Jefferson-Pilot Communications Company owns its radio and television studios and office buildings in Charlotte, North Carolina. It also owns the radio studios and office buildings in Denver, Colorado and Miami, Florida. The radio studios and offices are leased in Atlanta, Georgia and San Diego, California, as are the television studios and offices in Charleston, South Carolina. The television studio and office building in Richmond, Virginia are owned as well.
On October 6, 1995, JP acquired Alexander Hamilton Life Insurance Company of America and certain of its affiliates from a subsidiary of Household International, Inc. (HI). The acquisition was completed through a merger into a wholly-owned Michigan domiciled stock life insurance subsidiary of JP, which thereupon was renamed Alexander Hamilton Life Insurance Company of America (AH Life). First Alexander Hamilton Life Insurance Company (FAHL), a New York stock life insurance company, was acquired on October 13, 1995. The acquisitions were effective October 1, 1995 and included substantially all of the life and single premium deferred annuity business of AH Life and FAHL. Certain product classes, including Credit Life and Accident and Health Insurance, Corporate-owned Life Insurance and Periodic Payment Annuities, were not acquired but were 100% reinsured back to affiliates of HI through coinsurance agreements. HI provided payment, performance, and capital maintenance guarantees to secure these reinsurance agreements and established trusts backing a majority of the assets, subject to annual requirements for solvency and capital adequacy. The purchase price was approximately $575 million paid as follows: $475 million plus accrued interest in cash and $50 million in newly-issued floating rate preferred stock of AH Life. In addition, an outstanding surplus note of AH Life (which is classified as a liability in accordance with GAAP) was acquired from HI for $50 million plus accrued interest. The acquisition was financed through internal resources, borrowings of $187 million under a 364-day Credit Agreement dated October 4, 1995 and $127 million from the sale of Automatic Common Exchange Securities Due January 21, 2000, which are subject to exchange into shares of NationsBank Corporation common stock beginning 30 days prior to maturity.
Realized investment gains (net of applicable income taxes): Continuing operation 34.3 38.9 35.6 Discontinued operations 15.2 .1 1.7 49.5 39.0 37.3 SFAS 106 - - (24.1) Net income applicable to common shareholders $273.0 $239.2 $195.2
Operating income available to common shareholders (including discontinued operations but excluding net realized investment gains) increased 11.6% in 1995 to $223.5 million and 10.0% in 1994 to $200.2 million. In 1995, acquisitions contributed 9.6% growth and internal development 2.0%. 1995's results were impacted adversely by lower earnings on Group operations.
The Life Insurance segment is comprised of operations conducted by the Individual Life Insurance, Annuity and Investment Products, and Group Insurance distribution systems, as follows.
Carrying amounts of Goodwill, Value of Insurance in Force, and Deferred Policy Acquisition Costs 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 relevant factors.
JP's financial strength is among the highest of its peer companies. Consolidated shareholders' equity was $2,156 and $1,733 million at December 31, 1995 and 1994. Shareholders' equity includes net unrealized gains on securities available for sale of $526.7 million and $230.8 million at December 31, 1995 and 1994. The Company adopted SFAS 115 as of January 1, 1994, as described in Note 3 to the Consolidated Financial Statements. This resulted in a net increase in shareholders' equity on that date of $101.4 million.
Short-term debt outstanding was $230 million and $29.4 million at December 31, 1995 and 1994. During 1995 and 1994, the Company utilized uncommitted bank lines of credit to manage parent company cash flows. In October 1995, the Company replaced uncommitted bank lines with a 364-day unsecured revolving credit agreement, which was placed with a commercial bank syndicate, in the amount of $450 million. Proceeds are to be used for funding a portion of the acquisition of AH Life and for general corporate purposes. Interest rates of borrowings under the revolving credit agreement either are selected by the Company by competitive bids from the syndicate banks or, at the Company's option, are established at a level using the London Interbank Borrowing Rate as a base. The maximum amounts outstanding at any time under the revolving agreement and uncommitted bank lines were $390 million in 1995 and $90 million during 1994.
Currently, prescribed or permitted Statutory Accounting Principles (SAP) may vary between states and between companies. The National Association of Insurance Commissioners (NAIC) is in the process of codifying SAP to promote standardization of methods utilized throughout the industry. Completion of this project might result in changes in statutory accounting practices for the Company; however, it is not expected that such changes would critically impact the Company's statutory capital requirements.
Adjustments to reconcile net income to net cash provided by operating activities: Change in policy liabilities other than deposits 8,940 (15,696) 35,415 Credits to policyholder accounts, net 144,861 26,537 28,143 Deferral of policy acquisition costs, net (67,773) (41,117) (17,570) Change in receivables and asset accruals (42,534) (10,350) (45,063) Change in payables and expense accruals 70,074 (11,608) 17,629 Realized investment gains and gain on disposal of discontinued operations (69,012) (61,569) (56,947) Other 2,353 16,654 29,391
Securities available for sale: 						 Sales 1,257,064 778,976 - Maturities, calls and redemptions 300,705 98,243 - Purchases (1,601,965) (817,464) -
Cash and cash equivalents: The Company includes with cash and cash equivalents its holdings of highly liquid investments which either mature within three months of the date of acquisition or contain an investor put option that can be exercised at par within 90-day intervals. The Company routinely maintains cash deposits with financial institutions in amounts that exceed federally-insured limits, but has not experienced any loss of principal related to such deposits.
