Total assets prior to 1993 were adjusted to reflect the adoption of Financial Accounting Standard (FAS) 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts". The amounts shown for 1992 to 1990 were increased by $20,925,000, $20,176,000, and $19,615,000, respectively, compared to amounts previously reported.
1994 1993 1992 1991 1990 Life and accident and health insurance $ 168,460 $ 158,242 $ 156,588 $ 146,205 $ 128,153 Communications 21,986 17,335 14,169 10,327 10,019 Other 531 ( 1,581) ( 6,544) ( 5,958) ( 5,442) Realized investment gains, net of taxes 38,919 35,565 30,385 21,409 18,657 Net income, continuing operations $ 229,896 $ 209,561 $ 194,598 $ 171,983 $ 151,387
The following is management's discussion and analysis of financial condition and results of operations for the three years ended December 31, 1994. It is intended to analyze the results of operations, consolidated financial condition, liquidity and capital resources of Jefferson-Pilot Corporation and consolidated subsidiaries (J-P or Company). The discussion should be read in conjunction with the consolidated financial statements and notes.
Included in Net Income are realized investment gains from sale of investments. The following table illustrates J-P's results before and after the inclusion of realized investment gains:
Income before investment gains (operating income) and the initial application of SFAS 106 increased 10.0% in 1994 and 6.3% in 1993. Income from continuing operations was 9.8% higher in 1994 and 6.0% higher in 1993. Income from discontinued operations increased 16.2% in 1994 and 14.3% in 1993.
Investment gains for 1994 relate primarily to securities that have been classified as "available for sale" since the adoption of SFAS 115," Accounting for Certain Investments in Debt and Equity Securities". The following table illustrates the sources of realized gains and (losses) for the last three years:
Common stocks $ 65.7 $ 32.8 $ 40.8 Bonds and other debt instruments (9.5) 16.8 6.8 Other 5.2 4.6 (1.9) Sub-total 61.4 54.2 45.7 Less applicable federal and state taxes (22.4) (16.9) (13.7)
As reported $ 39.0 $ 37.3 $ 32.0 ====== ====== ======
Cost of equity securities held $290.4 $325.7 $332.3 Fair value $718.0 $903.5 $889.5
The following table illustrates earnings per share for the years reported: 1994 1993 1992 Income before effect of initial application of SFAS 106 and realized investment gains: Continuing operations $ 3.93 $ 3.46 $ 3.22 Discontinued operations .19 .16 .14 Operating income 4.12 3.62 3.36
Realized investment gains (net of applicable federal and state income taxes): Continuing operations .80 .71 .60 Discontinued operations - .03 .03 .80 .74 .63
Shares outstanding, beginning of year 49.5 50.4 51.3 Issued 0.3 0.1 - Purchased (1.3) (1.0) (.9)
Shares outstanding, end of year 48.5 49.5 50.4 ===== ===== =====
March 31 8.08% 8.95% 9.58% June 30 8.06 8.95 9.52 September 30 8.03 8.58 9.40 December 31 8.10 8.24 9.27
Growth in investment income was achieved by growth in invested assets arising from policyholder contract deposits related to universal life and annuity products. During 1994, these deposits increased 17.2% to $1,846 million, of which annuity funds comprised $1,081 million, an increase of 22.0%. During 1993, policyholder contract deposits increased 14.8% to $1,575 million with annuities increasing 17.8% to $887 million.
Revenues from the Communications segment increased 19.0% in 1994 to $172.5 million and 11.7% in 1993 to $145.0 million due to acquisitions, market share increases and a favorable economic environment. All of these events favorably influenced advertising receipts, the Company's primary component of Communications revenues.
1994 1993 1992 Income taxes as a percent of before-tax income 33.9% 32.5% 29.3%
J-P's continuing business segments include Life Insurance and Communications. The Other Insurance Segment, included in prior years, is reported as "Discontinued Operations". Operating income of the business segments includes investment income but excludes net realized investment gains. Operating income and losses of the parent company, consolidation entries and net realized investment gains are included in the "other" category. Currently, all corporate capital is allocated to the business segments.
Operating income from all business segments increased $18.2 million or 10% in 1994 and $10.8 million or 6.3% in 1993. Product lines contributing to the increase were as follows: Incr. (Decr.) 1994 1993 (In millions) Life insurance: Individual $ 7.1 $ (0.1) Group 3.1 1.7 10.2 1.6
Communications 4.7 3.1 Other 2.1 5.1 Sub-total, before discontinued operations 17.0 9.8 Discontinued operations 1.2 1.0 Total $ 18.2 $ 10.8 ====== ======
The Life insurance segment is comprised of operations conducted by the Individual and Group distribution systems.
