GLIC conducts operations in Omaha, NE in two buildings and also owns a third building on its 11 acre campus.
The Company had four business segments in 1999: Life Insurance Products, Annuity and Investment Products (AIP), Communications, and Corporate and Other. Within the Life Insurance Products segment, JP offers individual and group insurance products. Life insurance, accident, disability, and annuity products are currently marketed to individuals and businesses in the United States through the Company's principal life insurance subsidiaries: Jefferson-Pilot Life Insurance Company (JP Life), Alexander Hamilton Life Insurance Company of America (AH Life), Jefferson Pilot Financial Insurance Company and its subsidiary, Jefferson Pilot LifeAmerica Insurance Company (collectively JP Financial), and Guarantee Life Insurance Company (Guarantee).
The following tables illustrate JP's results before and after the inclusion of realized investment gains:
(1) Total reportable segment results include all elements of net income available to common stockholders except realized investment gains.
Reportable segments are determined in a manner consistent with the way management organizes for purposes of making operating decisions and assessing performance. Invested assets backing insurance liabilities are assigned to segments in relation to policyholder funds and reserves. Net deferred acquisition costs incurred, value of business acquired, reinsurance receivables and communications assets are assigned to the respective segments where those assets originate. Invested assets are also assigned to back capital allocated to each segment in relation to JP's philosophy for managing business risks, reflecting appropriate conservatism. The remainder of invested and other assets are assigned to the Corporate and Other segment.
The Life Insurance Products (Life Insurance) segment offers a wide array of individual and group insurance policies through a career agency force, independent agents recruited through independent marketing organizations and a regional office network, home service agents, financial institutions, and workplace marketing representatives.
Life Insurance Reportable segment results increased 8.8% in 1999 and 26.6% in 1998. In 1999, individual products contributed a 9.5% increase due to growth of the business in force and expense management, while group products improved only 2.5% as group medical policies continue to decline. In 1998, individual products increased 20.1% over 1997, which included JP Financial for eight months in the prior year. Group products improved 151.6% due to aggressive rate increases and expense management. The following table summarizes Reportable segment results for each product category:
JP ceased offering group medical policies on April 1, 1999. A full line of group life and disability policies are still offered through existing distribution channels of JP Life and Guarantee. The following table illustrates amounts included in Life Insurance results for group medical contracts:
Policy benefits declined 10.4% in 1999 and 6.1% in 1998, primarily due to Group medical. Traditional policy benefits were 92.2% of premiums in 1999 versus 85.0% and 89.3% in 1998 and 1997. The increase was primarily a result of higher mortality in 1999. The group health incurred loss ratio improved to 41% in 1999 versus 72% and 87% in 1998 and 1997, as claim liabilities are released on the declining block of medical business. During the fourth quarter of 1999, the Company reviewed its claims management and reserving practices for Group disability policies as well as a closed block of Individual disability policies. This review resulted in a reduction of claim reserves which benefited fourth quarter results by $4.5 million, net of taxes, primarily in the closed Individual block. Approximately $2.6 million of this amount had been recorded as a charge during the third quarter of 1999. Policy benefits on UL-type products improved to 6.8% of average policyholder funds and separate accounts in 1999 versus 7.6% in 1998 and 8.2% in 1997. The improvement is due to lower credited rates on policyholder accounts and an increase in VUL separate account assets as a percentage of these liabilities. Policy benefits include interest credited to policyholder accounts on UL-type products, whereas premium receipts on these products are credited directly to policyholder accounts and not recorded as revenues.
(1) Reportable segment results include all elements of net income available to common stockholders except realized investment gains.
Reportable segment results increased 16.4% in 1999 and 17.5% in 1998. The Company's broadcasting properties continued to benefit from the generally favorable advertising environment and the strong local economies in which they operate. Combined revenues for Radio and Television grew 3.5% and 8.9% in 1999 and 1998. Television experienced strong political revenues in the fourth quarter of 1998, which were not replaced in 1999. Disregarding political revenues, Radio and Television grew 5.4% and 7.1% in 1999 and 1998. Radio experienced strong revenue growth in 1999 and 1998, resulting from increased demand for local advertising. Two of the television stations are CBS affiliates and benefited from robust winter Olympic related advertising during first quarter 1998. However, Television revenues declined for much of 1999 and 1998 as national agency sales continued to be sluggish, consistent with a nationwide trend. There was slight improvement in Television national sales in the fourth quarter of 1999, though local sales continued to be off in some markets.
