(1) Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended.
Within our Individual Products segment, we offer a wide array of individual life insurance products including variable life insurance. AIP offers both fixed and variable annuities, as well as other investment products marketed through Jefferson Pilot Securities Corporation, a registered broker/dealer (with related entities, JPSC). Benefit Partners offers group non-medical products such as term life, disability and dental insurance to the employer marketplace. We market these insurance and investment products to individuals and businesses in the United States. At December 31, 2001, our principal life insurance subsidiaries were Jefferson-Pilot Life Insurance Company (JP Life), and Jefferson Pilot Financial Insurance Company (JPFIC) and its subsidiary Jefferson Pilot LifeAmerica Insurance Company (JPLA) (collectively JP Financial).
Our subsidiary, Jefferson-Pilot Communications Company (JPCC), and its subsidiaries conduct communications operations consisting of radio and television broadcasting operations 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, financing expenses on Corporate debt, strategic initiatives designed to benefit the entire company, and federal and state income taxes not otherwise allocated to business segments. We include realized gains and losses on investments in the Corporate segment.
Excluding realized gains and losses, our 2001 revenues were derived 52.7% from Individual Products, 19.9% from AIP, 18.4% from Benefit Partners, 6.0% from Communications, and 3.0% from Corporate and Other.
Deferred acquisition costs (DAC) and value of business acquired (VOBA) reflect our expectations about the future experience of the business in force. Some of the assumptions regarding future experience that can affect the carrying value of DAC and VOBA balances include mortality, interest spreads and policy lapse rates. Significant changes in these assumptions can impact the carrying balance of DAC and VOBA and therefore, produce changes which must be reflected in earnings. See Financial Position, Capital Resources and Liquidity for further discussion of these items including a sensitivity analysis.
We have amortized goodwill, representing the cost of prior acquisitions over the value of the net assets received, through 2001 in a systematic fashion over periods ranging from 30 to 35 years. Effective January 1, 2002, we adopted a new accounting standard which eliminates systematic amortization of goodwill and requires that we test the remaining balance for impairment on at least an annual basis. As part of the adoption of the new accounting standard, we must use judgment in both the allocation of goodwill to our reporting units and the calculation of their fair value. Based upon our preliminary estimates, we do not expect to recognize a significant impairment as we adopt this new standard.
Our investments in debt securities include both publicly-traded and privately-placed securities. We obtain values for actively traded securities from established external pricing services. For infrequently traded securities and private placements, we utilize an internal pricing model. This model requires us to make judgments related to the security's credit quality, liquidity and credit spread. We evaluate securities that have experienced declines in fair value to determine if the decline is other than temporary. To do this we evaluate the probability of collecting scheduled payments, and we monitor other external factors that could affect the security's issuer such as litigation, bankruptcy proceedings or regulatory changes.
We are involved in legal and administrative proceedings and claims of various types, some of which include claims for punitive damages. In recent years, the life insurance industry has experienced increased litigation in which large jury awards including punitive damages or settlements in lieu of litigation have occurred. Because of the considerable uncertainties that exist, we cannot predict the outcome of pending or future litigation with certainty. In general, we have accrued only the costs of defense because we cannot reasonably estimate the risk or any potential range of possible loss. Based on consultation with our legal advisors, we believe that resolution of pending legal proceedings will not have a material adverse effect on our financial position or liquidity but could have a material adverse effect on the results of operations for a specific period.
In the following discussion, "reportable segment results" and "total reportable segment results" include all elements of net income available to common stockholders except realized investment gains. Realized investment gains are gains and losses on sales and writedowns of investments, net of related income taxes. We include realized investment gains in the Corporate and Other segment. We use reportable segment results in assessing the performance of our business segments and believe that reportable segment results are relevant and useful information. We may realize investment gains in our sole discretion from our Available for Sale equity and bond
Net income available to common stockholders increased 0.1% in 2001 and 9.1% in 2000 with the 2001 results reflecting lower realized investment gains and the other factors described below. Total reportable segment results increased 5.4% in 2001 and 10.2% in 2000, due to increased profitability in the Individual Products, Benefit Partners and Corporate and Other segments. The increase in 2000 reflected the deployment of corporate capital into the more profitable Individual Products, AIP and Benefit Partners segments primarily through the acquisition of Guarantee. AIP decreased 1.9% in 2001 reflecting a decline in JPSC earnings and increased competition for fixed annuity products. Communications segment results decreased 18.7% due to a weak advertising market throughout 2001. Net realized investment gains decreased 34.7% in 2001 reflecting bond losses and writedowns, partially offset by gains from sales of equities, and increased 2.1% in 2000.
