Note: All share information has been restated to reflect an April 1998 3-for-2 stock split, effected in the form of a dividend. Cash dividends per share may not add due to rounding related to the split.
Management's discussion and analysis of financial condition and results of operations for the three years ended December 31, 2000 analyzes the results of operations, consolidated financial condition, liquidity and capital resources of Jefferson-Pilot Corporation and consolidated subsidiaries (collectively, JP or Company). The discussion should be read in conjunction with the Consolidated Financial Statements and Notes. All dollar amounts are in millions except per share amounts. All references to Notes are to Notes to the Consolidated Financial Statements.
The Company has five reportable segments: Individual Products, Annuity and Investment Products (AIP), Benefit Partners (formerly called Group Products), Communications, and Corporate and Other. Within the Individual Products segment, JP offers a wide array of individual life insurance products including variable life insurance. AIP offers both fixed and variable annuities, as well as other investment products. Benefit Partners offers group non-medical products such as term life, disability and dental insurance to the employer marketplace. Various insurance and investment products are currently marketed to individuals and businesses in the United States. At December 31, 2000, the Company's principal life insurance subsidiaries were Jefferson-Pilot Life Insurance Company (JP Life), Jefferson Pilot Financial Insurance Company (JPFIC) and its subsidiary Jefferson Pilot LifeAmerica Insurance Company (JPLA), (collectively, JP Financial). Effective August 1, 2000, Alexander Hamilton Life Insurance Company of America (AHL) and Guarantee Life Insurance Company (Guarantee) merged into JPFIC in order to improve efficiencies and reduce administrative expenses and other costs.
Excluding realized gains and losses, JP's 2000's revenues were derived 54% from Individual Products, 20% from AIP, 17% from Benefit Partners, 7% from Communications, and 2% from Corporate and Other.
In the following discussion "reportable segment results" and "total reportable segment results" include all elements of net income available to common stockholders except realized gains on sales of investments (realized investment gains). Realized investment gains, as defined, are net of related income taxes and amortization of
Net income available to common stockholders increased 9.1% in 2000 and 12.2% in 1999, and total reportable segment results increased 10.2% in 2000 and 12.1% in 1999, due to increased profitability in the Individual Products, AIP, Benefit Partners and Communications segments. The increase in 2000 also reflected the deployment of corporate capital into the more profitable Individual Products, AIP and Benefit Partners segments primarily through the acquisition of Guarantee. The Corporate and Other segment declined in 2000 due to financing costs associated with the Guarantee acquisition, share repurchases and the redeployment of capital into operating segments. Net realized gains increased 2.1% in 2000 and 12.9% in 1999.
Management assesses profitability by business segment and measures other operating statistics as detailed in the separate segment discussions that follow. Sales are one of the statistics we use to track performance. Because of the nature of our sales, which are primarily long-duration contracts in the Individual Products and AIP segments, sales in a given quarter do not have a near term material impact on operating results and therefore are not considered to be material information. However, trends relating to new product sales over a longer period of time may be an indicator of future growth and profitability.
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.
Individual Products include universal life (UL) and variable universal life (VUL), together referred to as UL-type products, as well as traditional life products. The operating cycle for life insurance products is long term in nature; therefore, actuarial assumptions are important to financial reporting for these products. Traditional products require the policyholder to pay scheduled premiums over the life of the coverage. Traditional premium receipts are recognized as revenues and profits are expected to emerge in relation thereto. Interest-sensitive product (or UL-type product) premiums may vary over the life of the policy at the discretion of the policyholder and are not recognized as revenues. Revenues and reportable segment results on these products arise from mortality, expense and surrender charges to policyholder fund balances (policy charges). Additionally, JP earns interest spreads and investment advisory fees on policyholder fund balances. Reportable segment results for both traditional and UL-type products also includes earnings on required capital.