Total assets for the Corporate and Other segment decreased 26.9% in 1999 and increased 7.2% in 1998. 1999's decline occurred primarily due to surrenders of 100% co-insured COLI policies and changes in market values of available for sale securities and employee benefit plan assets. Unrealized gains and losses on all available for sale equity and fixed income securities are assigned to this segment. Those values declined $743 during 1999 and increased $80 during 1998. The 1999 decline resulted from increases in market interest rates and declines in market values of financial services stocks. 1998's increase in total segment assets occurred primarily due to retention of earnings less capital reinvested in the Life Insurance and AIP segments.
in 1999 due to higher operating results as well as changes in effective tax rates on assets assigned to this segment. 1998's taxes declined $2.2 in relation to the decline in operating results as well as changes in effective tax rates.
The results of this segment may vary from year to year due to expenses associated with strategic activities, income recorded on equity method investments, transfers of assets to and from business segments as well as refinements in asset assignments and investment income allocation methodologies to other reportable segments.
Total assets increased $2,108 or 8.7% in 1999. This growth resulted from the acquisition of Guarantee, increases in Separate Account assets and policyholder contract deposits, and cash provided by operating activities. These favorable influences were offset by declines in the market values of available for sale investments, a $655 decline related to business that is 100% coinsured to a third party, cash dividends and share repurchases. Total assets increased $1,207 or 5.2% in 1998 due to increases in Separate Account assets and policyholder contract deposits, increases in market values of available for sale investments and cash provided by operating activities.
The Life Insurance and AIP segments are subject to regulatory constraints. The Company's insurance subsidiaries have statutory surplus and risk based capital levels well above required levels. These capital levels together with the rating agencies' assessments of the Company's business strategies have enabled the major life insurance affiliates to attain the following claims paying ratings:
Liquidity requirements are met primarily by positive cash flows from the operations of subsidiaries. Overall sources of liquidity are sufficient to satisfy operating requirements. Primary sources of cash from the insurance operations are premiums, other insurance considerations, receipts for policyholder accounts, investment sales and maturities and investment income. Primary uses of cash include purchases of investments, payment of insurance benefits, operating expenses, withdrawals from policyholder accounts, costs related to acquiring new business, and income taxes. Primary sources of cash from the Communications operations are revenues from advertising. Primary uses of cash include payment of agency commissions, cost of sales, operating expenses and income taxes.
Net cash used in investing activities was $1,111, $719 and $1,218 in 1999, 1998 and 1997. 1999 and 1997 included acquisitions of subsidiaries, net of cash received.
Cash and short-term investments were $62, $21 and $9 at December 31, 1999, 1998 and 1997. Additionally, fixed income and equity securities held by the parent company and non-regulated subsidiaries were $446, $538 and $564. These securities, which include the $289 (at December 31, 1999) of Bank of America Corporation common stock which supports the Exchangeable Securities, are considered to be sources of liquidity to support the Company's strategies.
Total debt and equity securities available for sale at December 31, 1999 and 1998 were $12,568 and $11,907.
JP's strategy for managing the insurance investment portfolio is to dependably meet pricing assumptions while achieving the highest possible after-tax returns over the long term. Cash flows are invested primarily in fixed income securities. The nature and quality of investments held by insurance subsidiaries must comply with state regulatory requirements. The Company has a formal investment policy that governs overall quality and diversification.
The Policy permits use of derivative financial instruments such as futures contracts and interest rate swaps in conjunction with specific direct investments. Actual use of derivatives has been limited to managing well-defined interest rate risks. Interest rate swaps with a notional value of $186, $186 and $200 were open as of December 31, 1999, 1998 and 1997. There were no terminations of derivative financial instruments in 1999, 1998 or 1997. Potential termination of these arrangements as of December 31, 1999 under then current interest rates would result in a potential loss of $1, which would be amortized over the remaining life of the hedged asset or liability.
Since JP's assets and liabilities are largely monetary in nature, the Company's financial position and earnings are subject to risks resulting from changes in interest rates at varying maturities, changes in spreads over U.S. Treasuries on new investment opportunities, changes in the yield curve and equity pricing risks. During 1999, 10 year U.S. Treasury rates increased 179 basis points versus a decline of 110 basis points in 1998. These forces contributed to a decrease in unrealized gains on securities available for sale of $462 in 1999 versus an increase of $53 in 1998. In 1999, risk premiums over rates that could otherwise be earned on US Treasury securities remained favorable for investors in response to heavy corporate debt issuance, especially during the first three quarters. In 1998, risk premiums widened significantly in the third and fourth quarters.