Total reportable segment results per share, including the cumulative effect of the change in accounting for derivatives, increased 7.3% in 2001 and 12.5% in 2000, reflecting the increase in core business earnings and share repurchases in 2001 and 2000. Net income available to common stockholders per share increased 2.1% in 2001 and 11.4% in 2000 and net income available to common stockholders per share assuming dilution increased 1.8% in 2001 and 11.2% in 2000 for the same reasons as well as lower realized investment gains in 2001. Due to share repurchases, net of stock option and incentive plan issuances, the average number of diluted shares outstanding decreased 1.6% to 153 million shares in 2001 and 2.2% to 156 million shares in 2000.
Individual Products reportable segment results increased 2.5% in 2001 and 18.6% in 2000. Both years' increases reflect growth of the business in force; however, the significant 2000 increase was due primarily to the Guarantee acquisition.
Financial and operating risks for this segment include, among others, asset/liability management, interest rate risks, changes in the underlying assumptions of DAC and VOBA and the effects of unresolved litigation. We discuss these risks in more detail in the Financial Position, Capital Resources and Liquidity as well as in the Market Risk Exposures sections.
Reportable segment results decreased 1.9% in 2001 and increased 16.3% in 2000. The largest factors contributing to the 2001 decrease were a decline in net income from JPSC of $3.6, and lower annuity surrenders that reduced policy charges. The following table summarizes key information for AIP:
We derive annuity revenues from investment income on segment assets, policy charges, and concession income earned on investment product sales by JPSC. AIP revenues increased 3.3% in 2001 and 22.9% in 2000. The 2001 increase is due to growth in policyholder fund balances, offset by lower surrender charge income (included in policy charges) and lower JPSC concession income, and include the adoption of FASB 133, which caused a one-time increase to net investment income of $2.3. The increase in 2000 is primarily due to the Guarantee acquisition and higher JPSC concession income. Fixed annuity premium sales increased 16.8% and 43.8% in 2001 and 2000. Recently introduced products drove the strong 2001 sales, especially a fixed annuity with a market value adjustment. Increased distribution, particularly in financial institutions, also contributed to sales growth. 2000's results reflect new products introduced in 1999 through the existing distribution channels. JPSC's concession and other income decreased 15.3% and increased 60.6% in 2001 and 2000. The decrease in 2001 is due to lower volumes of equity market purchase/sale transactions. The increase in 2000 is due to higher volumes of securities and mutual fund transactions, and the integration of a broker/dealer acquisition.
Benefit Partners reportable segment results increased 36.5% and 33.1% in 2001 and 2000, primarily due to the growth in this business and the integration of Guarantee. The following table summarizes key information for Benefit Partners:
Benefit Partners revenues increased $64.9 and $372.7 in 2001 and 2000, with 2000 reflecting the Guarantee acquisition. Sales for the core life, disability and dental lines of business grew 25.0% and 700.0% in 2001 and 2000. The 2001 increase in revenue results from both sales growth and satisfactory persistency in our non-medical business. The revenue growth was somewhat dampened by our exiting the excess loss medical business. These results reflect the success of our technologically advanced approach to selling and underwriting group insurance products.
Risks beyond normal competition that may impact this segment include: (1) a weak economy may increase disability claim costs; (2) an acceleration in medical cost inflation can put pressure on non-medical benefit costs because employers may focus more on the employer's cost of non-medical programs; and (3) concentration risks from acts of terrorism not priced for or reinsured. We are mitigating these risks by monitoring new and existing claims and industry health care trend reports which serve as indicators of increased employer medical costs, and through intensive review of our concentration risks. Our catastrophe reinsurance agreement that expires in April 2002 covers extraordinary life claims arising from catastrophic events in the group life line. Because this catastrophe reinsurance agreement cannot be replaced except with a much higher premium and deductible and with a terrorism exclusion, we have determined not to purchase catastrophic coverage and instead will rely on case by case management to mitigate our concentration exposures.
