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,
studios and office buildings in Charlotte, North Carolina. It also owns the
The radio studios and offices are leased in Atlanta, Georgia and San Diego,
1994 1993 1992 1991 1990 Life and accident and health insurance $1,025,672 $ 986,972 $ 965,862 $ 956,426 $ 946,262 Communications 172,501 144,961 129,734 125,045 127,330 Other 9,211 6,282 4,656 4,570 5,656 Realized investment gains 61,426 54,234 45,726 32,220 28,174 Revenues, continuing operations $1,268,810 $1,192,449 $1,145,978 $1,118,261 $1,107,422
Discontinued operations 9,341 9,720 8,640 3,704 6,250 Accumulated post- retirement benefit obligation, net 0 ( 24,109) 0 0 0
Net income $ 239,237 $ 195,172 $ 203,238 $ 175,687 $ 157,637 ========== ========== ========== ========== ==========
Jefferson-Pilot Corporation is a holding company. Its major subsidiary, Jefferson-Pilot Life Insurance Company (J-P Life), offers a wide range of life, health and annuity products which are sold in the Individual and Group markets. Individual insurance products are offered through career general agents, independent marketing organizations and home service agents. Annuity products are offered through these distribution systems and are sold through financial institutions. J-P 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 single-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. Jefferson-Pilot Communications Company (J-P Communications) owns and operates three network television and thirteen radio broadcast stations. J-P Communications operations originate from the sale of advertising and other related services through its television and radio stations. J-P's revenues are derived approximately 80% from Life insurance, 13% from Communications and 7% from parent company and other investments.
1994 1993 1992 (In millions) Income before effect of initial application of SFAS 106 and realized investment gains: Continuing operations $191.0 $174.0 $164.2 Discontinued operations 9.2 8.0 7.0
J-P holds a sizable portfolio of equity securities, which may continue to produce future realized capital gains. J-P 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 as follows: 1994 1993 1992 (In millions)
Amortized cost of "available for sale" debt securities $1,692 N/A N/A Fair value $1,607 N/A N/A
Net Income $ 4.92 $ 3.88 $ 3.99 ====== ====== ======
J-P has periodically reacquired shares of its stock and issued additional shares under incentive option programs. The following table analyzes changes in the Company's outstanding shares and the average shares outstanding for each year reported:
Earnings per share increased 26.8% in 1994 and decreased 2.8% in 1993. Earnings per share excluding the effects of adopting SFAS 106 and net realized investment gains increased 13.8 % in 1994 and 7.7% in 1993, partly due to improved earnings and partly due to the impact of share repurchases. Earnings per share from continuing operations improved 13.6% in 1994 and 7.5% in 1993.
Total benefits, claims and expenses increased 4.4% in 1994 to $921.2 million and 1.3% in 1993 to $882.0 million. Life benefits and credits to policyholder accounts increased 7.7% in 1994 and 6.0% in 1993, reflecting the growth in life business in force. Accident and health benefits were 1.1% higher in 1994 and 3.8% lower in 1993, indicative of strategic moves as well as moderate growth in medical inflation and utilization. Net life insurance expenses (after deferral of policy acquisition costs) declined 3.1% in 1994 and increased 0.1% in 1993. This result was achieved as the Company improved the economies of its Individual distribution systems. Cost of Communications operations increased 20.7% in 1994 to $120.8 million and 7.0% in 1993 to $100.1 million as a result of acquisitions of television and radio properties as well as costs associated with higher overall revenues. As the result of expense controls, the rate of growth in operating income exceeded the rate of growth in revenues.
Income taxes from continuing operations increased $16.8 million or 16.7% in 1994 and $20.1 million or 24.9% in 1993. Effective tax rates were as follows:
1994's effective tax rate increased as a result of a reduction in the percentage of tax-favored investments. 1993's effective tax rate increased because of recoveries and reductions of prior years' taxes recorded in 1992, a reduction in the percentage of tax-favored investments and an increase in the federal income tax rate in 1993 from 34% to 35%.
