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 September 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 September 30, 2001 150,451,507
JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
Part I. Financial Information
Consolidated Unaudited Condensed Balance Sheets
- September 30, 2001 and December 31, 2000 3
Consolidated Unaudited Condensed Statements of Income
- Nine Months ended September 30, 2001 and 2000 4
Consolidated Unaudited Condensed Statements of Cash Flows
- Nine Months ended September 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)
September 30 December 31
2001 2000
------------ -----------
ASSETS
Investments:
Debt securities available for sale, at fair value
(amortized cost $13,826 and $12,919) $14,276 $12,978
Debt securities held to maturity, at amortized cost
(fair value $3,486 and $3,134) 3,367 3,130
Equity securities available for sale, at fair value
(cost $31 and $64) 506 551
Mortgage loans on real estate 2,979 2,771
Policy loans 935 923
Real estate 133 135
Other investments 22 11
------- -------
Total investments 22,218 20,499
Cash and cash equivalents 109 26
Accrued investment income 286 272
Due from reinsurers 1,427 1,450
Deferred policy acquisition costs and value of business
acquired 1,935 1,959
Cost in excess of net assets acquired 315 323
Assets held in separate accounts 1,926 2,311
Other assets 488 481
------- -------
Total assets $28,704 $27,321
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $ 2,545 $ 2,655
Policyholder contract deposits 17,548 16,555
Dividend accumulations and other policyholder funds
on deposit 246 191
Policy and contract claims 177 176
Other 471 388
------- -------
Total policy liabilities 20,987 19,965
Debt:
Commercial paper and revolving credit borrowings 490 405
Exchangeable Securities and other debt 150 139
Securities sold under repurchase agreements 459 397
Currently payable income taxes 85 60
Deferred income tax liabilities 343 212
Liabilities related to separate accounts 1,926 2,311
Accounts payable, accruals and other liabilities 522 373
------- -------
Total liabilities 24,962 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 2001-150,451,507 shares;
2000-154,305,846 shares 188 131
Retained earnings 2,753 2,683
Accumulated other comprehensive income -
net unrealized gains on securities 501 345
------- -------
3,442 3,159
------- -------
Total liabilities and stockholders' equity $28,704 $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 Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------------------ -----------------
Revenue:
Premiums and other considerations $ 359 $ 337 $1,057 $1,011
Net investment income 391 356 1,133 1,068
Realized investment gains 24 26 111 105
Communications sales 45 48 143 150
Other 26 40 84 96
------- ------- ------- -------
Total revenue 845 807 2,528 2,430
------- ------- ------- -------
Benefits and Expenses:
Insurance and annuity benefits 465 407 1,325 1,214
Insurance commissions, net of deferrals 29 39 95 79
General and administrative expenses,
net of deferrals 60 60 187 189
Amortization of policy acquistion costs
and value of business acquired 54 71 180 228
Communications operations 28 27 90 89
------- ------- ------- -------
Total benefits and expenses 636 604 1,877 1,799
------- ------- ------- -------
Income before income taxes 209 203 651 631
Provision for income taxes 70 68 218 215
------- ------- ------- -------
Income before dividends on Capital
Securities and cumulative effect of
change in accounting principle 139 135 433 416
Dividends on Capital Securities (6) (6) (18) (18)
Cumulative effect of change in
accounting for derivative instruments,
net of income taxes (Note 5) - - 1 -
------- ------- ------- -------
Net income available to common
stockholders $ 133 $ 129 $ 416 $ 398
======= ======= ======= =======
Net income available to common
stockholders, before dividends
on Capital Securities $ 139 $ 135 $ 434 $ 416
Other comprehensive income - change
in net unrealized gains on securities 132 92 156 (14)
------- ------- ------- -------
Comprehensive income $ 271 $ 227 $ 590 $ 402
======= ======= ======= =======
Average number of shares outstanding 152.0 154.5 152.5 154.7
======= ======= ======= =======
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 $ 0.78 $ 0.73 $ 2.25 $ 2.13
Realized investment gains, net of
income taxes 0.10 0.11 0.47 0.45
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 $ 2.73 $ 2.58
======= ======= ======= =======
Net income available to common
stockholders - assuming dilution $ 0.87 $ 0.83 $ 2.70 $ 2.55
======= ======= ======= =======
Dividends declared per common share $ 0.275 $ 0.246 $ 0.825 $ 0.740
======= ======= ======= =======
See Notes to Consolidated Condensed Financial Statements
-4-
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED
STATEMENTS OF CASH FLOWS
(In Millions)
Nine Months Ended
September 30
---------------------
2001 2000
---------------------
Net cash provided by operations $ 590 $ 302
-------- --------
Cash Flows from Investing Activities:
Investments purchased, net (1,195) (464)
Other investing activities (25) (28)
-------- --------
