FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2001 Commission file number 1-5955
Jefferson-Pilot Corporation
(Exact name of registrant as specified in its charter)
North Carolina 56-0896180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Greene Street, Greensboro, North Carolina 27401
(Address of principal executive offices) (Zip Code)
(336) 691-3000
(Registrant's telephone number, including area code)
Indicate whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
------ ------
Number of shares of common stock outstanding at June 30, 2001 152,161,168
JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
Part I. Financial Information
Consolidated Unaudited Condensed Balance Sheets
- June 30, 2001 and December 31, 2000 3
Consolidated Unaudited Condensed Statements of Income
- Six Months ended June 30, 2001 and 2000 4
Consolidated Unaudited Condensed Statements of Cash Flows
- Six Months ended June 30, 2001 and 2000 5
Notes to Consolidated Unaudited Condensed Financial
Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information 32
Signatures 33
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JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
(Dollar Amounts in Millions Except Share Information)
June 30 December 31
2001 2000
------- -----------
ASSETS
Investments:
Debt securities available for sale, at fair value
(amortized cost $13,172 and $12,919) $13,233 $12,978
Debt securities held to maturity, at amortized cost
(fair value $3,373 and $3,134) 3,362 3,130
Equity securities available for sale, at fair value
(cost $37 and $64) 560 551
Mortgage loans on real estate 2,891 2,771
Policy loans 938 923
Real estate 134 135
Other investments 15 11
------- -------
Total investments 21,133 20,499
Cash and cash equivalents 53 26
Accrued investment income 282 272
Due from reinsurers 1,402 1,450
Deferred policy acquisition costs and value of business
acquired 2,022 1,959
Cost in excess of net assets acquired 318 323
Assets held in separate accounts 2,218 2,311
Other assets 480 481
------- -------
Total assets $27,908 $27,321
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $ 2,591 $ 2,655
Policyholder contract deposits 16,904 16,555
Dividend accumulations and other policyholder funds
on deposit 252 191
Policy and contract claims 142 176
Other 424 388
------- -------
Total policy liabilities 20,313 19,965
Debt:
Commercial paper and revolving credit borrowings 538 405
Exchangeable Securities and other debt 150 139
Securities sold under repurchase agreements 284 397
Currently payable income taxes 31 60
Deferred income tax liabilities 265 212
Liabilities related to separate accounts 2,218 2,311
Accounts payable, accruals and other liabilities 520 373
------- -------
Total liabilities 24,319 23,862
------- -------
Commitments and contingent liabilities
Guaranteed preferred beneficial interest in
subordinated debentures ("Capital Securities") 300 300
Stockholders' Equity:
Common stock and paid in capital, par value $1.25
per share: authorized 350,000,000 shares; issued
and outstanding 2001-151,161,168 shares;
2000-154,305,846 shares 192 131
Retained earnings 2,728 2,683
Accumulated other comprehensive income -
net unrealized gains on securities 369 345
------- -------
3,289 3,159
------- -------
Total liabilities and stockholders' equity $27,908 $27,321
======= =======
See Notes to Consolidated Condensed Financial Statements
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JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
(In Millions Except Per Share Information)
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
2001 2000 2001 2000
------------------ -----------------
Revenue:
Premiums and other considerations $ 349 $ 336 $ 698 $ 675
Net investment income 372 358 742 711
Realized investment gains 30 31 87 79
Communications sales 48 50 98 102
Other 30 28 58 56
------- ------- ------- -------
Total revenue 829 803 1,683 1,623
------- ------- ------- -------
Benefits and Expenses:
Insurance and annuity benefits 425 401 860 808
Insurance commissions, net of deferrals 35 30 66 62
General and administrative expenses,
net of deferrals 65 63 127 129
Amortization of policy acquistion costs
and value of business acquired 63 72 126 133
Communications operations 28 29 62 62
------- ------- ------- -------
Total benefits and expenses 616 595 1,241 1,194
------- ------- ------- -------
Income before income taxes 213 208 442 429
Provision for income taxes 72 72 148 148
------- ------- ------- -------
Income before dividends on Capital
Securities and cumulative effect of
change in accounting principle 141 136 294 281
Dividends on Capital Securities (6) (6) (12) (12)
Cumulative effect of change in
accounting for derivative instruments,
net of income taxes (Note 5) - - 1 -
------- ------- ------- -------
Net income available to common
stockholders $ 135 $ 130 $ 283 $ 269
======= ======= ======= =======
Net income available to common
stockholders, before dividends
on Capital Securities $ 141 $ 136 $ 295 $ 281
Other comprehensive income - change
in net unrealized gains on securities (70) (113) 24 (106)
------- ------- ------- -------
Comprehensive income $ 71 $ 23 $ 319 $ 175
======= ======= ======= =======
Average number of shares outstanding 152.1 154.7 152.8 154.7
======= ======= ======= =======
Net Income Per Share of Common Stock:
Net income available to common
stockholders before realized investment
gains and cumulative effect of change
in accounting principle, net of
income taxes $ 0.75 $ 0.71 $ 1.47 $ 1.41
Realized investment gains, net of
income taxes 0.13 0.13 0.37 0.33
Cumulative effect of change in
accounting for derivative instruments,
net of income taxes - - 0.01 -
------- ------- ------- -------
Net income available to common
stockholders $ 0.88 $ 0.84 $ 1.85 $ 1.74
======= ======= ======= =======
Net income available to common
stockholders - assuming dilution $ 0.87 $ 0.83 $ 1.83 $ 1.72
======= ======= ======= =======
Dividends declared per common share $ 0.275 $ 0.247 $ 0.550 $ 0.494
======= ======= ======= =======
See Notes to Consolidated Condensed Financial Statements
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JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED
STATEMENTS OF CASH FLOWS
(In Millions)
Six Months Ended
June 30
---------------------
2001 2000
---------------------
Net cash provided by operations $ 358 $ 199
-------- --------
Cash Flows from Investing Activities:
Investments purchased, net (479) (272)
Other investing activities - (5)
-------- --------
Net cash used in investing activities (479) (277)
-------- --------
Cash Flows from Financing Activities:
Policyholder contract deposits, net 1,147 1,211
Policyholder contract withdrawals, net (838) (1,006)
Net borrowings (repayments) 24 (31)
Repurchase of common shares, net (94) (22)
Cash dividends paid (92) (85)
Other financing activities 1 1
-------- --------
Net cash provided by financing activities 148 68
-------- --------
Increase (Decrease) in cash and cash equivalents 27 (10)
Cash and cash equivalents at beginning of period 26 62
-------- --------
Cash and cash equivalents at end of period $ 53 $ 52
======== ========
Supplemental Cash Flow Information:
Income taxes paid $ 138 $ 97
======== ========
Interest paid $ 31 $ 30
======== ========
See Notes to Consolidated Condensed Financial Statements
-5-
JEFFERSON-PILOT CORPORATION
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in millions)
1. Basis of Presentation
The accompanying consolidated unaudited condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. All significant intercompany accounts
and transactions have been eliminated in consolidation. Operating results for
the six-month period ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001. Certain
prior year amounts have been reclassified to conform with the current year
presentation.
