Registrant utilizes space and personnel of JP Life. JP Life owns its home office consisting of a 20-story building and an adjacent 17-story building. These structures house insurance operations and provide space for commercial leasing. JP Life also owns a supply and printing facility, a parking deck, and a computer center, all located on nearby properties. It also owns 233 acres in Guilford County, North Carolina, formerly home office of Pilot Life Insurance Company, and an Employees' Club located in northwestern Guilford County, with approximately 500 acres of land surrounding the Club. Office space is leased in Lexington, Kentucky for operation of the Kentucky Central Life business assumed.
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 and 1991 were increased by $20,925,000 and $20,176,000, respectively, compared to amounts originally reported.
Stockholders' equity was adjusted to reflect adoption of FAS 109 "Accounting for Income Taxes". The amounts shown for 1992 and 1991 were all decreased by $18,555,000, compared to amounts originally reported. Stock- holders' equity per share reflects these adjustments also.
Discontinued operations 36,127 64,862 54,175 56,351 55,215 Total revenues $1,605,543 $1,333,672 $1,246,624 $1,202,329 $1,173,476
Discontinued operations 18,541 9,341 9,720 8,640 3,704 Dividends on preferred stock (857) 0 0 0 0 Accumulated post- retirement benefit obligation, net 0 0 ( 24,109) 0 0 Net income $ 272,997 $ 239,237 $ 195,172 $ 203,238 $ 175,687
Management's discussion and analysis of financial condition and results of operations for the three years ended December 31, 1995 analyzes the results of operations, consolidated financial condition, liquidity, and capital resources of Jefferson-Pilot Corporation and consolidated subsidiaries (JP or Company). The discussion should be read in conjunction with the Consolidated Financial Statements and Notes.
Jefferson-Pilot Corporation is a holding company. Jefferson-Pilot Life Insurance Company (JP Life) offers a wide range of life, health, and annuity products which are sold in the Individual and Group markets. Individual insurance and annuity products are offered through career general agents, home service agents, independent agents recruited by regional directors and independent marketing organizations, and are sold through financial institutions. JP Life has experienced substantial growth in its individual life insurance sales, primarily due to the expansion of its independent marketing organization distribution channel. It has also emphasized the sale of flexible-premium deferred annuities, increasing the sales of this product. Group insurance products are issued to employers covering their employees and to associations covering their members.
Included in Net Income are realized investment gains from sale of investments. JP's results before and after the realized investment gains were: 1995 1994 1993 (In millions) Income applicable to common shareholders before effect of initial application of SFAS 106 and realized investment gains: Continuing operations $221.3 $191.0 $174.0 Discontinued operations 2.2 9.2 8.0 Operating income 223.5 200.2 182.0
Investment gains for 1995 and 1994 relate primarily to securities that have been classified as "available for sale" since the adoption of SFAS 115. Sources of realized gains and (losses) from continuing operations for the last three years were: 1995 1994 1993 (In millions) Common stocks $ 62.9 $ 65.6 $ 32.8 Bonds and other debt instruments (3.5) (9.5) 16.8 Other (10.9) 5.2 1.9 Subtotal 48.5 61.3 51.5 Less federal and state taxes (14.2) (22.4) (15.9)
Cost of equity securities held $207.1 $290.4 $325.7 Fair value $816.3 $718.0 $903.5 Amortized cost of "available for sale" debt securities $6,208 $1,692 N/A Fair value $6,458 $1,607 N/A
Shares outstanding, beginning of year 48.5 49.5 50.4 Issued - 0.3 0.1 Purchased (1.0) (1.3) (1.0) Stock dividend 23.7 - - Shares outstanding, end of year 71.2 48.5 49.5
Realized investment gains (net of applicable federal and state income taxes): Continuing operations .46 .53 .47 Discontinued operations .23 - .02 .69 .53 .49 SFAS 106 - - (.32)
JP's plan of operations focuses on growing revenues through internal expansion and acquisitions. Revenues increased 23.6% to $1,569 million in 1995 and 6.4% to $1,269 million in 1994. Excluding realized investment gains, revenues increased 26.0% in 1995 and 6.1% in 1994. 1995's increase was largely attributable to acquisitions. Premiums and considerations (excluding discontinued operations) increased 23.6% in 1995 to $810.0 million and 4.4% in 1994 to $655.3 million. Life and annuity premiums and considerations increased 55.7% in 1995 to $398.9 million and 6.3% in 1994 to $256.2 million. In 1995, a 37.2% increase was accomplished through the Company's acquisition strategy and an 18.5% growth through internal development. The internal growth in JP Life is attributable to the successful implementation of its Individual Life and Annuity and Investment Products business plans over the last two years. The Individual Life business plan focuses on improvement in the productivity of career life agents and on developing new relationships with independent producers. The Annuity and Investment Products business plan emphasizes growth through multiple distribution systems including financial institutions, independent agents, investment professionals, and broker/dealers. This focus on multiple distribution sources has resulted in growth in premium receipts from traditional products as well as universal life and annuity products (not including acquisitions) exceeding 13% in 1995 and 25% in 1994. Receipts on universal life and most annuity products do not flow through income in the year of receipt but are included in the liability for policyholder contract deposits. Accident and health premiums increased 3.0% in 1995 to $411.1 million and 3.2% in 1994 to $399.1 million. Accident and health premium growth for such years was modest due to a moderation in the rate of medical inflation in the most recent two years and intense market competition.
Net investment income grew 44.1% in 1995 to $540.8 million and 4.0% in 1994 to $375.2 million. In 1995, net investment income grew 3.7% without acquisitions. This growth occurred in spite of lower investment yields experienced during the three year period. Such decline is represented by the following table that presents Yield at Cost on bonds and mortgages:
1995 1994 1993 March 31 8.12% 8.08% 8.95% June 30 8.05 8.06 8.95 September 30 7.99 8.03 8.58 December 31 7.68 8.10 8.24
Growth in investment income was achieved primarily by growth in invested assets arising from policyholder contract deposits related to universal life and annuity products. During 1995, policyholder contract deposits (excluding acquisitions) increased 17.5% to $2,169 million with annuities increasing 20.5% to $1,303 million. During 1994, these deposits increased 17.2% to $1,846 million, of which annuity funds comprised $1,081 million, an increase of 22.0%. Total policyholder deposits (including acquisitions) at year end were $10,781 million, of which $6,092 million were annuity funds.
Revenues from the Communications segment declined 3.9% in 1995 due to the sale of assets of Jefferson-Pilot Data Services and increased 19.0% in 1994 to $172.5 million. Without inclusion of this entity in 1994 operating results, revenues increased 12.0% in 1995. Growth in both years was achieved as a result of acquisitions, market share increases, and a favorable economic environment. All of these events favorably influenced advertising receipts, the primary component of Communications revenues.
JP's continuing business segments include Life Insurance and Communications. Within the Life Insurance Segment, major product classes include Individual Life Insurance, Annuity and Investment Products and Group Insurance. Annuity and Investment Products are now shown as a separate product class because of growth in these products from acquisitions. Certain prior year amounts have been reclassified to break out results of Annuity and Investment Products. 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.
The Individual Life Insurance distribution systems offer a wide array of life and health insurance through a career agency force, independent agents recruited through independent marketing organizations and regional directors, home service agents, financial institutions, and individual health sales and service offices. Operating results were:
Policy benefits 309,753 211,166 202,960 193,645 194,031 Expenses 111,666 61,189 70,949 74,695 72,711 Total benefits and expenses 421,419 272,355 273,909 268,340 266,742
Operating income $118,819 $ 92,772 $ 90,716 $ 86,580 $ 87,794
Individual Life operating income improved 28.1% in 1995 to $118.8 million and 2.3% in 1994 to $92.8 million. As a percentage of total revenues, operating income for the Individual Life Insurance unit was 19.9% in 1995 (22.1% without acquisitions), 22.6% in 1994, and 22.3% in 1993. 1995's results were favorably influenced (especially during the fourth quarter) by acquisitions, improved mortality, and earnings on increased policyholder contract deposits. 1994's results improved on the strength of expense savings. Expenses represented 18.7% of total revenues in 1995, 14.9% in 1994, and 17.4% in 1993. Without acquisitions, 1995's expense ratio is 15.9%. Effective tax rates are 32.6% for 1995, 32.7% for 1994, and 32.2% for 1993. These effective rates have increased over 1992 because of the Company's emphasis on holding a greater percentage of its investments in fully-taxable securities.