The Company also considers the timing of cash flows arising from market risk sensitive instruments (other than trading) and insurance portfolios under varying interest rate scenarios as well as the related impact on reported earnings under those varying scenarios. Market risk sensitive instruments (other than trading) include debt and equity securities available for sale and held to maturity, mortgage loans, policy loans, investment commitments, annuities in the accumulation phase and periodic payment annuities, commercial paper borrowings, repurchase agreements, interest rate swaps, debt, and Exchangeable Securities. The following table shows the estimated impact that various hypothetical interest rate scenarios would be expected to have on the Company's earnings for a calendar year, based on the assumptions contained in the Company's model. Management believes that its analysis of the effects of 100 basis point increases and decreases utilized in the sensitivity analysis below reflect reasonably possible near term changes in interest rates as of December 31, 1999
and 1998. The change in these estimates was due primarily to differences in the yield curves and in the sensitivities they introduced to the Company's model.
The Company is exposed to equity price risk on its equity securities (other than trading). JP holds common stock with a fair value of $730. Approximately $417 of such value is represented by investments in a single issuer, Bank of America Corporation (BankAmerica). The Company's Exchangeable Securities are exchangeable into shares of BankAmerica common stock. Had the Exchangeable Securities been redeemed as of year end, the redemption value would have been $289 (see Note 8). Management believes that a hypothetical 10% decline in the equity market is reasonably possible in the near term. If the market value of the S&P 500 Index, and of BankAmerica common stock specifically, decreased 10%, the fair value of the Company's common stock and Exchangeable Securities would change as follows:
The Clinton Administration recently released its 2001 budget proposals, which included revenue-raising provisions estimated at $12.9 billion aimed at life insurers and their policyholders. These include re-proposals of measures from the prior year that were not ultimately included in tax legislation, as well as several new proposals. In addition, the Administration's budget contains several retirement savings proposals, which could benefit financial services providers. It is not possible to predict the outcome or financial impact of the Administration's proposals.
Prescribed or permitted Statutory Accounting Principles (SAP) may vary between states and between companies. The NAIC has completed the process of codifying SAP to promote standardization of methods, and is encouraging each state to adopt Codification as soon as possible, with a proposed implementation date of January 1, 2001. Related statutory accounting changes are not expected to significantly impact the Company's statutory capital requirements, although they are expected to reduce levels of statutory capital industry wide.
Assessments by state guaranty associations are made to cover losses to policyholders of insolvent or rehabilitated insurance companies. 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 deductions.
JP is exposed to environmental regulation and litigation as a result of ownership of investment real estate and Communications subsidiaries. Actual loss experience has been minimal and exposure to environmental losses is considered by the Company to be insignificant.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. Certain information contained herein or in any other written or oral statements made by or on behalf of JP are or may be viewed as forward looking. Although the Company has used appropriate care in developing any such forward looking information, forward looking information involves risks and uncertainties that could significantly impact actual results. These risks and uncertainties include, but are not limited to, the matters discussed in "Market Risk Exposures", "External Trends and Forward Looking Information" and other risks detailed from time to time in the Company's SEC filings; to the risks that JP might fail to successfully complete strategies for cost reductions, including anticipated expense savings and operating efficiencies from the integration of Guarantee, and for growth in sales of products through all distribution channels; and more generally to: general economic conditions; competitive factors, including pricing pressures, technological developments, new product offerings and the emergence of new competitors; interest rate trends and fluctuations; and changes in federal and state laws and regulations, including, without limitation, changes in financial services industry or tax laws and regulations. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future developments or otherwise.
Jefferson-Pilot Corporation (the Company) operates in the life insurance and communications industries. Life insurance, accident, disability and annuity products are currently marketed to individuals and businesses in the United States through the Company's principal life insurance subsidiaries: Jefferson-Pilot Life Insurance Company (JP Life), Alexander Hamilton Life Insurance Company of America (AH Life), Jefferson Pilot Financial Insurance Company and its subsidiary, Jefferson Pilot LifeAmerica Insurance Company (JPLA), collectively referred to as JP Financial, and Guarantee Life Insurance Company (GLIC). Communications operations are conducted by Jefferson-Pilot Communications Company (JPCC) and consist of radio and television broadcasting, through facilities located in strategically selected markets in the Southeastern and Western United States, and sports program production.