Net cash used in investing activities (1,220) (492)
-------- --------
Cash Flows from Financing Activities:
Policyholder contract deposits, net 2,126 2,056
Policyholder contract withdrawals, net (1,256) (1,579)
Net short-term borrowings (repayments) 148 (134)
Repurchase of common shares, net (166) (21)
Cash dividends paid (140) (135)
Other financing activities 1 2
-------- --------
Net cash provided by financing activities 713 189
-------- --------
Increase (Decrease) in cash and cash equivalents 83 (1)
Cash and cash equivalents at beginning of period 26 62
-------- --------
Cash and cash equivalents at end of period $ 109 $ 61
======== ========
Supplemental Cash Flow Information:
Income taxes paid $ 148 $ 141
======== ========
Interest paid $ 39 $ 50
======== ========
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 nine-month period ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending 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:
September 30 December 31
2001 2000
------------ ------------
Assets
Individual Products $ 15,665 $ 15,239
AIP 8,470 7,784
Benefit Partners 771 739
Communications 207 212
Corporate & other 3,591 3,347
------------ ------------
Total assets $ 28,704 $ 27,321
============ ============
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Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2001 2000 2001 2000
------------------ ------------------
Revenues
Individual Products $429 $417 $1,280 $1,255
AIP 159 166 476 469
Benefit Partners 157 135 444 395
Communications 45 47 143 148
Corporate & Other 31 16 74 58
---- ---- ------ ------
821 781 2,417 2,325
Realized investment 24 26 111 105
gains, before tax ---- ---- ------ ------
Total revenues before
cumulative effect of
change in accounting
principle $845 $807 $2,528 $2,430
==== ==== ====== ======
Reportable segments results
and reconciliation to net
income available to
common stockholders
Individual Products $ 70 $ 77 $ 216 $ 214
AIP 17 18 55 58
Benefit Partners 12 7 33 25
Communications 8 10 24 28
Corporate & Other 10 - 15 5
---- ---- ------ ------
Total reportable segment
results, before
cumulative effect of
change in accounting
principle 118 112 343 330
Realized investment gains,
net of tax 16 17 72 68
---- ---- ------ ------
Net income available to
common stockholders,
before cumulative effect
of change in accounting
principle 133 129 415 398
Cumulative effect of change
in accounting for
derivative instruments,
net of income taxes - - 1 -
---- ---- ------ ------
Net income available to
common stockholders $133 $129 $ 416 $ 398
==== ==== ====== ======
-7-
3. Income 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 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 Nine Months Ended
September 30 September 30
------------------------ ------------------------
2001 2000 2001 2000
------------------------ ------------------------
Numerator:
Net income before
dividends on Capital
Securities and
cumulative effect of
change in accounting
principle $ 139 $ 135 $ 433 $ 416
Dividends on Capital
Securities and
preferred stock 6 6 18 18
----------- ----------- ----------- -----------
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 $ 133 $ 129 $ 415 $ 398
=========== =========== =========== ===========
Denominator:
Denominator for
earnings per share-
weighted-average
shares outstanding 151,958,906 154,522,837 152,535,148 154,659,624
Effect of dilutive
securities:
Employee stock
options 1,544,505 1,428,111 1,537,657 1,330,239
----------- ----------- ----------- -----------
Denominator for
earnings per share-
assuming dilution -
adjusted weighted-
average shares
outstanding 153,503,411 155,950,948 154,072,805 155,989,863
=========== =========== =========== ===========
Earnings per share,
before cumulative
effect of change in
accounting principle $ 0.88 $ 0.83 $ 2.72 $ 2.57
=========== =========== =========== ===========
Earnings per share -
assuming dilution,
before cumulative
effect of change
in accounting
principle $ 0.87 $ 0.83 $ 2.69 $ 2.55
=========== =========== =========== ===========
-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 SFAS 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.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (SFAS 141) and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires that all business combinations initiated after June 30, 2001, be
accounted for under the purchase method of accounting and establishes specific
criteria for the recognition of intangible assets separately from goodwill.
Effective January 1, 2002, the Company will adopt SFAS 142, which primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition. Upon adoption, goodwill and certain other intangible assets will
no longer be amortized. The Company will also be required to evaluate all
existing goodwill and intangible assets with indefinite lives for impairment at
least annually at the reporting unit level. Any transitional impairment losses
will be recognized as the effect of a change in accounting principle. The
Company does not expect the effect of any impairment losses to have a material
impact on the Company's financial position or results of operations.