1994 1993 1992 1991 1990 (In thousands) Premiums and other considerations $203,736 $196,100 $182,232 $178,244 $175,046 Net investment income 321,097 311,120 304,477 299,234 290,233 Other income 4,352 4,543 4,053 3,076 2,636
Individual operating income improved 6.1% in 1994 to $124.2 million. 1993's results were flat at $117.1 million. As a percentage of Total revenues, operating income for the Individual unit was 23.5% in 1994, 22.9% in 1993 and 23.9% in 1992. 1994's results improved on the strength of expense savings. Expenses represented 13.1% of Total revenues in 1994, 15.3% in 1993 and 16.5% in 1992. Expenses also declined in 1993; however, on a comparable basis, 1993 operating income did not improve due to federal income tax refunds and recoveries which were received in 1992. Effective tax rates have increased since 1992, not only because of the federal tax recoveries, but also due to an increase in the statutory rate and the Company's emphasis on fully-taxable securities.
Premiums and other considerations increased 3.9% in 1994 and 7.6% in 1993. Premium receipts on universal life and most annuity contracts are reported as additions to policyholder accounts rather than premium income. 1993's increase is reflective of the Company's business plan which focuses on agent productivity and recruitment of new distribution sources. Policy benefits increased 5.5% in 1994 and 5.6% in 1993, reflective of the growth of business in force. Death benefits in 1994 were 7.5% higher than the prior year at $64.0 million. Mortality experience fluctuates from period to period and the Company does not expect that this experience is indicative of a negative long-term trend. Death benefits for 1993 were up 2.3% to $59.6 million. Expenses improved 11.4% in 1994 and 3.1% in 1993. The efficiencies were achieved through improved economies in the Career and Home Service distribution channels and as a result of the increase in the proportion of expenses related to new business sales, and thus deferred.
First year life insurance premiums $ 43.3 $ 29.0 $ 25.4 Renewal and other life insurance premiums 169.2 165.7 162.1 Annuity premiums 250.0 174.7 140.3 Accident and health 27.5 28.3 25.8
First year life insurance premiums grew 49.2% in 1994 and 14.2% in 1993 as the Company's business plan was implemented. Annuity premium receipts were up 43.1% in 1994 and 24.5% in 1993.
The Group Department is a Southeastern and Southwestern-focused provider of a wide range of Group insurance products for employers and their employees. It offers conventionally insured and alternatively funded medical benefits, as well as a variety of life, disability income, dental and retirement plans. A summary of this unit's operations follows:
Operating income before income taxes 65,637 60,297 54,682 45,869 37,877 Provision for income taxes 21,422 19,191 15,270 12,714 10,850 Operating income $ 44,215 $ 41,106 $ 39,412 $ 33,155 $ 27,027
$ 44.2 $ 41.1 $ 39.4 ====== ====== ====== Premiums and equivalents, which include the equivalent premiums on cases administered by the Group Department on an uninsured basis, increased 6.2% in 1994 as the Company has focused on expanding its managed care capabilities. They declined 3.4% in 1993 as a result of the loss of a large case. Policy benefits on fully-insured coverages increased 3.4% in 1994 but declined 2.6% in 1993. Death benefits in 1994 were 10.6% higher than the prior year at $52.9 million. The Group Department experienced unusually high mortality in 1994, particularly in its large case business. Death benefits for 1993 were up 2.4% to $47.9 million. Expenses increased 5.8% in 1994 and 5.2% in 1993. The majority of the increases were attributable to managed care, network access fees and other expenses that are passed through to customers. These increased as a result of more widespread use of managed care provider networks. II-11
Operating income from the Communications segment increased 26.8% in 1994 and 22.3% in 1993. 1994's increase is attributable to: market share increases, particularly among radio properties; a favorable sales environment in the broadcast media business; acquisitions in new and existing markets; and increases in sports production business. 1993's increase is also attributable to an improved economic environment and increased market shares.
Total expenses, as a percentage of revenues, improved to 79.0% in 1994 versus 81.0% in 1993 and 81.3% in 1992. This favorable trend resulted from higher sales associated with improved market shares and a strong business environment as well as special sports programming events. The marginal profits on improved sales were more than sufficient to overcome lower margins on recent acquisitions.