Total expenses (including the net deferral and amortization of policy acquisition costs) increased 1.9% in 2001. This is significantly less than the increase in sales of core products of 25% as we benefited from both the integration of the group business to Omaha and increased efficiency in policy and claims administration. We expect that future increases in sales would correlate more closely to an increase in expenses as additional policy and claims administration expenses are incurred. 2000 total expenses increased 285.5% primarily due to the Guarantee acquisition. As a percentage of premium income, total expenses were 23.7% for 2001 and 26.2% for 2000, and without Guarantee, 18.4% for 1999. The 2001 improvement is due primarily to the integration of JP Life's and Guarantee's group operations.
Total expenses, excluding interest expense, decreased 0.3% and increased 0.3% in 2001 and 2000, respectively. Expenses as a percent of communication revenues were 69.7%, 65.4% and 66.9% for 2001, 2000 and 1999. The 2001 increase in this percentage is due mainly to the decrease in revenues, while expenses have been held relatively flat year-to-year. A one-time insurance recovery of $1.4 after tax reduced corporate general and administrative expenses in 2001, which helped segment earnings but is not reflected in broadcast cash flow. Effective January 1, 2002, JPCC will no longer be required to systematically amortize the amounts paid for FCC licenses or goodwill from previous acquisitions. Instead, those amounts will be tested for impairment on at least an annual basis. We do not expect to record impairment losses on JPCC's current intangible assets. FCC license and goodwill amortization expense was $3.2 in each of the last three years.
The following table summarizes assets assigned to this segment at the end of each year:
Total assets for the Corporate and Other segment decreased 6.0% in 2001 due primarily to repayment of commercial paper debt, writedowns of impaired securities and the repurchase of common stock. Unrealized gains and losses on all Available for Sale fixed income securities are assigned to this segment, and increased $119 during 2001 and $273 during 2000. The increase both years is primarily due to declining market interest rates, partially offset by declines in market values of financial services stocks.
Our primary resources are investments related to our Individual Products, AIP and Benefit Partners segments, properties and other assets utilized in all segments and investments backing corporate capital. The Investments section reviews our investment portfolio and key strategies.
Total assets increased $1,675 in 2001 due to growth in income, net policyholder contract deposits and an increase in the value of Available for Sale securities. In 2000, total assets increased $875 primarily due to growth in separate accounts, net policyholder contract deposits and an increase in Available for Sale securities.
The Individual Products, AIP and Benefit Partners segments defer the costs of acquiring new business, including first year commissions, first year bonus interest, certain costs of underwriting and issuing policies plus agency office expenses (referred to as DAC). We capitalize acquisition costs up to the amounts we used in the specific product pricing models, and we expense any acquisition costs in excess of the pricing allowable. When we acquire new business through an acquisition, we allocate a portion of the purchase price to a separately identifiable intangible asset, referred to as VOBA. We initially establish VOBA as the actuarially determined present value of future gross profits of each business acquired.
We amortize DAC and VOBA on traditional products in proportion to premium revenue recognized. We amortize DAC and VOBA on UL-type products relative to the future estimated gross profits (EGP) from those products. The EGP for UL-type products include the following components: (1) estimates of fees charged to policyholders to cover mortality, surrenders and maintenance costs; (2) estimated mortality in excess of fund balances accumulated; (3) expected interest rate spreads between income earned and amounts credited to policyholder accounts; and (4) estimated cost of policy administration (maintenance). EGP is also reduced by our estimate of future losses due to defaults in fixed interest investments. DAC and VOBA related to UL-type products are sensitive to a change in our assumptions regarding EGP components, and any change in such an assumption will immediately impact the current DAC and VOBA balances with the change reflected through the income statement. At December 31, 2001, the DAC and VOBA related to Individual UL-type products amounted to 74.9% of the $2,070 on the balance sheet.
The models and our assumptions regarding EGP that we utilize for calculation of amortization expense for UL-type products are continuously reviewed so that the assumptions reflect a reasonable view of the future. We consider three assumptions to be most significant: (1) estimated mortality; (2) estimated interest spread; and (3) estimated future policy lapses. The following table reflects the possible change which could occur in a given year, if we change our assumptions as illustrated, as a percentage of current DAC and VOBA balances related to Individual UL-type products on our balance sheet:
Goodwill was $312 and $323 at December 31, 2001 and 2000, reflecting amortization. Goodwill as a percentage of shareholders' equity was 9.2% and 10.2% at year-end 2001 and 2000.
Under previous accounting standards we regularly reviewed carrying amounts of DAC and VOBA, and goodwill 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.