Premiums and other considerations increased 55.9% in 1995 and 2.2% in 1994. 1995's increase is reflective of the Company's strategy to achieve growth through new distribution sources as well as acquisitions. Without acquisitions, premiums and considerations increased 6.7% in 1995. Policy benefits increased 46.7% in 1995 (2.7% without acquisitions) and 4.0% in 1994. Exclusive of acquisitions, death benefits in 1995 were 7.2% higher than the prior year with a 14.3% increase in face amount of insurance in force. In 1994, death benefits increased 9.7% while insurance in force increased 11.3%. Expenses increased 82.5% in 1995 (10.5% without acquisitions) but declined 13.8% in 1994. 1995's increase is primarily related to acquisitions and growth of existing business. The decline in 1994 occurred 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. II-10
1995 1994 1993 (In millions) First year life insurance premiums $119.3 $ 43.3 $ 29.0 Renewal and other life insurance premiums 263.2 169.2 165.7 Accident and health 24.2 27.6 28.3 $406.7 $240.1 $223.0
First year life insurance premiums grew 175.6% in 1995 and 49.3% in 1994. Without acquisitions, first year premium receipts are up 69.2% in 1995 as the Company continued to implement its business plan.
Individual life insurance written (as measured by face amount) increased 44.2% in 1995 to $5,343 million (28.5% without acquisitions) and 48.7% in 1994 to $3,706 million. Sales gains in 1995 were a result of an 89% growth in independent agents' production, and in 1994 were due to improved productivity in the career agency force (up 20%) and an increase in independent agents contracted which resulted in sales increasing 243%.
1995 1994 1993 1992 1991 (In thousands) Premiums and other considerations $ 49,424 $ 14,815 $ 11,331 $ 10,094 $ 9,399 Net investment income 185,861 104,213 92,803 91,924 82,891 Other income 0 0 0 0 0 Total revenues 235,285 119,028 104,134 102,018 92,290
Policy benefits 158,388 63,886 57,638 53,158 51,241 Expenses 15,280 8,392 7,552 6,311 6,091 Total benefits and expenses 173,668 72,278 65,190 59,469 57,332
Annuity receipts were up 51.9% in 1995 (20.4% without acquisitions) and 43.1% in 1994.
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. Operating results were:
Policy benefits 374,155 352,810 341,126 350,306 360,577 Expenses 83,181 78,040 73,785 70,112 69,426 Total benefits and expenses 457,336 430,850 414,911 420,418 430,003
1995 1994 1993 (In millions) Operating income: Group life $ 11.8 $ 10.4 $ 12.9 Group health 25.9 33.8 28.2 $37.7 $ 44.2 $ 41.1
Premiums and equivalents, which include the equivalent premiums on cases administered on an uninsured basis, increased 1.6% in 1995 and 6.2% in 1994. 1995's growth was affected by premium concessions to encourage clients to adopt managed care arrangements. 1994's growth was favorable as the Company sold more new managed care cases. Policy benefits on fully-insured coverages increased 6.0% in 1995 and 3.4% in 1994. Death benefits in 1995 were 0.9% higher at $53.4 million and were 10.6% higher in 1994 at $52.9 million. The Group Department experienced unusually high mortality in 1994, particularly in its large case business, with improvement noted in 1995. Expenses increased 6.6% in 1995 and 5.8% in 1994. The majority of the increases were attributable to managed care costs, network access fees, and other expenses that were passed through to customers. Such expenses increased as a result of more widespread use of managed care provider networks.
JP Communications operates television and radio broadcast properties and produces syndicated sports and entertainment programming. Operating results were:
Total expenses, as a percentage of revenues, improved to 76.5% in 1995 versus 79.0% in 1994 and 81.0% in 1993. This favorable trend resulted from higher sales associated with improved market shares and a strong business environment, as well as special sports programming events.
Effective tax rates (including both federal and state income taxes) of 39.5% in 1995, 39.3% in 1994 and 37.1% in 1993 were influenced favorably by refunds of Federal income taxes.
The Life Insurance segment defers the costs of acquiring new business including commissions, certain costs of underwriting and issuing policies, and certain agency office expenses. Such amounts deferred were $353.4 million and $329.1 million at December 31, 1995 and 1994, an increase of $24.3 million.
Goodwill (representing the cost of acquired businesses in excess of fair value of net assets) of $69.2 million and $28.1 million at December 31, 1995 and 1994 relates to acquisitions of AH Life and communication properties and is being amortized over periods ranging from 5 to 40 years, with a dollar- weighted average amortization period of approximately 25 years. Goodwill as a percentage of shareholders' equity was 3.2% and 1.6% at December 31, 1995 and 1994.
JP considers existing capital resources to be more than adequate to support the current level of its business activities. The Company's business plan places priority on redirecting certain capital resources now invested in bonds and stocks into its core businesses, which businesses would be expected to produce higher returns over time. As part of its plan to use its capital resources effectively, the Company may continue to purchase its own common stock from time to time. Management believes that acquisitions and other strategic opportunities can be funded using a prudent balance of capital and debt financing.
Long-term debt outstanding was $137.1 million at December 31, 1995. In the fourth quarter, the Company filed a shelf registration statement for $300 million of debt securities. In December 1995, the Company completed a public offering of 1,815,000 unsecured Automatic Common Exchange Securities Due January 21, 2000 (ACES). Annual interest of 7.25% is payable quarterly in arrears. Net proceeds of $127.6 million were used to repay short-term borrowings incurred in connection with the acquisition of AH Life. At maturity, or within the prior thirty days, the Company will exchange the ACES into shares of NationsBank Corporation common stock or equivalent cash, as more particularly described in Note 6 to the Consolidated Financial Statements. While it has made no commitments for obtaining additional financing, the Company may issue additional long-term debt securities to finance acquisitions or for other corporate purposes. The Company is also obligated under a variable rate note with an outstanding balance of $5.56 million collateralized by an investment property and equipment.
JP considers the capital requirements of its business segments in determining the level of capital available for strategic development. The Life Insurance segment, which employs the larger level of required capital, is subject to regulatory constraints. Capital employed in the life insurance companies is measured in accordance with statutory accounting practices (SAP) which differ from generally accepted accounting principles (GAAP). The bases for valuation of GAAP assets and liabilities are described in Note 1 to the Consolidated Financial Statements. The life companies have not previously ceded business under "surplus relief" reinsurance arrangements nor has statutory capital and surplus been enhanced by any transaction or item that is either not included in GAAP shareholders' equity or eliminated in the preparation of the Company's Consolidated Financial Statements.
The National Association of Insurance Commissioners (NAIC) has adopted risk-based capital (RBC) levels for life insurers. RBC requires the maintenance of minimum levels of statutory capital and surplus based on formulas related to investment credit risk, insurance risk, interest rate risk, and general business risk. For purposes of determining compliance with this new requirement, JP Life and AH Life compare minimum capital requirements (authorized control level) with adjusted statutory capital (includes statutory capital and surplus, asset valuation reserves, and other adjustments). Regulatory authorities require that life insurers maintain adjusted capital and surplus positions up to twice the authorized control level. Each of these subsidiaries currently hold surplus levels substantially in excess of amounts needed to comply with regulatory requirements.
JP Life AH Life A.M. Best A++ A+ Standard & Poor's (claims paying) AAA AAA Duff and Phelps AAA AAA Moody's Aa2 Aa3
JP management believes that the 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.
In managing its capital position, JP measures required capital for each of its major product lines in a manner similar to methods utilized by regulatory authorities for risk-based capital requirements. Capital is allocated to product lines in amounts which management believes are prudent and necessary to cover all risks inherent in the book of business. Management also focuses on investment quality and other indications of capital adequacy, such as operating leverage, capital and surplus ratios, and the ratio of higher risk assets as a percentage of statutory capital and surplus. Management believes that these ratios are more conservative than those prevailing in the life insurance industry.