On December 30, 1999, the Company acquired The Guarantee Life Companies Inc. and its subsidiaries, including Guarantee Life Insurance Company, collectively referred to as Guarantee. Guarantee's operations include group and worksite marketed non-medical products, including term life and disability products marketed through regional group offices. Guarantee also brings a substantial block of individual insurance products, principally universal life. The cost of the acquisition consisted of $298 cash paid, plus other acquisition expenses. In addition, the Company assumed outstanding debt of Guarantee of $123. The Company financed the acquisition through the issuance of commercial paper and through proceeds from repurchase agreements. The acquisition was accounted for using the purchase method. Because the acquisition took place on December 30, none of Guarantee's results of operations are included in the consolidated income statement for 1999. The allocation of the purchase price was made based on preliminary estimates of the fair value of Guarantee's tangible and identifiable intangible assets and liabilities and of the related tax bases of assets and liabilities, and is subject to change. The acquisition resulted in $81 of cost in excess of net assets acquired (i.e. goodwill) and $206 of value of business acquired. This goodwill is being amortized over 35 years. Pro forma financial information for this acquisition has not been presented, as the pro forma impact on consolidated operations is not significant.
In May 1997, the Company acquired JP Financial. JP Financial's operations, principally universal life, variable universal life and term insurance, are conducted nationwide. Jefferson Pilot Securities Corporation is a full service NASD registered broker-dealer. The cost of the acquisition consisted of $775 cash paid, plus other acquisition expenses. The $775 was financed through the liquidation of invested assets, various securities offerings (see Notes 8 and 9) and the issuance of commercial paper. The acquisition was accounted for using the purchase method. JP Financial's results of operations from May 1, 1997 forward are included in the accompanying consolidated financial statements. The acquisition resulted in $163 of goodwill and $494 of value of business acquired. This goodwill is being amortized over 35 years.
The Company includes with cash and cash equivalents its holdings of highly liquid investments which mature within three months of acquisition.
Real estate not acquired by foreclosure is stated at cost less accumulated depreciation. Real estate acquired by foreclosure is stated at the lower of depreciated cost or fair value minus estimated costs to sell. Real estate, primarily buildings, is depreciated principally by the straight-line method over estimated useful lives generally ranging from 30 to 40 years. Accumulated depreciation was $41 and $39 at December 31, 1999 and 1998. Other investments are stated at equity, or the lower of cost or market, as appropriate.
Property and equipment, which is included in other assets, is stated at cost and depreciated principally by the straight-line method over estimated useful lives, generally 30 to 50 years for buildings and approximately 10 years for other property and equipment. Accumulated depreciation was $148 and $144 at December 31, 1999 and 1998.
Separate account assets and liabilities represent funds segregated for the benefit of certain policyholders who bear the investment risk. The separate account assets and liabilities, which are equal, are recorded at fair value.
Benefits and expenses, other than deferred policy acquisition costs, related to traditional life, accident and health, and disability insurance products are recognized when incurred in a manner designed to match them with related premiums and spread income recognition over expected policy lives. For universal life-type and annuity products, benefits include interest credited to policyholders' accounts, which is recognized as it accrues.
The Company accounts for stock incentive awards in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", and accordingly, recognizes no compensation expense for stock option awards when the option price is not less than the market value of the stock at the date of award.
Effective January 1, 2001, the Company will adopt SFAS 133, "Accounting for Derivative Instruments and for Hedging Activities". SFAS 133 requires all derivatives to be recorded on the balance sheet and establishes accounting rules for hedging activities. The effect of the hedge accounting rules is to offset changes in value or cash flows of both the hedge and hedged item in earnings in the same period. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported in earnings in the period of the change. Based on the limited nature of the Company's use of derivatives and hedging activities, adoption of this pronouncement is not expected to have a material impact on the Company's financial position or results of operations.
The Company's mortgage loan portfolio is comprised primarily of conventional real estate mortgages collateralized by retail (37%), apartment (18%), industrial (17%), office (14%) and hotel (13%) properties. Mortgage loan underwriting standards emphasize the credit status of a prospective borrower, quality of the underlying collateral and conservative loan-to-value relationships. Approximately 36% of stated mortgage loan balances as of December 31, 1999 are due from borrowers in South Atlantic states and approximately 22% are due from borrowers in West South Central states, and approximately 10% are due from borrowers in Mountain states. No other geographic region represents as much as 10% of December 31, 1999 mortgage loans.
