
Net income available to
common stockholders $127.2 $111.8
===== =====
(1) Total reportable segment results includes all elements of net income
available to common stockholders except realized investment gains on
sales of investments net of related income taxes.
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. Individual life insurance products include 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 is still
offered to employers, primarily in the Southeastern U.S.
Operating results were:
Three Months Ended
March 31
1999 1998
---- ----
Premiums, considerations, and other income $229.7 $281.1
Net investment income 188.0 179.8
----- -----
Total revenues 417.7 460.9
Policy benefits 228.9 274.0
Expenses 89.5 99.6
----- -----
Total benefits and expenses 318.4 373.6
----- -----
Reportable segment results before
income taxes 99.3 87.3
Provision for income taxes 34.2 30.5
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Reportable segment results (1) $ 65.1 $ 56.8
===== =====
(1) Reportable segment results includes all elements of net income available
to common stockholders except realized investment gains on sales of
investments net of related income taxes.
-12-
Life Insurance reportable segment results increased 14.6% over the first
quarter of 1998. Operating results for Individual life insurance products
increased 12.7% while Group insurance products improved 39.0% due to
aggressive rate increases and expense management. The following table
summarizes reportable segment results for each category:
Three Months Ended
March 31
1999 1998
---- ----
Individual $59.4 $52.7
Group 5.7 4.1
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Total Life Insurance Products $65.1 $56.8
===== =====
The following table summarizes key information for Life Insurance Products:
Three Months Ended
March 31
1999 1998
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Annualized Individual life insurance sales $ 40.5 $ 38.5
Annualized Group insurance sales 5.1 7.5
Individual traditional insurance premium income 50.2 53.3
Individual commissionable premium receipts 320.4 323.4
Group premium income and equivalents 63.4 142.5
Average UL policyholder fund balances 7,377.1 6,907.9
Average VUL separate account assets 865.2 651.9
Average face amount insurance in force-
UL-type policies 100,245.1 96,122.1
Average assets - Individual products 12,347.4 11,373.8
Average assets - Group products 415.5 511.1
Life Insurance revenues (excluding realized gains) declined 9.4% over the
first quarter of 1998 because of declines in Group medical premiums from the
decision to non-renew Group medical policies in 1999. Revenues include
traditional insurance premiums, policy charges and investment income.
Individual revenues increased 1.4% to $367.5 due to growth in average
policyholder funds and separate accounts, which increased 9.0%. On a
comparable basis, the first quarter's results were influenced by reinsurance
costs. During 1999, one of the Company's subsidiaries converted to annual
pay reinsurance coverages and reduced retention limits on certain products due
to competitive pricing available in reinsurance markets. Without the
influence of such reinsurance premiums, Individual revenues increased 2.8%.
Individual commissionable premium receipts (which exclude premium deposits in
excess of target or commissionable premiums) declined 0.9% as 1999's receipts
included higher premiums in excess of target, especially on VUL sales.
-13-
Group revenues declined 49.0% because the medical rate increases
implemented resulted in non-renewals by many customers.
Life insurance traditional insurance premium income declined 35.0% from the
first quarter of 1998 primarily due to the decline in premiums of the
previously mentioned Group medical products. Individual traditional premium
income declined 5.8% (2.6% without reinsurance charges discussed above) as
recent sales have been more concentrated among UL-type products. Group
traditional premium income declined 52.9%. Including equivalent premiums on
self-insured health policies, Group premium income was down 55.5%. These
declines were again attributable to the decision not to renew group medical
policies in 1999. Policy charges declined 0.8%, but improved 2.1% without
reinsurance charges, somewhat lagging the 4.3% increase in average face
amount for UL-type products, due to lower expense and surrender charges.
Investment income on invested assets assigned to the Life Insurance segment
improved 4.6% 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
declined 18 basis points over the first quarter of 1998. Due to effective
management of asset/liability risks, 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 products increased 27 basis points to
2.02%. In addition to being impacted by portfolio yields and crediting
rates, interest spreads may vary over time due to competitive strategies
and changes in product design.
Policy benefits declined 16.5% primarily due to Group medical. Policy
benefits include interest credited to policyholder accounts on UL-type
products, whereas premium receipts on these products are credited directly
to policyholder accounts and not recorded as revenues. Policy benefits on
UL-type products (annualized) improved to 6.9% of average policyholder funds
and separate accounts for first quarter 1999 compared to 7.7% in first
quarter 1998. The improvement is due to lower credited rates on policyholder
accounts, lower benefit provisions on policy riders and an increase in VUL
separate account assets as a percentage of these policy liabilities.
