AH Life owns two office buildings in Farmington Hills, Michigan, one of which is used as its home office.
Per share amounts for 1991 through 1994 have been restated for the 1995 3-for-2 stock split.
REVENUE BY SOURCES (In Thousands) 1995 1994 1993 1992 1991 Individual Life $ 597,588 $ 410,157 $ 407,629 $ 388,744 $ 388,264 Annuity and investment products 235,285 119,028 104,134 102,018 92,290 Group insurance 513,092 496,487 475,209 475,100 475,872 Total life insurance $1,345,965 $1,025,672 $ 986,972 $ 965,862 $ 956,426 Communications 165,815 172,501 144,961 129,734 125,045 Other 9,127 9,211 6,282 4,656 4,570 Realized investment gains 48,509 61,426 54,234 45,726 32,220 Revenues, continuing operations $1,569,416 $1,268,810 $1,192,449 $1,145,978 $1,118,261
NET INCOME BY SOURCES (In Thousands) 1995 1994 1993 1992 1991 Individual Life $ 118,819 $ 92,772 $ 90,716 $ 86,580 $ 87,794 Annuity and investment products 41,460 31,473 26,420 30,596 25,256 Group insurance 37,710 44,215 41,106 39,412 33,155 Total life insurance $ 197,989 $ 168,460 $ 158,242 $ 156,588 $ 146,205 Communications 23,595 21,986 17,335 14,169 10,327 Other 605 531 ( 1,581) ( 6,544) ( 5,958) Realized investment gains, net of taxes 33,124 38,919 35,565 30,385 21,409 Net income, continuing operations $ 255,313 $ 229,896 $ 209,561 $ 194,598 $ 171,983
Jefferson-Pilot Communications Company (JP Communications) owns and operates three network television and fourteen radio broadcast stations and produces syndicated sports and entertainment programming. JP Communications' revenues originate principally from the sale of advertising and other related services through its television and radio stations.
On May 31, 1995, JP acquired a majority of the life insurance and annuity business of Kentucky Central Life Insurance Company (KCL). The acquisition was accomplished through an assumption reinsurance agreement in which JP Life assumed noncash assets of $932 million and recorded liabilities of $1,096 million. Further participation options to be exercised by approximately 4,000 policyholders may result in adjustments to assets and liabilities assumed, as well as the Company's enhancement under the assumption reinsurance agreement. Currently, the Company has recorded approximately $78 million as an other liability relating to the pending resolution of the further participation option process. Policy reserves of approximately $116 million will be recorded if 100% of such policyholders elect participation. To the extent that such options are not exercised, the Company will refund policy amounts received plus interest thereon. Additionally, subsidies to policyholders by participating guaranty associations which are intended to mitigate against the unfavorable financial impact to policyholders of surrenders do not apply prior to February 1, 1996. After that time, the level of policyholder withdrawals may increase. The Company does not expect that either of these uncertainties will have a material impact on the Company's financial position or results of operations.
JP's revenues are derived approximately 90% from Life Insurance, 8% from Communications, and 2% from parent company and other investments. The weightings have shifted more toward the Life Insurance segment during 1995 due to acquisitions. Consolidated revenues for 1995 include the results of the KCL assumption for the last seven months and for the AH Life acquisition for the last three months of the year.
JP's Consolidated Net Income applicable to common shareholders was $273.0 million, $239.2 million, and $195.2 million in 1995, 1994, and 1993, respectively. 1993's results included a charge of $24.1 million to record the cumulative effect of adopting SFAS 106 "Employers' Accounting for Post Retirement Benefits Other Than Pensions". Excluding the initial effect of adopting SFAS 106, 1995's Net Income applicable to common shareholders increased 14.1%, and 1994's Net Income increased 9.1%. Excluding the results of discontinued operations from all years, income from continuing operations before cumulative effect of change in accounting principle increased 11.1% in 1995 and 9.7% in 1994.
Income before investment gains (operating income) and the initial application of SFAS 106 increased 11.6% in 1995 and 10.0% in 1994. Income from continuing operations was 15.9% higher in 1995 and 9.8% higher in 1994.
JP holds a sizable portfolio of equity securities, which may continue to produce realized capital gains. JP also holds a portfolio of debt securities which, beginning in 1994, are partly categorized as "available for sale". The cost and fair value of these "available for sale" portfolios were:
JP has periodically reacquired shares of its stock and issued additional shares under incentive and option programs. The Company, through a 50% stock dividend, effected a 3-for-2 stock split to holders of record on December 8, 1995. All amounts shown are adjusted where appropriate to reflect this split. Changes in the Company's outstanding shares and the average shares outstanding were: 1995 1994 1993 (In millions)
Average shares outstanding with 1994 and 1993 restated to give effect to stock split 71.7 73.0 75.4
Earnings per common share increased 16.2% in 1995 and 26.6% in 1994. Earnings per common share excluding the effects of adopting SFAS 106 and net realized investment gains increased 13.5% in 1995 and 13.6% in 1994. The increase for both years was partly due to improved earnings and partly due to the impact of share repurchases. Earnings per common share from continuing operations improved 12.7% in 1995 and 13.3% in 1994.
Total benefits, claims, and expenses increased 29.0% in 1995 to $1,188.7 million and 4.4% in 1994 to $921.2 million. Without acquisitions, they increased 10.1% to $1,014.4 million in 1995. Life benefits and credits to policyholder accounts increased 13.9% in 1995 and 7.7% in 1994, reflecting the growth in life business in force. Accident and health benefits increased 6.9% in 1995 due to higher loss ratios, but only 1.1% in 1994 as growth in medical inflation and utilization were moderate in that year. Net life insurance expenses (after deferral of policy acquisition costs) increased 4.5% in 1995 due to increased life productions, and declined 3.1% in 1994 as the Company improved the economies of its Individual distribution systems. Cost of Communications operations declined 6.2% in 1995 due to the sale of Jefferson- Pilot Data Services and increased 20.7% in 1994 as a result of acquisitions of television and radio properties as well as costs associated with higher overall revenues.
The following table illustrates operating income by segments and classes of products: 1995 1994 1993 (In millions) Life Insurance: Individual life insurance $118.8 $ 92.8 $ 90.7 Annuity and investment products 41.5 31.4 26.4 Group insurance 37.7 44.2 41.1 198.0 168.4 158.2 Communications 23.5 22.0 17.3 Discontinued operations 2.2 9.2 8.0 Other (0.2) 0.6 (1.5)
1995 1994 1993 1992 1991 (In thousands) Premiums and other considerations $294,436 $188,921 $184,769 $172,138 $168,845 Net investment income 298,913 216,884 218,317 212,553 216,343 Other income 4,239 4,352 4,543 4,053 3,076 Total revenues 597,588 410,157 407,629 388,744 388,264
Operating income before income taxes 176,169 137,802 133,720 120,404 121,522 Provision for income taxes 57,350 45,030 43,004 33,824 33,728
Recognizing the significant market for retirement products, Annuity and Investment Products are shown as a separate product line this year with comparable amounts for the previous four years. With the acquisition of AH Life, these products are significant and a separate discussion enhances the reader's comprehension of JP's results. Annuity and investment products are offered through financial institutions, independent agents, career agents, investment professionals, and broker/dealers. Operating results were:
Operating income improved 31.7% in 1995 and 19.1% in 1994. Without acquisitions (which are included for only three months in 1995), operating income would have been 5.2% higher in 1995. Annuity funds on deposit increased 462.8% to $6,092 million (20.4% to $1,303 without acquisitions) in 1995 and 22.0% to $1,081 in 1994.