2. Segment Reporting
The Company has five reportable segments that are defined based on the nature
of the products and services offered: Individual Products, Annuity and
Investment Products (AIP), Benefit Partners, Communications, and Corporate and
Other. The Corporate and Other segment includes activities of the parent
company and passive investment affiliates, surplus of the life insurance
subsidiaries not allocated to other reportable segments including earnings
thereon, financing expenses on Corporate debt and debt securities including
Capital Securities, federal and state income taxes not otherwise allocated to
other reportable segments and all of the Company's realized gains and losses.
Surplus is allocated to the Individual Products, AIP and Benefit Partners
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 individual life, annuity and
investment products and group insurance have been aggregated in the Individual
Products, AIP and Benefit Partners reporting segments.
The following table summarizes certain financial information regarding the
Company's reportable segments:
June 30 December 31
2001 2000
------------- -------------
ASSETS
Individual Products $ 15,348 $ 15,054
AIP 7,856 7,691
Benefit Partners 742 736
Communications 200 212
Corporate & other 3,762 3,628
------------- -------------
Total assets $ 27,908 $ 27,321
============= =============
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Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2001 2000 2001 2000
------------------ ------------------
REVENUES
Individual Products $426 $415 $ 851 $ 839
AIP 159 154 317 302
Benefit Partners 144 132 287 260
Communications 48 49 97 101
Corporate & Other 22 22 44 42
---- ---- ------ ------
799 772 1,596 1,544
Realized investment
gains, before tax 30 31 87 79
---- ---- ------ ------
Total revenues before
cumulative effect of
change in accounting
principle $829 $803 $1,683 $1,623
==== ==== ====== ======
REPORTABLE SEGMENTS RESULTS
AND RECONCILIATION TO NET
INCOME AVAILABLE TO COMMON
STOCKHOLDERS
Individual Products $ 76 $ 69 $ 146 $ 138
AIP 19 19 38 40
Benefit Partners 11 9 21 17
Communications 8 9 15 18
Corporate & Other 1 4 5 5
---- ---- ------ ------
Total reportable segment
results, before
cumulative effect of
change in accounting
principle 115 110 225 218
Realized investment gains,
net of tax 20 20 57 51
---- ---- ------ ------
Net income available to
common stockholders,
before cumulative effect
of change in accounting
principle 135 130 282 269
Cumulative effect of
change in accounting for
derivative instruments,
net of income taxes
- - 1 -
---- ---- ------ ------
Net income available
to common
stockholders $135 $130 $ 283 $ 269
==== ==== ====== ======
-7-
3. Income from Continuing Operations Per Share of Common Stock
On February 12, 2001, the Board authorized a 50% stock dividend distributed
on April 19, 2001 to shareholders of record as of March 19, 2001. All share
and per share amounts have been restated to give a retroactive effect to the
stock split. The following table sets forth the computation of earnings per
share before cumulative effect of change in accounting principle and earnings
per share assuming dilution before cumulative effect of change in accounting
principle:
Three Months Ended Six Months Ended
June 30 June 30
------------------------- --------------------------
2001 2000 2001 2000
------------------------- --------------------------
Numerator:
Net income before
dividends on Capital
Securities and
cumulative effect of
change in accounting
principle $ 141 $ 136 $ 294 $ 281
Dividends on Capital
Securities and
preferred stock 6 6 12 12
------------ ------------ ------------ ------------
Numerator for earnings
per share and
earnings per share -
assuming dilution -
Net income available
to common
stockholders, before
cumulative effect of
change in accounting
principle $ 135 $ 130 $ 282 $ 269
============ ============ ============ ============
Denominator:
Denominator for
earnings per share -
weighted-average
share outstanding 152,133,839 154,725,350 152,828,044 154,728,770
Effect of dilutive
securities:
Stock options 1,537,663 1,381,023 1,493,424 1,281,302
------------ ------------ ------------ ------------
Denominator for
earnings per share
assuming dilution -
adjusted weighted-
average shares
outstanding 153,671,502 156,106,373 154,321,468 156,010,072
============ ============ ============ ============
Earnings per share,
before cumulative
effect of change in
accounting principle $ 0.88 $ 0.84 $ 1.84 $ 1.74
============= =========== ============ ============
Earnings per share -
assuming dilution,
before cumulative
effect of change
in accounting
principle $ 0.87 $ 0.83 $ 1.82 $ 1.72
============= =========== ============ ============
-8-
4. Contingent Liabilities
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 cases, management believes that our practices have
complied with state insurance laws and intends to vigorously defend the claims
asserted.
In the normal course of business, the Company and its subsidiaries are parties
to various lawsuits. Because of the considerable uncertainties that exist, the
Company cannot predict the outcome of pending or future litigation. However,
management believes that the resolution of pending legal proceedings will not
have a material adverse effect on the Company's financial position or liquidity,
although it could have a material adverse effect on the results of operations
for a specified period.
5. Accounting Pronouncements
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and for Hedging Activities" and SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" (collectively
referred to as SAFA 133). SFAS 133 requires all derivatives to be recorded on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through earnings. If the derivative is a hedge, changes
in its fair value are either offset against the change in fair value of assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The adoption of SFAS 133 on January 1, 2001 resulted in
the cumulative effect of an accounting change, net of income taxes of $1.5 being
recognized as income in the statement of net income. There was no cumulative
effect recognized in other comprehensive income related to the Company's
interest rate swaps, used as cash flow hedges, because these swaps were carried
at fair value prior to adoption of SFAS 133. See Note 6 for a complete
discussion of the Company's derivative instruments.
6. Derivative Financial Instruments
SFAS 133 requires companies to recognize all derivative instruments as either
assets or liabilities in the balance sheet at fair value. The fair values of
the Company's derivative instruments of $8.4 at June 30, 2001, are included in
other investments in the accompanying balance sheet. The accounting for changes
in the fair value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and further, on the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the exposure being hedged, as
either a fair value hedge, cash flow hedge or a hedge of a net investment in a
foreign operation. The Company accounts for changes in fair values of
derivatives that have no hedge designation or do not qualify for hedge
accounting through current earnings during the period of the change. For
derivatives that are designated and qualify as cash flow hedges, the effective
-9-
portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into earnings in the
same period during which the hedged transaction impacts earnings. The remaining
gain or loss on these derivative instruments is recognized in current earnings
during the period of the change. Effectiveness of the Company's hedge
relationships is assessed and measured on a quarterly basis. The Company has no
fair value hedges or hedges of net investments in foreign operations.