-9-
Based on current levels of amortization expense, the Company estimates that the
elimination of goodwill expense will positively impact net income by
approximately $12.7 or approximately $0.08 per common share (diluted), on an
annual basis.
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 $14.2 at September 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
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 nine months
ended September 30, 2001, the ineffective portion of the Company's cash flow
hedging instruments, which is recognized in realized investment gains, was not
significant.
During the quarter and the nine months ended September 30, 2001, the Company
recognized other comprehensive income related to cash flow hedges of $4.3 and
$5.2.
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 Life Insurance Company (Guarantee). These contracts
have an equity market component, where interest credited to the contracts is
linked to the performance of the S&P 500(R) 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 third quarter
and the nine months ended September 30, 2001, activity reflected in net
investment income related to these options was not significant.
-10-
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 nine months ended September 30, 2001, the Company
recognized realized investment gains of $1.3 and $1.4 related to these swaps.
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 third quarter and nine months ended September 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
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 September 30, 2001, changes in financial condition for the nine months then
ended, and results of operations for the three month and nine month periods
ended September 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. These insurance and investment
products are currently marketed to individuals and businesses in the United
States. At September 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).
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, including earnings thereon of the life insurance
subsidiaries not allocated to other reportable segments, financing expenses on
Corporate debt, strategic initiatives derived to benefit the entire company, and
federal and state income taxes not otherwise allocated to business segments.
JP has expanded through acquisitions in prior years. 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 nine months 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.
As a result of strategic studies undertaken last year, a refined marketing
strategy called Premier Partnering was adopted. Strategic initiatives include
a higher level of marketing support and improved service for more productive
-12-
agents, tailoring specific products and marketing programs, and implementation
of "lean manufacturing" to improve quality and reliability throughout our
marketing processes. The Company remains intensely focused on implementing this
strategy to accelerate the growth of life insurance sales and increase the
number of agents who qualify as Premier Partners.
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 (DAC) and value of business
acquired (VOBA). 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. Reportable segment results as described above may not be comparable
to similarly titled measures reported by other companies.
The following tables illustrate JP's results before and after the inclusion of
realized investment gains and the cumulative effect of the SFAS 133 change in
accounting for derivatives:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Consolidated Summary of Income
------------------------------
Income before dividends on
Capital Securities and
cumulative effect of
change in accounting
principle $139.8 $135.3 $433.3 $416.7
Dividends on Capital Securities (6.1) (6.1) (18.4) (18.4)
Cumulative effect of change in
accounting for derivative
instruments, net of income
taxes - - 1.5 -
------- ------- ------- -------
Net income available to common
stockholders $133.7 $129.2 $416.4 $398.3
======= ======= ======= =======
Income before dividends on
Capital Securities $139.8 $135.3 $434.8 $416.7
Other comprehensive income -
change in net unrealized
gains on securities 132.0 92.5 155.9 (14.0)
------- ------- ------- -------
Comprehensive income $271.8 $227.8 $590.7 $402.7
======= ======= ======= =======
-13-
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- --------------------------------
2001 2000 2001 2000
---------------------------- --------------------------------
Average
number of
shares
outstanding 151,958,906 154,522,837 (a) 152,535,148 (a) 154,659,624 (a)
=========== =============== =============== ===============
Average
number of
shares
outstanding -
assuming
dilution 153,503,411 155,950,948 (a) 154,072,805 (a) 155,989,863 (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.
The following table shows total reportable segment results:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Consolidated Earnings Per Share
-------------------------------
Basic:
Total reportable segment
results $0.78 $0.73 $2.26 (b) $2.13
Realized investment gains
(net of applicable income
taxes) 0.10 0.11 0.47 0.45
----- ----- ----- -----
Net income available to
common stockholders $0.88 $0.84 $2.73 $2.58
===== ===== ===== =====
Fully-diluted:
Total reportable segment
results $0.77 $0.72 $2.24 (b) $2.12
Realized investment gains (net
of applicable income taxes) 0.10 0.11 0.46 0.43
----- ----- ----- -----
Net income available to common
stockholders $0.87 $0.83 $2.70 $2.55
===== ===== ===== =====
(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 3.5% and 4.5% from the
third quarter and nine months of 2000. Total reportable segment results
increased 5.0% and 4.4% over the third quarter and nine months of 2000. There
-14-
were several one-time earnings fluctuations that occurred during the 2001 third
quarter, including increased mortality relating to the September 11th terrorist
attacks. In total these fluctuations reduced quarterly and year-to-date
reportable segment results by approximately $4. The larger fluctuations are
discussed further in the results by segment. Net realized gains decreased 6.5%
and increased 5.3% from the third quarter and nine months of 2000.