Fixed annuity receipts for policyholder accounts are illustrated below (in millions): 1995 1994 1993
1995 1994 1993 1992 1991 (In thousands) Premiums and other considerations $466,180 $451,566 $431,504 $432,154 $434,684 Net investment income 46,912 44,921 43,396 42,588 40,685 Other income - - 308 358 503 Total revenues 513,092 496,487 475,208 475,100 475,872
Operating income before income taxes 55,756 65,637 60,297 54,682 45,869 Provision for income taxes 18,046 21,422 19,191 15,270 12,714 Operating income $ 37,710 $ 44,215 $ 41,106 $ 39,412 $ 33,155
Group operating income declined 14.7% in 1995 but improved 7.6% in 1994. As a percentage of Premiums and other considerations, operating income for the Group Department was 8.1% in 1995, 9.8% in 1994, and 9.5% in 1993. Group life results improved during 1995 due to improved mortality costs, whereas 1994's life results were lower due to adverse mortality experience. Health results improved 19.9% in 1994 but declined 23.4% in 1995 due to higher loss ratios among conventionally-insured coverages and adverse experience in long-term disability claims in certain industries, as indicated by the following chart:
1995 1994 1993 1992 1991 (In thousands) Communications revenues $165,815 $172,501 $144,961 $129,734 $125,045
Operating income from the Communications segment increased 7.3% in 1995 and 26.8% in 1994. In early 1995, substantially all of the assets and the media services operations of Jefferson-Pilot Data Services, Inc. (JPDS) were sold for aggregate consideration approximating $33 million. Operating income of JPDS of $1.3 million in 1995, $2.6 million in 1994, and $2.0 million in 1993 is included in the Communications segment. Earnings on sale proceeds of JPDS are included in the "other" segment for 1995. Excluding JPDS, operating income increased 15.0% in 1995. 1995's increase in core broadcasting earnings is attributable to both television and radio properties, as well as refunds of federal income taxes and related interest. 1994's increase is attributable to: market share increases, particularly among radio properties; a favorable sales environment in the broadcast media business; acquisitions in new and existing markets; and increases in sports production business.
Revenues declined 3.9% in 1995 and improved 19.0% in 1994. During 1995, television revenues improved 10.1%, radio 5.8%, and sports and entertainment 22.5%. Despite the decline in political revenues from 1994, television benefitted from strong market growth and improved revenue shares in several key markets as well as the addition of sports programming. Radio experienced strong growth in all markets, but this gain was partially offset by a decline in market share in two major markets due to increased competition. During 1994, television revenues improved 22.6%, radio 29.9%, and sports and entertainment 58.9%. Television improved as a result of acquisition activity, political advertising, and improved economic conditions. Radio benefitted from very favorable advertising conditions, acquisitions, and improved market shares. The majority of the sports and entertainment increase was related to special sports programming events occurring during 1994.
Discontinued operations include the operations of Jefferson-Pilot Fire & Casualty (JPF&C) and Jefferson-Pilot Title Insurance Company (JP Title). These subsidiaries formerly comprised the "Other insurance" segment. On December 23, 1994, JP agreed to sell the stock of JPF&C for cash of $55 million and recorded a gain on sale of $16.4 million in 1995. Prior to sale, JP received a dividend in partial liquidation of $36.2 million. JP Title was sold during the fourth quarter of 1994 for a small gain. Earnings on proceeds from sale of these subsidiaries are included in the "other" segment for 1995.
The operations of both subsidiaries are segregated as "Discontinued Operations" in the accompanying financial statements. Operating income attributable to Discontinued Operations declined to $2.2 million, as they were only included for a portion of the year, but increased 16.2% in 1994 to $9.2 million. Gain on disposal of these companies included $3.0 million from sale of investments prior to closing.
Operating results categorized as "other" include earnings on investments held in the parent company and passive investment subsidiaries, as reduced by expenses of the Corporation and financing costs. These results improved in 1995 due to earnings on cash sales proceeds of discontinued operations, offset by acquisition financing costs of $5.2 million (for three months), and in 1994 due to a reduction of expenses associated with shareholder litigation and income from options written on equity securities totaling $2.5 million.
JP's resources are primarily represented by investments related to its Life Insurance segment, properties, and other assets used in its Life Insurance and Communications segments and investments backing corporate capital. The Investments section reviews the Company's investment portfolio and key strategies. II-14
Total assets were $16,478 million and $6,140 million at December 31, 1995 and 1994 - an increase of $10,338 million, or 168.4%. Primary sources for asset growth were acquisitions ($9,400 million), increases in policyholder contract deposits ($323 million), net borrowings ($338 million), and cash provided by operating activities. These sources were offset by cash dividends paid to shareholders ($89.3 million) and net acquisitions of JP shares ($52 million). Asset values also increased due to changes in market values of assets held in the "available for sale" category. These increases were the result of decreases in market interest rate yields and transfers of certain held to maturity securities to the available for sale designation.
Additionally, JP recorded Value of Insurance in Force at fair value of $548.5 million in conjunction with the assumption from KCL and acquisition of AH Life. This asset represents the actuarialy-determined present value of future gross profits for the businesses acquired, discounted at a risk- adjusted rate of return. Value of Insurance in Force is amortized at a constant rate based on the present value of the estimated gross profit amounts expected to be realized over the life of the business. During 1995, the balance was reduced by $26.5 million for net amortization, $1.2 million for the effect of realized investment gains, and $39.4 million for the effect of unrealized investment gains.
At December 31, 1995, JP had recorded reinsurance receivables of $1,404.3 million and policy loans of $828.5 million which are related to the businesses of AH Life not acquired by JP. These businesses are 100% coinsured to HI, which has provided payment, performance, and capital maintenance guarantees with respect to the balances receivable.
During 1995 and 1994, the Company sold U.S. Treasury obligations under repurchase agreements involving various counterparties. Proceeds were used to purchase securities with longer durations as an asset/liability management strategy. The repurchase agreements were accounted for as financing arrange- ments. The maximum amount outstanding during 1995 and 1994 was $264.7 million and $266.8 million. Underlying securities collateralizing open repurchase agreements at year-end were $196 million at fair value and $188 million at amortized cost for 1995, and $266 million at fair value and $273 million at amortized cost for 1994.
JP's capital adequacy is illustrated by the following table: 1995 1994 1993 1992 1991 (In millions)
Total assets $16,478 $6,140 $5,641 $5,257 $4,945 Total shareholders' equity $2,156 $1,733 $1,733 $1,668 $1,544 Ratio of shareholders' equity to assets 13.1% 28.2% 30.7% 31.7% 31.2%
The Company's ratio of capital to assets declined during 1995 as a result of acquisitions and internal growth, and in 1994 due to growth in policyholder contract deposits as well as securities sold under repurchase agreements which are accounted for as financing arrangements.
JP Life and AH Life have been assigned the following ratings by the following agencies:
Cash and short-term investments were $122.5 million and $22.8 million at December 31, 1995 and 1994. Additionally, debt and equity securities held by the parent company and nonregulated subsidiaries with carrying amounts of
JP's strategy for managing its investment portfolio is to dependably meet its pricing assumptions while achieving the highest possible after-tax returns over the long term. Operating structures are in place to require that credit and interest rate risks are prudently managed and that sufficient liquidity is maintained. Management focuses on option-adjusted yields as a measure of anticipated performance and on option-adjusted durations of assets and liabilities as a measure of interest rate risk.
JP held the following carrying amounts of investments at each of the dates reported: Dec. 31, 1995 % Dec. 31, 1994 % (Dollars in millions)
Privately-placed bonds and commercial mortgage loans have decreased as a percentage of invested assets due to acquisitions. Near-term strategies include identification of fixed income market sectors and niches that provide investment opportunities to meet the portfolios' growth, quality, and yield requirements. As a result, the Company anticipates that private placement and commercial mortgage loan production will increase these categories as a percent of total assets as they did in 1995 before the acquisitions. Common stocks, as a percent of total assets, have declined due to acquisitions and transfers to Separate Accounts for Company-sponsored pension plans. The Company will continue to hold common stock as an investment of corporate capital and surplus to enhance the long-term value of the Company and to provide opportunities for tax efficient portfolio management strategies; however, the percentage of common stocks will likely decline as new cash flows from policyholder account balances are invested in fixed interest securities.