Cash Flow Hedging Strategy
The Company uses interest rate swaps to convert floating rate investments to
fixed rate 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. During the quarter and the six months
ended June 30, 2001, the ineffective portion of the Company's cash flow hedging
instruments, which is recognized in realized investment gains, was not
significant.
Activity in other comprehensive income related to cash flow hedges during the
quarter and the six months ended June 30, 2001 was not significant.
The Company does not expect to reclassify a significant amount of net gains
(losses) on derivative instruments from accumulated other comprehensive income
to earnings during the next twelve months.
Other Derivatives
The Company acquired a $30 block of equity indexed annuities as the result of
its purchase of Guarantee. These contracts have an equity market component,
where interest credited to the contracts is linked to the performance of the S&P
500r index. The Company has historically managed this risk by purchasing call
options that mirrored the interest credited to the contracts. These call
options act as an economic hedge, as changes in their fair values are recognized
in net investment income. For the second quarter and the six months ended June
30, 2001, activity reflected in net investment income related to these options
was not significant.
Certain swaps serve as economic hedges but do not qualify for hedge accounting
under SFAS 133. These swaps are marked to market through realized gains.
During the quarter and the six months ended June 30, 2001, activity related to
these swaps, which is recognized in realized investment gains, was not
significant.
The Company also invests in debt securities with embedded options, which are
considered to be derivative instruments under SFAS 133. These derivatives are
marked to market through realized investment gains, but had an insignificant
effect for the second quarter and the six months ended June 30, 2001.
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.
The Company's credit risk exposure on swaps is limited to the fair value of swap
agreements that it has recorded as an asset. 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
-10-
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.
-11-
JEFFERSON-PILOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of financial condition as
of June 30, 2001, changes in financial condition for the six months then ended,
and results of operations for the three month and six month periods ended June
30, 2001, as compared to the same periods of 2000 of Jefferson-Pilot Corporation
and consolidated subsidiaries (collectively, JP or Company). The discussion
supplements Management's Discussion and Analysis in Form 10-K for the year ended
December 31, 2000, and it should be read in conjunction with the interim
financial statements and notes contained herein. All dollar amounts are in
millions except per share amounts. All prior share amounts have been restated
to give retroactive effect to the Company's 50% stock dividend, which was
effective in April 2001.
COMPANY PROFILE
The Company has five reportable segments: Individual Products, Annuity and
Investment Products (AIP), Benefit Partners, 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 June 30, 2001, 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.
Communications operations are conducted by Jefferson-Pilot Communications
Company (JPCC) and consist of radio and television broadcasting operations
located in strategically selected markets in the Southeastern and Western United
States, and sports program production.
Corporate and Other contains the activities of the parent company and passive
investment affiliates, surplus of the life insurance subsidiaries not allocated
to other reportable segments including earnings thereon, financing expenses on
Corporate debt and debt securities including Capital Securities, and federal and
state income taxes not otherwise allocated to business segments.
JP's acquisition strategy is designed to enhance core business growth and deploy
excess capital. The focus is to increase distribution, add products, add
technology and provide economies of scale.
For the first half of 2001, JP's revenues were derived 53% from Individual
Products, 20% from AIP, 18% from Benefit Partners, 6% from Communications, and
3% from Corporate and Other, excluding realized gains.
-12-
As a result of strategic studies undertaken last year, a refined marketing
strategy emerged called Premier Partnering. The Company is intensely focused in
2001 on implementing this strategy to accelerate growth in individual life
insurance sales. Strategic initiatives focus particularly on relationships with
more productive agents, by providing a higher level of marketing support, as
well as new ways of differentiating service for these key agents. Further, JP
is focusing on selective markets in which the Company is tailoring specific
products and marketing programs: wealth accumulation, wealth preservation and
business planning. The Company plans to spend approximately $5 in 2001,
primarily in new field recruiting and relationship management marketing support
for agents. Most of the hiring was completed by June 30 and expenses were $2.5
and $3.0 for the second quarter and first six months of 2001. Related JP
initiatives include an increased emphasis on employee development through
adoption of a performance culture, continued effective cost control and
application of "lean manufacturing" concepts to improve quality and reliability
throughout our operating processes. The Company has set stretch goals of
doubling the number of agents who qualify as Premier Partners and increasing the
annual rate of life insurance sales (excluding large-case BOLI) by 50% within
two years from 2000.
RESULTS OF OPERATIONS
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 deferred acquisition costs and value of business acquired.
Realized investment gains are included in the "Corporate and Other" segment.
Reportable segment results is the basis used by management of the Company in
assessing the performance of its business segments. Management believes that
reportable segment results are relevant and useful information. Gains from sale
of investments arise in majority from its Available for Sale equity and bond
portfolios and may be realized in the sole discretion of management. Effective
January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative
Instruments and for Hedging Activities" which caused a one time increase to
after tax income of $1.5 which is primarily included in the AIP reportable
segment results. Reportable segment results as described above may not be
comparable to similarly titled measures reported by other companies.
-13-
The following tables illustrate JP's results before and after the inclusion of
realized investment gains and the cumulative effect of change in accounting for
derivatives:
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Consolidated Summary of Income
------------------------------
Income before dividends on
Capital Securities and
cumulative effect of change
in accounting principle $140.4 $136.4 $293.5 $281.4
Dividends on Capital Securities (6.2) (6.2) (12.3) (12.3)
Cumulative effect of change in
accounting for derivative
instruments, net of income
taxes - - 1.5 -
------- ------- ------- -------
Net income available to common
stockholders $134.2 $130.2 $282.7 $269.1
======= ======= ======= =======
Income before dividends on
Capital Securities $140.4 $136.4 $295.0 $281.4
Other comprehensive income -
change in net unrealized
gains on securities (70.1) (113.9) 23.9 (106.5)
------- ------- ------- -------
Comprehensive income $ 70.3 $ 22.5 $318.9 $174.9
======= ======= ======= =======
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
2001 2000 2001 2000
------------------------------ ------------------------------
Average number of shares
outstanding 152,133,839 154,725,350 (a) 152,828,044 154,728,770 (a)
=========== =========== =========== ===========
Average number of shares
outstanding - assuming
dilution 153,671,502 156,106,373 (a) 154,321,468 156,010,072 (a)
=========== =========== =========== ===========
(a) Number of shares has been restated as if the 50% stock dividend effective April 9, 2001
had been in effect for all periods presented.
-14-
The following table shows total reportable segment results:
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Consolidated Earnings Per Share
-------------------------------
Basic:
Total reportable segment
results $0.75 $0.71 $1.48 (b) $1.41
Realized investment gains
(net of applicable income
taxes) 0.13 0.13 0.37 0.33
----- ----- ----- -----
Net income available to
common stockholders $0.88 $0.84 $1.85 $1.74
===== ===== ===== =====
Fully-diluted:
Total reportable segment
results $0.75 $0.71 $1.47 (b) $1.40
Realized investment gains
(net of applicable income
taxes) 0.12 0.12 0.36 0.32
----- ----- ----- -----
Net income available to common
stockholders $0.87 $0.83 $1.83 $1.72
===== ===== ===== =====
(b) Includes $0.01 per share of income relating to cumulative effect of
change in accounting for derivatives.