On February 14, 1995, substantially all of the assets and the media services operations of Jefferson-Pilot Data Services, Inc. (J-P DS) were sold for aggregate consideration approximating $33 million. The Company expects to realize an after-tax gain of approximately $11.5 million as a result of the sale. Net income of J-P DS of $2.6 million in 1994, $2.0 million in 1993 and $2.5 million in 1992 is included in operating income of the Communications segment for the years reported. It is expected that income on reinvestment of sale proceeds will be included in parent company results in the future and that consolidated results will not be materially affected as a result of the sale.
On December 30, 1994, J-P Title entered into a reinsurance agreement with the purchaser to assume the obligations and liabilities of policies in-force. A dividend in partial liquidation was paid to J-P and the purchaser subsequently purchased the stock of J-P Title. A small gain was recorded on the sale of the stock.
Goodwill and other intangible assets relate to acquisitions of communication properties and are being amortized over periods ranging from 5 to 40 years, with a dollar-weighted average amortization period of approximately 30 years.
The Company's ratio of capital to assets declined during 1994 due to growth in policyholder contract deposits as well as securities sold under repurchase agreements which are accounted for as financing arrangements.
Statutory capital and surplus at December 31 $ 971.6 $ 945.2 Adjustments: Deferred policy acquisition costs 312.7 272.3 Asset valuation reserves 205.2 263.2 Future policy benefits 103.1 102.4 Fair value adjustment on debt securities (58.5) - Deferred income taxes (96.5) (154.5) All other, net (8.1) 6.5
J-P Life has been assigned the highest ratings by the following agencies:
A.M. Best A++ Standard & Poor's (claims paying) AAA Weiss A+
J-P management believes that the superior ratings assignments are a result of its overall capital position, stability of life insurance earnings, high quality investment portfolio and competitive position within the market.
Net cash provided by operations on a consolidated basis was $117.1 million, $160.2 million and $155.9 million for 1994, 1993 and 1992. Cash flows provided from increases in policyholder contract deposits were $270.6 million, $202.6 million, and $167.9 million in 1994, 1993 and 1992. Net proceeds from short-term borrowing and securities sold under repurchase agreements were $256.5 million, $39.7 million and -0- in 1994, 1993 and 1992. These sources of funds were used to purchase net investments of $513.9 million, $399.5 million and $220.8 million; pay dividends to shareholders of $83.4 million, $78.1 million and $69.1 million; and to make net acquisitions of shares outstanding of $55.7 million, $48.9 million and $34.9 million in 1994, 1993 and 1992.
During 1994 and 1993, the Company utilized uncommitted bank lines of credit to manage parent company cash flows, primarily due to timing differences between receipt of dividends from subsidiaries versus dividends paid to shareholders and purchase of its outstanding shares. The maximum amounts outstanding at any time approximated $90.0 million during 1994 and $40.0 million during 1993. The maximum combined availability of all uncommitted lines as of December 31, 1994 is $375.0 million. Additionally, during 1994 the Company sold U.S. Treasury obligations under repurchase agreements involving various counterparties. Proceeds from such sales were used to purchase securities with longer durations as an asset / liability management strategy. The repurchase agreements were accounted for as a financing arrangement. The maximum amount outstanding during the year approximated the year-end liability of $266.8 million.
Cash and short-term investments on hand were $22.8 million and $34.6 million at December 31, 1994 and 1993. Additionally, debt and equity securities of the parent company with carrying amounts of $188.0 million and $145.3 million at December 31, 1994 and 1993 are considered to be sources of liquidity to support the Company's strategies. Proceeds from the sale of J-P F&C and J-P Data Services of approximately $100 million are expected to increase parent company liquid resources. Total debt and equity securities available for sale at December 31, 1994 are $2,324.9 million.
J-P's strategy for managing its investment portfolio is to dependably meet its pricing assumptions while achieving the highest possible after-tax returns over the long term. Operating structures are in place to require that credit and interest rate risks are prudently managed and that sufficient liquidity is maintained. Management focuses on option-adjusted yields as a measure of anticipated performance and on option-adjusted durations of assets and liabilities as a measure of interest rate risk.
J-P held the following carrying amounts of investments at each of the dates reported:
1994 % 1993 % (In millions) Bonds near or in default $ - - $ - - Bonds below investment grade 122.3 2.3 100.2 2.0 Mortgage loans 60 days delinquent or in foreclosure 0.9 - 13.3 0.3 Mortgage loans restructured 13.5 0.3 6.4 0.1 Foreclosed properties 7.8 0.2 8.4 0.2 Sub-total, "higher risk assets" 144.5 2.8 128.3 2.6 All other investments 5,098.9 97.2 4,820.1 97.4 Total cash and investments $5,243.4 100.0 $4,948.4 100.0
The Company's investment guidelines allow investments in below investment grade bonds up to a stated percentage of adjusted statutory capital and surplus, which amount currently approximates $200 million. In making acquisitions of this nature, the Company attempts to identify well structured private placements offering enhanced yields. Also, the highest tier of public non-investment grade bonds which have the potential to be upgraded ("crossover credits") are considered for acquisition. It is expected that the level of non-investment grade bonds may increase; however, the Company will continue to manage its credit risks in a prudent fashion with due regard to regulatory constraints and efficient utilization of surplus.