JP's Investment Policy Statement requires an average quality fixed income portfolio (excluding mortgage loans) of "A" or higher. Currently, the average quality is "Aa3", excluding mortgage loans. The Policy Statement also imposes limits on the amount of lower quality investments and requires diversification
Carrying amounts of investments categorized as "higher risk" assets were, at year-end: 1995 % 1994 % (Dollars in millions) Bonds near or in default $ 12.5 0.1% $ - - Bonds below investment grade 443.0 3.3 122.3 2.3 Mortgage loans 60 days delinquent or in foreclosure 8.3 0.1 0.9 - Mortgage loans restructured 17.7 0.1 13.5 0.3 Foreclosed properties 4.2 - 7.8 0.2 Subtotal, "higher risk assets" 485.7 3.6 144.5 2.8
Statement authorizes an investment up to $50 million in trading securities shares for the primary purpose of writing covered call options to enhance returns from option premiums, market appreciation, and dividends received. Option premiums received under this program are recorded as investment income together with realized and unrealized gains on the portfolio. Considerations received for both programs were $10.9 million in 1995 and $4.9 million in 1994. As discussed in the Liquidity section, the Company sold securities under repurchase agreements as an asset/liability management strategy.
JP held the following Collateralized Mortgage Obligations (CMO's) at year-end: 1995 1994 (In millions) Available for sale, at fair value: Federal agency issued CMO's $1,856.1 $ 366.8 Corporate private-labeled CMO's 640.4 87.0 Held to maturity, at amortized cost: Federal agency issued CMO's - 509.7
The Company's investment strategy with respect to CMO's focuses on actively-traded, less volatile issues that produce relatively stable cash flows. CMO holdings consist predominantly of the least volatile Planned Amortization Classes and sequential tranches of federal agency issuers. During 1994, the Company liquidated its holdings of mortgage pass-through securities and reinvested the proceeds into less volatile CMO's with longer durations. Due to the high quality and liquid nature of these investments, the Company believes that the impairment risks associated with these securities are no greater than those applicable to direct agency or corporate issues.
In October 1995, the Financial Accounting Standards Board (FASB) announced that reporting entities would be allowed an opportunity to reassess the appropriateness of the classification of all securities held. Subsequent guidance indicated that reclassifications from the held-to-maturity category that result from this one-time reassessment will not call into question the intent of an entity to hold other debt securities to maturity in the future. In response, the Company transferred certain securities between the "held to maturity" (HTM) category and the "available for sale" (AFS) category as shown below:
Separate asset portfolios have been established for each insurance line. Various modeling and analytical systems are employed in analyzing the assets and liabilities which make up each of these lines. Option-adjusted liability durations have been developed using stochastic actuarial projections of liability cash flows. In addition, the Investment Department's models measure the assets' effective duration and produce other analytical measures necessary for portfolio management. JP considers the duration match for the respective portfolios as well as total assets and liabilities. The Company also considers the timing of the cash flows arising from the assets and liabilities under different interest rate scenarios. Management intends that option- adjusted durations for interest sensitive portfolios such as universal life and annuities remain prudently matched. A wider tolerance is permissible for the noninterest sensitive (traditional) portfolios. At December 31, 1995 and 1994, 75.4% and 39.7% of life insurance invested assets at amortized cost were held for interest-sensitive portfolios and 24.6% and 60.3% were held for traditional portfolios and corporate capital and surplus.
The Company's recent growth in assets and liabilities is largely attributable to increases in interest-sensitive products. Because JP earns profits on the basis of investment spreads, changes in interest rates may also affect results of operations. In a rising interest rate environment, competitive pressures may make it difficult for the Company to sustain the spreads on its interest sensitive portfolio of insurance products. Durations of the Company's assets and liabilities may also be adversely impacted by changes in interest rates.
Medical inflation and utilization of medical services affects the profitability of health products offered through the Individual and Group distribution systems. In the event that premium rates are not adjusted in anticipation of medical trends, profitability of health insurance products may be adversely affected.
The number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in assessments by state guaranty associations to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in most states. The Company has accrued for expected assessments net of estimated future premium tax deduductions.
In recent years, the life insurance industry has experienced increased litigation in which large jury awards including punitive damages have occurred. JP is involved in various legal and administrative proceedings and claims of various types, some of which include claims for punitive damages. Because of the considerable uncertainties that exist, the Company cannot predict the outcome of pending or future litigation with certainty. It is possible that results of operations in a particular period could be materially affected by certain legal proceedings. Based on consultation with the Company's legal advisers, management does not believe that resolution of pending legal proceedings will have a material adverse effect on the Company's financial position or liquidity.
JP adopted the provisions of SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994. This statement applies to equity securities having readily-determinable fair values as well as debt securities and requires classification of securities as: 1) securities held to maturity stated at amortized cost; 2) trading securities at fair value with unrealized gains and losses reflected in income currently; or 3) securities available for sale stated at fair value with unrealized gains and losses, net of deferred income tax effect, included in a separate component of stockholders' equity.
March June September December 31 30 30 31 Revenues, including net investment income and realized gains on investments $307,248 $314,466 $312,455 $334,640 Benefits and expenses 228,067 228,615 225,892 238,633 Provision for income taxes 26,782 29,569 29,659 31,696 Income from continuing operations $ 52,399 $ 56,282 $ 56,904 $ 64,311 Discontinued operations, net of income taxes 1,865 2,088 1,895 3,493 Net income applicable to common shareholders $ 54,264 $ 58,370 $ 58,799 $ 67,804 Per share of common stock $ .74 $ .80 $ .81 $ .93
Per share information has been restated for the 1995 stock split.
We have audited the accompanying consolidated balance sheets of Jefferson- Pilot Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Alexander Hamilton Life Insurance Company of America and subsidiaries as of December 31, 1995 and for the three-month period then ended, which are included in the accompanying 1995 consolidated financial statements. The consolidated financial statements of Alexander Hamilton Life Insurance Company of America and subsidiaries reflect total assets and revenue constituting 53% and 9%, respectively, of the related consolidated totals for 1995. The consolidated financial statements of Alexander Hamilton Life Insurance Company of America and subsidiaries were audited by other auditors whose report has been furnished to us, and our opinion for 1995, insofar as it relates to the amounts included for Alexander Hamilton Life Insurance Company of America and subsidiaries, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors referred to above provide a reasonable basis for our opinion.
Consolidated Balance Sheets Dollar Amounts in Thousands Except Per Share Information
Future policy benefits (Note 5) $ 1,452,603 $ 1,278,978 Policyholder contract deposits (Note 5) 10,781,219 1,846,043 Dividend accumulations and other policyholder funds on deposit 181,694 176,519 Policy and contract claims 199,205 172,216 Dividends for policyholders 19,149 18,350 Deferred revenue and premiums collected in advance 34,149 23,321 Other 53,555 118,336
Short-term borrowings (Note 6) 230,000 29,350 Other debt (Note 6) 137,148 - Securities sold under repurchase agreements (Note 7) 196,040 266,838 Currently payable income taxes 39,526 - Deferred income tax liabilities (Note 12) 214,898 122,253 Liabilities related to separate accounts 345,530 210,225 Accounts payable, accruals and other liabilities 387,237 145,364
Jefferson-Pilot Corporation and Subsidiaries Consolidated Statements of Income Dollar Amounts in Thousands Except Per Share Information
Life premiums & other considerations $ 398,923 $ 256,237 $ 240,996 Accident and health premiums 411,117 399,065 386,608 Total premiums & other considerations 810,040 655,302 627,604 Net investment income (Note 3) 540,805 375,196 360,800 Realized investment gains (Note 3) 48,509 61,426 54,234 Communications operations 165,815 172,501 144,961 Other 4,247 4,385 4,850 1,569,416 1,268,810 1,192,449
Life benefits and other credits to policyholders 511,972 318,913 296,078 Accident and health benefits 330,324 308,949 305,648 Total benefits 842,296 627,862 601,726 Insurance commissions 109,890 71,752 55,189 General and administrative 134,411 117,819 119,029 Insurance taxes, licenses and fees 28,629 23,351 23,474 Net deferral of policy acquisition costs (Note 4) (66,456) (40,410) (17,527) Net amortization of value of insurance in force (Note 4) 26,490 - - Communications operations 113,394 120,833 100,100
Income from discontinued operations, net of income taxes (Note 2): Income from operations prior to disposal 2,178 9,341 9,720 Gain on disposal 16,363 - -
Jefferson-Pilot Corporation and Subsidiaries Consolidated Statements of Income (Continued) Dollar Amounts in Thousands Except Per Share Information
Income before cumulative effect of change in accounting principle $ 273,854 $ 239,237 $ 219,281
Net income available to common shareholders (Note 1) $ 272,997 $ 239,237 $ 195,172
Income from operations prior to disposal 0.03 0.13 0.13 Gain on disposal 0.23 - -
Jefferson-Pilot Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity Years Ended December 31, 1995, 1994 and 1993 Dollar Amounts in Thousands Except Per Share Information
Balance, January 1, 1993 $ 63,049 $ - $ 1,270,342 Net income - - 195,172 Common dividends, $1.04 per share - - (78,125) Common stock issued 137 2,982 Common stock reacquired (1,355) (2,982) (47,717) Decrease during year - - -
Jefferson-Pilot Corporation and Subsidiaries Consolidated Statements of Cash Flows Dollar Amounts in Thousands
Equity securities: 		 				 Sales - - 99,845 Purchases - - (65,246) Repayments of mortgage loans 95,727 71,114 63,399 Mortgage loans originated (291,000) (173,139) (85,678) Decrease (increase) in policy loans, net (108,208) 8,242 6,063 Cash received in assumption reinsurance transaction 164,488 - - Cash paid for insurance business acquired, net (505,306) - - Other investing activities, net (7,148) (32,787) 7,762
Net increase (decrease) in cash and cash equivalents 99,700 (8,789) (124,106)
Nature of operations: The Company's continuing operations are in the life insurance and communications industries. Life insurance, accident and health insurance and annuities are currently marketed to individuals and businesses in the United States and Canada. Communications operations consist of radio and television broadcasting conducted through facilities located in strategically selected markets in the Southeastern and Western United States, and sports program production.