In its securities lending program, the Company generally receives cash collateral in an amount that is in excess of the market value of the securities loaned. Market values of securities loaned and collateral are monitored daily, and additional collateral is obtained as necessary. The market value of securities loaned and collateral received amounted to $210 and $220, respectively, at December 31, 1999 and $239 and $250, respectively, at December 31, 1998.
The Company sold certain securities that had been classified as held to maturity, due to significant declines in credit worthiness. Total proceeds were $7, $13 and $10 in 1999, 1998 and 1997.
Interest rate swaps are used to reduce the impact of interest rate fluctuations on specific floating-rate direct investments. Interest is exchanged periodically on the notional value, with the Company receiving the fixed rate and paying various short-term LIBOR rates on a net exchange basis. The net amount received or paid under these swaps is reflected as an adjustment to investment income. For hedges of investments classified as available for sale, net unrealized gains, net of the effects of income taxes and the impact on deferred policy acquisition costs and the value of business acquired, are not significant and are included in net unrealized gains on securities available for sale in stockholders' equity as of December 31, 1999 and 1998.
The Company is exposed to credit risk in the event of non-performance by counterparties to derivative instruments. The Company limits this exposure by diversifying among counterparties with high credit ratings.
Credited interest rates for universal life-type products ranged from 4.1% to 6.65% in 1999, 3.8% to 6.85% in 1998, and 4% to 7.5% in 1997. The average credited interest rates for universal life-type products were 5.6%, 5.84%, and 6.02% for 1999, 1998 and 1997. For annuity products, credited interest rates generally ranged from 4% to 9.5% in 1999, 4% to 8.15% in 1998, and 4% to 9.25% in 1997.
Effective September 22, 1999, the 6.65% MEDS were renegotiated with the holder and now provide for an interest rate of 3.325% and an additional cash payment per security at redemption or maturity equal to any shortfall in the stock price below $66.625 but not more than $11.125 per security. Similarly, effective December 22, 1999, the 6.95% MEDS were renegotiated. The interest rate is 3.475% and the additional cash payment per security equals any shortfall in the stock price below $55.55 but not more than $9.2375 per security.
Interest expense totaled $50 for 1999, $46 for 1998 and $37 for 1997.
In January and March 1997, respectively, the Company privately placed $200 of 8.14% Capital Securities, Series A and $100 of 8.285% Capital Securities, Series B. The Capital Securities mature in the year 2046, but are redeemable prior to maturity at the option of the Company beginning January 15, 2007. The Capital Securities are supported by subordinated indebtedness of the Company.
Mandatorily redeemable non-voting floating rate preferred stock (with a par value of $100 per share) of subsidiaries authorized, issued and outstanding at December 31, 1998 totaled 30,000 shares. The mandatorily redeemable preferred stock was repurchased and cancelled as of January 1, 1999.
Changes in the number of shares outstanding, adjusted for the three-for-two common stock split which was effected as a 50% stock dividend on April 13, 1998, are as follows:
A total of 9,875,413 shares are available for issuance pursuant to outstanding or future awards as of December 31, 1999. The option price may not be less than the market value of the Company's common stock on the award date. Options are exercisable for periods determined by the Committee, not to exceed ten years from the award date, and vest immediately or over periods as determined by the Committee. Restricted and unrestricted stock grants are limited to 10% of the total shares reserved for the Plan. This plan will terminate as to further awards on May 3, 2009, unless earlier terminated by the Board.
SFAS 123 requires the presentation of pro forma information as if the Company had accounted for its employee and director stock options granted after December 31, 1994 under the fair value method of that Statement. The fair value was estimated at grant date using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997: risk-free interest rates of 5.2%, 5.8% and 6.2%; volatility factors of the expected market price of the stock of 0.19; and a weighted-average expected life of the options of 8.2 years for 1999, 9.9 years for 1998 and 7.7 years for 1997. Dividends were assumed to increase by 10% annually.
The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of the options.
The estimated fair value of the options is amortized to expense over the options' vesting period. The pro forma information follows:
The Company's life insurance subsidiaries prepare financial statements on the basis of statutory accounting practices (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 permitted accounting practices is not significant for the life insurance subsidiaries.