JP's liquidity requirements are met primarily by cash flows from the operations of JP Life, AH Life and other consolidated subsidiaries. The Company has historically posted positive cash flows from operating activities of its Life Insurance and Communications segments. Management believes that its overall sources of liquidity will continue to be sufficient to satisfy its operating requirements.
Net cash provided by operations on a consolidated basis was $320.8 million, $142.1 million, and $186.2 million for 1995, 1994, and 1993. Cash flows provided from increases in policyholder contract deposits were $358.7 million, $244.1 million, and $174.5 million in 1995, 1994, and 1993. Net proceeds from short-term borrowing and securities sold under repurchase agreements were $129.9 million, $256.5 million, and $39.7 million in 1995, 1994, and 1993. These sources of funds were used to purchase net investments of $720.5 million, $513.9 million, and $399.5 million, pay dividends to shareholders of $89.3 million, $81.8 million, and $76.0 million, and to make net acquisitions of shares outstanding of $52.4 million, $55.7 million, and $48.9 million in 1995, 1994, and 1993.
Primary sources of cash from its Life Insurance segment are premiums, other insurance considerations, receipts for policyholder accounts, investment sales and maturities, and investment income. Primary uses of cash include payment of insurance benefits, operating expenses, withdrawals from policyholder accounts, costs related to acquiring new business, income taxes, and investment purchases.
Primary sources of cash from the Communications segment are revenues from advertising and sports and entertainment production. Primary uses of cash include payment of agency commissions, cost of sales, operating expenses, and income taxes.
Cash dividends paid to the parent company from its subsidiaries were $133.7 million in 1995, $128.0 million in 1994, and $102.8 million in 1993. JP Life has been the primary source of dividends. JP Life is subject to North Carolina laws and AH Life is subject to Michigan laws. Both states limit the amount of dividends that may be paid without first obtaining the approval of the State's Insurance Commissioner. On a statutory basis, 1995 total dividends from JP Life to the parent company of $423.7 million include an extraordinary dividend representing shares in a former JP Life subsidiary, whose holdings at year-end included approximately four million shares of NationsBank common stock. Because of this dividend and extraordinary dividends paid by AH Life prior to its acquisition, any dividends by either company prior to the fourth quarter of 1996 will require regulatory approval. The first quarter 1996 dividend of $30.0 million from JP Life was approved and paid. No common stock dividends from AH Life are planned for 1996.
$391.7 million and $188.0 million at December 31, 1995 and 1994 are considered to be sources of liquidity to support the Company's strategies. Total trading securities and debt and equity securities available for sale at December 31, 1995 were $7,321.0 million.
Cash flows from operations are invested primarily in fixed income securities, including publicly-issued bonds, privately-placed notes and bonds, and commercial mortgage loans. The nature and quality of the various types of investments held by insurance subsidiaries must comply with the statutes and regulations imposed by the states in which they are licensed.
Publicly-issued bonds $ 7,846 59% $ 2,564 49% Privately-placed bonds 2,081 15 961 18 Commercial mortgage loans 1,050 8 681 13 Common stock 826 6 670 13 Policy loans 1,152 9 206 4 Preferred stock 96 1 69 1 Real estate 77 1 31 1 Cash, other invested assets 163 1 61 1 Total $13,291 100% $ 5,243 100%
by issuer and asset type. The Company monitors investments which are considered to be "higher risk" for compliance with the Investment Policy Statement and for proper valuation. Securities that experience other than temporary declines in value are adjusted to net realizable values through a charge to earnings. Commercial mortgage loans in default are carried at the net present value of expected future cash flows. Additionally, the Company carries a reserve for nonspecific losses attributable to the mortgage portfolio. Other investments are carried at the lower of cost or net realizable value, as appropriate.
The Company's investment guidelines allow investments in below investment grade bonds up to a level which is specifically authorized by the Finance Committee. In making acquisitions of this nature, the Company attempts to identify well structured private placements offering enhanced yields. Also, the highest tier of public noninvestment grade bonds which have the potential to be upgraded ("crossover credits") are considered for acquisition. Due to the acquisition of AH Life, below investment grade bonds exceed the prior year as a percentage of total assets. It is expected that this percentage will decline as new purchases are concentrated in investment grade securities. The Company will continue to manage its credit risks in a prudent fashion with due regard to regulatory constraints and efficient utilization of surplus.
While the Company's investment policy permits the use of derivative financial instruments such as futures contracts and interest rate swaps in conjunction with specific direct investments, JP has not historically employed such instruments to alter investment or liability positions. AH Life has limited involvement with derivative financial instruments and has not previously used them for trading purposes, but generally to manage well- defined interest rate risks. Interest rate swaps with a notional value of $125 million are open as of December 31, 1995, termination of which at current interest rates would result in an insignificant settlement payment. The net amount paid or received under these arrangements is reflected as an adjustment to investment income.
Transfers from HTM to AFS at fair value $633.0 million Transfers from AFS to HTM at fair value $392.8 million
Prior to the reclassifications, JP generally classified approximately 50% of its bond portfolio as AFS; after the above reclassifications, the Company expects that approximately 60% of its bond portfolio will be classified as AFS.
The asset/liability management process focuses primarily on the management of interest rate risk. One measure of this risk is a comparison of asset and liability durations. Duration measures the sensitivity of asset and
JP operates largely in the U. S. Financial Services market, which is subject to general economic conditions in the U.S. Over the past several years, these conditions have exhibited signs of gradual improvement and slow growth. Recent trends which have affected the Company include: rising bond and stock prices caused by secular declines in interest rates; increased levels of mergers, consolidations and reorganizations; and moderate increases in health care utilization and inflation as a result of increased emphasis on managed care arrangements.
Growth of life and health insurance sales continues to be slow for most insurance companies due to changing demographics and inefficient distribution systems. A slowing economy and increased competition from banks, mutual funds, and other financial institutions for investable consumer dollars also suppressed premium growth over the last two years. The Company believes that it has experienced growth at a rate greater than the overall industry because of acquisitions, its strong financial position, and efforts to increase distribution sources.
Interest rates have varied in response to concerns for inflationary pressures in the U.S. economy. During 1995, ten year U.S. Treasury rates declined approximately 225 basis points. In 1994, the Federal Reserve raised interest rates significantly out of a concern for inflationary pressures. Since JP'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 declines during 1995 and increases during
1994 contributed to the increase in unrealized gains on securities available for sale, net of deferred taxes of $295.9 million and the decrease in 1994 of $202.1 million. 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.
To protect against the negative impact of interest rate risk, JP focuses on measuring option-adjusted durations of its assets and manages the risk of mismatch between assets and liabilities. The Company also adjusts interest crediting rates, at least on an annual basis, to reflect the yield of its investment portfolio and assumptions for pricing and profitability.
JP 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.
The U.S. insurance industry has experienced an increasing number of mergers, acquisitions, consolidations, and sales of certain business lines. These consolidations have been driven by a need to reduce costs of distribution and maintenance of business in force. Additionally, increased competition, health care reform, regulatory capital requirements, and technology costs have also contributed to the level of consolidation in the industry. These forces are expected to continue as is the level of industry consolidation.
SFAS 114 "Accounting by Creditors for Impairment of a Loan" was effective for the Company's 1995 consolidated financial statements. SFAS 114, as amended by SFAS 118, requires that certain impaired loans be reported at the net present value of expected future cash flows, the loan's observable market price, or the fair value of the underlying collateral. The Company adopted SFAS 114 during the first quarter of 1995, and the effect of adoption did not have a material impact on results of operations.
In connection with the adoption of SFAS 115, the Company classified debt securities that it has both the positive intent and ability to hold until maturity as held to maturity. Other debt securities and all holdings of equity securities were classified as available for sale. At adoption, approximately 53% (at amortized cost) of the Company's debt securities were classified as available for sale and 47% as held-to-maturity. The adjustment to available for sale debt securities and parent company equity securities increased shareholders' equity by $101.4 million as of January 1, 1994.