Net income available to common stockholders increased 3.1% and 5.1% from the
second quarter and first six months of 2000. Total reportable segment results
increased 4.1% over the second quarter and first six months of 2000. Net
realized gains decreased 2.5% and increased 9.2% from the second quarter and
first six months of 2000.
Total reportable segment results per share including the cumulative effect of
the change in accounting for derivatives increased 5.6% over second quarter 2000
and 5.0% over the first six months of 2000, reflecting the increase in earnings
and the share repurchases since first quarter 2000. Earnings per share
increased 4.8% over second quarter 2000 and 6.3% from the first six months of
2000. Earnings per share assuming dilution increased 4.8% from second quarter
2000 and increased 6.4% over the first six months of 2000 for the same reasons.
Due to share repurchases net of stock plan issuances, the average number of
diluted shares outstanding decreased 1.6% to 153.7 million shares and 1.1% to
154.3 million shares from the second quarter and first six months of 2000.
RESULTS BY BUSINESS SEGMENT
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 JP uses 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
-15-
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.
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.
Results by Reportable Segment
Three Months Ended Six Months Ended
June 30 June 30
------------------ --------------------
2001 2000 2001 2000
------------------ --------------------
Individual Products $ 76.5 $ 69.0 $146.0 $137.3
AIP 19.1 19.4 39.8 (a) 40.3
Benefit Partners 10.5 8.9 20.9 17.2
Communications 8.7 9.2 15.5 18.0
Corporate and Other (0.1) 3.7 4.5 5.0
------- ------ ------ ------
Total reportable segment
results 114.7 110.2 226.7 217.8
Net realized investment
gains 19.5 20.0 56.0 51.3
------- ------ ------ ------
Net income available to
common stockholders $134.2 $130.2 $282.7 $269.1
======= ====== ====== ======
(a) Includes $1.5 relating to the cumulative effect of change in
accounting for derivatives.
Segment Assets
June 30 June 30
2001 2000
------- -------
Individual Products $15,348 $14,883
AIP 7,856 7,525
Benefit Partners 742 715
Communications 200 210
Corporate and Other 3,762 3,466
------- -------
Total Assets $27,908 $26,799
======= =======
A more detailed discussion of reportable segment results follows.
-16-
INDIVIDUAL PRODUCTS
The Individual Products segment markets individual life insurance policies
through independent general agents, independent national account marketing
firms, agency building general agents, home service agents, broker/dealers,
banks and strategic alliances.
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 VUL policyholder fund balances. Reportable segment
results for both traditional and UL-type products also includes earnings on
required capital.
Segment results were:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2001 2000 2001 2000
------------------ ------------------
Life premiums and other
considerations $ 50.3 $ 53.7 $ 99.5 $112.0
UL and investment product
charges 156.8 150.4 316.2 304.6
Investment income, net of
expenses 216.9 209.4 431.5 417.7
Other income 1.9 2.1 3.9 4.3
------ ------ ------ ------
Total revenues 425.9 415.6 851.1 838.6
------ ------ ------ ------
Policy benefits 232.4 226.5 474.7 461.7
Expenses 75.8 83.1 152.0 166.5
------ ------ ------ ------
Total benefits and
expenses 308.2 309.6 626.7 628.2
------ ------ ------ ------
Reportable segment results
before income taxes 117.7 106.0 224.4 210.4
Provision for income taxes 41.2 37.0 78.4 73.1
------ ------ ------ ------
Reportable segment results $ 76.5 $ 69.0 $146.0 $137.3
====== ====== ====== ======
-17-
Individual Products reportable segment results increased $7.5 or 10.9% and $8.7
or 6.3% over the second quarter and first half of 2000, due primarily to growth
in policyholder funds and expense reductions.
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
2001 2000 2001 2000
----------------------- -----------------------
Annualized life insurance
premium sales:
Sales excluding large-
case BOLI $ 43.1 $ 37.4 $ 79.3 $ 77.8
Large-case BOLI 8.3 0.4 8.6 2.1
Individual traditional
insurance premiums $ 49.9 $ 52.9 $ 99.0 $ 110.6
Average UL policyholder
fund balances 9,083.3 8,687.4 9,002.1 8,644.0
Average VUL separate
account assets 1,269.7 1,400.9 1,325.8 1,372.5
---------- ---------- ---------- ----------
$ 10,353.0 $ 10,088.3 $ 10,327.9 $ 10,016.5
========== ========== ========== ==========
Average face amount of
insurance in force:
Total $156,435.0 $157,609.0 $156,543.0 $157,856.0
UL-type policies $114,531.0 $112,002.0 $114,246.0 $111,784.0
Average assets $ 15,181.6 $ 14,891.3 $ 15,071.8 $ 14,793.8
Annualized life insurance premium sales in the prior year have been reclassified
to conform with the presentations adopted in the current quarter.
Annualized life insurance premium sales excluding large-case BOLI increased
15.2% and 1.9% for the second quarter and first half of 2001 as the Company was
repositioning several UL products to meet marketplace demand, despite a drop in
Survivorship sales due to continued uncertainty about estate tax changes.
Annualized large-case BOLI sales increased significantly over the second quarter
and first half of 2000. JP's business strategy is to respond to individual
sales opportunities for large-case BOLI when market rates of new investments
accommodate required returns. Accordingly, these sales results will vary widely
between periods.
Revenues include traditional insurance premiums, policy charges, and investment
income. Individual revenues increased $10.3 or 2.5% over the second quarter of
2000 and $12.5 or 1.5% over the first half of 2000, primarily due to growth in
average UL policyholder fund balances of 4.6% and 4.1% over the second quarter
and first half of 2000. Average VUL separate account assets declined 9.4% and
3.4% over the second quarter and six months of 2000 primarily due to the drop in
the equity markets.
Individual traditional premiums decreased 5.7% and 10.5% from second quarter and
first half of 2000 as a result of a decrease in traditional business in force
and certain reclassifications made during the integration of Guarantee. Policy
charges, which include mortality, expense and surrender charges, improved 4.3%
-18-
and 3.8% over the second quarter and first six months of 2000. 2001's increase
is a result of the growth of the UL-type business in force.