Recurring premium sales increased in 2000 due primarily to an increase in VUL sales resulting from new product introductions and a heightened marketing emphasis versus a decrease in 1999. Single premium sales relating to benefit funding products, such as Bank Owned Life Insurance (BOLI), decreased 35.7% in 2000 and increased 36.6% in 1999. Due to the nature of these single premium products, volatility between periods is normal. Overall, life insurance premium sales decreased 8.9% in 2000 and increased 1.1% in 1999.
Revenues include traditional insurance premiums, policy charges, and investment income. Individual revenues increased $216.2 or 14.7% and $44.1 or 3.1% in 2000 and 1999 due to growth in average UL policyholder fund balances and average VUL separate account assets, in addition to the Guarantee acquisition. The growth in average UL policyholder fund balances and VUL separate accounts, which increased 16.1% in 2000 and 12.7% in 1999, was a result of net policyholder receipts and interest credited. The 2000 increase in average UL policyholder fund balances also reflected the acquisition of Guarantee.
Individual traditional premiums increased 12.3% in 2000 resulting primarily from the Guarantee acquisition. Individual traditional premiums decreased 8.3% in 1999 as sales were more concentrated among UL type products. Policy charges, which include mortality, expense and surrender charges, improved 16.4% in 2000 and 1.2% in 1999. 2000's increases are primarily from the Guarantee acquisition and growth of the business. 1999's increases are a result of growth in UL type policies in force.
Annuity and Investment Products offers its products through financial institutions, independent agents, career agents, investment professionals and broker/dealers. Reportable segment results were:
Reportable segment results increased 16.3% in 2000 and decreased 5.8% in 1999. The following table summarizes key information for AIP:
Total AIP benefits and expenses increased 24.6% in 2000 due primarily to the Guarantee acquisition and growth of the business, versus 3.0% in 1999 consistent with the growth in average policyholder fund balances. Policy benefits, which are mainly comprised of interest credited to policyholder accounts, as a percentage of average policyholder fund balances were 5.4% in 2000 and 1999 and 5.2% in 1998. Interest credited represented 5.3% of average policyholder fund balances in 2000 and 1999, versus 5.1% in 1998. Effective spreads were
Total AIP expenses increased 63.7% in 2000 and 5.2% in 1999, with insurance expenses as a percentage of average policyholder fund balances including separate accounts being 2.4% in 2000 versus 1.6% in 1999 and 1998. The growth in expenses was due to an increase in concessions related to broker/dealer operations, similar to the increases in concession and other income, and an increase in amortization of DAC due to increased surrenders.
The strategic initiatives discussed for the Individual Products segment involving JP's relationship with key agents, additional marketing support, and operating process improvements are also targeted to impact the AIP segment.
Benefit Partners revenues increased $372.7 or 227.1% in 2000, reflecting the acquisition of Guarantee, including premium growth of $351.2 or 269.1%. 1999 revenues declined $148.8 or 47.6% including declines in premiums of $139.0 or 51.6% due to exiting the group medical business in 1999 and 1998. Including equivalent
premiums on self-insured health policies, premiums increased 171.5% and decreased 60.4% in 2000 and 1999. Annualized sales for the core life, disability and dental lines of business grew $105 or 700.0% and declined $2 or 11.8% in 2000 and 1999, with new sales now reflecting Guarantee. If sales for Guarantee were included in 1999, the increase in 2000 would be 24.0%, reflecting core growth in life, disability and dental sales.
Policy benefits increased 283.8% in 2000 with the addition of the Guarantee acquisition and decreased 54.7% in 1999 primarily due to declining group medical business. The life, disability and dental incurred loss ratio was 73.4% versus 85.2% in 2000 and 1999. The results for 1999 were comprised solely of the JP Life business, which has a significantly larger average policy size than that of Guarantee and is a more mature block of business. Both of these factors contributed to the higher 1999 loss ratio.