In March 1995, the FASB issued SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used for long-lived assets, and certain identifiable intangibles to be disposed of. The statement will be effective for the Company's 1996
In October 1995, the FASB issued SFAS 123 "Accounting for Stock-Based Compensation", which will also be effective in 1996. SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans and allows entities to continue to measure compensation cost for those plans using the intrinsic value-based method prescribed by Accounting Principles Board (APB) Opinion 25 "Accounting for Stock Issued to Employees", or to adopt a fair value-based measurement method. Entities that do not elect to adopt a fair value-based method are required to make proforma disclosures of net income and income per share as if the fair value-based method had been applied. Such proforma amounts are likely to be less than the corresponding amounts presented in future statements of net income if the APB 25 method is continued. The Company has not yet decided whether to adopt the fair value-based measurement method described in SFAS 123.
March June September December 31 30 30 31 Revenues, including net investment income and realized gains on investments $293,736 $293,298 $ 289,564 $315,815 Benefits and expenses 224,040 220,846 213,025 224,079 Provision for income taxes 21,779 23,579 26,105 29,436 Income from continuing operations $ 47,917 $ 48,873 $ 50,434 $ 62,336 Discontinued operations, net of income taxes 2,018 3,368 2,040 2,295 Accumulated postretirement benefit obligation, net 24,109 0 0 0 Net income applicable to common shareholders $ 25,826 $ 52,241 $ 52,474 $ 64,631 Per share of common stock $ .34 $ .69 $ .69 $ .87
As disclosed in the notes to consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities in 1994 and changed its method of accounting for postretirement benefits other than pensions in 1993.
Cash and cash equivalents $ 122,474 $ 22,774 Debt securities available for sale, at fair value (amortized cost 1995 $6,208,347; 1994 $ 1,691,974) 6,458,209 1,606,865 Debt securities held to maturity, at amortized cost (fair value 1995 $3,648,539; 1994 $1,798,135) 3,527,404 1,940,046 Equity securities available for sale, at market value) cost 1995 $207,128; 1994 $290,370) 816,344 718,023 Equity securities trading portfolio, at market value (cost 1995 $45,868) 46,406 - Mortgage loans on real estate 1,049,464 680,625 Policy loans 1,151,947 206,361 Real estate, less accumulated depreciation 1995 $21,179; 1994 $21,160 76,646 30,888 Other investments 41,705 37,861
Accrued investment income 156,532 67,371 Accounts receivable and agents' balances 134,126 62,959 Due from reinsurers (Note 14) 1,449,613 31,268 Property and equipment, less accumulated depreciation 1995 $104,701; 1994 $100,184 109,937 100,672 Deferred policy acquisition costs and value of insurance in force, net of amortization (Note 4) 834,764 329,139 Cost of acquired businesses in excess of net assets, net of accumulated amortization 1995 $11,579;1994 $15,183 69,240 28,069 Assets held in separate accounts 345,530 210,225
Redeemable preferred stock, par value $100 per share, authorized 500,000 shares; issued 500,000 shares (Note 8) 50,000 - Stockholders' equity (Notes 3, 9, 10 and 11): Undesignated preferred stock - - Common stock, par value $1.25 per share, authorized 1995 150,000,000 shares; 1994 100,000,000 shares; issued 1995 71,213,162 shares; 1994 72,674,060 shares, (adjusted for 1995 three-for-two stock split) 89,016 60,564 Retained earnings 1,542,344 1,441,132 Net unrealized gains on securities available for sale, less deferred income taxes 1995 $279,787; 1994 $121,989 526,724 230,847 Net unrealized losses on foreign currency translation, net of income taxes of $373 (2,025) -
1,188,654 921,207 881,991 Income from continuing operations before income taxes and effect of change in accounting principle 380,762 347,603 310,458
Income from continuing operations before cumulative effect of change in accounting principle 255,313 229,896 209,561
Cumulative effect of change in accounting principle on years prior to 1993, net of income tax benefit (Note 13) - - (24,109)
Income from continuing operations before cumulative effect of change in accounting principle $ 3.55 $ 3.15 $ 2.78
Balance, December 31, 1993 61,831 - 1,339,672 Change in accounting principle effective 1/1/94 (Note 3) - - - Net income - - 239,237 Common dividends, $1.15 per share - - (83,357) Common stock issued 408 7,343 Common stock reacquired (1,675) (7,343) (54,420) Decrease during year - - -
Balance, December 31, 1994 60,564 - 1,441,132 Net income - - 273,854 Common dividends, $1.28 per share - - (91,222) Preferred dividends - - (857) Common stock issued 27 1,019 - Common stock reacquired (1,245) (1,019) (50,784) Three-for-two common stock split (Note 9) 29,670 - (29,779) Increase during year
Net Net Unrealized Net Unrealized Unrealized Gains on Losses on Gains Securities Foreign Total on Equity Available Currency Stockholders' Securities for Sale Translation Equity
$ 334,819 $ - $ - $ 1,668,210 - - - 195,172 - - - (78,125) - - - 3,119 - - - (52,054) (3,251) - - (3,251)
Securities held to maturity: 		 				 Sales - 7,431 - Maturities, calls and redemptions 33,513 122,589 - Purchases (58,366) (577,121) -
Jefferson-Pilot Corporation and Subsidiaries Consolidated Statements of Cash Flows (Continued) Dollar Amounts in Thousands
Policyholder contract deposits $ 741,205 $ 361,991 $ 264,602 Withdrawals of policyholder contract deposits (382,475) (117,939) (90,108) Increase(decrease) in note payable,net (29,350) (10,350) 39,700 Borrowings under short-term credit facilities 395,000 - - Repayments under short-term credit facilities (165,000) - - Issuance of other debt 131,588 - - Proceeds from securities sold under repurchase agreements - 584,225 - Payments for securities sold under repurchase agreements (70,798) (317,387) - Cash dividends (89,269) (81,814) (75,986) Common stock transactions, net (52,360) (55,687) (48,935) Other financing activities, net 20,892 - -
Cash and cash equivalents, ending $ 122,474 $ 22,774 $ 31,563
Prior to 1995, substantially all of the Company's life insurance operations were conducted by Jefferson-Pilot Life Insurance Company, a wholly-owned subsidiary (J-P Life). In May 1995, J-P Life assumed certain life insurance and annuity business of Kentucky Central Life Insurance Company ("KCL") in an assumption reinsurance transaction. In October 1995, the Company acquired Alexander Hamilton Life Insurance Company of America by merging it into a previously-existing subsidiary ("AH Life"). In April 1995, the Company sold Jefferson-Pilot Fire & Casualty Company ("JPF&C"), formerly a wholly-owned subsidiary engaged in property and casualty insurance operations. Also during 1995, the assets and data processing operations of Jefferson-Pilot Data Services, Inc. ("JPDS") were sold. Additional information about the above-described transactions is presented in Note 2 and information about business segments is presented in Note 16.
Basis of presentation: The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). The insurance subsidiaries also submit financial statements to insurance industry regulatory authorities. Those financial statements are prepared on the basis of statutory accounting practices ("SAP") and are significantly different from financial statements prepared in accordance with GAAP.
A comparison of statutory basis net income and capital and surplus of the life insurance subsidiaries to the amounts included in the consolidated financial statements is presented in Note 10, along with a description for the principal differences between SAP and GAAP as they related to the subsidiaries' financial statements.
The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 115 Accounting for Certain Investments in Debt and Equity Securities effective January 1, 1994. SFAS 115 applies to equity securities having readily determinable fair values and to debt securities. Securities under its scope must be classified for financial reporting purposes as either 1) securities held to maturity, stated at amortized cost; 2) trading securities, stated at fair value with unrealized gains and losses reflected in income; or 3) securities available for sale, stated at fair value with net unrealized gains and losses included in a separate component of stockholders' equity, net of deferred income tax effect.
Real estate and other investments: 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 is depreciated principally by the straight-line method over estimated useful lives generally ranging from 30 to 40 years for buildings. Other investments are stated at equity, or the lower of cost or market, as appropriate.