Net investment income increased $7.5 or 3.6% and $13.8 or 3.3% over the second
quarter and first six months of 2000, following the growth in policyholder
funds. The portfolio yield on traditional assets increased 5 basis points to
7.79% and 4 basis points to 7.80% from the second quarter and first six months
of 2000. The average investment spread on UL products (calculated as the
difference between portfolio yields earned on invested assets less interest
credited to policyholder funds, assuming the same level of invested assets)
increased 5 basis points to 2.01% and 3 basis points to 1.98% from the second
quarter and six months of 2000. In addition to being impacted by portfolio
yields and crediting rates, interest spreads may vary over time due to
competitive strategies and changes in product design.
Policy benefits increased 2.6% and 2.8% from the second quarter and six months
of 2000. Traditional policy benefits were 107.9% versus 109.9% of premiums in
the second quarter and 110.7% versus 104.7% for the first six months of 2001 and
2000. The increase for the first half 2001 was primarily due to
reclassification of benefits reported in 2000 related to the integration of
Guarantee which is consistent with JP's classification of expenses. Policy
benefits on UL-type products (annualized) increased to 6.9% and 7.1% of average
policyholder funds and separate accounts versus 6.7% and 6.9% in the second
quarter and six months of 2000. 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.
Total expenses (including the net deferral and amortization of policy
acquisition costs) decreased 8.8% and 8.7% from the second quarter and six
months of 2000. The decline is due to the benefit derived from the Guarantee
integration which includes some miscellaneous expense reductions and
reclassifications, continued discipline in regards to general and administrative
cost management and reduced DAC amortization. Expenses on individual
traditional products were 30.4% of premiums in the second quarter and six months
of 2001. For UL-type products, annualized expenses as a percentage of
policyholder funds and separate accounts were 2.3% in the second quarter and six
months of 2001 versus 2.6% for the second quarter and six months of 2000.
Average Individual Products assets grew 1.9% over the second quarter and six
months of 2000. 2001's growth was due to sales of UL-type products and growth
in existing policyholder funds from interest credited, partially offset by VUL
equity declines. The annualized return on average Individual Products assets
was 2.02% versus 1.85% and 1.94% versus 1.86% for the second quarter and six
months of 2001 and 2000, as reportable segment results have grown faster than
the growth in assets.
ANNUITY AND INVESTMENT PRODUCTS
Annuity and Investment Products, including variable annuity products, are
marketed through most distribution channels discussed in the Individual Products
segment as well as through financial institutions, investment professionals and
annuity marketing organizations. JP's full service broker/dealer markets
variable life insurance and variable annuities written by our insurance
subsidiaries, and also sells other securities and mutual funds.
-19-
Reportable segment results were:
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Policy charges, premiums
and other considerations $ 4.1 $ 7.7 $ 8.5 $ 13.9
Net investment income 127.4 119.0 257.8 235.8
Concession and other income 27.9 27.1 53.6 52.7
-------- -------- -------- --------
Total revenues 159.4 153.8 319.9 302.4
-------- -------- -------- --------
Policy benefits 90.2 83.6 181.1 165.4
Expenses 39.7 40.3 77.4 74.8
-------- -------- -------- --------
Total benefits and expenses 129.9 123.9 258.5 240.2
-------- -------- -------- --------
Reportable segment results
before income taxes 29.5 29.9 61.4 62.2
Provision for income taxes 10.4 10.5 21.6 21.9
-------- -------- -------- --------
Reportable segment results $ 19.1 $ 19.4 $ 39.8 $ 40.3
======== ======== ======== ========
Reportable segment results decreased $0.3 or 1.5% and $0.5 or 1.2% from the
second quarter and first six months of 2000 due to a drop in earnings of the
broker/dealer. The cumulative effect of the change in accounting for
derivatives of $1.5 after tax was included in reportable segments of AIP in the
first quarter 2001. The following table summarizes key information for AIP:
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Fixed annuity premium sales $ 226.4 $ 284.4 $ 493.3 $ 509.0
Variable annuity premium
sales 6.6 27.2 17.0 57.7
-------- -------- -------- --------
$ 233.0 $ 311.6 $ 510.3 $ 566.7
Average policyholder fund
balances $6,651.9 $6,233.0 $6,627.8 $6,230.2
Average separate account
policyholder fund
balances 552.6 721.9 550.0 708.4
-------- -------- -------- --------
$7,204.5 $6,954.9 $7,177.8 $6,938.6
======== ======== ======== ========
Investment product sales $ 733.5 $ 850.4 $1,464.6 $1,751.7
Average assets $7,810.9 $7,505.5 $7,726.1 $7,484.9
Fixed and variable annuity premium sales in the prior year have been
reclassified to conform with the presentations adopted in the current quarter.
Annuity revenues are derived from investment income on segment assets, policy
charges, and concession income earned on investment product sales by Jefferson
Pilot Securities Corporation (JPSC), a registered broker/dealer, and related
entities. Revenues increased 3.6% and 5.8% over the second quarter and first
six months of 2000. The adoption of FASB 133 caused a one time increase to net
investment income of $2.3 in the first quarter 2001 as the derivatives utilized
by the Company giving rise to the change were primarily associated with AIP
products. Fixed annuity sales decreased 20.4% and 3.1% from the second quarter
and first six months of 2000 due to lower prevailing interest rates, competition
(especially from new products), and continued pricing discipline. In total,
-20-
fixed and variable annuity sales decreased by 25.2% and 10.0% from the second
quarter and first half of 2000, also reflecting the weaker equity markets.
Fixed annuity benefits and surrenders as a percentage of beginning fund balances
decreased to 14.2% versus 24.5% and 15.4% versus 22.5% from the second quarter
and first six months of 2000. Fixed annuities experienced a lower lapse rate,
reflecting the combined efforts of lower interest rates on competing
investments, increased surrender charge protection on our in-force block of
business, and internal conservation initiatives. The surrender rate in the AIP
segment is influenced by many factors, including the portion of the business
that has low or no remaining surrender charges, and competition from other
annuity products including those which pay interest rate bonuses and from other
investment products. Fund balances with 5% or more surrender charges, including
payout annuities, increased to 42% versus 35% at June 30,2001 and 2000. JP
maintains asset/liability management practices that reflect the characteristics
of the AIP liabilities. Concession and other income increased 3.0% and 1.7%
from the second quarter and first six months of 2000.
Total AIP benefits and expenses increased 4.8% and 7.6% over the second quarter
and first six months of 2000 primarily due to interest credited consistent with
the growth of the fund balances. Annualized policy benefits, which are mainly
comprised of interest credited to policyholder accounts, as a percentage of
average policyholder fund balances remained constant at 5.4% in the second
quarter and were 5.5% versus 5.3% in the first six months of 2001 and 2000.
Effective spreads declined to 1.94% from 2.18% and 2.02% from 2.17% in the
second quarter and first six months of 2000 due to continued strong sales of
JP's lower commission five-year product, which carries a lower spread
requirement; competition; and higher crediting rates on new products than on
annuities being surrendered.