The ratio of equity to assets less separate accounts has remained relatively constant. Unrealized gains on Available for Sale securities, which are included as a component of stockholders' equity, increased $69 and $79 in 2001 and 2000. We used $188 in 2001 (4,437,100 shares at an average cost of $42.42) and $44 in 2000 (1,101,000 shares at an average cost of $40.07) to purchase common shares outstanding. In February 2001 and again in November 2001, our Board of Directors updated its ongoing share repurchase authorization to cover 5 million shares of common stock, and we intend to continue to make opportunistic repurchases.
Net cash provided by financing activities was $737, $74 and $671 in 2001, 2000 and 1999, with 2001 reflecting higher policyholder contract deposits coupled with lower surrenders. The 2000 decrease of $597 is primarily due to net borrowing repayments of $232 versus 1999 short-term borrowings of $303 reflecting the Guarantee acquisition. Cash inflows from policyholder contract deposits net of withdrawals were $1,321, $512 and $704. The 2000 decrease is a result of higher annuity surrenders and decreased UL-type contract receipts, with both factors reversing in 2001.
Cash and cash equivalents were $139, $26 and $62 at December 31, 2001, 2000 and 1999. The increase at year-end 2001 reflected amounts that would be used to pay off the MEDS in January 2002. Additionally, fixed income and equity securities held by the parent company and non-regulated subsidiaries were $542, $549 and $446 at these dates. These securities are considered to be sources of liquidity to support our strategies.
Our guidelines permit use of derivative financial instruments such as futures contracts and interest rate swaps in conjunction with specific direct investments. Our actual use of derivatives has been limited to managing well- defined interest rate risks. Interest rate swaps with a current notional value of $132 and $185 were open as of December 31, 2001 and 2000. Also, during 2001, interest rate swaps with a combined notional value of $50 expired. There were no terminations of derivative financial instruments in 2000 or 1999.
Mortgage backed securities (including Collateralized Mortgage Obligations) at December 31, which are included in debt securities Available for Sale, were as follows:
Our investment strategy with respect to mortgage backed securities (MBS's) focuses on actively traded, less volatile issues that produce relatively stable cash flows. The majority of MBS holdings are sequential and planned amortization class tranches of federal agency issuers. The MBS 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.
Since our assets and liabilities are largely monetary in nature, our financial position and earnings are subject to risks resulting from changes in interest rates at varying maturities, changes in spreads over U.S. Treasuries on new investment opportunities, changes in the yield curve, and equity price risks. During 2001, 10 year U.S. Treasury rates increased 14 basis points versus a decrease of 148 basis points in 2000. In 2001 and 2000, in response to deteriorating economic conditions and the uncertainty created by the September 11th event, risk premiums over rates that could otherwise be earned on U.S. Treasury securities increased due to continued poor liquidity conditions.
volatility and by purchasing securities that provide for "make-whole" type prepayment fees. Falling interest rates can also impact demand for our products, as bank certificates of deposit with no surrender charges, and higher average returns from equity markets, may become more attractive to new and existing customers. Conversely, in a rising interest rate environment, competitive pressures may make it difficult for us to sustain spreads between rates credited on interest-sensitive products and portfolio earnings rates, thereby prompting withdrawals by policyholders. We manage this risk by adjusting our interest crediting rates with due regard to the yield of our investment portfolio and pricing assumptions and by prudently managing interest rate risk of assets and liabilities.
We employ various methodologies to manage our exposure to interest rate risks. Our asset/liability management process focuses primarily on the management of interest rate risk of our insurance operations. We monitor the duration of insurance liabilities compared to the duration of assets backing the insurance lines, measuring the optionality of cash flows. Our goal in this analysis is to prudently balance profitability and risk for each insurance product category, and for us as a whole. At December 31, 2001 and 2000, 89% and 88% of policy liabilities related to interest-sensitive portfolios.
We derived these estimated incremental income (loss) amounts by modeling estimated cash flows of our market risk sensitive instruments and insurance portfolios. Incremental income or loss is net of taxes at 35%. Estimated cash flows produced in the model assume reinvestments representative of our current investment strategy, and calls/prepayments include scheduled maturities as well as those expected to occur when borrowers can benefit financially based on the difference between prepayment penalties and new money rates under each scenario. Assumed lapse rates within insurance portfolios consider the relationships expected between crediting rates and market interest rates, as well as the level of surrender charges inherent in individual contracts. The illustrated incremental income or loss also includes the expected impact on amortization of DAC and VOBA. The model is based on our existing business in force as of December 31, 2001 and does not consider new sales of life and annuity products or the potential impact (as discussed above) of interest rate fluctuations on sales.