Total expenses (including the net deferral and amortization of policy acquisition costs) increased 285.5% in 2000 primarily due to the Guarantee acquisition. 1999 total expenses decreased 52.7% as a result of continued aggressive expense management and the declining block of medical business. As a percentage of premiums and equivalents, total expenses were 26.2% for 2000 and 18.4% for 1999 due to the change in average policy size with the addition of the Guarantee contracts.
Reportable segment results increased 9.6% in 2000 and 16.4% in 1999. During the last half of 2000, the Company experienced a slowing in the rate of revenue growth from that experienced earlier and in previous years. This is consistent with a general slowing in economic activity throughout the country. 1999's increase resulted from the favorable advertising environment and the strong local economies in which our stations operated. Combined revenues for Radio and Television grew 5.9% and 3.5% in 2000 and 1999. Disregarding political revenues, Radio and Television grew 3.8% and 5.4% in 2000 and 1999. Television revenues declined for much of 2000 and 1999 despite strong performances in our two smaller markets, which were offset by disappointing sales in our largest market, reflecting activity associated with rebuilding the sales force in that market.
Revenues from Sports operations decreased 16.7% in 2000 and 1.1% in 1999. The decline in 2000 revenues resulted from the one time only payment received in 1999 for the sale of certain entertainment production activities and a change in our relationship with the Carolina Panthers that resulted in lower revenues but higher net profits for that product. The decline in 1999 resulted from the sale of certain entertainment production activities.
Broadcast cash flow grew by 5.2% and 12.4% in 2000 and 1999.
Reportable segment results including realized gains decreased 25.5% in 2000 and increased 40.7% in 1999. Investment earnings decreased 8.1% in 2000 and improved 28.9% in 1999. 2000's decline was attributable to capital being allocated to other segments through the Guarantee acquisition and a change in allocation methodology for intra-company rents between this and other segments of $3.3. 1999's increase was due to the accumulation of corporate capital, and increased income on equity method investments. Interest expense on debt and exchangeable securities increased $20.6 in 2000 and decreased $1.8 in 1999 as the level of commercial paper borrowings and life company reverse repurchase agreements increased with the acquisition of Guarantee, share repurchases and the January 2000 redemption of Automatic Common Exchange Securities (ACES). Operating expenses, which increased 77.2% in 2000 and decreased 32.2% in 1999, vary with the level of Corporate activities. Such activities included approximately $3 for developing strategic marketing initiatives during 2000. Federal and state income tax expense includes the tax benefit of preferred dividends on Capital Securities, which are recorded gross of related tax effects. Federal and state income taxes decreased $16.4 in 2000 due primarily to the tax effect of lower Corporate and Other segment pre-tax operating results. Federal and state income taxes increased $17.1 in 1999 due to higher operating results as well as changes in effective tax rates on assets assigned to this segment.
The results of this segment fluctuate from quarter to quarter and year to year due to expenses associated with strategic activities, advertising expenses, 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.
JP's primary resources are investments related to its Individual Products, AIP and Benefit Partners segments, properties and other assets utilized in all segments and investments backing corporate capital. The Investments section reviews the Company's investment portfolio and key strategies.
Carrying amounts of goodwill, VOBA and DAC are regularly reviewed for indications of value impairment, with consideration given to the financial performance of acquired properties, future gross profits of insurance in force and other factors. Reductions, which flow through earnings, have been made where appropriate, including for the higher level of annuity withdrawals.
At December 31, 2000 and 1999, JP had reinsurance receivables of $947 and $1,057 and policy loans of $184 and $192 which are related to the businesses of JP Financial that were coinsured with Household International (HI) affiliates. HI has provided payment, performance and capital maintenance guarantees with respect to the balances receivable. JP 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 reinsurance activities during the three years ended December 31, 2000.