Total reportable segment results per share including the cumulative effect of
the change in accounting for derivatives increased 6.8% and 6.1% over third
quarter and nine months of 2000, reflecting the increase in earnings and common
share repurchases. Earnings per share assuming dilution increased 4.8% and
5.9% over the third quarter and nine months of 2000 for the same reasons. As
mentioned in the previous paragraph, one-time negative earnings fluctuations
affected earnings per share by approximately $.03 per share. Due to share
repurchases, net of stock plan issuances, the average number of diluted shares
outstanding decreased 1.6% to 153.5 million shares and 1.2% to 154.1 million
shares from the third quarter and nine 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 life insurance 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
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
is assigned to the Corporate and Other segment.
-15-
Results by Reportable Segment
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Individual Products $ 69.9 $ 76.6 $215.9 $213.9
AIP 17.3 18.3 57.1 (a) 58.6
Benefit Partners 12.1 7.5 33.0 24.7
Communications 8.2 9.7 23.7 27.7
Corporate and Other 10.3 0.1 14.8 5.1
------ ------ ------ ------
Total reportable segment results 117.8 112.2 344.5 330.0
Net realized investment gains 15.9 17.0 71.9 68.3
------ ------ ------ ------
Net income available to common
stockholders $133.7 $129.2 $416.4 $398.3
====== ====== ====== ======
(a) Includes $1.5 relating to the cumulative effect of change in accounting
for derivatives.
Segment Assets
September 30 September 30
2001 2000
------------ ------------
Individual Products $15,665 $15,188
AIP 8,470 7,733
Benefit Partners 771 742
Communications 207 203
Corporate and Other 3,591 3,407
------------ ------------
Total Assets $28,704 $27,273
============ ============
A more detailed discussion of reportable segment results follows.
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 on these products arise from mortality,
expense and surrender charges to policyholder fund balances (policy charges).
-16-
Additionally, JP earns interest spreads on all UL-type and traditional products
as well as investment advisory fees on VUL policyholder fund balances. Policy
benefits include interest credited to policyholder fund balances net of
mortality, and other claim related costs. Reportable segment results for both
traditional and UL-type products also includes earnings on required capital.
Segment results were:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ --------------------
2001 2000 2001 2000
------------------ --------------------
Life premiums and other
considerations $ 47.5 $ 48.1 $ 147.0 $ 160.1
UL and investment product
charges 161.3 154.8 477.5 459.5
Investment income, net of
expenses 218.2 211.7 649.7 629.4
Other income 1.8 2.3 5.7 6.6
------- ------- -------- --------
Total revenues 428.8 416.9 1,279.9 1,255.6
------- ------- -------- --------
Policy benefits 256.5 225.3 731.2 687.0
Expenses 64.8 74.6 216.8 241.1
------- ------- -------- --------
Total benefits and expenses 321.3 299.9 948.0 928.1
------- ------- -------- --------
Reportable segment results
before income taxes 107.5 117.0 331.9 327.5
Provision for income taxes 37.6 40.4 116.0 113.6
------- ------- -------- --------
Reportable segment results $ 69.9 $ 76.6 $ 215.9 $ 213.9
======= ======= ======== ========
Individual Products reportable segment results decreased $6.7 or 8.7% and
increased $2.0 or 0.9% over the third quarter and nine months of 2000. The
third quarter results included $6.0 after tax of unusual items that adversely
affected this segment. The largest item was an after tax/after DAC $4.0 related
to additional mortality resulting from the September 11th event. The other $2.0
primarily related to an internal reallocation from the Individual Products to
the Corporate segment, which did not affect net income overall.
-17-
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2001 2000 2001 2000
---------------------- ----------------------
Annualized life insurance
premium sales:
Sales excluding
large case BOLI $ 47.9 $ 40.6 $ 127.2 $ 118.3
Large case BOLI 2.5 - 11.1 2.1
Individual traditional
insurance premiums $ 46.8 $ 47.5 $ 145.8 $ 158.2
Average UL policyholder
fund balances $ 9,182.9 $ 8,826.8 $ 9,044.4 $ 8,770.7
Average VUL separate
account assets 1,336.6 1,406.1 1,294.3 1,383.7
---------- ---------- ---------- ----------
$ 10,519.5 $ 10,232.9 $ 10,338.7 $ 10,154.4
========== ========== ========== ==========
Average face amount of
insurance in force:
Total $157,051.0 $156,928.0 $156,779.0 $157,551.0
UL-type policies $115,473.0 $112,460.0 $114,696.0 $112,025.0
Average assets $ 15,599.9 $ 15,128.4 $ 15,396.0 $ 15,029.1
Annualized life insurance premium sales excluding large case BOLI increased
18.0% and 7.5% for the third quarter and nine months of 2001 as the Company is
experiencing increased sales as a result of marketing initiatives and the
introduction of several new UL products during the first quarter. Annualized
large case BOLI sales increased significantly over the third quarter and nine
months of 2000. JP's business strategy is to respond to individual sales
opportunities for large case BOLI when the market accommodates required returns.