Traditional policy benefits were 95.0% of premiums in first quarter 1999
compared to 92.1% during first quarter 1998. The deterioration is primarily
attributable to increased Individual mortality, as a percentage of
premiums, in the first quarter of 1999 versus 1998. The Group health
incurred loss ratio improved to 63% versus 78% in the first quarter of the
prior year due to the aggressive rate increases and the decision to exit
group medical activities.
Total expenses (including the net deferral and amortization of policy
acquisition costs) decreased 10.1% due to aggressive expense management.
General and administrative expenses on Individual products were 8.7% of
commissionable premiums versus 9.1% in the same quarter of the prior year.
For Group policies, total expenses were 17.1% of premiums and equivalents
versus 14.7% last year. Group expenses declined 48.3%, in response to a
55.5% decline in premiums and equivalents as the Company exits group medical
activities.
Average Life Insurance assets grew 7.4% 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 2.04% for first quarter 1999 compared to 1.91% for first
quarter 1998. The improvement in 1999 relates to the profitable growth of
UL-type assets and improved profitability of Group health policies.
-14-
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
March 31
1999 1998
------ ------
Premiums and other considerations $ 4.1 $ 4.2
Net investment income 103.4 108.6
Other income 16.7 15.0
------ ------
Total revenues 124.2 127.8
Policy benefits 72.3 76.0
Expenses 25.2 24.7
------ ------
Total benefits and expenses 97.5 100.7
------ ------
Reportable segment results before income taxes 26.7 27.1
Provision for income taxes 9.4 9.5
------ ------
Reportable segment results (1) $ 17.3 $ 17.6
====== ======
(1) Reportable segment results includes all elements of net income available
to common stockholders except realized investment gains on sales of
investments net of related income taxes.
Reportable segment results decreased 1.7% from the same quarter of last year.
The following table summarizes key information for AIP:
Three Months Ended
March 31
1999 1998
-------- --------
Fixed annuity receipts $ 92.1 $ 96.9
Variable annuity receipts 27.8 16.2
Average general account policyholder fund balances 5,619.4 5,833.4
Average separate account policyholder fund balances 492.1 341.8
Investment product sales 548 360
Average assets 6,500.0 6,536.4
Revenues declined 2.8% from the first quarter of 1998, in line with the
decline in average policyholder fund balances. 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 registered broker-dealer, and related entities
(collectively referred to as JPSC). The decrease in policyholder fund
balances represents the net result of interest credited and new receipts
less benefits paid and withdrawals. Fixed annuity receipts declined 5.0%
over last year's first quarter as fixed rate products were perceived less
-15-
favorably than other fixed interest investments, and as potential customers
chose variable annuities on the strength of United States equity markets.
In total, fixed and variable annuity receipts increased by 6.0% over the
first quarter of 1998. Fixed annuity benefits and surrenders as a
percentage of beginning fund balances improved to 13.2% for first quarter
1999 compared to 15.0% for first quarter 1998. This moderation reflects a
general decline in competitive fixed interest investments; however,
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 represents concession income earned by JPSC, increased
11.3% over the same quarter of the prior year.
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 2.10% and 2.11% for
first quarters 1999 and 1998. The decline was held to 1 basis point
despite a decline in portfolio yields due to effective asset/liability
management.
Total annualized insurance expenses as a percentage of average policyholder
fund balances including separate accounts were 0.67% for 1999 compared to
0.71% for 1998. Annualized general and administrative expenses as a
percentage of average invested assets for fixed annuities improved to 0.23%
in 1999 versus 0.25% in 1998. The growth in AIP expenses of 2.0% in 1999
was primarily due to broker/dealer operations, similar to the increase in
other income. Broker/dealer expenses increased $0.9 to $14.8, due to
increased commission expense.
Average AIP assets decreased 0.6% for the first quarter of 1999 versus the
same quarter of the prior year. AIP posted annualized returns on average
assets of 1.06% for first quarter 1999 compared to 1.08% for first quarter
1998. Both years included earnings of JPSC which were $1.1 and $0.8 for
first quarter 1999 and 1998.