We are exposed to equity price risk on our equity securities (other than trading). We hold common stock with a fair value of $509; approximately $477 is in a single issuer, Bank of America Corporation (BankAmerica). Our Exchangeable Securities were exchangeable into shares of BankAmerica common stock, but were repaid in cash in January 2002. We believe that a hypothetical 20% decline in the equity market is reasonably possible in the near term. If the market value of the S&P 500 Index, and of BankAmerica common stock specifically, decreased 20%, the fair value of our common stock as of December 31, 2001 would change as follows:
Certain fixed interest rate market risk sensitive instruments may not give rise to incremental income or loss during the period illustrated, but may be subject to changes in fair values which are reflected in equity. Note 18 presents additional disclosures concerning fair values of financial assets and financial liabilities, and is incorporated by reference.
For comments about litigation, see Critical Accounting Policies above. Also, see Note 19, which is incorporated by reference, for discussion of our contingent liabilities.
We undertake no obligation to publicly correct or update any forward looking statements, whether as a result of new information, future developments or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our press releases and filings with the SEC. In particular, you should read the discussion in the section entitled "External Trends and Forward Looking Information," and other sections it may reference, in our most recent 10-K report as it may be updated in our subsequent 10-Q and 8-K reports. This discussion covers certain risks, uncertainties and possibly inaccurate assumptions that could cause our actual results to differ materially from expected and historical results. Other factors besides those listed there could also adversely affect our performance.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jefferson-Pilot Corporation and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 to the financial statements, in 2001 the Company changed its method of accounting for derivative financial instruments.
Jefferson-Pilot Corporation (with its subsidiaries, referred to as the Company) operates in the life insurance and communications industries. Life insurance, annuities, disability and dental insurance 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), and Jefferson Pilot Financial Insurance Company (JPFIC) and its subsidiary, Jefferson Pilot LifeAmerica Insurance Company (JPLA), collectively referred to as JP Financial. Communications operations are conducted by Jefferson-Pilot Communications Company (JPCC) and consist of radio and television broadcasting, through facilities located in strategically selected markets in the Southeastern and Western United States, and sports program production.
On December 30, 1999, the Company acquired The Guarantee Life Companies Inc. and its subsidiaries, including Guarantee Life Insurance Company, collectively referred to as Guarantee. Guarantee's operations include group and worksite marketed non-medical products, including term life, disability, and dental products marketed through regional group offices. Guarantee's operations also include a substantial block of individual insurance products, principally universal life. The cost of the acquisition consisted of $298 cash paid plus other acquisition expenses. In addition, the Company assumed outstanding debt of $123. The Company financed the acquisition through the issuance of commercial paper and through proceeds from repurchase agreements. The acquisition was accounted for using the purchase method. Because the acquisition took place on December 30, none of Guarantee's results of operations are included in the consolidated income statement for 1999. The acquisition resulted in $105 of goodwill and $202 of value of business acquired. This goodwill was being amortized over 35 years on a systematic basis through 2001.
The preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are
Real estate not acquired by foreclosure is stated at cost less accumulated depreciation. Real estate acquired by foreclosure is stated at the lower of depreciated cost or fair value minus estimated costs to sell. Real estate, primarily buildings, is depreciated principally by the straight-line method over estimated useful lives generally ranging from 30 to 40 years. Accumulated depreciation was $47 and $43 at December 31, 2001 and 2000. Other investments are stated at equity, or the lower of cost or market, as appropriate.
Deferred policy acquisition costs for traditional life insurance policies are amortized over the premium paying periods of the related contracts using the same assumptions for anticipated premium revenue that are used to compute liabilities for future policy benefits. For universal life and annuity products, these costs are amortized at a constant rate based on the present value of the estimated future gross profits to be realized over the terms of the contracts, not to exceed 25 years.