The ratio of equity to assets has increased primarily due to changes in unrealized gains on securities and a decline in stock repurchases from 1999. The decline in 1999 was due to an increase in unrealized losses on securities and an increase in stock repurchases. Stockholders' equity increased $79 in 2000 and declined $462 in 1999 due to changes in values of Available for Sale securities. Additionally, $44 in 2000 (734,000 shares at an average cost of $60.10) and $183 in 1999 (2,801,400 shares at an average cost of $65.50) was used to purchase common shares outstanding. In February 2001, JP's Board of Directors updated its ongoing share repurchase authorization to cover 5 million shares of common stock, and the Company intends to continue to make opportunistic repurchases.
The Individual Products, AIP and Benefit Partners 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:
At December 31, 2000 and 1999, net advances from subsidiaries were $346 and $329, all of which are eliminated in consolidation.
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.
Cash provided by operations in 2000, 1999 and 1998 was $501, $481 and $438. 2000's increase of $20 reflects changes in payables and receivables related to the timing of investment commitments net of higher policy acquisition costs. The 1999 increase reflects growth in the Company's business segments as reflected in net income.
Net cash used in investing activities was $611, $1,111 and $719 in 2000, 1999 and 1998, with the decline due to the timing of investment commitments and repayment of commercial paper borrowings. 1999 included the acquisition of Guarantee, net of cash received.
Net cash provided by financing activities was $74, $671 and $293 in 2000, 1999 and 1998. The 2000 decrease of $597 is primarily due to net borrowing repayments of $232 versus 1999 short-term borrowings of $303 for the Guarantee acquisition. Cash inflows from policyholder contract deposits net of withdrawals were $512, $704 and $318. The 2000 decrease is a result of higher annuity surrenders and decreased UL-type contract receipts. The 1999 increase is a result of higher annuity sales, lower withdrawals of policyholder funds, and higher UL-type contract receipts due to the shift from traditional to UL-type business.
The strategy of identifying market sectors and niches that provide investment opportunities to meet the portfolios' growth, quality and yield requirements could result in increasing percentages of private placements and commercial mortgage loans.
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 current notional value of $185, $186 and $186 were open as of December 31, 2000, 1999 and 1998. There were no terminations of derivative financial instruments in 2000, 1999 or 1998. Potential termination of these arrangements as of December 31, 2000 under then current interest rates would result in a potential gain of $5.
The Company's investment strategy with respect to mortgage backed securities focuses on actively traded, less volatile issues that produce relatively stable cash flows. The majority of mortgage backed security holdings
are sequential and planned amortization class tranches of federal agency issuers. The mortgage backed security portfolio has been constructed with underlying mortgage collateral characteristics and structure in order to lower cash flow volatility over a range of interest rate levels.
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and for Hedging Activities", and the discussion in the New Accounting Pronouncements section of Note 2 is incorporated by reference.
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 2000, 10 year U.S. Treasury rates decreased 148 basis points versus an increase of 179 basis points in 1999. In 2000, risk premiums over rates that could otherwise be earned on US Treasury securities increased due to continued poor liquidity conditions and expectations of deteriorating credit conditions in the market. In 1999, risk premiums over rates that could otherwise be earned on US Treasury securities remained favorable for investors compared to 1998 in response to heavy corporate debt issuance.
The Company also considers the timing of cash flows arising from market risk sensitive instruments 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 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, and 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 reflects reasonably possible near term
Certain fixed interest rate market risk sensitive instruments may not give rise to incremental income or loss during the period illustrated but may be subject to changes in fair values. Note 18 presents additional disclosures concerning fair values of financial assets and financial liabilities, and is incorporated by reference.
JP operates within the United States financial services and communications market sectors, which are both subject to general economic conditions. After increasing in 1999 and much of 2000, interest rates on longer maturity instruments began trending down later in 2000 as economic growth slowed. Changes in rates may affect our businesses as discussed earlier. The Company's operations are also impacted over the longer term by demographic shifts, global markets, technological innovation and overall capital market volatility. These forces impact JP in various ways such as demand for its insurance products and advertising revenues, competition from other financial services providers, competition from emerging technologies for television and radio advertising,
competition for new investments, debt costs, mergers and consolidations within the financial services and communications sectors, and costs inherent in administering complex financial products.