Accordingly, these sales results will vary widely between periods.
Revenues include traditional insurance premiums, policy charges and investment
income. Individual revenues increased $11.9 or 2.9% over the third quarter of
2000 and $24.3 or 1.9% over the nine months of 2000, primarily due to growth in
average UL policyholder fund balances of 4.0% and 3.1% over the third quarter
and nine months of 2000. Average VUL separate account assets declined 4.9% and
6.5% from the third quarter and nine months of 2000 primarily due to the drop in
the equity markets. Adjusting for the decrease in fair market value, net of
dividends, year over year, separate account balances would have increased by
15.0% and total fund balances would have grown by 5.0%.
Individual traditional premiums decreased 1.5% and 7.8% from third quarter and
nine months of 2000 as a result of a decrease in traditional business in force
and certain reclassifications made in 2000 related to the integration of
Guarantee. Product charges, which include mortality, expense and surrender
charges, improved 4.2% and 3.9% over the third quarter and nine months of 2000,
due to the growth of the UL-type business in force.
-18-
Net investment income increased $6.5 or 3.1% and $20.3 or 3.2% over the third
quarter and nine months of 2000, following the growth in policyholder funds. The
portfolio yield on traditional assets increased 3 basis points to 7.76% and 6
basis points to 7.79% from the third quarter and nine 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) decreased 3
basis points and increased 1 basis point to 1.98% from the third quarter and
nine 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.
Total policy benefits increased 13.8% and 6.4% from the third quarter and nine
months of 2000 reflecting an overall increase in mortality of $15.1 for the
quarter and $13.5 year-to-date. This increase includes $7.8 related to the
September 11th terrorist attack coupled with unusually low mortality in the
third quarter of 2000. Traditional policy benefits were 108.1% versus 99.5% of
premiums in the third quarter and 109.8% versus 103.2% for the nine months of
2001 and 2000, reflecting the continual decrease in demand for traditional type
products versus UL-type products. Policy benefits on UL-type products
(annualized) increased to 7.8% and 7.4% of average policyholder funds and
separate accounts versus 7.0% and 6.9% in the third quarter and nine 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 decreased 13.1% and 10.1% from the third quarter and nine months
of 2000. The decline is due primarily to a decrease in amortization of DAC and
VOBA resulting from an increase in mortality on UL-type policies in 2001 versus
2000. Amortization of DAC and VOBA on UL-type products will increase when
mortality experience is lower and decrease when mortality experience is higher.
Expenses on individual traditional products were 23.2% and 28.1% of premiums in
the third quarter and nine months of 2001. For UL-type products, annualized
expenses as a percentage of policyholder funds and separate accounts were 2.0%
and 2.2% in the third quarter and nine months of 2001 versus 2.5% for the third
quarter and nine months of 2000.
Average Individual Products' assets grew 3.1% and 2.4% over the third quarter
and nine months of 2000, due to sales of UL-type products and growth in existing
policyholder funds from interest credited, partially offset by VUL separate
account declines. The annualized return on average Individual Products' assets
was 1.8% and 1.9% in the third quarter and nine months of 2001 versus 2.0% and
1.9% for the third quarter and nine months of 2000.