Total AIP expenses decreased 1.5% and increased 3.5% from the second quarter and
first six months of 2000. The decrease/increase in expenses from period to
period results from a change in DAC amortization relative to the actual lapse
rates experienced during the periods.
AIP posted annualized returns on average assets of 0.98% versus 1.03% and 1.03%
versus 1.08% for the second quarter and first six months of 2001 and 2000.
The combined earnings of the broker/dealer and related entities which are
included in the segment results were $0.4 versus $1.3 and $1.4 versus $3.0 for
the second quarter and first six months of 2001 and 2000.
BENEFIT PARTNERS
The Benefit Partners segment offers group non-medical products such as term
life, disability and dental insurance to the employer marketplace. These
products are marketed primarily through a national distribution system of
regional group offices. These offices develop business through
employee benefit brokers, third party administrators and other employee benefit
firms.
The six months ended June 30, 2001 reflect JP's operational integration of the
prior JP Life group life and disability operations into Guarantee's Omaha,
Nebraska life, disability and dental operations.
-21-
Reportable segment results were:
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Premiums and other
considerations $ 130.9 $ 119.3 $ 260.2 $ 235.2
Investment income,
net of expenses 13.4 12.7 26.7 25.1
-------- -------- -------- --------
Total revenues 144.3 132.0 286.9 260.3
-------- -------- -------- --------
Policy benefits 96.5 87.4 192.2 171.8
Expenses 31.6 30.9 62.6 62.2
-------- -------- -------- --------
Total benefits and
expenses 128.1 118.3 254.8 234.0
-------- -------- -------- --------
Reportable segment results
before income taxes 16.2 13.7 32.1 26.3
Provision for income taxes 5.7 4.8 11.2 9.1
-------- -------- -------- --------
Reportable segment results $ 10.5 $ 8.9 $ 20.9 $ 17.2
======== ======== ======== ========
Benefit Partners reportable segment results increased $1.6 or 18.0% and $3.7 or
21.5% over the second quarter and first six months of 2000. The following table
summarizes key information for Benefit Partners:
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Life, Disability, and
Dental:
Annualized sales $ 32.8 $ 25.3 $ 79.3 $ 63.7
Loss ratio 72.0% 70.5% 72.5% 71.9%
Total expenses, % of
premiums and
equivalents 24.1% 25.8% 24.1% 26.0%
Average assets $ 734.6 $ 710.3 $ 727.3 $ 683.2
Premium income $ 130.9 $ 119.7 $ 259.4 $ 238.6
Benefit Partners revenues increased $12.3 or 9.3% and $26.6 or 10.2% over the
second quarter and first six months of 2000, including premium growth of $11.6
or 9.7% and $25.0 or 10.6% over the second quarter and first six months of 2000.
Premium income increased 9.4% and 8.7% over the second quarter and first six
months of 2000. Annualized sales growth for the core life, disability and
dental lines of business was $7.5 or 29.6% and $15.6 or 24.5% over the second
quarter and first six months of 2000. The increase in revenue is due to
continued favorable sales growth combined with satisfactory persistency in the
non-medical business; offset somewhat by the impact of the exit from the excess
loss medical business.
Policy benefits increased 10.4% and 11.9% over the second quarter and first six
months of 2000 which is consistent with the growth of business in force. The
-22-
life, disability and dental incurred loss ratio was 72.0% versus 70.5% and 72.5%
versus 71.9% in the second quarter and first six months of 2001 and 2000.
Total expenses (including the net deferral and amortization of policy
acquisition costs) decreased 2.3% and 0.6% in the second quarter and first six
months of 2001. As a percentage of premiums and equivalents, total expenses
decreased to 24.1% versus 25.8% and 24.1% versus 26.0% for the second quarter
and first six months of 2001 and 2000. This favorable expense trend is due in
part to the integration of JP's and Guarantee's group operations and deferral of
first year expenses on profitable Dental products.
COMMUNICATIONS
JPCC operates radio and television broadcast properties and produces syndicated
sports and entertainment programming. Reportable segment results were:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2001 2000 2001 2000
------------------ ------------------
Communications revenues (net) $ 48.3 $ 49.8 $ 98.9 $103.2
Operating costs and expenses 28.0 28.6 61.8 61.9
------- ------- ------- -------
Broadcast cash flow 20.3 21.2 37.1 41.3
Depreciation and amortization 2.7 2.9 5.5 5.7
Corporate general and
administrative expenses 2.0 1.4 3.3 2.7
Net interest expense 1.1 1.2 2.2 2.4
------- ------- ------- -------
Operating revenue before
income taxes 14.5 15.7 26.1 30.5
Provision for income taxes 5.8 6.5 10.6 12.5
------- ------- ------- -------
Reportable segment results $ 8.7 $ 9.2 $ 15.5 $ 18.0
======= ======= ======= =======
Reportable segment results decreased 5.4% and 13.9% compared to the second
quarter and first six months of 2000. The company continued to experience a
decline in demand for advertising, due to a general softening of the economy in
all markets.
Combined revenues for Radio and Television decreased 3.5% and 5.3% from the
second quarter and first six months of 2000. Disregarding political revenues,
Radio and Television decreased 2.7% and 4.0% from the second quarter and first
six months of 2000. This decline is primarily attributable to decreases in
national sales, due to slowing economic conditions.
Broadcast cash flow decreased by 4.2% and 10.2% from the second quarter and
first six months of 2000.
Total expenses, excluding interest expense, decreased 0.6% in the second quarter
and increased 0.4% for the first six months of 2001. Expenses, excluding
interest expense, as a percent of communication revenues were 67.7% versus 66.1%
and 71.4% versus 68.1% for the second quarter and first six months of 2001 and
2000. The increase as a percentage of revenues is mainly attributable to the
decrease in revenues, while expenses have been held relatively flat year to
year.
-23-
CORPORATE AND OTHER
The following table summarizes operating results for this segment:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2001 2000 2001 2000
------------------ ------------------
Earnings on investments $ 23.0 $ 26.2 $ 47.3 $ 51.5
Interest expense on debt and
Exchangeable Securities (8.3) (9.2) (16.8) (18.1)
Operating expenses (10.2) (5.2) (17.4) (12.7)
Federal and state income tax
expense 1.6 (2.0) 3.7 (3.4)
------- ------- ------- -------
6.1 9.8 16.8 17.3
Dividends on Capital Securities
and manditorily redeemable
preferred stock (6.2) (6.1) (12.3) (12.3)
------- ------- ------- -------
Reportable segment results (0.1) 3.7 4.5 5.0
Realized investment gains 19.5 20.0 56.0 51.3
------- ------- ------- -------
Reportable segment results,
including realized gains $ 19.4 $ 23.7 $ 60.5 $ 56.3
======= ======= ======= =======
The following table summarizes assets assigned to this segment:
June 30 June 30
2001 2000
------- --------
Parent company, passive investment
companies and Corporate line assets of
insurance subsidiaries $1,630 $1,599
Unrealized gain (loss) on fixed interest
investments 52 (246)