The U.S. insurance industry has experienced an increasing number of mergers, acquisitions, consolidations, sales of business lines and marketing arrangements with other financial services providers. These activities have been driven by a need to reduce costs of distribution and to increase economies of scale in the face of growing competition from larger insurers, banks, securities brokers, mutual funds and other non-traditional competitors. The Gramm-Leach-Bliley Act modernized the regulatory framework for financial services in the United States and allows insurance companies, banks and securities firms to affiliate under Financial Holding Companies. With the passage of this law, combined with changing demographics, technological advances and customer expectations for one-stop shopping, further strategic alignments are expected within the financial services industry. JP continues to analyze its options within this environment for increasing distribution and improving economies of scale.
The Bush Administration has proposed an income tax plan that reduces tax rates, which could make our tax advantaged products less attractive. Various proposals have been considered by Administration officials which could eliminate or reduce estate taxes. If enacted, this could have an adverse impact on some life insurance products such as those with survivorship benefits. Additionally, recent drops in the equity markets have caused variable products to become less appealing. However, this same drop in equity products may contribute to growth in the markets for UL and non-variable annuities.
Certain information in our SEC filings and in any other written or oral statements made by JP or on our behalf, involves forward looking statements. We have used appropriate care in developing this information, but any forward looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties that could significantly affect our actual results. These risks and uncertainties include, among others, 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. Other uncertainties include 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 tax, financial services industry or other laws and regulations.
We undertake no obligation to publicly correct or update any forward looking statements, whether as a result of new information, future developments or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our press releases and filings with the SEC. In particular, you should read the discussion in the section entitled "External Trends and Forward Looking Information," and other sections it may reference, in our most recent 10-K report to the SEC, as it may be updated in our subsequent 10-Q and 8-K reports. That discussion covers certain risks, uncertainties and possibly inaccurate assumptions that could cause our actual results to differ materially from expected and historical results. Other factors besides those listed there could also adversely affect our performance.
We have audited the accompanying consolidated balance sheets of Jefferson-Pilot Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jefferson-Pilot Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
Jefferson-Pilot Corporation (with its subsidiaries, referred to as the Company) operates in the life insurance and communications industries. Life insurance, annuities, and disability and dental insurance are currently marketed to individuals and businesses in the United States through the Company's principal life insurance subsidiaries: Jefferson-Pilot Life Insurance Company (JP Life), and Jefferson Pilot Financial Insurance Company (JPFIC) and its subsidiary, Jefferson Pilot LifeAmerica Insurance Company (JPLA), collectively referred to as JP Financial. Alexander Hamilton Life Insurance Company of America and Guarantee Life Insurance Company were merged into JP Financial effective August 1, 2000. 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.
During the first quarter 2000, the Company acquired Polaris Financial Services and Polaris Advisory Services, collectively referred to as Polaris. Polaris's operations consist of financial planning and broker/dealer services. The purchase price was $9, including cash and assumed liabilities, and was accounted for under the purchase method. The acquisition resulted in $9 of cost in excess of net assets acquired.
Pro forma financial information for these acquisitions has not been presented, as the pro forma impact on consolidated operations is not significant.
The Company includes with cash and cash equivalents its holdings of highly liquid investments which mature within three months of the date 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 $43 and $41 at December 31, 2000 and 1999. Other investments are stated at equity, or the lower of cost or market, as appropriate.
Revenue from universal life-type and annuity products includes charges for the cost of insurance, initiation and administration of the policy and surrender of the policy. Revenue from these products is recognized in the year assessed to the policyholder, except that any portion of an assessment which relates to services to be provided in future years is deferred and recognized over the period during which services are provided.
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 to employees when the option price is not less than the market value of the stock at the date of award.
Certain amounts reported in prior years' consolidated financial statements have been reclassified to conform with the presentations adopted in the current year. These reclassifications have no effect on net income available to common stockholders or stockholders' equity of the prior years.