Principles of consolidation: The consolidated financial statements include the accounts of Jefferson-Pilot Corporation and all of its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.
Use of estimates: The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, 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. Actual results and outcomes can differ from those estimates.
Management considers available facts and knowledge of existing circumstances when establishing estimated amounts included in the financial statements. While it does not generally expect significant near- term changes in estimated amounts reflected in the accompanying consolidated financial statements, operating in the life insurance industry requires management to utilize historical experience and assumptions about future events and circumstances in order to develop estimates of material reported amounts and disclosures. Accounting estimates also play a significant role in the financial reporting process of the communications industry. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are (1) fair values of assets received and liabilities assumed in assumption and acquisition transactions, (2) fair values of investments in securities and other financial instruments, (3) asset valuation allowances, (4) policy liabilities, (5) deferred policy acquisition costs and value of insurance in force, (6) liabilities for pension and other postretirement benefits, (7) liabilities for potential assessments of additional income taxes relating to prior years and (8) the potential effects of resolving litigated matters. Estimates regarding all of the preceding are inherently subject to change and are reassessed periodically.
SFAS 115 establishes criteria for classifying debt securities as held to maturity or trading and requires debt securities not otherwise classified to be accounted for as available for sale. Equity securities with readily determinable fair values are required to be classified as either trading or available for sale. Except for those included in a trading portfolio, individual securities that experience other-than-temporary declines in value to amounts less than amortized cost must be adjusted to a new cost basis, with a corresponding charge to earnings.
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 marketable equity securities were classified as available for sale. Prior to adopting SFAS 115, all debt securities were stated at amortized cost less allowances for other-than-temporary declines in value. Debt securities classified as available for sale were adjusted to aggregate fair value as of January 1, 1994 and equity securities held by the parent company, which were previously stated at the lower of aggregate cost or market, were adjusted to market value. Equity securities held by insurance subsidiaries were already stated at market and therefore were not adjusted.
Fair values of debt and equity securities have been determined using values obtained from independent pricing services and discounted cash flow techniques, as considered appropriate based on consideration of relevant investment characteristics.
Mortgage and policy loans: Mortgage loans on real estate are stated at unpaid balances, net of allowances for unrecoverable amounts. Policy loans are stated at their unpaid balances.
During 1995, the Company adopted SFAS 114 Accounting by Creditors for Impairment of a Loan. 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, for collateral dependent loans, the fair value of the underlying collateral. Adoption of SFAS 114 did not have a significant effect on the consolidated financial statements for 1995.
Property and equipment: Property and equipment are stated at cost and depreciated principally by the straight-line method over their estimated useful lives, generally 30 to 50 years for buildings and approximately 10 years for other property and equipment.
Deferred policy acquisition costs and value of insurance in force: The costs of acquiring new business, including commissions, certain costs of underwriting and issuing policies and certain agency office expenses, all of which vary with and are primarily related to the production of new business, have been deferred.
For traditional life insurance policies, the deferred costs are amortized over the premium paying periods of the related contracts using the same assumptions about 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.
Recognition of revenue: Premiums on traditional life insurance products are reported as revenue when received unless received in advance of the due date. Benefits and expenses are provided against earned premium revenue in a manner which recognizes profits over the estimated lives of the insurance contracts.
Recognition of benefits and expenses: Benefits and expenses, other than deferred policy acquisition costs, related to traditional life and accident and health 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.
Reinsurance balances and transactions: Reinsurance receivables include amounts related to paid benefits and estimated amounts related to unpaid policy and contract claims, future policy benefits and policyholder contract deposits. The cost of reinsurance is accounted for over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies.
Advertising costs: Advertising costs are expensed as incurred. Advertising expense approximated $9.6 million in 1995, $9.4 million in 1994 and $8.0 million in 1993.
Net income per share of common stock: Net income per share of common stock is based on the weighted average number of common shares outstanding. The weighted average number of shares outstanding was 71,693,816 in 1995, 72,960,533 in 1994 and 75,375,227 in 1993. Net income per share of common stock for 1995 was computed after deducting dividends on redeemable preferred stock of $857 thousand.
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 pro-forma disclosures of net income and income per share as if the fair value-based method had been applied. Such pro-forma amounts are likely to be less than the corresponding amounts presented in future statements of 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.
Periodic Payment Annuity ("PPA") contracts, consisting primarily of structured settlements and lottery business and Corporate-Owned Life Insurance ("COLI") written prior to the acquisition, as well as certain pre-acquisition credit life, accident and health and other ("Affiliated") business written in conjunction with the lending activities of Household were reinsured with affiliates of Household on a coinsurance basis with 100% reinsurance. As discussed in Note 14, 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 Household has entered into certain guarantee agreements regarding payment, performance and capital maintenance on the part of its affiliates. A similar guarantee regarding affiliate payment and performance covers the Affiliated business reinsured. Businesses acquired include substantially all of the life insurance and single premium deferred annuity contracts of Alexander Hamilton Life Insurance Company of America and FAHL that were in force on the acquisition date.
The aggregate purchase price of $575 million was paid $475 million in cash and $50 million in redeemable preferred stock of AH Life, plus the purchase from Household of a $50 million surplus note of Alexander Hamilton Life Insurance Company of America. The acquisition was financed through a combination of internal liquid resources, borrowings of approximately $187 million under a revolving credit agreement and proceeds of $127 million (after transaction costs) from the issuance of Automatic Common Exchange Securities ("ACES") Due January 21, 2000 (see Note 6).
Pursuant to the stock purchase agreement, the entire acquisition was effective October 1, 1995 and was accounted for as a purchase under Opinion 16 of the Accounting Principles Board ("APB 16"). The Company's consolidated financial statements include the consolidated results of operations of AH Life for the period since that date. Assets and liabilities of the acquired companies were recorded at their fair values as of the acquisition's effective date. Value of insurance in force of $324.6 million, computed using a risk-adjusted discount rate and representing the actuarially determined present value of anticipated profits to be realized from the acquired life insurance and annuity business, was recorded as an asset. The excess of cost (purchase price) over the fair value of identifiable tangible and intangible net assets acquired ($50.4 million) was also recorded as an asset. The allocation of the purchase price has been made based on preliminary estimates of tax basis of assets and liabilities and assignment of cost of acquired businesses in excess of net assets among affiliates and may be subject to change. The Company's management has completed a plan of integration under which a majority of AH Life's employees will be involuntarily terminated or relocated within nine months of the acquisition date. The present value of expected associated costs approximating $11 million was accrued as of the acquisition date.