Co-insurance receivables on acquired blocks 1,138 1,251
Employee benefit plan assets 364 342
Goodwill arising from insurance acquisitions 275 263
Other 303 257
------ -------
Total $3,762 $3,466
====== =======
Total assets for the Corporate and Other segment increased 8.6% from the first
six months of 2000, primarily due to increases in market values of Available for
Sale securities. Unrealized gains and losses on all Available for Sale fixed
income securities are assigned to this segment, and increased $298 from June 30,
2000. The increase is primarily the result of declining market interest rates.
Reportable segment results including realized gains decreased 17.7% and
increased 7.6% from the second quarter and first six months of 2000. These
amounts reflect an increase in stock repurchase activity primarily toward the
end of the first quarter 2001, resulting in lower investment earnings in the
second quarter of 2001, a decrease in interest expense due to lower borrowing
rates, and an increase in corporate expenses. These expenses were primarily for
the Company's national advertising campaign and consulting fees associated with
implementation of the Premier Partnering strategic initiative which together
were $6 and will not be repeated in the second half of 2001. Investment
earnings decreased 12.2% and 8.2% from the second quarter and first six months
of 2000. Interest expense on debt and exchangeable securities decreased $0.9
-24-
and $1.3 from the second quarter and first six months of 2000, as a result of
lower average interest rates year over year. Operating expenses increased 96.2%
and 37.0% over the second quarter and first six months of 2000 as described
above. 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 $3.6 and $7.1 from the
second quarter and first six months of 2000 due primarily to the implementation
of strategies that reduced the federal income tax on investment earnings and the
resolution of tax issues for which we had previously established reserves.
The results of this segment fluctuate from quarter to quarter due to expenses
associated with strategic activities, share repurchases, tax strategies,
advertising expenses, income recorded on equity method investments, and
transfers of assets to and from business segments, as well as refinements in
asset assignments and investment income allocation methodologies to other
reportable segments.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
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.
Total assets increased $587 or 2.1% during the first six months of 2001,
reflecting growth in income, policyholder contract deposits and investments.
These favorable influences were partially offset by cash dividends paid to
stockholders.
The Individual Products, AIP and Benefit Partners segments defer the costs of
acquiring new business, including commissions, first year bonus interest,
certain costs of underwriting and issuing policies, and agency office expenses
(referred to as DAC). Net amounts deferred were $1,320 at June 30, 2001, an
increase of 8.3% over December 31, 2000.
Value of business acquired (VOBA) represents the actuarially-determined present
value of future gross profits of each business acquired. VOBA was $702 at June
30, 2001, down 5.0% from year end due to amortization.
Goodwill (cost of acquired businesses in excess of the fair value of net assets)
was $318 at June 30, 2001 and $323 at December 31, 2000 with the decrease due to
amortization. Goodwill as a percentage of shareholders' equity was 9.7% and
10.2% at June 30, 2001 and December 31, 2000.
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.
At June 30, 2001 and December 31, 2000, JP had reinsurance receivables of $936
and $947 and policy loans of $182 and $184 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
-25-
related to reinsurance activities. No significant credit losses have resulted
from reinsurance activities during 2001 and 2000.
CAPITAL RESOURCES
Stockholders' Equity
JP's capital adequacy is illustrated by the following table:
June 30 December 31
2001 2000
----------- -----------
Total assets less separate accounts $25,690 $25,010
Total stockholders' equity $ 3,289 $ 3,159
Ratio of stockholders'equity to assets 12.8% 12.6%
The ratio of equity to assets has increased slightly primarily due to changes in
unrealized gains on securities, partially offset by stock repurchases.
Stockholders' equity increased $130 over December 31, 2000 due to net changes in
values of Available for Sale securities and net income less dividends paid.
Common shares outstanding reflected repurchases during the first six months of
2001 of $96 (2,227,500 shares at an average cost of $43.03 per share), which
decreased equity. 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.
JP considers existing capital resources to be more than adequate to support the
current level of its business activities. The business plan places priority on
redirecting certain capital resources invested in bonds and stocks into its core
businesses, which would be expected to produce higher returns over time.
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:
JP Life JPFIC JPLA
------- ----- ----
A.M. Best A++ A++ A++
Standard & Poor's AAA AAA AAA
Fitch AAA AAA AAA
Debt and Exchangeable Securities
Commercial paper outstanding was $538 and $405 at June 30, 2001 and December 31,
2000 with weighted average interest rates of 5.56% and 6.21%. The increase in
commercial paper is due to the share repurchases and an opportunistic ability to
purchase higher yielding securities. The maximum amount outstanding during the
-26-
first six months of 2001 was $565 versus $525 during the year ended December 31,
2000.
JP insurance subsidiaries have sold U.S. Treasury obligations and collateralized
mortgages under repurchase agreements involving various counterparties,
accounted for as financing arrangements. Repurchase agreements outstanding were
$284 and $397 at June 30, 2001 and December 31, 2000. Proceeds are used to
purchase securities with longer durations as an asset/liability management
strategy. The maximum amounts outstanding were $373 and $467 during the first
six months of 2001 and in 2000 as the portion used to help fund the Guarantee
acquisition was repaid. The securities involved had a fair value and amortized
cost of $290 and $281, and $415 and $404, as of June 30, 2001 and December 31,
2000.
At June 30, 2001 and December 31, 2000, the Company had $150 and $139
Exchangeable securities and other debt outstanding, reflecting the Mandatorily
Exchangeable Debt Securities (MEDS). Additionally, $300 of guaranteed preferred
beneficial interest in subordinated debentures (Capital Securities) remained
outstanding at June 30, 2001.
At June 30, 2001 and December 31, 2000, net advances from subsidiaries were $393
and $346, all of which are eliminated in consolidation.
While the Company has no commitments for additional financing, additional funds
may be borrowed to finance acquisitions or for other corporate purposes.
LIQUIDITY
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.
Cash provided by operations was $358 and $199 for the first six months of 2001
and 2000. The increase of $159 reflects changes in payables and receivables
related to the timing of investment commitments net of higher policy acquisition
costs.
Net cash used in investing activities was $479 and $277 for the first six months
of 2001 and 2000, with the increase due to the timing of investment commitments
and opportunistic purchases of higher yielding securities funded by commercial
paper issuance.
Net cash provided by financing activities was $148 and $68 for the first six
months of 2001 and 2000. Cash inflows from policyholder contract deposits net
of withdrawals were $309 and $205 for the first six months of 2001 and 2000.
The 2001 increase is a result of a decrease in annuity surrenders. Short-term
borrowings (including commercial paper and repurchase agreements) increased by
$20 for the first six months of 2001.