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 at fair value 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 is not expected to have a material impact on the Company's financial position or results of operations.
Aggregate amortized cost and aggregate fair value of debt securities as of December 31, 2000, according to contractual maturity date, are as indicated below. 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.
At December 31, 2000 and 1999, the recorded investment in mortgage loans that are considered to be impaired was $52 and $63. Delinquent loans outstanding as of December 31, 2000 and 1999 totaled $0.6 and $0. The related allowance for credit losses on all mortgage loans decreased from $30 at December 31, 1999 to $29 at December 31, 2000 through a charge to realized gains in 2000. The average recorded investment in impaired loans was $57, $64 and $70 during the years ended December 31, 2000, 1999 and 1998, on which interest income of $3, $6 and $7 was recognized.
The Company uses repurchase agreements to meet various cash requirements. At December 31, 2000 and 1999, the amounts held in debt securities available for sale pledged as collateral for these borrowings were $415 and $530.
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 $294 and $303 at December 31, 2000 and $210 and $220 at December 31, 1999.
Guarantee marketed an equity indexed annuity product which has an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500(R) index. Guarantee historically managed this risk by purchasing call options that mirrored the interest credited to the contracts. As of December 31, 2000, the fair value and the carrying value of these options totaled $4. As of December 31, 1999, the fair value and the carrying value of these options totaled $5 reflecting the mark-to-market adjustment made to Guarantee's assets as of the acquisition date.
The Company's credit exposure on swaps is limited to the fair value of swap agreements favorable to the Company. The Company does not expect any counterparty to fail to meet its obligation. Currently, non-performance by a counterparty would not have a material adverse effect on the Company's financial position or
results of operations. The Company's exposure to market risk is mitigated by the offsetting effects of changes in the value of swap agreements and the related direct investments and credited interest on annuities.
The liability for future policy benefits associated with ordinary life insurance policies has been determined using initial interest rate assumptions ranging from 2.0% to 9.9% and, when applicable, uniform grading over 20 to 30 years to ultimate rates ranging from 2.0% to 6.0%. Interest rate assumptions for weekly premium, monthly debit and term life insurance products generally fall within the same ranges as those pertaining to individual life insurance policies.
For immediate annuities issued prior to 1987, mortality assumptions are based on blends of the 1971 Individual Annuity Mortality Table and the 1969-71 U.S. Life Tables. For similar products issued after 1986, mortality assumptions are based on blends of the 1983a and 1979-81 U.S. Life Tables.
Activity in the liabilities for accident and health and disability benefits, including reserves for future policy benefits and unpaid claims and claim adjustment expenses, is summarized below:
The Company has entered into two bank credit agreements for unsecured revolving credit, under which the Company has the option to borrow at various interest rates. One agreement is for $375 and extends to May 2002, and the other agreement is for $200 and extends to December 18, 2001. The credit agreements principally support the issuance of commercial paper. As of December 31, 2000, outstanding commercial paper had various maturities, with $214 maturing in excess of 90 days. The Company can issue commercial paper with maturities of up to 270 days. If the Company cannot remarket commercial paper at maturity, the Company intends to borrow a like amount under a credit agreement. The weighted-average interest rates for commercial paper borrowings outstanding of $405 and $361 at December 31, 2000 and 1999 were 6.51% and 5.80%.
In April and June 1997, the Company issued MEDS of $75 at 6.95% and $75 at 6.65%. The MEDS are based on BankAmerica common stock. Interest is payable quarterly. The MEDS mature January 10, 2002 and represent senior indebtedness of the Corporation. The MEDS had principal amounts at issue of: 6.95% MEDS, $55.55 per security and 6.65% MEDS, $66.625 per security. Two weeks prior to, or at, maturity, the principal amount of the MEDS will be mandatorily exchanged into either a number of shares of the common stock of BankAmerica (stock) determined based on an exchange rate reflecting the then trading price for the stock, or cash in an amount of equal value, at the Company's option. Subject to adjustments to reflect dilution, the exchange rate is equal to (1) 0.8264 shares if the stock price is at least: 6.95% MEDS, $67.22 and 6.65% MEDS, $80.62, (2) a fractional share of the stock having a value equal to the principal amount if the price is more than the principal amount but less than the amount stated in (1), or (3) one share if the price is less than or equal to the principal amount.