1994 1993 1992 (In millions) Life insurance: Individual $124.2 $117.1 $117.2 Group 44.2 41.1 39.4 168.4 158.2 156.6 Communications 22.0 17.3 14.2 Discontinued operations 9.2 8.0 7.0 Other 0.6 (1.5) (6.6)
Operating income 200.2 182.0 171.2 Net realized investment gains 39.0 37.3 32.0 Income before cumulative effect of change in accounting principle $239.2 $219.3 $203.2 ====== ====== ======
The Individual Insurance distribution system offers a wide array of life insurance, annuity, health and investment products through a career agency force, independent marketing organizations, home service agents, individual health sales and service offices and financial institutions. A summary of this unit's operating results for each of the years presented is as follows:
Operating income before income taxes 184,552 172,664 162,953 156,480 141,848 Provision for income taxes 60,307 55,528 45,777 43,430 40,722
Operating income $124,245 $117,136 $117,176 $113,050 $101,126 ======== ======== ======== ======== ========
Individual life insurance written (as measured by face amount) increased 48.7% in 1994 to $3,706 million and 15.0% in 1993 to $2,492 million. Sales gains were a result of improved productivity in the career agency force and an increase in independent agents contracted, growing to 9,000 agents at the end of 1994 versus 3,500 at the beginning of the year.
Group operating income improved 7.6% in 1994 and 4.3% in 1993. As a percentage of Premiums and other considerations, Operating income for the Group Department was 9.8% in 1994, 9.5% in 1993 and 9.1% in 1992. Group life results have declined over the last two years primarily due to adverse mortality experience while health results have improved, as indicated by the following chart: 1994 1993 1992 (In millions) Operating income: Group life $ 10.4 $ 12.9 $ 18.4 Group health 33.8 28.2 21.0
Communications operations are conducted by Jefferson-Pilot Communications Company through television and radio broadcast properties as well as production and syndication of sports and entertainment programming. A summary of this unit's operations follows:
1994 1993 1992 1991 1990 (In thousands) Communications revenues $172,501 $144,961 $129,734 $125,045 $127,330
Operating costs 120,833 100,100 93,561 92,334 95,356 Depreciation and amortization 10,139 10,757 8,303 9,642 9,980 General expenses 5,297 6,522 3,608 5,046 5,092 Total expenses 136,269 117,379 105,472 107,022 110,428
Provision for income taxes 14,246 10,247 10,093 7,696 6,883 Operating income $ 21,986 $ 17,335 $ 14,169 $ 10,327 $ 10,019
Revenues improved 19.0% in 1994. J-P Communications' business strategy includes acquisitions of under-performing properties which can be enhanced through management's efforts. Acquisition expenditures of $19.6 million in 1994, $21.6 million in 1993 and $0 in 1992 contributed to the revenue growth as exhibited by the following: 1994 1993 1992 (In millions) Revenues attributable to newly- acquired properties $ 19.2 $ 4.3 - Total segment revenues $172.5 $145.0 $129.7
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 programming events occurring during 1994.
1993 revenues improved 11.7% with television increasing 3.0%, radio 20.6% and sports and entertainment 4.9%. Television gains were attributable to acquisitions, partly offset by a decline in political spending from 1992 levels. Radio growth came from improved market shares as well as acquisitions. Stronger collegiate sports revenues contributed to growth in the sports and entertainment business in both 1994 and 1993.
Effective tax rates of 39.3% in 1994, 37.1% in 1993 and 41.6% in 1992 were influenced favorably by receivables recorded for refundable Federal income taxes and interest in 1993.