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In order to meet the parent company's dividend payments, debt servicing
obligations and other expenses, internal dividends are received from
subsidiaries. Total internal cash dividends paid to the parent from its
subsidiaries during the first six months were $155 in 2001 and $379 in 2000,
from JP Life, JPFIC and JPCC. The Company's life insurance subsidiaries are
subject to laws in the states of domicile that limit the amount of dividends
that can be paid without the prior approval of the respective State's Insurance
Commissioner. The Company has no reason to believe that such approval will be
withheld.
Cash and cash equivalents were $53 and $26 at June 30, 2001 and December 31,
2000. Additionally, fixed income and equity securities held by the parent
company and non-regulated subsidiaries were $576 at June 30, 2001 and $549 at
December 31, 2000. These securities, including $150 (at June 30, 2001) of Bank
of America Corporation common stock which supports the MEDS, are considered to
be sources of liquidity to support the Company's strategies.
Total debt and equity securities Available for Sale at June 30, 2001 and
December 31, 2000 were $13,793 and $13,529.
INVESTMENTS
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 carrying value of JP's holdings were as follows:
June 30, 2001 December 31, 2000
----------------- -----------------
Publicly-issued bonds $12,443 58.7% $12,006 58.5%
Privately-placed bonds 4,123 19.5 4,073 19.8
Mortgage loans on real property 2,891 13.6 2,771 13.5
Common stock 558 2.6 549 2.7
Policy loans 938 4.4 923 4.5
Preferred stock 31 0.2 31 0.2
Real estate 134 0.6 135 0.7
Other 15 0.1 11 -
Cash and equivalents 53 0.3 26 0.1
-------- ------- -------- -------
Total $21,186 100.0% $20,525 100.0%
======== ======= ======== =======
Certain amounts reported in the prior years schedule of privately-placed and
publicly-issued assets have been reclassified to conform with the presentation
adopted in the current year.
The strategy of identifying market sectors and niches that provide investment
opportunities to meet the portfolios' growth, quality and yield requirements
could result in changing percentages of private placements and commercial
mortgage loans.
JP's Investment Policy Statement requires an average quality fixed income
portfolio (excluding mortgage loans) of "A" or higher. Currently, the average
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quality is "A1". The Policy also imposes limits on the amount of lower quality
investments and requires diversification by issuer and asset type. The amount
of "below-investment grade" bonds increased this quarter as a result of several
downgrades, yet it remains near JP's investment parameters. The Company
monitors "higher risk" investments for compliance with the Policy 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 foreclosure are carried at the net present value of expected
future cash flows.
Carrying amounts of investments categorized as "higher risk" assets were:
June 30, 2001 December 31, 2000
----------------- -----------------
Bonds near or in default $ 44 0.2% $ 21 $ 0.1%
Bonds below investment grade 866 4.1 751 3.7
Mortgage loans 60 days
delinquent or in foreclosure 4 - 1 -
Mortgage loans restructured 10 0.1 10 -
Foreclosed properties 2 - 2 -
-------- ------- -------- -------
Sub-total, "higher risk assets" 926 4.4 785 3.8
All other investments 20,260 95.6 19,740 96.2
-------- ------- -------- -------
Total cash and investments $21,186 100.0% $20,525 100.0%
======== ======= ======== =======
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 and equity indexed risks associated with certain
annuity products. Interest rate swaps with a current notional value of $183
were open as of June 30, 2001. There were no terminations of derivative
financial instruments in the first six months of 2001. Effective January 1,
2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and
for Hedging Activities".
Mortgage backed securities (including Collateralized Mortgage Obligations) at
June 30, which are included in debt securities Available for Sale, were as
follows:
June 30 December 31
2001 2000
----------- -----------
Federal agency issued mortgage backed securities $2,648 $2,492
Corporate private-labeled mortgage backed securities 2,292 2,230
----------- -----------
Total $4,940 $4,722
=========== ===========
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.
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MARKET RISK EXPOSURES
With respect to the Company's exposure to market risks, see management's
comments in the 2000 Form 10-K. During the first six months of 2001, interest
rates declined 125 basis points more than the projected range of interest rates
utilized in the sensitivity analysis in Form 10-K. The analysis of the impact
on estimated earnings resulting from an additional decrease of 125 basis points
over that utilized in Form 10-K would consist primarily of two components: (1)
short-term debt (including commercial paper and repurchase agreements) and (2)
the insurance portfolio. The decrease of 225 basis points in short-term interest
rates since year-end has not been fully reflected in the first six months of
2001 as the majority of the short-term debt rolled over before the full rate
reductions were in effect. As the majority of short-term debt rolls over during
the second half of the year, current rates indicate a reduction of approximately
$4 after tax from the first half's interest expense total. The insurance
portfolio, however, would not be significantly impacted by an additional
decrease in interest rates of 125 basis points above the amount utilized in Form
10-K based upon the predominately interest-sensitive insurance portfolio and
asset/liability strategies employed by the Company. Management believes that
the 20% hypothetical decline in the equity market remains reasonably possible in
the near term.
EXTERNAL TRENDS AND FORWARD LOOKING INFORMATION
With respect to economic trends, inflation and interest rate risks,
environmental liabilities and the regulatory and legal environment, see
management's comments in the 2000 Form 10-K.
Forward Looking Information
You should note that this document and our other SEC filings reflect information
that we believe was accurate as of the date the respective materials were made
publicly available. Thus they do not reflect later developments.
As a matter of policy, Jefferson Pilot does not normally make projections or
forecasts of future events or our performance. When we do, we rely on a safe
harbor provided by the Private Securities Litigation Reform Act of 1995 for
statements that are not historical facts, called forward looking statements.
These may include statements relating to our future actions, sales and product
development efforts, expenses, the outcome of contingencies such as legal
proceedings, or financial performance. An example would be our forecast of the
anticipated earnings contribution over time from our Guarantee acquisition.
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 through all distribution channels. 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 (including estate tax), financial services industry or other laws and
regulations and their impact.
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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.
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PART II. OTHER INFORMATION
JEFFERSON-PILOT CORPORATION
Item 1. Legal Proceedings
The registrant is involved in various claims and lawsuits incidental to and in
the ordinary course of its business. In the opinion of management, the ultimate
liability will not have a material effect on the financial condition or
liquidity of the Company, but could have a material adverse effect on the
results of operations for a specified period.
Item 4. None not previously reported
Item 6. Exhibits and Reports on Form 8-K
(a) Reports of Form 8-K
There were none filed during the second quarter of 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERSON-PILOT CORPORATION
By (Signature) /s/Dennis R. Glass
(Name and Title) Dennis R. Glass, Executive Vice President,
Chief Financial Officer and Treasurer
Date August 14, 2001
By (Signature) /s/Reggie D. Adamson
(Name and Title) Reggie D. Adamson, Senior Vice President - Finance
(Principal Accounting Officer)
Date August 14, 2001
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