-16-
Communications
JPCC operates television and radio broadcast properties and produces
syndicated sports and entertainment programming. Operating results were:
Three Months Ended
March 31
1999 1998
---- ----
Communications revenues $51.7 $48.5
Operating costs and expenses 32.7 30.8
----- -----
Broadcast cash flow 19.0 17.7
Depreciation and amortization 2.9 2.9
Corporate general and administrative expenses 1.2 1.3
Net interest expense (investment income) 1.3 1.5
----- -----
Reportable segment results before income taxes 13.6 12.0
Provision for income taxes 5.6 4.7
----- -----
Reportable segment results (1) $ 8.0 $ 7.3
===== =====
(1) Reportable segment results includes all elements of net income available
to common stockholders except realized investment gains on sales of
investments net of related income taxes.
Reportable segment results from the Communications segment increased $0.7 or
9.6% compared to the first quarter of 1998.
The Company's radio broadcasting properties continued to benefit from the
generally favorable advertising environment and the strong local economies
in which they operate. Combined revenues for Radio and Television grew
0.6% over the first quarter of 1998. Radio experienced strong revenue
growth in the first quarter of 1999 and all quarters of 1998, 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 national sales continue to be
sluggish, as they have been for several quarters industry-wide.
First quarter revenues in the Sports division increased $3.0 or 27.5% from
the first quarter of 1998. Two-thirds of the increase was the result of
improved collegiate basketball sales in 1999 with the remainder
attributable to an early first quarter ice skating event followed by the
sale of rights to several ice skating and gymnastics events coupled with an
agreement not to compete in the production of such events.
Broadcast cash flow grew by 7.3% for the first quarter, 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-influenced
results.
Total expenses (operating costs and expenses, depreciation and
amortization, and corporate general and administrative expenses) increased
5.1% over 1998. The majority of the increase is the result of the
relatively high cost of generating the increased Sports revenues. Expenses
as a percentage of communication revenues for the first quarter of 1999 and
1998 were 71.2% and 72.2%. The 1999 decline was the result of high margin
-17-
sales in Radio combined with aggressive cost cutting measures at all
divisions.
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
March 31
1999 1998
---- ----
Earnings on investments and other income $32.6 $22.3
Interest expense on debt and Exchangeable Securities (7.5) (9.0)
Operating expenses (4.3) (6.8)
Federal and state income (tax) benefit (6.4) 2.8
----- -----
14.4 9.3
Dividends on Capital Securities and
mandatorily redeemable preferred stock (6.1) (7.1)
----- -----
Reportable segment results (1) 8.3 2.2
Realized investment gains, net 28.5 27.9
----- -----
Reportable segment results, including realized
investment gains $36.8 $30.1
===== =====
(1) Reportable segment results includes all elements of net income available
to common stockholders except realized investment gains on sales of
investments net of related income taxes.
The following table summarizes assets assigned to this segment.
Three Months Ended
March 31
1999 1998
---- ----
Parent company, passive investment companies and
Corporate line assets of insurance subsidiaries $2,145 $1,662
Co-insurance receivables on acquired blocks 1,565 1,926
Net SFAS 115 adjustments 195 305
Employee benefit plan assets 344 413
Goodwill arising from insurance acquisitions 190 198
Other 172 200
------ ------
Total $4,611 $4,704
====== ======
Total assets for the Corporate and Other segment declined 2.0% when
compared to first quarter 1998 due to surrenders of 100% co-insured COLI
policies. Invested assets assigned to this segment increased $335.0 or
15.9% ($481.5 or 28.9% not including changes in market values of Available
for Sale securities) due to accumulation of retained earnings, an increase
in reverse repurchase obligations and changes in segment allocations
(primarily related to exiting the Group medical business).
-18-
Reportable segment results increased $6.1 compared to first quarter 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 reportable segment
results. Interest expense improved commensurate with a decline in short-term
interest rates. Operating expenses may vary with the level of Corporate
activities and were down 36.8% from the same quarter of the prior year.
Dividends on preferred stock improved due to the retirement of $50
preferred shares early in 1998.
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 $54 or 0.2% during the first three months of 1999.
Excluding a $365 decrease related to business 100% coinsured to Household
International, total assets increased $311. This increase resulted from
cash provided from operating activities and increased policyholder contract
deposits, partially offset by payment of dividends.
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 $877 at March 31, 1999, up 3.9% 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
$609 at March 31, 1999, an increase of 7.1% since year end. The increase
is primarily attributable to changes 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 $227 at March 31, 1999 and $229 at December
31, 1998, declining by the amount of amortization for the period. Goodwill
as a percentage of stockholders' equity was 7.5% at March 31, 1999 and
December 31, 1998.