Discontinued operations include the operations of Jefferson-Pilot Fire & Casualty (J-P F & C) and Jefferson-Pilot Title Insurance Company (J-P Title). These subsidiaries formerly comprised the "Other insurance" segment. On December 23, 1994, J-P agreed to sell the stock of J-P F & C, subject to regulatory approval. The Company believes that regulatory approval will be given and that closing will occur during the first half of 1995. At or before closing, it is expected that the Company will receive a dividend in partial liquidation and that the purchaser will subsequently buy the stock of J-P F & C. The amount of the dividend to be received is subject to adjustment through closing. A gain is expected to result from the sale of the stock.
The operations of both subsidiaries are segregated as "Discontinued Operations" in the accompanying financial statements. Operating income attributable to Discontinued Operations increased 16.2% in 1994 to $9.2 million and 14.3% in 1993 to $8.0 million. It is expected that the reinvestment of net proceeds from liquidating dividends and sale of these subsidiaries will replace the operating income included as a component of Discontinued Operations.
Operating results categorized as "other" include earnings on investments held in the parent company as reduced by expenses of the corporation. These results improved in 1994 and in 1993 due to a reduction of expenses associated with shareholder litigation and income from options written on equity securities held by the parent company totaling $2.5 million in 1994.
J-P'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.
Total assets were $6,140 million and $5,641 million at December 31, 1994 and 1993 - an increase of $500 million or 8.9%. Primary sources for asset growth were increases in policyholder contract deposits (primarily annuities and universal life contracts), proceeds from securities sold under repurchase agreements and cash provided by operating activities. These sources were offset by cash dividends paid to shareholders and net acquisitions of J-P shares outstanding. Asset values were also reduced by declines in the market values of assets held in the "available for sale" category. These declines were the direct result of increases in market interest rate yields.
J-P's 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 $329.1 million and $277.7 million at December 31, 1994 and 1993 - an increase of $51.4 million or 18.5 %. The increase is primarily related to the incidence of Individual first year premiums, which have grown significantly in recent years. Deferred policy acquisition costs are reviewed periodically to determine that the unamortized portion does not exceed expected recoverable amounts.
J-P's financial strength is among the highest of its peer companies. Consolidated shareholders' equity was $1,733 million at December 31, 1994 and 1993 and no long-term debt was outstanding at either date. Shareholders' equity includes net unrealized gains on securities available for sale at December 31, 1994 of $230.8 million and net unrealized gains on equity securities at December 31, 1993 of $331.6 million. The Company adopted SFAS 115 as of January 1, 1994, as more particularly described in Note 2 to the Consolidated Financial Statements. This resulted in a net increase in shareholder's equity on that date of $101.4 million. During 1994, fair values of securities classified as available for sale, net of deferred taxes, decreased by $202.1 million . The net effect on shareholders' equity during the year was a decline of $100.7 million or 5.8% from the December 31, 1993 balance.
J-P 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 effectively use its capital resources, 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. Currently, the Company does not have any long-term debt outstanding and, while it has made no commitments for obtaining such financing, limited amounts of long-term debt may be used to finance acquisitions or for other corporate purposes in the future. Its capital adequacy is illustrated by the following table:
Ratio of shareholders' equity to assets 28.2% 30.7% 31.7% 31.2% 29.8%
J-P 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 J-P Life is measured in accordance with statutory accounting practices (SAP) which differ from generally accepted accounting principles (GAAP), as illustrated by the following analysis:
The bases for valuation of GAAP assets and liabilities are described more thoroughly in Note 1 to the Consolidated Financial Statements. J-P Life has 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 (1) not included in GAAP shareholders' equity or (2) eliminated in the preparation of the Company's Consolidated Financial Statements.
Effective for year-end 1993, the National Association of Insurance Commissioners (NAIC) 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, J-P Life compares its minimum capital requirement (authorized control level) with adjusted statutory capital (includes statutory capital and surplus, asset valuation reserves and other adjustments). Regulatory authorities require that J-P Life maintain adjusted capital and surplus positions up to twice the authorized control level. The Company currently holds surplus levels substantially in excess of amounts needed to comply with the new requirements.