On December 30, 1994, Jefferson-Pilot Title Insurance Company ("JPT") entered into a reinsurance agreement with First American Title Insurance Company (First American) under which JPT ceded to First American its obligations and liabilities on all policies issued through that date. After the reinsurance agreement became effective, substantially all of JPT's cash and investments were transferred to the parent company and the parent company then sold 100% of JPT's common stock to First American for cash and a note totaling approximately $1.3 million. No material gain was realized on the transactions which resulted in the disposition of JPT.
Financial information relative to discontinued operations follows (in thousands). Asset and liability information, as of December 31, 1994, relates entirely to JPF&C.
Revenue $ 15,956 $ 64,862 $ 54,175 Income before income taxes and cumulative effect of change in accounting principle 2,413 10,944 11,573 Income taxes 235 1,603 1,853 Cumulative effect of change in accounting principle, net of tax benefit of $263 - - (510) Net income $ 2,178 $ 9,341 $ 9,210
On February 14, 1995, substantially all of the assets and the media industry data processing operations of Jefferson-Pilot Data Services, Inc. (JPDS) were sold. Prior to the sale, JPDS was a part of the Company's communications business segment. Aggregate consideration approximated $33 million in cash and, after accrual of certain sale-related expenses the sale resulted in a realized gain of approximately $15.7 million ($11 million after income taxes). Aside from the disposition gain, JPDS net income for 1995 amounted to $1.3 million, substantially all of which resulted from retirement plan curtailment gains. JPDS net income of $2.6 million in 1994 and $2.0 million in 1993 is included in the consolidated statements of income of those years. JPDS net income for 1993 reflects an after-tax charge of $575,000 resulting from the adoption of SFAS 106 (see Note 13).
Changes during 1995 and 1994 in amounts affecting net unrealized gains included in the separate component of stockholders' equity, reduced by deferred income taxes, are as follows (in thousands):
Effect of adopting SFAS 115 as of January 1, 1994: Increase in stated amount of securities $ 106,624 $ 70,104 $ 176,728 Reduction of deferred policy acquisition costs (15,235) - (15,235) Increase in deferred income tax liabilities (31,986) (28,103) (60,089) Increase in net unrealized gains included in stockholders' equity 59,403 42,001 101,404
Changes during year ended December 31, 1994: Decrease in stated amount of securities (191,733) (150,220) (341,953) Increase in deferred policy acquisition costs 25,526 - 25,526 Decrease in deferred income tax liabilities 52,022 62,280 114,302 Decrease in net unrealized gains included in stockholders' equity (54,782) (45,939) (100,721) Net unrealized gains on equity securities held by insurance subsidiaries as of 12/31/93 - 331,568 331,568 Net unrealized gains (losses) on securities available for sale as of December 31, 1994 (54,782) 285,629 230,847 Change during year ended December 31, 1995: Increase in stated amount of securities 337,323 181,561 518,884 Reduction of value of insurance in force and deferred policy acquisition costs (65,209) - (65,209) Increase in deferred income tax liabilities (91,534) (66,264) (157,798) Increase in net unrealized gains included in stockholders' equity 180,580 115,297 295,877
Net unrealized gains on securities available for sale as of December 31, 1995 $ 125,798 $ 400,926 $ 526,724
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, 1995 are as follows (in thousands):
U. S. Treasury obligations and direct obligations of U. S. Government agencies $ 483,040 $ 37,462 $ (22) $ 520,480 Federal agency issued collater- alized mortgage obligations 1,774,585 87,147 (5,614) 1,856,118 Obligations of states and political subdivisions, including special revenue obligations 290,272 6,129 (452) 295,949 Corporate obligations 2,998,584 119,878 (32,072) 3,086,390 Corporate private-labeled collateralized mortgage obligations 600,685 40,794 (1,044) 640,435 Redeemable preferred stocks 61,181 1,029 (3,373) 58,837 Subtotal, debt securities 6,208,347 292,439 (42,577) 6,458,209 Equity securities 207,128 610,054 (838) 816,344
Securities available for sale $ 6,415,475 $ 902,493 $ (43,415) $ 7,274,553
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, 1995 are as follows (in thousands):
Obligations of states and political subdivisions, including special revenue obligations $ 41,701 $ 577 $ (184) $ 42,094 Corporate obligations 3,485,703 147,911 (27,169) 3,606,445 Debt securities held to maturity $ 3,527,404 $ 148,488 $ (27,353) $ 3,648,539
U. S. Treasury obligations and direct obligations of U. S. Government agencies $ 573,529 $ 8,417 $ (29,851) $ 552,095 Federal agency issued collater- alized mortgage obligations 394,855 229 (28,310) 366,774 Obligations of states and political subdivisions, including special revenue obligations 61,927 1,271 (2,518) 60,680 Corporate obligations 550,204 2,242 (33,758) 518,688 Corporate private-labeled collateralized mortgage obligations 87,592 2,385 (3,001) 86,976 Redeemable preferred stocks 23,867 301 (2,516) 21,652
Debt securities held to maturity $ 1,940,046 $ 14,208 $ (156,119) $ 1,798,135
Aggregate amortized cost and aggregate fair value of debt securities as of December 31, 1995, according to contractual maturity date, are as indicated below (in thousands). Actual future maturities will differ from the contractual maturities shown because the issuers of certain debt securities have the right to call or prepay the amounts due the Company, with or without penalty.
Due in one year or less $ 14,959 $ 15,043 $ 18,961 $ 19,044 Due after one year through five years 767,479 793,070 847,584 847,743 Due after five years through ten years 1,692,834 1,760,259 1,052,614 1,089,046 Due after ten years through twenty years 374,281 398,245 342,914 356,934 Due after twenty years 291,364 306,446 27,248 29,172 Amounts not due at a single maturity date 3,006,249 3,126,309 1,238,083 1,306,600
The Company's investment policy requires it to maintain a diversified, high average quality debt securities portfolio and imposes limits on holdings of lower quality securities, including those with heightened risk-reward exposure. Credit exposure is regularly monitored on an overall basis and from industry, geographic and individual issuer perspectives. Exposure limits are reduced as credit quality declines. When credit quality declines to the extent that limits are violated, the affected holdings must be promptly conformed to limits or Finance Committee approval must be sought. Current investment policy limits the life insurance subsidiaries' investments in equity securities and real estate to a prescribed percentage of statutory surplus plus asset valuation reserve. Duration/cash flow characteristics of fixed-income investments are compared with those of insurance liabilities to ascertain that durations are prudently managed. Only fixed-income investments back the Company's life insurance liabilities and cash flow tests are regularly performed.
Investments in debt and equity securities include approximately 2,000 issuers, with only one corporate issuer representing more than one-percent of the aggregate reported amounts of these investments. Included with equity securities is common stock of NationsBank Corporation stated at value of $288.3 million (2.7%) and $236.6 million (5.5%) as of December 31, 1995 and 1994. Debt securities considered less than investment grade approximated 4.7% of the debt securities portfolio as of December 31, 1995. Debt securities with fair value approximating $20 million are on deposit with or for states in which subsidiaries conduct life insurance operations.
At December 31, 1995, the recorded investment in loans that are considered to be impaired under SFAS 114 was $78 million, for which the related allowance for credit losses is $12 million. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $79 million. For the year ended December 31, 1995, the Company recognized interest income on impaired loans of $7.9 million using the cash basis method. Recorded investments in impaired loans and related interest income in 1994 and 1993 were less than the amounts as of and for the year ended December 31, 1995.
The Company's mortgage loan portfolio is comprised primarily of conventional real estate mortgages collateralized by retail (46%), apartment (16%), hotel and office (11% each) properties. Mortgage loan underwriting standards emphasize the credit status of a prospective borrower, quality of the underlying collateral and conservative loan-to-value relationships. Speculative lending arrangements presenting heightened risk-reward exposure comprise an insignificant percentage of the portfolio. Approximately 49% of stated mortgage loan balances as of December 31, 1995 are due from borrowers in South Atlantic states and approximately 16% are due from borrowers in West South Central states. No other geographic region represents as much as 10% of December 31, 1995 mortgage loans. Delinquent loans outstanding as of December 31, 1995 approximated $8 million and the Company has provided a valuation allowance of $27 million against the entire mortgage loan portfolio. Real estate acquired by foreclosure is carried at $3.5 million, net of allowances of $.9 million.