Value of insurance in force represents the actuarially determined present value of anticipated profits to be realized from life insurance and annuity business acquired, using the same assumptions used to value the related liabilities where appropriate. Value of insurance in force relating to the KCL transaction was determined using a risk-adjusted discount rate. A risk-adjusted discount rate was also applied in determining the value of insurance in force acquired in the AH Life transaction. Value of insurance in force is amortized over the related contract periods, using current crediting rates to accrete interest and a constant rate based on the present value of expected future profits to amortize.
The carrying amounts of deferred policy acquisition costs and value of insurance in force are adjusted for amounts that would have been recognized if realized gains and losses and net unrealized holding gains or losses on debt securities classified as available for sale had actually been realized. Both deferred policy acquisition costs and value of insurance in force are reviewed periodically to determine that the unamortized portion does not exceed expected recoverable amounts. No impairment adjustments have been reflected in earnings of any year presented.
Amounts relating to acquisitions completed after October 31, 1970 are amortized on a straight-line basis over periods of 5 to 40 years. Carrying amounts are regularly reviewed for indications of value impairment, with consideration given to financial performance and other relevant factors.
Separate accounts: Separate accounts are assets and liabilities associated with certain contracts for which investment income and investment gains and losses accrue directly to the contract holders. The assets of the separate accounts are stated at value and are not subject to any claims which may arise out of any other business of the Company.
Policy and contract claims: The liability for policy and contract claims consists of the estimated amount payable for claims reported but not yet settled, claims incurred during the year but reported subsequent to the date of the consolidated balance sheet, and an estimate of claims incurred but not reported, which is based on the historical experience of the life insurance subsidiaries, adjusted for trends and circumstances. Management believes that the recorded liability is sufficient to provide for the associated claims adjustment expenses.
Participating policies: Participating life policies approximate the following percentages of ordinary life insurance in force and ordinary life insurance premium revenue as of December 31, 1995, 1994 and 1993 and for the years then ended:
Income taxes: The parent company and its subsidiaries file a consolidated life/nonlife federal income tax return. Deferred income taxes are recorded on the differences between the tax bases of assets and liabilities and the amounts at which they are reported in the consolidated financial statements. Recorded amounts are adjusted to reflect changes in income tax rates and other tax law provisions as they become enacted.
Reclassifications: The Company's policy is to reclassify certain amounts reported in prior years' consolidated financial statements when necessary to conform with the presentations adopted in the current year. These reclassifications have no effect on net income or stockholders' equity of the prior years.
New accounting pronouncements: In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of which will be effective in 1996. SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill relating both to such assets that are to be held and used and to long-lived assets and certain identifiable intangibles that are to be disposed of. The Company has not yet completed its analysis of the effects, if any, that initial application of SFAS 121 might have on its consolidated financial statements.
On October 6, 1995, the Company acquired Alexander Hamilton Life Insurance Company of America and its wholly-owned subsidiary Alexander Hamilton Capital Management, Inc. from a subsidiary of Household International, Inc. ("Household") under a stock purchase agreement dated August 9, 1995. The acquisition was completed through merger into a wholly-owned Michigan domiciled life insurance subsidiary of the Company, which was thereupon renamed Alexander Hamilton Life Insurance Company of America ("AH Life"). First Alexander Hamilton Life Insurance Company ("FAHL"), which is domiciled in New York, was acquired by AH Life on October 13, 1995.
The following pro-forma financial information (in thousands except per share amounts) has been prepared assuming that the acquisition of Alexander Hamilton Life Insurance Company of America and affiliates had taken place at the beginning of each year presented. The pro-forma information includes adjustments for interest expense and foregone investment income that would have resulted from financing the acquisition, amortization of adjustments to fair value, amortization of value of insurance in force and excess of cost over value of net assets acquired, reinsurance administration fees and related tax effects. The pro-forma financial information is not necessarily indicative of results of operations that would have been reported had the transaction been completed on the dates assumed.
Revenue $ 1,725,801 $ 1,418,443 Income from continuing operations 279,850 261,493 Net income applicable to common shareholders 294,854 267,272 Net income per common share 4.11 3.66
Discontinued operations include the property and casualty and title insurance subsidiaries which formerly comprised the Company's other insurance business segment.
Cash and cash equivalents $ 2,857 Investments available for sale 108,870 Receivables and other 34,717 146,444 Liabilities
Losses payable 42,595 Unearned premiums 28,104 Deferred income taxes and other 10,705 81,404
Aggregate amortized cost, aggregate fair value (stated amount), and gross unrealized gains and losses pertaining to securities classified as available for sale as of December 31, 1994 are as follows (in thousands):
Aggregate amortized cost (stated amount), aggregate fair value and gross unrealized gains and losses pertaining to debt securities classified as Held to maturity as of December 31, 1994 are as follows (in thousands):
Held to Maturity Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value
Federal agency issued collateralized mortgage obligations $ 509,741 $ - $ (58,027) $ 451,714 Obligations of states and political subdivisions, including special revenue obligations 31,705 684 (1,275) 31,114 Corporate obligations 1,398,600 13,524 (96,817) 1,315,307
Available for Sale Held to Maturity Amortized Fair Amortized Fair Cost Value Cost Value
At its acquisition date, Alexander Hamilton Life Insurance Company of America had in place a planned program of investing in higher yielding, below investment grade fixed-income securities. As of December 31, 1995 investments under this program and all other below investment grade securities of AH Life and its subsidiaries amounted to $342.5 million, which is above the Company's investment policy limit. AH Life's below investment grade program has been reviewed by the Finance Committee and a plan to align the holdings with Company policy is under design.
While the Company's investment policy permits the use of derivative financial instruments such as futures contracts and interest rate swaps in conjunction with specific direct investments, the Company has not historically employed such instruments to alter investment or liability positions. AH Life has limited involvement with derivative financial instruments and does not use them for trading purposes, but generally to manage well-defined interest rate risk. Interest rate swaps with a notional value of $125 million are open as of December 31, 1995, termination of which at current interest rates would result in an insignificant settlement payment. Interest is exchanged monthly on the notional value, with the Company receiving a weighted average rate of 5.28% and paying one month LIBOR (5.6875% at December 31, 1995) on a net exchange basis. The net amount received or paid under these swaps is reflected as an adjustment to investment income. Although off-balance-sheet derivative financial instruments do not expose the Company to credit risk equal to the notional amount, such agreements represent credit risk to the extent of any gain in fair value if the counterparty fails to perform. The counterparties to these swaps are large commercial banks and investment banks which have been approved by the Finance Committee. During 1995 the Company also established a portfolio of trading securities for the primary purpose of writing covered call options in expectation of enhanced total returns from option premiums, market appreciation and dividends received. The proceeds received from covered call options was not material and the net unrealized holding gain included in 1995 income approximated $500 thousand.
The Company's investment policy relating to collateralized mortgage obligations ("CMO's") focuses on actively traded, less volatile issues that produce relatively stable cash flows. CMO holdings as of December 31, 1995 consist predominately of the least volatile PAC and sequential tranches of federal agency issues. Due to the high quality and liquid nature of the CMO portfolio, the Company believes the impairment risks associated with these securities are no greater than those applicable to direct agency or corporate issues.