During 1994 and 1993, J-P sold call options on selected common stock holdings classified as available for sale to reduce the price volatility of its equity investments and as an additional source of investment returns. Option premiums received are applied to reduce the basis of the shares called or are recorded as investment income upon expiry. Total option premiums received were $4.9 million in 1994 and $2.4 million in 1993. The Company's Investment Policy Statement authorizes an investment up to $50 million in trading securities shares for the primary purpose of writing covered call options in expectation of enhanced total returns from option premiums, market appreciation and dividends received. The Company has not utilized derivative financial instruments other than mortgage-backed securities (MBS), collateralized mortgage obligations (CMO)and covered call options and has no current plans to do so. As discussed in the Liquidity section, the Company sold securities under repurchase agreements as an asset / liability management strategy.
J-P held the following MBS's and CMO's at the dates reported:
1994 1993 (In millions) Available for sale, at fair value: Federal agency issued CMO's $ 366.8 $ - Corporate private-labeled CMO's 87.0 - Held to maturity at amortized cost: Federal agency issued CMO's 509.7 - Debt securities at amortized cost: Federal agency issued CMO's - 373.7 Corporate private-labeled CMO's - 165.3 Mortgage-backed pass-through securities - 60.6
Separate asset portfolios have been established for each insurance line. Various sophisticated modeling and analytical systems are employed in analyzing the assets and liabilities which make up each of these lines. Option-adjusted liability durations have been developed using stochastic actuarial projections of liability cash flows. In addition, the Investment Department's models measure the assets' effective duration, as well as other analytics necessary for portfolio management. The Company also considers the timing of the cash flows arising from the assets and liabilities under different interest rate scenarios. It is the intention of management that option-adjusted durations for interest sensitive portfolios such as universal life and annuities remain very closely matched. A wider tolerance is permissible for the non-interest sensitive (traditional) portfolios. At December 31, 1994, 39.7% of J-P Life's invested assets at amortized cost were held for interest-sensitive portfolios and 60.3% were held for traditional portfolios and corporate capital and surplus.
Reflecting a concern for inflationary pressures in the U.S. economy, the Federal Reserve raised interest rates significantly during 1994. Since J-P's assets and liabilities are largely monetary in nature, the Company's financial position is impacted by changes in the general interest rate environment. Interest rate increases during 1994 contributed to the decrease in unrealized gains on securities available for sale, net of deferred taxes, of $202.1 million during the year. Interest rate changes can affect the Company's net worth either positively or negatively since fixed income securities available for sale are recorded at fair values but corresponding liabilities are not adjusted to fair values.
J-P is exposed to environmental regulation and litigation as a result of ownership of investment real estate, property and casualty and Communications subsidiaries. The Company's actual loss experience has been minimal and exposure to environmental losses is considered by the Company to be insignificant.
J-P adopted the provisions of SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994. This statement applies to equity securities having readily-determinable fair values as well as debt securities and requires classification of securities as either 1) securities held to maturity stated at amortized cost; 2) trading securities at fair value with unrealized gains and losses reflected in income currently; or 3) securities available for sale stated at fair value with unrealized gains and losses, net of deferred income tax effect, included in a separate component of stockholders' equity.
The Kentucky Insurance Commissioner has submitted to the Circuit Court of Franklin County, Kentucky a proposed plan of rehabilitation for Kentucky Central Life Insurance Company, which was seized in February 1993. Under the proposed plan, J-P Life would assume most of Kentucky Central's life insurance and annuity business. Kentucky Central reported statutory basis life reserves and deposit liabilities totaling approximately $1 billion as of December 31, 1993. On August 18, 1994, the Circuit Court entered a final but appealable order that approved the plan. The Circuit Court's order was subsequently appealed by Kentucky Central's stockholders. The outcome of the proposed plan is dependent upon resolution of the appeal of the Circuit Court's order.
Per share $ 1.11 $ 1.20 $ 1.21 $ 1.40 ======== ======== ========= ========
Net income $ 25,826 $ 52,241 $ 52,474 $ 64,631 ======== ======== ========= ========