The details of realized gains (losses) for the three years ended December 31, 1995 follow (in thousands):
Information about proceeds and gross realized gains and losses on securities transactions involving continuing operations during 1995 and 1994 follows (in thousands):
Gross realized: 								 Gains $ 54,018 $ 1,490 $ 60,860 $ 1,709 Losses (26,903) (163) (23,520) (329) Net realized gains $ 27,115 $ 1,327 $ 37,340 $ 1,380
Beginning balance, life insurance operations $ 323,015 $ 272,314 $ 254,787 Deferral: Commissions 71,034 43,369 27,737 Other 23,109 19,306 14,873
Adjustment related to unrealized (gains) losses on certain securities (Note 3) (36,071) 10,291 - Ending balance, life insurance operations 353,400 323,015 272,314
Ending balances, included in consolidated balance sheet $ 189,861 $ 291,503 $ 481,364
1996 12.0 % 9.0 % 1997 10.4 8.5 1998 10.0 8.5 1999 9.8 8.5 2000 9.8 8.0
The liability for future policy benefits associated with ordinary life insurance policies issued by J-P Life has been determined using interest rate assumptions which vary by year of issue and range from 3% to 9.9% for participating policies, remaining level for all durations. For nonparticipating J-P Life policies, assumed interest rates grade uniformly over 20 to 30 years with initial rates ranging from 3% to 9.75% and ultimate rates ranging from 3% to 6%. Interest rate assumptions for J-P Life's weekly premium, monthly debit and term life insurance products generally fall within the same ranges as those pertaining to individual life insurance policies. Interest rate assumptions used to value the business assumed in the KCL transaction fall within the ranges of rates applied in the valuation of comparable J-P Life products. For term insurance policies issued by AH Life prior to 1993 (prior to 1994 for FAHL issues), assumed interest rates grade from 9.5% to 8% over 10 years. Assumed interest rates for post-1992 AH Life term policies (post-1993 FAHL issues) grade from 6.5% to 5% over 10 years.
Activity in the liabilities for accident and health and disability insurance benefits, including reserves for future policy benefits and unpaid claims and claim adjustment expenses is summarized below (in thousands). Substantially all of the claims and claim adjustment expenses incurred relate to each respective current year.
Amount paid, related to: Current year 242,483 228,233 220,682 Prior years 81,966 78,046 72,958 324,449 306,279 293,640
Net balance as of December 31 259,397 253,522 250,852 Plus reinsurance recoverables 14,262 12,524 11,312 Balance as of December 31 $ 273,659 $ 266,046 $ 262,164
The weighted average interest rate of the $230 million of Eurodollar rate committed loans outstanding as of December 31, 1995 was 6.04%. The weighted average interest rate of the $29.35 million of short-term borrowings outstanding as of December 31, 1994 was 6.23%. The weighted average interest rate on all short-term borrowings was 6.33% during 1995 and 4.5% during 1994. The maximum amount of short-term borrowings outstanding during 1995 was $390 million ($90 million during 1994). Interest expense on short-term borrowings approximated $6.2 million on average outstanding balances of $98 million during 1995 and $1.7 million on average outstanding balances of $38 million in 1994. Interest expense on short-term borrowings was not significant in 1993.
In December 1995, the Company completed a public offering of 1,815,000 unsecured Automatic Common Exchange Securities (ACES) Due January 21, 2000, having a principal amount of $72.50 per security. Interest at an annual rate of 7.25% is payable quarterly in arrears. The proceeds, after payment of transaction costs, were used in financing the acquisition of Alexander Hamilton Life Insurance Company of America and affiliates.
During 1995 and 1994, J-P Life sold U. S. Treasury obligations under repurchase agreements involving broker and dealer counterparties. The repurchase agreements are accounted for as financing transactions and the related obligations, together with accrued interest, have been included with liabilities in the consolidated balance sheets.
The non-voting floating rate redeemable preferred stock issued by AH Life provides holders of the securities a senior claim with regard to payment of dividends and distribution of assets upon liquidation, dissolution, and winding up of the corporation. Dividends are cumulative and are payable quarterly at the rate of LIBOR plus 1.25% per annum applied to the $100 par value of the shares. Certain additional provisions apply if dividend payments are not paid in accordance with the purchase agreement. At any time subsequent to April 5, 1998, a holder of the preferred shares may, upon 10 days prior written notice, require AH Life to redeem its shares at a redemption price of $100 per share plus an amount equal to accrued and unpaid dividends. At any time subsequent to October 5, 2000 AH Life may redeem all of the outstanding shares of preferred stock at a redemption price of $100 per share plus an amount equal to accrued and unpaid dividends. A liquidating distribution in the amount of $100 per share plus an amount equal to accrued and unpaid dividends shall be paid to holders of the preferred shares prior to any payment or distribution to holders of the common shares of AH Life in the event of liquidation, dissolution, or winding up of the corporation.
Year Ended December 31, 1995 1994 1993 Shares outstanding, beginning 72,674,060 74,194,456 75,656,074 Shares issued under stock plans 32,749 489,238 164,283 Shares reacquired (1,493,647) (2,009,634) (1,625,901) Shares outstanding, ending 71,213,162 72,674,060 74,194,456
During 1989, the Committee awarded options to each employee and full-time life insurance agent who met specified requirements, with the number of options offered to eligible employees and agents determined based on compensation. Options included in the 1989 award became exercisable in 1994. During 1992, the Committee awarded options, exercisable in 1997, to those employees who met requirements similar to those applied in the 1989 award but were not eligible to participate in the previous award. The Committee awarded options to certain officers in each of the years 1993 through 1995, certain of which were in accordance with the terms of employment agreements.
Under the 1990 amendment, the Committee was authorized to make grants of the Company's common stock to selected officers and to make one-time common stock grants to current and future non-employee directors. Non-employee directors were granted an aggregate of 6,750 shares in 1993. During 1995, a total of 6,724 shares were issued to six executive officers under the Company's long term incentive compensation program. Compensation expense related to common stock grants was not material in any year presented.
Also on May 1, 1995, the shareholders approved a Non-Employee Directors' Stock Option Plan (Directors' Plan) under which 300,000 shares of the Company's common stock were initially reserved. All members of the Company's Board of Directors who are not employed by the Company or any affiliate on the date of an option award are eligible to participate. The Directors' Plan is intended to be self-governing and provides for automatic awards of nonqualified stock options as specified therein.
An option to purchase 7,500 shares of the Company's common stock was automatically awarded to each eligible non-employee director during 1995. Each such option vested upon stockholder approval of the Directors' Plan and became exercisable in November 1995. An automatic award of an option to purchase 7,500 shares is made to each new eligible non-employee director on the date that such new director joins the Board. Options awarded to new eligible non-employee directors vest and become exercisable in three equal annual installments beginning on the first anniversary of the award date. An automatic award of an option to purchase 3,375 shares will be made to each eligible non-employee director, other than one who received an initial option award during the preceding six months, on the date of the first regular quarterly meeting of the Board in each year from 1996 through 1999. The annual option awards vest on the first anniversary of the date awarded. During 1995, the Company awarded options to purchase an aggregate of 97,500 shares to eligible non-employee directors, of which 15,000 were exercised in 1995. Of the 82,500 options outstanding at December 31, 1995, all but 7,500 are exercisable. An additional 202,500 shares remain available for option under the Directors' Plan as of December 31, 1995.