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 $1,115 and $1,072 at March 31, 1999 and
December 31, 1998 and policy loans of $423 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, declines thereof 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 $91 at March 31, 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 $191 in securities which support
the block.
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Capital Resources
- -----------------
Stockholders' Equity
JP's capital adequacy is illustrated by the following table:
March 31 December 31
1999 1998
---- ----
Total assets $24,284 $24,338
Total stockholders' equity 3,031 3,052
Ratio of stockholders' equity to assets 12.5% 12.5%
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 increases of $32 for ACES
and $11 for MEDS) are recorded to accumulated other comprehensive income -
net unrealized gains on securities in stockholders' equity, net of deferred
income taxes.
While the Company has made no commitments for additional financing,
additional debt may be incurred 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 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.
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Cash provided by operations was $215 and $154 for the first three 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 March 31, 1999 of
$381 was primarily 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 for all cash disbursed as required by the
coinsurance agreement and therefore this decline had no effect on liquidity
during these three months.
Net cash used in investing activities was $(305) and $(74) for the first
three months of 1999 and 1998. The variance in the amounts reflects the
purchase of $728 of securities categorized as Available for Sale, partially
offset by the sale of $435 of Available for Sale securities.
Net cash provided by financing activities was $100 and $(23) for the first
three months of 1999 and 1998. The Company made net short-term borrowings
of $34 in 1999 versus net repayments of $(54) in 1998. The increased
borrowings in 1999 related primarily to securities sold under repurchase
agreements, partially due to expansion of the repurchase program (which is
an asset/liability management strategy) to JP Financial. Cash inflows from
changes in policyholder contract deposits were $106 and $65 for the first
three months of 1999 and 1998. The increase is a result of lower
withdrawals of policyholder funds in 1999.
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 three months were $73 in 1999 and $51 in
1998. JP Life and AH Life were the primary sources of these dividends in
1999. 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 1999 will require regulatory approval. The Company has no
reason to believe that such approval will be withheld.
Fixed income and equity securities held by the parent company and non-
regulated subsidiaries were $597 and $538 at March 31, 1999 and December
31, 1998. These securities are considered to be sources of liquidity to
support the Company's strategies.
Total debt and equity securities Available for Sale at March 31, 1999 were
$11,982.
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.
-21-
JP held the following carrying amounts of investments:
March 31 December 31
1999 1998
------------- --------------
Publicly-issued bonds $11,329 60.4% $ 11,356 59.8%
Privately-placed bonds 3,144 16.8 3,131 16.4
Commercial mortgage loans 2,096 11.2 1,969 10.4
Common stock 936 5.0 931 4.9
Policy loans 1,034 5.5 1,439 7.6
Preferred stock 36 0.2 34 0.2
Real estate 108 0.6 86 0.4
Cash and other invested assets 65 0.3 53 0.3
------- ----- ------- -----
Total $18,748 100.0% $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.
Carrying amounts of investments categorized as "higher risk" assets were:
March 31 December 31
1999 1998
------------- --------------
Bonds near or in default $ 2 - % $ 2 - %
Bonds below investment grade 618 3.3 659 3.5
Mortgage loans 60 days
delinquent or in foreclosure 4 - 3 -
------ ----- ------ -----
Mortgage loans restructured 9 0.1 10 0.1
Foreclosed properties 3 - 3 -
Sub-total, higher risk assets 636 3.4 677 3.6
All other investments 18,112 96.6 18,322 96.4
------ ----- ------ -----
Total cash and investments $18,748 100.0% $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 March 31, 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 March 31, 1999 under then current
interest rates would result in a potential gain of $9, which would be
amortized over the remaining life of the hedged asset or liability.
-22-
Collateralized Mortgage Obligations (CMO's), which are included in debt
securities Available for Sale, as of March 31 were:
March 31 December 31
1999 1998
------ ------
Federal agency issued CMO's $2,688 $2,729
Corporate private-labeled CMO's 1,672 1,705
------ ------
Total $4,360 $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 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 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; and
addressing the compliance of key vendors and service providers to the
Company (business partners).
The project has 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) are Year 2000 compliant, each
system is tested using a standard testing methodology which includes
regression testing, millennium testing, millennium leap year testing and
cross over year testing. Certification testing is performed on each system
as soon as remediation is completed.