The details of investment income, net of investment expenses, for the three years ended December 31, 1995 follow (in thousands):
Interest on bonds and other debt securities $ 408,003 $ 260,130 $ 243,384 Dividends on preferred stocks 5,409 5,050 7,409 Dividends on common stocks 22,945 28,025 26,890 Interest on mortgage loans 79,098 62,599 57,139 Interest on policy loans 15,155 12,498 12,978 Real estate income 9,690 9,099 9,642 Other investment income 14,560 8,563 6,462 Investment income of life insurance operations 554,860 385,964 363,904 Investment income of other companies 24,244 12,149 7,793
Bonds and other debt instruments $ (3,475) $ (9,478) $ 16,786 Preferred stocks (3,454) 834 1,904 Common stocks 62,883 65,671 32,841 Other (7,445) 4,399 2,703 Realized investment gains $ 48,509 $ 61,426 $ 54,234
1995 1994 Available Held to Available Held to for Sale Maturity for Sale Maturity Proceeds: From sales $ 1,227,811 $ - $ 778,429 $ 7,431 From maturities, calls and redemptions 258,664 33,513 93,756 122,589 $ 1,486,475 $ 33,513 $ 872,185 $ 130,020
A held-to-maturity security with amortized cost of $5 million was transferred to the available-for-sale category during 1995 and securities with amortized cost of $7.76 million were sold during 1994, both due to significant declines in the credit worthiness of the issuers. Related recognized losses were not significant. On November 30, 1995, the Company transferred certain debt securities between the held-to-maturity and available-for-sale classifications concurrent with the adoption of additional SFAS 115 implementation guidance, which permitted a one-time reassessment of the appropriateness of classification of securities held. This reassessment resulted in available-for-sale debt securities with fair value of $392.8 million and amortized cost of $380.0 million being transferred to the held-to-maturity classification. The excess of transfer-date fair value of individual securities over their amortized cost, and the related unrealized net holding gain, will be amortized over the period to maturity. In addition, held-to-maturity debt securities with an amortized cost of $620.0 million and a fair value of $633.0 million were transferred to the available-for-sale classification, increasing unrealized net holding gains by $13.0 million.
Realized gains on held-to-maturity securities represent call premiums. During 1995 and 1994 J-P Life transferred securities classified as available for sale to the Company's defined benefit pension plans. Equity securities with cost of $7.1 million and value of $33.4 million were transferred during 1995, and gains of $26.3 million were recognized. The transfer in 1994 included debt securities with amortized cost of $48.9 million and equity securities with a cost of $7.8 million. The securities transferred in 1994 had an aggregate value of $75 million on the date of transfer and a gain of $18.3 million was recognized.
During 1993, the Company sold selected debt securities when calls or prepayments were considered likely. Proceeds from such sales represented $109 million of the $170 million total proceeds from sales of debt securities in 1993. Most of the realized gains on debt securities in 1993 represent call premiums. Realized gains on debt securities for 1993 are stated net of losses approximating $8 million related to declines in value considered other than temporary.
Information about the value of insurance in force for the year ended December 31, 1995 follows (in thousands):
Balances initially recorded $ 223,883 $ 324,600 $ 548,483 Interest accretion 7,800 4,734 12,534 Amortization (26,422) (12,602) (39,024) Net amortization reflected in expenses (18,622) (7,868) (26,490) Adjustment related to unrealized gains on certain securities (Note 3) (15,400) (24,029) (39,429) Adjustment related to realized gains on certain securities - (1,200) (1,200)
Expected approximate amortization percentages relating to the value of insurance in force for the next five years are as follows:
Credited interest rates for J-P Life's universal life-type products approximated 6.35% in 1995 and 6.5% in 1994 and 1993. Credited rates for comparable products assumed in the KCL transaction approximated J-P Life's 1995 rates. For annuity products issued by J-P Life, credited interest rates generally ranged from 5.2% to 6.35% during 1995, 5% to 6.5% during 1994 and 5% to 6.25% during 1993. Credited rates for annuity products assumed from KCL fall within the 1995 range applicable to J-P Life products. Credited interest rates pertaining to AH Life annuity products during the post-acquisition period ranged from 6% to 14.75% for pre-1987 issues and from 4.5% to 11% for 1987 and subsequent issues.
J-P Life's assumed mortality rates are generally based on experience multiples applied to select and ultimate tables commonly used in the industry. Withdrawal assumptions for individual life insurance policies issued by J-P Life from 1948 to 1972 are based on its historical experience and generally range between Linton's A and B tables. For policies issued by J-P Life in 1972 and later years, withdrawal rate assumptions are based on historical company experience and vary by issue age, type of coverage and policy duration. Mortality and withdrawal assumptions pertaining to the KCL business are similar to those applied to J-P Life policies. Mortality and withdrawal assumptions applied in the valuation of AH Life's ordinary life insurance policies are based on historical company experience. For immediate annuities issued by AH Life prior to 1987, mortality assumptions are based on blends of the 1971
Balance as of January 1 $ 266,046 $ 262,164 $ 247,202 Less reinsurance recoverables 12,524 11,312 8,358 Net balance as of January 1 253,522 250,852 238,844 Amount incurred 330,324 308,949 305,648
Future policy benefits $ 130,435 $ 116,558 $ 106,640 Policy and contract claims 143,224 149,488 155,524 $ 273,659 $ 266,046 $ 262,164
In October 1995, the Company entered into an agreement with a syndicate of banks under which it obtained $450 million of unsecured 364-day revolving credit. The credit facility includes a revolving loan commitment (committed loans) with a competitive loan component (competitive loans). Committed loans bear interest at an annual rate that is either (1) a base rate equal to the greater of the Federal Funds Rate plus 1/2 of 1% or the prime rate of the bank acting as agent for the syndicate or (2) a Eurodollar rate computed based on the LIBOR and the agent's Eurodollar reserve percentage. Interest rates applicable to committed loans and the interest periods for Eurodollar rate borrowings are determined by the Company at the time a borrowing is initiated. Interest rates and interest periods applicable to competitive loans are determined by a competitive bid process.
The Company is also obligated under a variable rate note with an outstanding balance of $5.56 million as of December 31, 1995, maturing in December 1997 and collateralized by property and equipment carried at $1.8 million.
As of December 31, 1995, securities carried at fair value of $196 million with amortized cost of $188 million were subject to open repurchase agreements having initial maturities of 30 to 60 days and weighted average remaining maturities of 19 days. As of December 31, 1994, securities carried at fair value of $266 million with amortized cost of $273 million were subject to open repurchase agreements having initial maturities of 120 days and weighted average remaining maturities of 68 days. The maximum repurchase liability at any month-end was $264.7 million during 1995 and $267 million during 1994. The weighted average interest rate of repurchase liabilities outstanding as of December 31, 1995 and 1994 was 5.8%. The weighted average interest rate on month-end repurchase liabilities was 6.07% during 1995 and 4.34% during 1994. Interest expense totaled $15.72 million on average month-end repurchase liabilities of $258.9 million during 1995 and $9.6 million on average month-end liabilities of $221 million during 1994.
On May 1, 1995, the Company's shareholders approved an amendment to the articles of incorporation under which 20,000,000 shares of preferred stock were authorized. The preferred stock may be issued in one or more series by authorization of the Board of Directors (Board) without further shareholder approval. The Board has broad powers to determine all designations, relative rights, preferences and limitations of the preferred stock. Holders will not be entitled to more than the lesser of one vote per $100 liquidation value or one vote per share when voting as a class with the holders of the Company's common stock, and will not be entitled to vote separately as a class except where the preferred stock is adversely affected or where applicable law requires a class vote. No holders of the Company's common stock will have preemptive rights to acquire any preferred stock issued.
On May 1, 1995, the shareholders approved an amendment to the articles of incorporation which increased the number of authorized shares of common stock from 100 million to 150 million.
On November 6, 1995, the Board authorized a three-for-two common stock split which was effected as a 50% stock dividend distributed on December 22, 1995 to shareholders of record as of December 8, 1995. The split-adjusted value of fractional shares was paid in cash. The par value of additional shares issued, which totaled $29,670,000, was reclassified from retained earnings to common stock during 1995. All share and per share information gives retroactive effect to the stock split.