Balances, January 1, 1993 $15.28 - $26.83 838,095 298,138 1,134,960 Options awarded $32.17 - $37.33 142,500 - (142,500) Shares granted - - - (6,750) Options becoming exercisable $15.28 - $37.33 - 178,949 - Options exercised $15.28 - $26.83 (157,533) (157,533) 27,201 Options terminated $15.28 - $26.83 (42,782) - 42,782 Balances, December 31, 1993 $15.28 - $37.33 780,280 319,554 1,055,693 Options awarded $30.09 - $34.75 193,500 - (193,500) Options becoming exercisable $15.28 - $30.08 - 459,738 - Options exercised $15.28 - $26.83 (489,238) (489,238) 15,624 Options terminated $15.28 - $26.83 (20,762) - 20,761 Balances, December 31, 1994 $17.11 - $37.33 463,780 290,054 898,578 Shares authorized - - - 3,300,000 Options awarded $36.42 - $37.33 483,000 - (483,000) Shares granted - - - (6,724) Options becoming exercisable $30.08 - $36.42 - 175,500 - Options exercised $17.11 - $36.42 26,025) (26,025) 865 Options terminated $26.83 - $30.08 (14,554) - 14,554 Balances, December 31, 1995 $26.17 - $37.33 906,201 439,529 3,724,273
Outstanding options that are not yet exercisable as of December 31, 1995 will become exercisable as follows:
Options Option Price Becoming Year Per Share Exercisable 1996 $30.08 - $37.33 148,500 1997 $26.83 - $37.33 203,422 1998 $36.42 - $37.33 114,750
Net income for the three months ended December 31, 1995 $ 45,917 $ 19,467
J-P Life (domiciled in the State of North Carolina) and AH Life (domiciled in the State of Michigan) prepare financial statements on the basis of SAP prescribed or permitted by the insurance departments of their states of domicile. Prescribed SAP include a variety of publications of the National Association of Insurance Commissioners ("NAIC") as well as state laws, regulations and administrative rules. Permitted SAP encompass all accounting practices not so prescribed. The impact of any permitted accounting practices on statutory capital and surplus is not material for either subsidiary.
The principal differences between SAP and GAAP as they relate to the financial statements of the subsidiaries are (1) policy acquisition costs are expensed as incurred under SAP, whereas they are deferred and amortized under GAAP, (2) the value of acquired insurance in force is not capitalized under SAP but is under GAAP, (3) amounts collected from holders of universal life-type and annuity products are recognized as premiums when collected under SAP, but are initially recorded as contract deposits under GAAP, with cost of insurance recognized as revenue when assessed and other contract charges recognized over the periods for which services are provided, (4) the classification and carrying amounts of investments in certain securities are different under SAP than under GAAP, (5) the criteria for providing asset valuation allowances, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP, (6) the timing of establishing certain reserves, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP, (7) no provision is made for deferred income taxes under SAP, (8) certain assets are not admitted for purposes of determining surplus under SAP, and (9) certain debt obligations that meet specified statutory criteria are accounted for as surplus under SAP.
The tax effects of temporary differences that result in significant deferred tax assets and deferred tax liabilities are as follows (in thousands):
Capitalization of acquisition costs for income tax purposes, net of amortization 78,431 20,353
Obligation for postretirement benefits other than pensions 12,124 12,012 Deferred compensation 13,983 1,507 Other deferred tax assets 13,505 12,663 Gross deferred tax assets 447,851 140,684 Valuation allowance (12,686) - Deferred tax assets after valuation allowance 435,165 140,684
Net unrealized gains on securities available for sale 279,787 121,989 Deferral of policy acquisition costs and value of insurance in force for financial reporting purposes, net of amortization 314,991 111,656 Deferred gain recognition for income tax purposes 16,956 7,857 Differences in investment bases 19,617 6,655 Depreciation differences 8,024 7,582 Other deferred tax liabilities 10,688 7,198 Gross deferred tax liabilities 650,063 262,937 Net deferred tax liabilities included in consolidated balance sheets $ (214,898) $ (122,253)
In connection with the acquisition of Alexander Hamilton Life Insurance Company of America and affiliates, the Company recorded net deferred tax assets of approximately $87.2 million and established a valuation allowance of $12,686,000 against certain specific deferred tax assets as to which it could not conclude that realization is more likely than not. If the deferred tax assets against which the allowance was established are realized in the future, the resultant reduction of the allowance will be allocated to reduce cost of acquired businesses in excess of net assets.
Federal income tax returns for all years through 1990 have been examined by the Internal Revenue Service and are closed. Settlements and other resolutions during 1993 resulted in the recovery of taxes and interest previously paid for years through 1987 and reductions of amounts provided for potential assessments involving subsequent years. In the opinion of management, recorded income tax liabilities adequately provide for all remaining open years.
The Company and its subsidiaries have defined benefit pension plans covering substantially all employees and full-time life insurance agents. The plans are noncontributory and are funded through group annuity contracts with J-P Life. The plans provide benefits based on annual compensation and years of service. The funding policy is to contribute annually no more than the maximum amount deductible for federal income tax purposes. The assets of the plans are those of the related contracts, approximately $33.7 million of which are on deposit in the general account of J-P Life as of December 31, 1995. Plan assets approximating $242.6 million are held in separate accounts established by J-P Life in 1994.
Service cost, benefits earned during the year $ 6,197 $ 6,320 $ 7,259 Interest cost on projected benefit obligation 11,941 12,557 11,414 Actual return on plan assets (36,687) (13,135) (11,235) Net amortization and deferral 19,387 (3,697) (4,947) Pension expense $ 838 $ 2,045 $ 2,491
The following table sets forth the funded status of the plans and amounts recognized in the consolidated balance sheets (in thousands):
Plan assets in excess of projected benefit obligation 51,820 24,540 Unrecognized net gain (39,532) (17,836) Unrecognized net asset (18,833) (20,984) Unrecognized prior service cost 8,860 10,176 Prepaid (accrued) pension cost $ 2,315 $ (4,104)
During 1995, the Company recognized pension plan curtailment gains of $1.4 million with the sale of the assets and operations of JPDS and $.6 million with the sale of Jefferson-Pilot Fire & Casualty Company. The acquisition of Alexander Hamilton Life Insurance Company of America and affiliates during 1995 increased the projected benefit obligation by $12.8 million and plan assets by $16.1 million. The increase in projected benefit obligation attributable to the reduction in discount rate in 1995 was offset primarily by the combined effects of reducing the assumed rate of compensation increase and increasing the assumed turnover rate.
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
The Company sponsors contributory health care and life insurance benefit plans for eligible retired employees, qualifying retired agents and certain surviving spouses. Substantially all of the Company's employees and qualifying agents may become eligible for these benefits if they reach retirement age or become disabled while employed by the Company and meet certain years-of-service requirements. Most of the postretirement health care and life insurance benefits are provided through J-P Life and, until December 1993, were funded as payments were made to retirees or their beneficiaries. In December 1993, the Company began contributing to a welfare benefit trust from which future benefits will be paid.
Plan assets at fair value $ 2,026 $ 1,557 $ 2,895 $ 2,053
Retirees and surviving spouses 11,003 8,656 9,353 7,465 Fully eligible active participants 743 650 1,201 1,055 Other active participants 3,943 2,851 2,329 1,720 15,689 12,157 12,883 10,240
Unrecognized (benefit) prior 		 		 		 		 service cost (8,248) (9,696) (2,776) (3,403) Unrecognized net (gain) loss (541) (2,061) 1,733 240
The Company's life insurance subsidiaries attempt to reduce their exposure to significant individual claims by reinsuring portions of certain individual life insurance policies and annuity contracts written. During 1995, J-P Life continued to follow a practice of reinsuring the portion of an individual life insurance risk that exceeds $1 million, with an additional $250,000 retention for accidental death benefits. Individual life insurance risks assumed in the KCL transaction that exceed $350,000 are also reinsured. AH Life and FAHL generally reinsure that portion of an individual ordinary life insurance risk that exceeds $500,000 ($1 million for universal life-type products), with additional retention of $300,000 for accidental death benefits. The subsidiaries also attempt to reduce exposure to losses that may result from unfavorable events or circumstances by reinsuring certain levels and types of term life and accident and health insurance risks underwritten. J-P Life assumes portions of the life and accident and health risks underwritten by certain other insurers on a limited basis, but amounts related to assumed reinsurance are not material to the consolidated financial statements.
The business transfer guarantee and support agreements for the PPA and COLI business obligate Household to ensure that the reinsurers maintain RBC ratios of at least 150% of Company Action Level RBC, with the ratio requirement automatically increasing to 250% in the event of a decline in Household's consolidated net worth below a specified amount, or a change in its control. The agreements require annual cash flow testing of the PPA and COLI business and obligate Household to take corrective action if the results indicate that the associated reserves are inadequate. The agreements also specify certain events that will occur and actions that will be taken in the event Household's credit rating as assigned by S&P is less than BBB-. Among these actions are periodic determinations of the fair values of the assets and liabilities pertaining to the reinsured PPA and COLI business and, whenever the fair value of the reinsured liabilities of either exceeds that of the related business assets, then (1) the transfer by Household to the applicable Trust of assets, satisfactory to the Company, having fair value equal to any excess of reinsured liabilities over related business assets, or (2) arrangement by Household for a letter of credit in favor of the applicable Trust, issued by a financial institution with S&P credit rating not less than A, in an amount equal to 150% of any excess of liabilities over assets.