The carrying amounts of deferred policy acquisition costs and value of business acquired are adjusted for the effect of non-credit related realized gains and losses, credit related gains, and the effects of unrealized gains and losses on debt securities classified as available for sale. Deferred policy acquisition costs and value of business acquired are not adjusted for the effect of credit related losses, rather as a part of the investment income allocation process a charge is made against the investment income allocated to the Individual Products, Annuity and Investment Products, and Benefit Partner segments. This charge is based upon the credit quality of the assets supporting each segment and is meant to replicate the expected credit losses that will emerge over a period of years. Through this mechanism, the Individual Products, Annuity and Investment Products, and Benefit Partner segments pay a relatively level charge to the corporate segment and in return are reimbursed when credit related losses actually occur.
Both deferred policy acquisition costs and value of business acquired are reviewed periodically to determine that the unamortized portion does not exceed the expected recoverable amounts. No impairment adjustments have been reflected in the results of operations for the years presented.
Benefits and expenses, other than deferred policy acquisition costs, related to traditional life, accident and health, disability and dental insurance products are recognized when incurred in a manner designed to match them with related premiums and spread income recognition over expected policy lives. For universal life-type and annuity products, benefits include interest credited to policyholders' accounts, which is recognized as it accrues.
The liability for policy and contract claims consists of the estimated amount payable for claims reported but not yet settled and an estimate of claims incurred but not reported, which is based on historical experience, adjusted for trends and circumstances. Management believes that the recorded liability is sufficient to provide for claims incurred through the balance sheet date and the associated claims adjustment expenses.
accounted for over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies.
Based on current levels of amortization expense, the Company estimates that the elimination of goodwill expense and intangible expenses (primarily Federal Communication Commission Licenses) will positively impact net income by approximately $13 or approximately $0.08 per common share (diluted), on an annual basis.
The Company's mortgage loan portfolio is comprised primarily of conventional real estate mortgages collateralized by retail (33%), industrial (19%), office (19%), apartment (17%), and hotel (12%) properties. Mortgage loan underwriting standards emphasize the credit status of a prospective borrower, quality of the underlying collateral and conservative loan-to-value relationships. Approximately 33% of stated mortgage loan balances as of December 31, 2001 are due from borrowers in South Atlantic states and approximately 23% are due from borrowers in West South Central states. No other geographic region represents as much as 10% of December 31, 2001 mortgage loans.
The Company uses repurchase agreements to meet various cash requirements. At December 31, 2001 and 2000, the amounts held in debt securities available for sale pledged as collateral for these borrowings were $306 and $415.
Changes in amounts affecting net unrealized gains included in other comprehensive income, reduced by deferred income taxes, are as follows:
Investment expenses include interest, salaries, expenses of maintaining and operating investment real estate, real estate depreciation and other allocated costs of investment management and administration.
The Company sold certain securities that had been classified as held to maturity, due to significant declines in credit worthiness. The net carrying amounts of sold securities were $27, $17, and $7 for 2001, 2000, and 1999. The realized losses on the securities were $6, $4, and $0 for 2001, 2000, and 1999.
SFAS 133 requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value. The fair values of the Company's derivative instruments of $10 at December 31, 2001, are included in other investments in the accompanying balance sheet. The accounting for changes in the fair value
The Company uses interest rate swaps to convert floating rate investments to fixed rate investments. Interest is exchanged periodically on the notional value, with the Company receiving the fixed rate and paying various short-term LIBOR rates on a net exchange basis. For the year ended December 31, 2001, the ineffective portion of the Company's cash flow hedging instruments, which is recognized in realized investment gains, was not significant. At December 31, 2001, the maximum term of interest rate swaps that hedge floating rate investments was eleven years.
For the year ended December 31, 2001, the Company did not reclassify any significant gains or losses into earnings as a result of the discontinuance of its cash flow hedges. Further, the Company does not expect to reclassify a significant amount of net gains (losses) on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months.
The Company's credit risk exposure on swaps is limited to the fair value of swap agreements that it has recorded as an asset. The Company does not expect any counterparty to fail to meet its obligation. Currently, non-performance by a counterparty would not have a material adverse effect on the Company's financial position or
During 2000, the Company finalized its purchase accounting for the acquisition of Guarantee, resulting in an adjustment to decrease the value of business acquired by $4.
The liability for future policy benefits associated with ordinary life insurance policies has been determined using initial interest rate assumptions ranging from 2.0% to 11.5% and, when applicable, uniform grading over 10 to 30 years to ultimate rates ranging from 2.0% to 6.5%. Interest rate assumptions for weekly premium, monthly debit and term life insurance products generally fall within the same ranges as those pertaining to ordinary life insurance policies.