Policyholder contract deposits: Policyholder contract deposits consist of policy values that accrue to holders of universal life-type contracts and annuities. The liability is determined using the retrospective deposit method and does not include a provision for possible future assessments against policyholders.
The amount of dividends to be paid on participating policies is determined annually by the Board of Directors. Anticipated dividends are accounted for as a planned contractual benefit in computing the value of future policy benefits. Estimated amounts of policy dividends for the succeeding twelve months are based on the current scale, while estimated dividends applicable to later years are based on the dividend scale which was in effect when the policies were issued.
On May 31, 1995, J-P Life assumed certain life insurance and annuity business of KCL in a transaction which was accomplished through an assumption reinsurance agreement. KCL has operated under the control of the Kentucky Insurance Commissioner since February 1993. The assumption reinsurance agreement was part of a plan of rehabilitation for KCL that was approved by the court of jurisdiction in August 1994 and subsequently appealed. Upon execution of the agreement, assets consisting primarily of cash, debt securities, policy loans and receivables with aggregate fair value of $874 million were transferred to J-P Life, and J-P Life assumed liabilities with aggregate fair value of $1.096 billion. The difference between the fair values of assets received and liabilities assumed was recorded as value of insurance in force, representing the actuarially determined present value of anticipated profits to be realized from the business, using a risk-adjusted discount rate.
Further participation options remaining available to approximately 4,000 KCL policyholders may result in future adjustment to the asset and liability balances related to the KCL transaction, and to the Company's policy value enhancement under the assumption reinsurance agreement. If 100% of such policyholders elected further participation, approximately $116 million of additional policy liabilities would result. To the extent such policyholders opt against further participation, J-P Life will refund related policy amounts with interest. The Company has recorded approximately $78 million, which is included with other liabilities, pending resolution of the policyholder option process. Policyholder subsidies provided by participating guaranty associations, which are intended in part to mitigate the unfavorable impact of surrenders, do not become effective before February 1, 1996. After that date, the policyholder withdrawal rate may increase. Management does not expect either of these unresolved circumstances to have a material effect on the Company's financial position or results of operations.
Note 4. Deferred Policy Acquisition Costs and Value of Insurance in Force
Information about deferred policy acquisition costs for the three years ended December 31, 1995 follows (in thousands):
Amounts related to discontinued property and casualty insurance operations - 6,124 5,417 Ending balance, included in consolidated balance sheets $ 353,400 $ 329,139 $ 277,731
At various times through September 1995, the Company had outstanding borrowings under unsecured bank lines of credit. Interest rates and maturities of borrowings under the lines of credit were bilaterally determined at the time a loan was initiated.
The ACES are redeemable beginning 30 days prior to maturity. Upon maturity or redemption, the principal amount of the ACES will be mandatorily exchanged into either (1) a number of shares of the common stock of NationsBank Corporation (the stock) determined based on an exchange rate, plus accrued interest in cash or (2) cash in an amount of equal value. Holders of ACES called for redemption will receive an additional cash payment of $0.05 per security. The Company may exercise the cash payment option with respect to all, or less than all, of the stock deliverable upon maturity or redemption. The exchange rate is determined based on the average closing price of the stock for the 20 trading days ending two days prior to maturity (the maturity price) or notice of redemption (the redemption price). Subject to adjustments that may result from certain dilution events, the exchange rate for each of the ACES held is equal to (1) 0.8333 shares of the stock if the maturity price or redemption price is at least $87 per share, (2) a fractional share of the stock having a value equal to $72.50 if the maturity price or redemption price is more than $72.50 per share but less than $87 per share or (3) one share of the stock if the maturity price or redemption price is not more than $72.50 per share.
Risk-Based Capital ("RBC") requirements promulgated by the NAIC became effective for life insurance companies in 1993. Under RBC requirements, life insurers must maintain minimum capitalization levels that are determined based on formulas incorporating credit risk pertaining to its investments, insurance risk, interest rate risk and general business risk. As of December 31, 1995, the life insurance subsidiaries' adjusted capital and surplus exceeded their authorized control level RBC.
A reconciliation of the federal income tax rate to the Company's effective income tax rate, computed based on income from continuing operations before cumulative effect of change in accounting principle, follows:
Under prior federal income tax law, one-half of the excess of a life insurance company's income from operations over its taxable investment income was not taxed, but was set aside in a special tax account designated as "Policyholders' Surplus". J-P Life has approximately $91 million of untaxed "Policyholders' Surplus" on which no payment of federal income taxes will be required unless it is distributed as a dividend, or under other specified conditions. The Company does not believe that any significant portion of the account will be taxed in the foreseeable future and no related deferred tax liability has been recognized. If the entire balance of the account became taxable under the current federal rate the tax would approximate $32 million.
Amounts related to all operations which do not constitute reportable business segments have been combined with realized investment gains and consolidating adjustments in the lines described as "Corporate and other". Corporate operations consist of certain management and treasury activities and include income, gains and expenses that have not been allocated to reportable business segments. Amounts related to the discontinued other insurance segment are not included in segment information pertaining to results of operations. Depreciation and amortization includes amortization of cost of acquired businesses in excess of net assets and amortization of other intangible assets related to communications operations, but does not include depreciation of real estate investments.
Cash payments for interest on financing arrangements totaled $23.1 million in 1995, $9.1 million in 1994, and $90 thousand in 1993. Cash payments for income taxes totaled $105 million, $127 million, and $114 million in 1995, 1994, and 1993, respectively.