The schedule for completion of all phases and categories is September 30,
1999. The Company has completed the assessment and strategy phases for
mainframe applications, operating systems and hardware and is executing the
remediation and certification phases. The Company's new business and
policyholder administration systems and the general ledger are on the
mainframe. The Company has determined that approximately 76% of the Company's
systems are compliant. The Company does not deem a system to be compliant
until the completion of remediation testing and certification to confirm that
its performance will not be affected by dates extending after 1999.
-23-
All of the Company's significant policyholder systems have been certified as
Year 2000 compliant. Two smaller closed blocks of business are currently
being administered on non-compliant policyholder systems; conversion of
records and administration for one of these blocks to an already
certified system, and certification of a vendor software upgrade to the system
for the other block will be completed in the 1999 second quarter. Other non-
policyholder mainframe systems have either been certified or are on
schedule for timely completion. For PC and LAN systems, the Company has
completed the strategy phases and is executing the assessment, remediation
and certification phases concurrently and intends to complete these phases
during the third quarter of 1999.
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
is being obtained. Where feasible, certification testing will be conducted
for systems and equipment that are material to operations. Some systems
and equipment, such as electrical power supply, are not feasible for the
Company to certify. Completion for non-IT systems and equipment is
scheduled for September 1999.
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 that have responded to the Company's inquiries have indicated
they are on schedule for Year 2000 compliance. The Company continues to
follow up with business partner financial institutions that have not yet
responded. 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 certification is underway. In addition
to financial institutions, other critical business partners have been
identified and surveys initiated. Results of these surveys have been
analyzed and appropriate testing or other due diligence will be conducted
in the second and third quarters of 1999.
The Company has not had an independent review of its 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.
Since inception of the project, the Company has incurred external costs of
$8.4 and internal costs of $8.0. The current estimate, based on actual
experience to date, of total project expense is $24.0, with remaining
external costs of $4.1 and internal costs of $3.5. 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. In addition, remediation/certification costs on
projects completed to date have been lower than originally estimated.
Total first quarter 1999 costs were $2.4. 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
-24-
compliance with the NAIC Securities Valuation Office's Due Diligence
Guidelines for analyzing these risks.
The Company expects to certify that all of its systems are compliant by
September 1999. However, there is no guarantee that these results will be
achieved. Specific factors that give rise to this uncertainty include a
possible loss of technical resources to perform the work (not yet
encountered), 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.
Although the Company is on schedule to complete 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 begun work on contingency plans for all
mission critical functions.
Market Risk Exposures
- ---------------------
With respect to the Company's exposure to market risks, see management's
comments in the 1998 Form 10-K. Mangement believes that its analysis of the
effects of 100 basis point increases and decreases utilized in the sensitivity
analysis in the 1998 Form 10-K continues to reflect reasonably possible near
term changes in interest rates. Additionally, management believes that the
10% hypothetical decline in the equity market remains reasonably possible in
the near term.
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
-25-
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; to business interruption risks if the Company or
a critical business partner does not timely complete its Year 2000
compliance project; 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 4. Submission of Matters to a Vote of Security Holders
(a) The following information relates to the registrant's Annual Meeting
of Shareholders held on May 3, 1999
(b) Election of Directors
Class I Term Votes For Withheld
-------------------- ------- ---------- -------
Kenneth C. Mlekush 3 years 87,397,043 840,330
William Porter Payne 3 years 87,290,958 946,415
David A. Stonecipher 3 years 87,378,224 859,149
(c) The following matters were voted upon at the meeting:
(1) A proposal by the registrant's board of directors to approve
key amendments to the Long Term Stock Incentive Plan:
For: 69,560,866
Against: 5,503,046
Abstain: 842,586
Broker Nonvotes: 12,330,875
-26-
(2) A proposal by the registrant's board of directors to approve
the ongoing amended Non-Employee Directors' Stock Option Plan:
For: 69,748,873
Against: 5,187,754
Abstain: 969,872
Broker Nonvotes: 12,330,875
Nonvotes:
(3) A proposal by the registrant's board of directors to approve
the registrant's CEO bonus arrangement:
For: 83,514,367
Against: 3,577,086
Abstain: 1,145,920
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financiol Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1999.
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 23, 1999
By (Signature) /s/Reggie D. Adamson
(Name and Title) Reggie D. Adamson, Senior Vice President - Finance
(Principal Accounting Officer)
Date November 23, 1999
-27-