Changes in the number of shares outstanding during each of the three years in the period ended December 31, 1995 are as follows:
On May 1, 1995, the shareholders approved an amendment and restatement of a stock option plan which was originally established in 1989 and first amended in 1990. The amended and restated plan is a Long Term Stock Incentive Plan in which only employees of the Company and certain full-time life insurance agents may participate (Employees' Plan). The Employees' Plan is, as before the 1995 restatement, administered by the Compensation Committee (Committee) of the Board, exclusive of any member who is not disinterested within the meaning of the applicable securities laws. The Committee has exclusive authority to interpret and govern the Employees' Plan, to identify eligible employees, to award nonqualifed or incentive stock options and stock appreciation rights and to make grants of the Company's stock. Stock grants may be either restricted stock or stock distributed upon the achievement of performance goals established by the Committee. Discretionary unrestricted stock grants are no longer permitted. The Committee establishes the terms, conditions and duration of each award. Upon adoption of the amendment and restatement, an additional 3,000,000 shares of the Company's common stock were reserved for the Employees' Plan and a total of 4,345,000 shares remain reserved for its purposes as of December 31, 1995. The option price may not be less than the market value of the Company's common stock on the date awarded. Options are exercisable for periods determined by the Committee, not to exceed ten years from the award date. The option price for shares acquired is due in full upon exercise in cash, shares of the Company's common stock, or a combination of the two. Shares received upon exercise of stock options, shares subject to an option that expires or otherwise terminates unexercised and any shares withheld for payment of taxes due upon exercise may again be subjected to option. Grants of restricted and unrestricted stock are limited to 10% of the total shares reserved for the Employees' Plan. The Employees' Plan will terminate as to further awards on May 1, 2005, unless sooner terminated by the Board.
Summarized information about outstanding stock options, exercisable options and shares available for purposes of the Company's stock plans follows:
A comparison of net income and statutory capital and surplus of J-P Life and AH Life, determined on the basis of statutory accounting practices prescribed or permitted by regulatory authorities (SAP) to net income and stockholder's equity of each on the basis of generally accepted accounting principles (GAAP) follows (in thousands):
Net income for the year ended December 31: Before gain recognized upon transfer of subsidiary to parent company $ 179,210 $ 158,298 $ 138,893 Gain recognized upon transfer of subsidiary to parent company in an extraordinary dividend 275,652 - - Reported net income $ 454,862 $ 158,298 $ 138,893 Statutory capital and surplus as of December 31 $ 830,236 $ 971,553 $ 945,157
Before cumulative effect of change in accounting principle $ 201,469 $ 194,502 $ 183,989 Cumulative effect of change in accounting principle, net of tax benefit of $10,195 - - (19,790) Reported net income $ 201,469 $ 194,502 $ 164,199
Stockholder's equity as of December 31 $ 1,529,571 $ 1,429,541 $ 1,435,098
The insurance statutes of the states of domicile limit the amount of dividends that the subsidiaries may pay annually without first obtaining regulatory approval. Generally, the limitations are based on statutory net income for the preceding year and statutory capital and surplus at the end of the preceding year. During 1995, J-P Life paid the parent company the maximum amount of dividends permitted without approval. Also during 1995, J-P Life transferred its interest in a wholly-owned subsidiary, the principal asset of which is NationsBank Corporation common stock, to the parent company in an extraordinary dividend approved by the North Carolina Department of Insurance. For SAP reporting purposes, J-P Life carried the subsidiary at statutory equity value of approximately $327 million on the transfer date, with an unrealized gain of $276 million included in surplus. Upon transfer, J-P Life recognized a gain in its statutory statement of operations and a dividend equal to carrying amount. The dividend was recorded at cost in J-P Life's GAAP financial statements and no gain was recognized. Because of the 1995 extraordinary dividend, J-P Life must obtain regulatory approval for 1996 dividends. Any dividend paid by AH Life before October 2, 1996 will require approval of the Michigan Director of Insurance. Thereafter, AH Life may pay dividends totaling up to $55,470,000 through December 31, 1996.
Under a shareholders' rights plan established in 1988 (the "Plan"), the Board declared a dividend of one common share purchase right for each outstanding share of the Company's common stock. The Plan was amended and restated during 1994. Under the amended and restated Plan, the rights detach and become exercisable ten days after a person or group publicly announces the acquisition of 15% or more of the Company's common stock, or ten business days after a person or group announces an offer which, if consummated, would result in the offeror owning 15% or more of the common stock. In the event that a person or group inadvertently exceeds the 15% threshold and promptly reduces its holdings to less than 15% of the common stock, the Board is authorized to exempt such an occurrence from triggering the Plan's provisions. If and when the rights become exercisable, a holder would be entitled to purchase from the Company one share of common stock for each right held at a price of $123.33 per share. The exercise price, number of shares covered by each right and number of rights outstanding are subject to adjustment upon the occurrence of certain events described in the amended and restated Plan.
If the Company is acquired in a merger or other business combination, or 50% or more of its consolidated assets or earning power are sold, the rights entitle a holder (other than the acquiring person or group) to buy, at the exercise price, stock of the acquiring company having a market value of twice the exercise price. In the event that any person or group acquires 15% or more of the Company's common stock, a holder (other than the acquiring person or group) will be entitled to purchase for each right held a number of additional shares of the Company's common stock having a market value of twice the exercise price. Following an acquisition by any person or group of 15% or more of the Company's common stock, but only prior to the acquisition by a person or group of a 50% stake in the common stock, the Board may also authorize the exchange of one share of the Company's common stock for each right held by holders other than the acquiring person or group.
Income taxes as reported in the consolidated statements of income are as follows (in thousands):
Reconciling items: 	 		 	 	 	 Tax exempt interest and dividends received deduction (2.0) (1.9) (2.3) Recoveries and reductions of amounts provided for prior years' tax assessments - - (0.5) Other increases, net - 0.8 0.3 Effective income tax rate 33.0% 33.9% 32.5%
Benefits provided to retirees by annuity contracts issued by J-P Life approximated $11.0 million in 1995, $11.2 million in 1994 and $10.0 million in 1993.
The components of nonpension postretirement benefits expense for 1995 and 1994 were as follows (in thousands):
Service cost, benefits earned 			 	 			 	 during the year $ 412 $ 433 $ 286 $ 320 Interest cost on accumulated benefit obligation 929 892 790 789 Actual return on plan assets (96) (57) (126) (72) Net amortization and deferral (1,139) (1,023) (420) (293) Nonpension postretirement benefits expense $ 106 $ 245 $ 530 $ 744
Curtailment gains totaling approximately $1.0 million were recognized during 1995, substantially all of which resulted from the sale of the assets and operations of JPDS. The acquisition of Alexander Hamilton Life Insurance Company of America and affiliates during 1995 increased accumulated postretirement benefit obligations by a total of approximately $3.0 million and the reduction in discount rate increased the obligations by about $2.5 million.
1995 1994 1993 Discount rate 7% 8% 7% Expected long-term rate of return on plan assets 9% 9% 7%
Effective April 1, 1993, the Company changed the eligibility criteria of its postretirement health care and life insurance plans to require employees and qualifying agents to complete 15 years of service after the age of 45 to be eligible for these benefits. Employees and agents hired before January 1, 1994, who were age 50 or older when hired, will be permitted to qualify for these benefits at age 65 with 10 years of service. Effective January 1, 1994 the Company changed its postretirement health care plan to limit annual benefit increases to a maximum rate of 4%. Since future health care cost trend rates in excess of 4% have been assumed in determining the accumulated postretirement benefit obligation as of December 31, 1995, future health care cost increases exceeding 4% per year will have no effect on the Company's obligation. The preceding changes resulted in the establishment of negative prior service cost during 1993, which is being amortized on a straight-line basis over the average remaining period of service to full eligibility of active employees who are not fully eligible.
Effective January 1, 1995, the Company adopted a defined contribution retirement plan covering all employees and full-time agents who have completed one year of service and attained age 21. The plan is intended to qualify under Section 401(k) of the Internal Revenue Code and includes a profit sharing component. The Company matches a portion of participant contributions by contributing to a fund which acquires and holds shares of the Company's common stock for the account of participants. Profit sharing contributions ranging up to 4% of participant earnings are made to the Company common stock fund annually based on established performance and/or profitability goals. Plan assets are invested under a group variable annuity contract issued by J-P Life. The Company expensed approximately $2.3 million related to the plan during 1995.