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 Nine Months Ended
September 30 September 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Policy charges, premiums and
other considerations $ 2.5 $ 7.6 $ 11.0 $ 21.5
Net investment income 133.8 121.4 391.6 358.0
Concession and other income 22.4 37.4 76.0 89.2
------ ------ ------ ------
Total revenues 158.7 166.4 478.6 468.7
------ ------ ------ ------
Policy benefits 98.8 86.0 279.9 251.4
Expenses 33.1 51.9 110.5 126.7
------ ------ ------ ------
Total benefits and expenses 131.9 137.9 390.4 378.1
------ ------ ------ ------
Reportable segment results
before income taxes 26.8 28.5 88.2 90.7
Provision for income taxes 9.5 10.2 31.1 32.1
------ ------ ------ ------
Reportable segment results $ 17.3 $ 18.3 $ 57.1 $ 58.6
====== ====== ====== ======
Reportable segment results decreased $1.0 or 5.5% and $1.5 or 2.6% from the
third quarter and nine months of 2000. The largest factor contributing to the
decrease was a decline in net income from the broker/dealer of $0.9 and $2.6 for
the quarter and year-to-date. The following table summarizes key information
for AIP:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
2001 2000 2001 2000
------------------ -------------------
Fixed annuity premium sales $ 524.1 $ 399.4 $1,017.5 $ 908.4
Variable annuity premium sales 4.4 19.3 21.4 77.0
-------- -------- -------- --------
$ 528.5 $ 418.7 $1,038.9 $ 985.4
Average policyholder fund
balances $6,925.8 $6,328.9 $6,707.7 $6,318.8
Average separate account
policyholder fund balances 512.3 698.9 549.8 706.4
-------- -------- -------- --------
$7,438.1 $7,027.8 $7,257.5 $7,025.2
Investment product sales $ 689.0 $1,071.5 $2,153.6 $2,823.3
Average assets $8,209.4 $7,675.9 $7,978.5 $7,610.7
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. AIP revenues decreased 4.6% and increased 2.1% over the third quarter
and nine months of 2000. The decrease in revenues reflected weak sales in our
broker/dealer due to the adverse equity market, and lower surrender charge
income as fixed annuity lapse rates improved. The 2001 nine month results
include the adoption of FASB 133, which caused a one-time increase to net
investment income of $2.3 in the first quarter 2001. Fixed annuity premium
sales increased 31.2% and 12.0% over the third quarter and nine months of 2000.
-20-
The strong sales were driven by more competitive products introduced in late
first quarter 2001, especially a fixed annuity with a market value adjustment,
and increased distribution particularly in financial institutions.
Fixed annuity surrenders as a percentage of beginning fund balances decreased to
11.6% versus 24.8% and 13.5% versus 23.3% from the third quarter and nine months
of 2000. The lower lapse rates reflected the combined effects 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 43% versus 36% over the nine
months of 2000.
JP maintains asset/liability management practices that reflect the
characteristics of the AIP liabilities. Concession and other income related to
the broker/dealer decreased 40.1% and 14.8% from the third quarter and nine
months of 2000 due to the difficult equity market.
Total AIP benefits and expenses decreased 4.4% and increased 3.3% over the third
quarter and nine months of 2000. The third quarter decrease resulted primarily
from lower commission expenses related to the broker/dealer and correlates to
the decrease in concession income. The year-to-date increase reflects the
overall growth in the AIP business in spite of the lower commissions.
Annualized policy benefits, which are mainly comprised of interest credited to
policyholder accounts, as a percentage of average policyholder fund balances
were 5.7% versus 5.4% and 5.6% versus 5.3% in the third quarter and nine months
of 2001 and 2000. Total AIP expenses decreased 36.2% and 12.8% from the third
quarter and nine months of 2000 due primarily to the lower commission expenses
at the broker/dealer. Effective spreads declined to 1.92% from 2.15% and 1.98%
from 2.16% in the third quarter and nine months of 2001, primarily due to
continued strong sales of JP's lower commission five-year products. These
products carry a lower spread requirement based upon commission rates
approximating 50% of normal commissions. The lower commission has the eventual
effect of decreasing expenses through reduced DAC amortization. Of the year-
to-date 18 basis point spread compression mentioned above, approximately one-
third represents economic spread contraction, while the remaining two-thirds is
related to the lower commission products.
The combined earnings of the broker/dealer and related entities which are
included in the segment results were $0.3 versus $1.3 and $1.7 versus $4.3 for
the third quarter and nine 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 offices. These offices develop business through employee benefit
brokers, third party administrators and other employee benefit firms.