Credited interest rates for universal life-type products ranged from 4.0% to 7.5% in 2001, 4.1% to 6.7% in 2000 and 4.1% to 6.7% in 1999. The average credited interest rates for universal life-type products were 5.6% each of the last three years. For annuity products, credited interest rates generally ranged from 4.0% to 9.8% in 2001, 4.0% to 9.0% in 2000 and 4.0% to 9.5% in 1999.
For immediate annuities issued prior to 1987, mortality assumptions are based on blends of the 1971 Individual Annuity Mortality Table and the 1969-71 U.S. Life Tables. For similar products issued between 1987 and 1999, mortality assumptions are based on blends of the 1983a and 1979-81 U.S. Life Tables. For similar products issued after 1999, mortality assumptions are based on the Annuity 2000 Mortality Table.
The Mandatorily Exchangeable Debt Securities (MEDS) and Automatic Common Exchange Securities (ACES) are collectively referred to as Exchangeable Securities.
Effective September 22, 1999, the 6.65% MEDS were renegotiated with the holder and provide for an interest rate of 3.325% and an additional cash payment per security at redemption or maturity equal to any shortfall in the stock price below $66.625 but not more than $11.125 per security. Similarly, effective December 22, 1999, the 6.95% MEDS were renegotiated to an interest rate of 3.475% with an additional cash payment per security equal to any shortfall in the stock price below $55.55 but not more than $9.2375 per security.
On January 10, 2002, the Company repaid the MEDS for $150 in cash, representing the original principal of the debt.
The Exchangeable Securities are carried at fair value. Changes in the carrying value, net of deferred income taxes, are recorded in other comprehensive income. At December 31, 2001 and 2000, the combined carrying value of the Exchangeable Securities was $150 and $139, based on the market value of BankAmerica stock. The value per share of BankAmerica stock was $62.95 and $45.88 as of year-end 2001 and 2000.
Interest expense totaled $44 for 2001, $67 for 2000 and $50 for 1999.
On February 12, 2001, the Board authorized a three-for-two common stock split which became effective as a 50% stock dividend distributed on April 9, 2001 to shareholders of record as of March 19, 2001. The split-adjusted value of fractional shares was paid in cash. The par value of additional shares issued, which totaled $64, was reclassified from retained earnings to common stock. All share and per share information gives retroactive effect to the stock split.
Effective January 1, 2001, the NAIC revised the Accounting Practices and Procedures Manual in a process referred to as Codification. The domiciliary states of the Company's insurance subsidiaries have adopted the provisions of the revised manual with certain exceptions. Codification has changed, to some extent, prescribed statutory accounting practices and resulted in changes to the accounting practices that the Company's insurance subsidiaries use to prepare their statutory basis financial statements. The effect of the adoption of Codification was to increase statutory surplus by $42, primarily through the addition of deferred income taxes.
A comparison of net income and statutory capital and surplus of the life insurance subsidiaries (excluding Guarantee for 1999) determined on the basis of SAP to net income and stockholder's equity of these life insurance subsidiaries (excluding Guarantee for 1999) on the basis of GAAP is as follows:
At December 31, 1999, Guarantee had statutory capital and surplus of $157 and GAAP stockholder's equity of $426. Prior to its acquisition, Guarantee converted from a mutual form to a stock life company. In connection with that conversion, Guarantee agreed to segregate certain assets to provide for dividends on participating policies using dividend scales in effect at the time of the conversion, providing that the experience underlying such scales continued. The assets, including revenue therefrom, allocated to the participating policies will accrue solely to the benefit of those policies. The assets and liabilities relating to these participating policies amounted to $298 and $369 at December 31, 2001 and $295 and $372 at December 31, 2000. The excess of liabilities over the assets represents the total estimated future earnings expected to emerge from these participating policies.
Risk-Based Capital ("RBC") requirements promulgated by the NAIC require life insurers to maintain minimum capitalization levels that are determined based on formulas incorporating credit risk, insurance risk, interest rate risk and general business risk. As of December 31, 2001, the life insurance subsidiaries' adjusted capital and surplus exceeded their authorized control level RBC.
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." The Company has approximately $107 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. No related deferred tax liability has been recognized for the potential tax, which would approximate $37.