The Exchangeable Securities are carried at fair value. Changes in the carrying value, net of deferred income taxes, are recorded in other comprehensive income. At December 31, 2000 and 1999, the combined carrying value of the Exchangeable Securities was $139 and $289, based on the market value of BankAmerica stock, which was $45.875 per share as of year end 2000.
On February 12, 2001, the Board authorized a three-for-two common stock split which will be effected as a 50% stock dividend distributed on April 9, 2001 to shareholders of record as of March 19, 2001.
A total of 9,626,603 shares are available for issuance pursuant to outstanding or future awards as of December 31, 2000. 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.
The following table summarizes certain stock option information at December 31, 2000:
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 2000, 1999 and 1998: risk-free interest rates of 6.7%, 5.2% and 5.8%; volatility factors of the expected market price of the Company's common stock of 0.20, 0.19 and 0.17; and a weighted-average expected life of the options of 8.6 years for 2000, 8.2 years for 1999 and 9.9 years for 1998. Dividends were assumed to increase by 10% annually.
The Black-Scholes option valuation 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 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 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.
The NAIC revised the Accounting Practices and Procedures Manual in a process referred to as Codification. The revised manual will be effective January 1, 2001. The domiciliary states of the Company's insurance subsidiaries have adopted the provisions of the revised manual with certain exceptions. The revised manual has changed, to some extent, prescribed statutory accounting practices and will result in changes to the accounting practices that the Company's insurance subsidiaries use to prepare their statutory basis financial statements. The Company expects implementation to have an immaterial impact on statutory surplus of its insurance subsidiaries.
trust from which future benefits will be paid. The Company accrues the cost of providing postretirement benefits other than pensions during the employees' active service period. The non-pension postretirement expense was $1 in 2000, 1999 and 1998.
JPFIC reinsures 100% of the Periodic Payment Annuities (PPA), COLI and Affiliated credit insurance business written prior to 1995 with affiliates of Household International, Inc. on a coinsurance basis. Balances are settled monthly, and the reinsurers compensate JPFIC for administrative services related to the reinsured business. In 1996, the Company recaptured a portion of the PPA reinsurance. The amount due from reinsurers in the consolidated balance sheets includes $948 and $1,057 due from the Household affiliates at December 31, 2000 and 1999.
Assets related to the reinsured PPA and COLI business have been placed in irrevocable trusts formed to hold the assets for the benefit of JPFIC 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. JPFIC 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. JPFIC 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.
As of December 31, 2000 and 1999, JPFIC had a reinsurance recoverable of $84 and $87 from a single reinsurer, pursuant to a 50% coinsurance agreement. JPFIC and the reinsurer are joint and equal owners in $172 and $191 of securities and short-term investments as of December 31, 2000 and 1999, 50% of which is included in investments in the accompanying consolidated balance sheets.
The fair value of the Capital Securities was determined based on market quotes for the securities.
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 $81 at December 31, 2000.
Jefferson-Pilot Life is a defendant in two separate proposed class action suits. The plaintiffs' fundamental claim in the first suit is that our policy illustrations were misleading to consumers. Management believes that our policy illustrations made appropriate disclosures and were not misleading. The second suit alleges that a predecessor company, Pilot Life, decades ago unfairly discriminated in the sale of certain small face amount life insurance policies, and unreasonably priced these policies. In both cases, the plaintiffs seek unspecified compensatory and punitive damages, costs and equitable relief. While management is unable to estimate the probability or range of any possible loss in either or both of these cases, management believes that our practices have complied with state insurance laws and intends to vigorously defend the claims asserted.