Results for the nine months ended September 30, 2001 benefited from 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 Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------------------ -----------------
Premiums and other
considerations $ 142.7 $ 121.6 $ 402.9 $ 356.7
Investment income,
net of expenses 14.1 13.0 40.8 38.2
------- ------- ------- -------
Total revenues 156.8 134.6 443.7 394.9
------- ------- ------- -------
Policy benefits 104.4 91.5 296.6 263.3
Expenses 33.8 31.6 96.4 93.8
------- ------- ------- -------
Total benefits and
expenses 138.2 123.1 393.0 357.1
------- ------- ------- -------
Reportable segment results
before income taxes 18.6 11.5 50.7 37.8
Provision for income taxes 6.5 4.0 17.7 13.1
------- ------- ------- -------
Reportable segment results $ 12.1 $ 7.5 $ 33.0 $ 24.7
======= ======= ======= =======
Benefit Partners reportable segment results increased $4.6 or 61.3% and $8.3 or
33.6% over the third quarter and nine months of 2000. The following table
summarizes key information for Benefit Partners:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------------------ -----------------
Life, Disability, and
Dental:
Annualized sales $ 40.0 $ 28.7 $ 119.3 $ 92.4
Loss ratio 71.3% 73.6% 72.1% 72.5%
Total expenses, % of
premium income 23.7% 26.0% 24.0% 26.1%
Average assets $ 757.3 $ 729.5 $ 742.7 $ 700.1
Premium income $ 142.7 $ 121.4 $ 402.1 $ 360.0
Benefit Partners revenues increased $22.2 or 16.5% and $48.8 or 12.4% over the
third quarter and nine months of 2000, including growth in premium income of
$21.3 or 17.5% and $42.1 or 11.7% over the third quarter and nine months of
2000. Annualized sales growth for the core life, disability and dental lines of
business was $11.3 or 39.4% and $26.9 or 29.1% over the third quarter and nine
months of 2000. The increase in revenue is due to continued favorable sales
growth combined with satisfactory persistency in the non-medical business,
reflecting our business model based on technology which lowers unit expenses and
enhances the quality of service, offset somewhat by the impact of the exit from
the excess loss medical business.
Policy benefits increased 14.1% and 12.6% over the third quarter and nine months
of 2000, consistent with the growth of business in force. The life, disability
-22-
and dental incurred loss ratio was 71.3% versus 73.6% and 72.1% versus 72.5% in
the third quarter and nine months of 2001 and 2000, reflecting continuing claims
management efforts coupled with favorable morbidity and mortality.
Total expenses (including the net deferral and amortization of DAC and VOBA)
increased 7.0% and 2.8% in the third quarter and nine months of 2001, reflecting
somewhat higher costs with sales growth. As a percentage of premium income,
total expenses decreased to 23.7% versus 26.0% and 24.0% versus 26.1% for the
third quarter and nine 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 the
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 Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------------------ -----------------
Communications revenues (net) $ 44.5 $ 48.5 $ 143.4 $ 151.6
Operating costs and expenses 28.3 27.4 90.1 89.2
-------- ------- ------- -------
Broadcast cash flow 16.2 21.1 53.3 62.4
Depreciation and amortization 2.6 2.7 8.1 8.3
Corporate general and
administrative expenses (0.7) 1.3 2.6 4.2
Net interest expense 1.0 1.2 3.2 3.5
-------- ------- ------- -------
Operating revenue before
income taxes 13.3 15.9 39.4 46.4
Provision for income taxes 5.1 6.2 15.7 18.7
-------- ------- ------- -------
Reportable segment results $ 8.2 $ 9.7 $ 23.7 $ 27.7
======== ======= ======= =======
Reportable segment results decreased 15.5% and 14.4% compared to the third
quarter and nine months of 2000, primarily reflecting the continued decline in
demand for advertising due to a general softening of the economy in all markets.
Combined revenues for Radio and Television decreased 8.9% and 6.5% from the
third quarter and nine months of 2000. Disregarding political revenues, Radio
and Television decreased 8.7% and 5.6% from the third quarter and nine months of
2000. The larger decline in the third quarter reflects both the overall slowing
of advertising and the impact of the September 11th terrorist attacks, which
resulted in commercial preemptions, cancellations of scheduled commercials, and
pending business that never materialized. This decline for the nine months is
primarily due to decreases in national sales, slowing economic conditions, and
lost revenues from the September 11th event.
Broadcast cash flow decreased by 23.2% and 14.6% from the third quarter and nine
months of 2000.
Total expenses, excluding interest expense, decreased 3.8% and 0.9% in the third
quarter and nine months of 2001, and as a percent of communication revenues were
67.9% versus 64.7% and 70.3% versus 67.1% for the third quarter and nine months
-23-
of 2001 and 2000. The increase as a percentage of revenues is mainly due to the
decrease in revenues, while expenses have been held relatively flat year-to-
year. A one-time insurance recovery of $1.1 after tax reduced corporate general
and administrative expenses in the third quarter of 2001, which helped segment
earnings but is not reflected in broadcast cash flow.