The Company sponsors contributory health care and life insurance benefit plans for eligible retired employees, qualifying retired agents and certain surviving spouses. The Company contributes to a welfare benefit trust from which future benefits will be paid. The Company accrues the cost of providing postretirement benefits other than pensions during the employees' active service period. The non-pension postretirement expense was $1 in 2001, 2000 and 1999.
Defined contribution retirement plans cover most employees and full time agents. The Company matches a portion of participant contributions and makes profit sharing contributions to a fund that acquires and holds shares of the Company's common stock. Most plan assets are invested under a group variable annuity contract issued by JP Life. Expenses were $4, $3 and $1 during 2001, 2000 and 1999.
Reinsurance contracts do not relieve an insurer from its primary obligation to policyholders. Therefore, the failure of a reinsurer to discharge its reinsurance obligations could result in a loss to the subsidiaries. The subsidiaries regularly evaluate the financial condition of their reinsurers and monitor concentrations of credit risk related to reinsurance activities. No credit losses have resulted from the reinsurance activities of the subsidiaries during the three years ended December 31, 2001.
The Company has five reportable segments, which are defined based on the nature of the products and services offered: Individual Products, Annuity and Investment Products (AIP), Benefit Partners, Communications, and Corporate and Other. The Benefit Partners segment was created in the first quarter of 2000, as a result of the acquisition of Guarantee. Amounts related to group non-medical products such as term life, disability and dental insurance that had been classified as Life Insurance Products in prior years have been reclassified to the Benefit Partners segment for 1999. The remaining amounts that had been classified as Life Insurance Products in prior years relate to individual life insurance products and have been renamed Individual Products for 1999. Within the Individual Products segment, the Company offers a wide array of individual life insurance products including variable life insurance. AIP offers both fixed and variable annuities, as well as other investment products. As mentioned above, Benefit Partners offers group non-medical products such as term life, disability and dental insurance to the employer marketplace. Various insurance and investment products are currently marketed to individuals and businesses in the United States. The Communications segment consists principally of radio and television broadcasting operations located in strategically selected markets in the Southeastern and Western United States, and sports program production. The Corporate and Other segment includes 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, federal and state income taxes not otherwise allocated to other reportable segments, and all of the Company's realized gains and losses. Surplus is allocated to the Individual Products, AIP, and Benefit Partners reportable segments based on risk-based capital formulae which give consideration to asset/liability and general business risks, as well as the Company's strategies for managing those risks. Various distribution channels and/or product classes related to the Company's individual life, annuity and investment products and group insurance have been aggregated in the Individual Products, AIP, and Benefit Partners reporting segments.
The segments are managed separately because of the different products, distribution channels and marketing strategies each employs. The Company evaluates performance based on several factors, of which the primary financial measure is reportable segment results, which excludes realized gains and losses. The accounting policies of the business segments are the same as those described in Note 2. Substantially all revenue is derived from sales
in the United States, and foreign assets are not material. The following table summarizes financial information of the reportable segments:
The Company allocates depreciation expense to Individual Products, AIP and Benefit Partners, but the related fixed assets are contained in the Corporate and Other segment.
The fair values of cash, cash equivalents, balances due on account from agents, reinsurers and others, and accounts payable approximate their carrying amounts in the consolidated balance sheets due to their short-term maturity or availability. Assets and liabilities related to separate accounts are reported at fair value in the consolidated balance sheets.
The fair value of the mortgage loan portfolio has been estimated by discounting expected future cash flows using the interest rate currently offered for similar loans.
JPCC has commitments for purchases of syndicated television programming and commitments on other contracts, and future sports programming rights as of December 31, 2001. The Company also has commitments to sell a portion of the sports programming rights to other entities, over the same period. They are as follows:
JP Life is a defendant in two separate proposed class action suits. The plaintiffs' fundamental claim in the first suit is that policy illustrations were misleading to consumers. Management believes that the policy illustrations made appropriate disclosures and were not misleading. The second suit alleges that a predecessor company, Pilot Life, decades ago unfairly discriminated in the sale of certain small face amount life insurance policies, and unreasonably priced these policies. In both cases, the plaintiffs seek unspecified compensatory and punitive damages, costs and equitable relief. While management is unable to estimate the probability or range of any possible loss in either or both of these cases, management believes that the subsidiary's practices have complied with state insurance laws and intends to vigorously defend the claims asserted. Accordingly, only the costs of defense have been recorded.