Any transfer of assets by Household under a guarantee and support agreement must be by either the purchase of additional shares of common stock of the applicable reinsurer or other contribution to its stockholder's equity. AH Life has the right to terminate the PPA and COLI reinsurance agreements by recapture of the related assets and liabilities if Household does not take a required action within 90 days of the triggering event. AH Life has the option to terminate the PPA and COLI reinsurance agreements on the seventh anniversary of the acquisition, by recapturing the related assets and liabilities at an agreed-upon price or their then-current fair values as independently determined. The reinsurers may retain the PPA business by permitting the rate used to determine annual compensation to AH Life to increase to a specified percentage of statutory reserves.
Reinsurance contracts do not relieve an insurer from its primary obligation to policyholders. Therefore, the failure of a reinsurer that is party to a contract with a subsidiary to discharge its reinsurance obligations could result in a loss to the affected subsidiary. The Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of credit risk related to reinsurance activities. No significant credit losses have resulted from the reinsurance activities of the subsidiaries during the three years presented.
Amounts due from reinsurers as reported in the consolidated balance sheets are summarized below (in thousands):
Life and annuity $ 6,489 $ 7,317 Accident and health 14,820 12,815 21,309 20,132 Resulting from reinsurance activities associated with insurance in force assumed or acquired during 1995: KCL in force assumed 11,922 - AH Life pre-acquisition business reinsured with affiliates of Household 1,404,308 - Other AH Life business reinsured 12,074 - 1,428,304 -
Amounts due from reinsurers as reported in consolidated balance sheets $ 1,449,613 $ 31,268
Cash and short-term investments $ 2,714 $ 1,864 Debt securities available for sale, at fair value (amortized cost 1995 $12,851; 1994 $151,126) 13,428 135,952 Equity securities available for sale, at market value (cost 1995 $9,200; 1994 $10,210) 54,204 52,094 Investment in continuing subsidiaries, at equity 2,548,586 1,522,393 Investment in discontinued subsidiaries, at equity - 65,040 Other investments 2,046 1,981 Total cash and investments 2,620,978 1,779,324 Due from subsidiaries - 8,480 Other assets 17,468 11,276
Revenue, principally dividends from subsidiaries $283,402 $159,824 $121,343 Expenses, principally general and administrative 10,775 11,183 11,513 272,627 148,641 109,830 Income taxes (benefit) (3,810) 7,518 1,453
Cash Flows From Investing Activities 						 Proceeds from sales of investments in securities 403,573 22,354 71,937 Purchases of investments in debt securities (263,637) - (200,511) Acquisition of Alexander Hamilton Life Insurance Company of America and affiliates (527,294) - - Other, net (18,600) 16,288 10,537 Net cash provided by (used in) investing activities (405,958) 38,642 (118,037)
Net increase (decrease) in cash and 						 cash equivalents 850 1,854 (110,277)
Cash and cash equivalents: Beginning 1,864 10 110,287 Ending $ 2,714 $ 1,864 $ 10
Liabilities and Stockholder's Equity: 				 Trade obligations $ 33,129 $ 29,982 Debt obligations to affiliate 22,605 25,405 Income taxes 8,855 7,505 Total liabilities 64,589 62,892
Income before cumulative effect of change in accounting principle 22,263 19,362 14,750
Cumulative effect of change in accounting principle, net (Note 13) - - (3,079)
Cash Flows From Investing Activities 						 Acquisition of broadcast properties (1,500) (18,750) (23,123) Other purchases of property & equipment (6,858) (5,290) (4,203) Other investing activities (5,855) (4,392) (4,988) Net cash used in investing activities (14,213) (28,432) (32,314)
Net increase (decrease) in cash and cash equivalents (5,502) 6,678 (3,797)
Communications - Communications operations consist principally of radio and television broadcasting and sports program production.
Revenue 						 Life insurance $ 1,345,965 $ 1,025,672 $ 986,971 Communications 165,815 172,501 144,961 Corporate and other 57,636 70,637 60,517 Consolidated $ 1,569,416 $ 1,268,810 $ 1,192,449
Income from continuing operations before 						 income taxes and cumulative effect of change in accounting principle
Life insurance $ 293,542 $ 250,189 $ 232,961 Communications 39,010 36,232 27,582 Corporate and other 48,210 61,182 49,915 Consolidated 380,762 347,603 310,458
The cumulative effect of the 1993 change in accounting principle applicable to postretirement benefits other than pensions approximated $37 million on a pretax basis and related primarily to the life insurance segment ($30 million) and the communications segment ($6 million). Additions to property and equipment approximated $30 million in 1995 (including amounts resulting from the AH Life acquisition), $17 million in 1994 and $21 million in 1993. Included in the preceding amounts are additions related to the communications industry segment totaling $7.3 million, $13.6 million and $17.6 million in 1995, 1994 and 1993, respectively. Other additions to property and equipment related primarily to the life insurance segment. Expenditures for acquired businesses in excess of net assets and for identified intangibles by the communications segment totaled $1.1 million in 1995, $17.1 million in 1994 and $11.9 million in 1993 and resulted from acquisitions of broadcast properties. Cost in excess of net assets obtained in the AH Life acquisition amounted to $50.4 million. During 1995, equity securities carried at $327 million were transferred from the life insurance segment to the corporate segment.
The fair values of debt and equity securities have been determined from nationally quoted market prices and by using values supplied by independent pricing services and discounted cash flow techniques. These fair values are disclosed together with carrying amounts in Note 3.
The fair value of policy loans outstanding, carried at $1,151.9 million and $206.4 million as of December 31, 1995 and 1994, has been estimated using a current risk-free interest rate applied to expected future loan repayments projected based on historical repayment patterns. The estimated fair value of policy loans approximated $1,154 million and $190 million as of December 31, 1995 and 1994.
The fair value of outstanding commitments to fund mortgage loans and to acquire debt securities in private placement transactions, which are not reflected in the consolidated balance sheets, approximated $138 million and $65 million as of December 31, 1995 and 1994, respectively.
The Company routinely enters into commitments to extend credit in the form of mortgage loans and to purchase certain debt instruments for its investment portfolio in private placement transactions. All such commitments outstanding at December 31, 1995 were in the normal course of the Company's investment activities and pertained to future investments which are similar in nature to those it currently holds.
The Company leases electronic data processing equipment and field office space under noncancelable operating lease agreements. The lease terms generally range from three to five years. Annual rent expense approximated $6 million in 1995 and in 1994, and $8 million in 1993. Future rental commitments are expected to be slightly higher than current year amounts.
JPCC has commitments for purchases of syndicated television programming of approximately $8.3 million as of December 31, 1995. These commitments are not reflected as an asset or liability in the accompanying 1995 consolidated balance sheet since these programs are not currently available for use.
The Company is involved in other 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 have occurred. Because of the considerable uncertainties that exist, the Company cannot predict the outcome of pending or future litigation with certainty. Based on consultation with the Company's legal advisers, management believes that resolution of pending legal proceedings will not have a material adverse effect on the Company's financial position or liquidity.
Fair value of noncash assets acquired $ 931,891 Cash received from assumption reinsurance 164,488 Liabilities assumed $ 1,096,379
Fair value of noncash assets acquired $ 8,376,830 Cash paid less cash received (505,306) Liabilities assumed $ 7,871,524
Liabilities disposed of $ 50,176 Cash received less cash paid 6,060 Noncash assets disposed of $ 56,236
In January 1996, JPCC entered into an agreement to purchase the assets and operations of radio station KIFM-FM in San Diego for $28.75 million. The purchase is subject to regulatory approval, but is currently expected to close during the second quarter of 1996. JPCC currently owns KSON-AM/FM in the San Diego market.