The principal differences between SAP and GAAP are (1) policy acquisition costs are expensed as incurred under SAP, but are deferred and amortized under GAAP, (2) the value of business acquired 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, and (8) certain assets are not admitted for purposes of determining surplus under SAP.
A comparison of net income and statutory capital and surplus of the life insurance subsidiaries (excluding GLIC) determined on the basis of SAP to net income and stockholder's equity of these life insurance subsidiaries (excluding GLIC) on the basis of GAAP is as follows:
At December 31, 1999, GLIC had statutory capital and surplus of $157 and GAAP stockholder's equity of $426. Prior to the acquisition of Guarantee, GLIC converted from a mutual form to a stock life company. In connection with that conversion, GLIC agreed to segregate certain assets to provide for dividends on participating policies using dividend scales in effect at the time of the conversion, providing that the experience underlying such scales continued. The assets, including revenue therefrom, allocated to the participating policies will accrue solely to the benefit of those policies. At December 31, 1999, the assets and liabilities relating to these
Risk-Based Capital ("RBC") requirements promulgated by the NAIC require life insurers to maintain minimum capitalization levels that are determined based on formulas incorporating credit risk, insurance risk, interest rate risk and general business risk. As of December 31, 1999, the life insurance subsidiaries' adjusted capital and surplus exceeded their authorized control level RBC.
Defined contribution retirement plans cover most employees and full time agents. The Company matches a portion of participant contributions and makes profit sharing contributions to a fund that acquires and holds shares of the Company's common stock. Most plan assets are invested under a group variable annuity contract issued by JP Life. Expenses were $1, $3 and $4 during 1999, 1998 and 1997.
The insurance subsidiaries attempt to reduce exposure to significant individual claims by reinsuring portions of certain individual life insurance policies and annuity contracts written. They reinsure the portion of an individual life insurance risk in excess of their retention, which ranges from $0.1 to $1.25 for various individual life and annuity products. They also attempt to reduce exposure to losses that may result from unfavorable events or circumstances by reinsuring certain levels and types of accident and health insurance risks underwritten. They assume 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 significant to the consolidated financial statements.
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 are subject to investment guidelines which identify (1) the types and quality standards of securities in which new investments are permitted, (2) prohibited new investments, (3) individual credit exposure limits and (4) portfolio characteristics. Household has unconditionally and irrevocably guaranteed, as primary obligor, full payment and performance by its affiliated reinsurers. 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 under the guarantee agreements within 90 days of a 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 Company has four reportable segments which are defined based on the nature of the products and services offered: Life Insurance Products, Annuity and Investment Products (AIP), Communications, and Corporate and Other. The Life Insurance Products segment offers a wide array of life and health insurance. AIP offers fixed and variable annuities and investment products. The Communications segment consists principally of radio and television broadcasting and sports program production. The Corporate and Other segment includes activities of the parent company and passive investment affiliates, surplus of the life insurance subsidiaries not otherwise allocated to reportable segments including earnings thereon, and all of the Company's realized gains and losses. Surplus is allocated to the Life Insurance Products and AIP reportable segments based on risk-based capital formulae which give consideration to asset/liability and general business risks, as well as the Company's strategies for managing those risks. Various distribution channels and/or product classes related to the Company's life insurance, annuity and investment products have been aggregated in the Life Insurance and AIP reporting segments.
The segments are managed separately because of the different products, distribution channels and marketing strategies each employs. The Company evaluates performance based on several factors, of which the primary financial measure is reportable segment results, which excludes realized gains and losses. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies (Note 2). Substantially all revenue is derived from sales in the United States, and foreign assets are not material. The following table summarizes financial information of the reportable segments:
The carrying values and fair values of financial instruments as of December 31 are summarized as follows:
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.
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. 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 sheet, approximates $85 as of December 31, 1999.
JPCC has commitments for purchases of syndicated television programming and future sports programming rights, and commitments on other contracts totaling approximately $89 as of December 31, 1999. These commitments are not reflected as an asset or liability in the consolidated balance sheet because the programs are not currently available for use.
JP Life is a defendant in a proposed class action suit, and AH Life is a defendant in a separate proposed class action suit. Each suit alleges deceptive practices, fraudulent and negligent misrepresentation and breach of contract in the sale of certain life insurance policies using policy illustrations which plaintiffs claim were misleading. Unspecified compensatory and punitive damages, costs and equitable relief are sought in each case. While management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome in either or both cases, management believes that it has made appropriate disclosures to policyholders as a matter of practice, and intends to vigorously defend its position.