In managing its capital position, J-P Life measures required capital for each of its major product lines 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.
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.
Dividends paid to the parent company from its subsidiaries were $128.0 million in 1994, $102.8 million in 1993 and $127.9 million in 1992. J-P Life is the primary source of dividends to the parent company. J-P Life is subject to North Carolina laws which limit the amount of dividends that may be paid without first obtaining the approval of the State's Insurance Commissioner. J-P Life has approximately $97 million available for distribution to the parent company during 1995 without obtaining prior approval.
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.
December 31, 1994 % January 1, 1994 % (In millions) Publicly-issued bonds $ 2,564 49 $ 2,461 48 Privately-placed bonds 961 18 840 16 Commercial mortgage loans 681 13 584 11 Common stock 670 13 843 17 Policy loans 206 4 215 4 Preferred stock 69 1 86 2 Real estate 31 1 31 1 Cash, other invested assets 61 1 64 1
Privately-placed bonds and commercial mortgage loans have increased as a percentage of invested assets while common stocks have decreased. Near-term strategies include identification of fixed income market sectors and niches that provide investment opportunities to enhance the Company's product flow, quality and yield. The Company anticipates that the recent expansion of private placement and commercial mortgage loan production will continue. The Company will also 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, it is expected that the percentage of common stocks will decline as new cash flows from policyholder account balances are invested in fixed interest securities.
J-P's Investment Policy Statement requires an average quality fixed income portfolio 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 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. Other investments are carried at the lower of cost or net realizable value, as appropriate.
Carrying amounts of investments categorized as "higher risk" assets were as follows at year-end:
The asset/liability management process focuses primarily on the management of interest rate risk. One measure of this risk is to compare asset and liability durations. Duration measures the sensitivity of asset and liability values to changes in interest rates. J-P monitors the durations of insurance liabilities for comparison to the durations of assets backing the insurance lines. In 1994, the Company established the Asset/Liability Management Committee, which is made up of Finance, Investment and Actuarial senior management. This group is charged with continually monitoring and refining the Company's position in an attempt to prudently balance profit-ability and risk for each insurance line, and for the Company in the aggregate.
The Company's recent growth in assets and liabilities is largely attributable to sales of interest sensitive products. Because J-P 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 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.
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. Approximately 53% (at amortized cost) of the Company's debt securities were classified as available for sale and 47% as held-to-maturity. Debt securities classified as available for sale were adjusted to aggregate fair value as of January 1, 1994. 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 the insurance subsidiaries were stated at market prior to adoption of SFAS 115 and therefore were not adjusted. 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.
SFAS 114," Accounting by Creditors for Impairment of a Loan" will be 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. Adoption of SFAS 114 is not expected to have a significant effect on the consolidated financial statements for 1995.
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 $ 54,264 $ 58,370 $ 58,799 $ 67,804 ======== ======== ========= ========
March June September December 31 30 30 31 Revenues, including net investment income and realized gains on investments $293,736 $293,298 $ 289,564 $315,851 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
Per share $ .51 $ 1.04 $ 1.04 $ 1.30 ======== ======== ========= ========
March June September December 31 30 30 31 Revenues, including net investment income and realized gains on investments $286,907 $281,050 $ 285,512 $292,510 Benefits and expenses 219,051 217,168 217,875 216,523 Provision for income taxes 19,864 18,183 21,042 21,675
Income from continuing operations $ 47,992 $ 45,699 $ 46,595 $ 54,312 Discontinued operations, net of income taxes 1,267 2,561 2,465 2,347
Net income $ 49,259 $ 48,260 $ 49,060 $ 56,659 ======== ======== ========= ========
Per share $ .96 $ .94 $ .96 $ 1.12 ======== ======== ========= ========
Financial statements and notes included on pages 36 through 59 of the
Annual Report of Jefferson-Pilot Corporation to its shareholders for the year