Assets related to the reinsured PPA and COLI business have been placed in irrevocable trusts formed to hold the assets for the benefit of AH Life and FAHL and are subject to investment guidelines which identify (1) the types and quality standards of securities in which new investments are permitted, (2) prohibited new investments, (3) individual credit exposure limits and (4) portfolio characteristics. Household and its affiliate reinsuring the COLI business have committed to use their best efforts to convert the reinsurance agreement covering that business to an assumption reinsurance agreement with an insurer having a Standard & Poor's Corporation (S&P) claims paying rating of at least A+ within three years or, at their option, to replace the reinsured COLI business with substitute issued policies. Household and its affiliate reinsuring the Affiliated business have committed to use their best efforts to convert the reinsurance agreements covering that business to assumption reinsurance agreements within four years of the acquisition date. Subject to regulatory approval, the Affiliated business reinsurance agreements will be converted into assumption reinsurance agreements on the fourth anniversary of the acquisition date. Household has entered into business transfer guarantee and support agreements with AH Life and the Company pertaining to the reinsured PPA and COLI business and a business transfer guarantee agreement pertaining to the reinsured Affiliated business. Under these agreements, Household has unconditionally and irrevocably guaranteed, as primary obligor, full payment and performance by its affiliated reinsurers.
Resulting from reinsurance activities of discontinued property and casualty insurance operations - 11,136
The effects of reinsurance on total premiums and other considerations and total benefits are as follows (in thousands):
Premiums and other considerations, before effect of reinsurance ceded $ 872,399 $ 670,309 $ 645,592 Less premiums and other considerations ceded 62,359 15,007 17,988 Net premiums and other considerations $ 810,040 $ 655,302 $ 627,604
Benefits, before reinsurance recoveries $ 901,385 $ 641,773 $ 610,927 Less reinsurance recoveries 59,089 13,911 9,201 Net benefits $ 842,296 $ 627,862 $ 601,726
Condensed parent-only balance sheets, statements of income and cash flow information of Jefferson-Pilot Corporation are presented below (in thousands):
Debt obligations $ 361,588 $ 29,350 Due to subsidiaries 75,629 - Other liabilities 45,170 37,187 Stockholders' equity 2,156,059 1,732,543 $ 2,638,446 $ 1,799,080
Cash Flows From Operating Activities 						 Net income $ 273,854 $ 239,237 $ 195,172 Adjustments to reconcile to cash provided: Equity in undistributed net income of subsidiaries 2,583 (98,114) (86,795) Noncash dividends received from subsidiaries (144,294) (18,270) - Change in accrued items and other adjustments, net 16,961 (8,302) (12,596) Net cash provided by operating activities 149,104 114,551 95,781
Cash Flows From Financing Activities Proceeds from external borrowings 526,588 - 39,700 Repayments of external borrowings (194,350) (10,350) - Borrowings from subsidiaries 68,650 - - Cash dividends (89,269) (81,814) (75,986) Common stock transactions, net (52,360) (55,687) (48,935) Other (1,555) (3,488) (2,800) Net cash provided by (used in) financing activities 257,704 (151,339) (88,021)
The parent company's stockholders' equity as of December 31, 1995 includes $1.315 billion of equity in undistributed net income of subsidiaries ($1.318 billion as of December 31, 1994) and $495 million of equity in net unrealized gains on subsidiaries' securities available for sale, after deferred income tax effect ($215 million as of December 31, 1994).
The only significant subsidiary that is not engaged in insurance operations is Jefferson-Pilot Communications Company ("JPCC"). JPCC is engaged in radio and television broadcasting operations and sports program production. Consolidated condensed financial statements of JPCC and subsidiaries are presented below (in thousands):
December 31, 1995 1994 Assets: Cash and cash equivalents $ 2,947 $ 8,449 Receivables 46,853 34,604 Property and equipment, net 40,051 39,444 Cost of acquired businesses in excess of net assets and other 52,020 50,413
Revenue $ 162,694 $ 145,316 $ 117,085 Expenses 126,039 113,431 94,312 36,655 31,885 22,773
Adjustments to reconcile to cash provided: Depreciation and amortization 8,839 8,079 9,030 Cumulative effect of accounting change, net - - 3,079 Other adjustments, net (4,591) 4,099 (2,979)
Net cash provided by operating activities $ 26,511 $ 31,540 $ 20,801
Cash Flows From Financing Activities Proceeds from term borrowings - 10,000 19,700 Repayments of term borrowings (2,800) (2,430) (6,984) Dividends paid (15,000) (4,000) (5,000) Net cash provided by (used in) financing activities (17,800) 3,570 7,716
Life insurance - Life insurance operations include the writing of individual and group life insurance, accident and health insurance and annuity products.
Identifiable assets at December 31 						 Life insurance $ 15,911,603 $ 5,654,372 $ 5,194,478 Communications 141,871 148,678 125,402 Discontinued operations - 146,444 175,670 Corporate and other 424,538 190,842 145,071 Consolidated $ 16,478,012 $ 6,140,336 $ 5,640,621
The fair values of cash, cash equivalents, balances due on account from agents, reinsurers and others, and accounts payable approximate their carrying amounts as reflected in the consolidated balance sheets due to their short-term availability or maturity. Assets and liabilities related to the Company's separate accounts are reported at fair value in the accompanying consolidated balance sheets.
The fair value of the mortgage loan portfolio, carried at $1,049.5 million and $680.6 million as of December 31, 1995 and 1994, has been estimated by discounting expected future cash flows using the interest rate currently offered for similar loans. The estimated fair value of mortgage loans approximated $1,133 million and $698 million as of December 31, 1995 and 1994.
Annuity contracts issued by the Company do not generally have defined maturities. Fair values of the Company's liabilities under annuity contracts, the carrying amounts of which are included with policyholder contract deposits in the accompanying consolidated balance sheets, are estimated to equal the cash surrender values of the underlying contracts. The stated amount and estimated fair value of the Company's liability under annuity contracts in the accumulation phase totaled $4.815 billion and $4.596 billion as of December 31, 1995 ($1.081 billion and $1.039 billion as of December 31, 1994).
The fair values of dividend accumulations, experience-rated refund liabilities and other policyholder funds on deposit approximate their carrying amount of $296 million and $202 million since they are either subject to current withdrawal or are of a relatively short-term nature. The estimated fair value of liabilities under supplementary contracts not involving life contingencies, which are combined with dividend accumulations and other policyholder funds on deposit, are estimated to approximate carrying amount of $23 million in 1995 and $22 million in 1994.
The fair values of short-term borrowings approximate their carrying amounts of $230 million and $29.4 million as of December 31, 1995 and 1994 due to their short-term nature and interest rates approximating those currently available. Similarly, the fair value of the liability for securities sold under repurchase agreements approximates its carrying amounts of $196.0 million and $266.8 million as of December 31, 1995 and 1994, which amounts include accrued interest. The fair value of other debt as of December 31, 1995, reported at $137.1 million, is estimated to be $138.3 million based primarily on the nationally quoted market price for the Company's Automatic Common Exchange Securities.
The fair value of the Company's redeemable preferred stock approximates its stated amount of $50 million since its dividend rate is adjustable and reprices frequently.
Except for the portfolio of equity securities classified as trading in the accompanying 1995 consolidated balance sheet, the Company has not maintained financial instruments for trading purposes.
JP-Life is a defendant in a proposed class action suit alleging deceptive practices, fraudulent and negligent misrepresentation and breach of contract in the sale of certain life insurance policies using policy performance illustrations which used then current interest or dividend rates and insurance charges and illustrated that some or all of the future premiums might be paid from policy values rather than directly by the insured. The claimant's actual policy values exceeded those illustrated on a guaranteed basis, but were less than those illustrated on a then current basis due primarily to the interest crediting rates having declined along with the overall decline in interest rates in recent years. Unspecified compensatory and punitive damages, costs and equitable relief are sought. The case is in the preliminary stages of pleadings and discovery. While management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome, management believes that it has made appropriate disclosures to policy- holders as a matter of practice, and intends to vigorously defend.
Under the terms of the assumption reinsurance agreement to acquire the majority of the life insurance business of Kentucky Central Life Insurance Company, liabilities were assumed as follows (in thousands):
In connection with the acquisition of Alexander Hamilton Life Insurance Company of America and its affiliates, liabilities were assumed as follows (in thousands):
In connection with dispositions, noncash assets were disposed of as follows (in thousands):