CORPORATE AND OTHER
The following table summarizes operating results for this segment:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------------------ -----------------
Earnings on investments $ 33.1 $ 20.4 $ 80.4 $ 71.8
Interest expense on debt and
Exchangeable Securities (6.4) (9.0) (23.2) (27.0)
Operating expenses (6.8) (7.1) (24.2) (19.8)
Federal and state income tax
expense (3.5) 1.9 0.2 (1.5)
-------- -------- -------- --------
16.4 6.2 33.2 23.5
Dividends on Capital Securities
and manditorily redeemable
preferred stock (6.1) (6.1) (18.4) (18.4)
-------- -------- -------- --------
Reportable segment results 10.3 0.1 14.8 5.1
Realized investment gains 15.9 17.0 71.9 68.3
-------- -------- -------- --------
Reportable segment results,
including realized gains $ 26.2 $ 17.1 $ 86.7 $ 73.4
======== ======== ======== ========
The following table summarizes assets assigned to this segment:
September 30 September 30
2001 2000
------------ ------------
Parent company, passive investment
companies and Corporate line assets of
insurance subsidiaries $ 1,234 $ 1,382
Unrealized gain (loss) on fixed interest
investments 305 (162)
Co-insurance receivables on acquired blocks 1,123 1,249
Employee benefit plan assets 352 379
Goodwill arising from insurance acquisitions 272 260
Other 305 299
----------- -------------
Total $ 3,591 $ 3,407
=========== =============
Total assets for the Corporate and Other segment increased 5.4% from September
30, 2000. Unrealized gains and losses on all Available for Sale fixed income
securities are assigned to this segment, and increased $467 from September 30,
2000, primarily due to declining market interest rates.
Reportable segment results excluding realized gains increased $10.2 and $9.7
from the third quarter and nine months of 2000. The third quarter benefited
from lower interest rates on commercial paper, mitigated somewhat by higher debt
primarily related to stock repurchases, $2.9 after tax of non-repeatable
-24-
investment earnings items, and $1.5 after tax one-time reallocation of
investment expenses to Individual Products. Investment earnings increased 62.3%
and 12.0% from the third quarter and nine months of 2000 due primarily to a
decrease in repurchase agreement interest expense of $6.5, reallocation of
inter-segment income of $4.5 and additional one-time under accrual of interest
income of $2.6. Interest expense on debt and exchangeable securities decreased
$2.6 and $3.8 from the third quarter and nine months of 2000, as a result of
lower average interest rates despite an increased level of commercial paper
debt. Operating expenses decreased 4.2% and increased 22.2% over the third
quarter and nine months of 2000. The year-to-year increase is primarily due to
national advertising campaign expenses incurred in the first half of 2001.
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 increased $5.4 and decreased $1.7 from
the third quarter and nine months of 2000. The quarterly increase resulted from
tax on the higher level of pre-tax income whereas the year over year decrease
was due 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 $1,383 or 5.1% during the nine months of 2001, reflecting
growth in income, policyholder contract deposits, and increase in market value
of Available for Sale securities. These favorable influences were partially
offset by cash dividends paid to stockholders and repurchases of common stock.
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.
Net amounts deferred were $1,295 at September 30, 2001, an increase of 6.2% over
December 31, 2000, reflecting increased sales.
Value of business acquired represents the actuarially determined present value
of future gross profits of each business acquired. VOBA was $640 at September
30, 2001, down 13.4% from year-end due to amortization.
Goodwill (cost of acquired businesses in excess of the fair value of net assets)
was $315 at September 30, 2001 and $323 at December 31, 2000, reflecting
amortization. Goodwill as a percentage of shareholders' equity was 9.2% and
10.2% at September 30, 2001 and December 31, 2000.
-25-
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 September 30, 2001 and December 31, 2000, JP had reinsurance receivables of
$922 and $947 and policy loans of $181 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
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:
September 30 December 31
2001 2000
------------ -----------
Total assets less separate accounts $ 26,778 $ 25,010
Total stockholders' equity $ 3,442 $ 3,159
Ratio of stockholders' equity to assets
less separate accounts 12.9% 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 $283 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 nine months of 2001
of $167 (3,946,500 shares at an average cost of $42.43 per share), which
decreased equity. In February 2001 and again in November 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
-26-
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 $490 and $405 at September 30, 2001 and
December 31, 2000 with weighted average interest rates of 5.02% and 6.21%. The
increase is due to share repurchases and an opportunistic ability to purchase
higher yielding securities. The maximum amount outstanding during the nine
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. Proceeds are used primarily to
purchase securities with longer durations as an asset/liability management
strategy. The maximum amounts outstanding were $457 during the first nine
months of 2001 and $467 during the year ended December 31, 2000, as the portion
used to help fund the Guarantee acquisition was repaid in the first half of 2001
followed by increased asset/liability management activities. The securities
involved had a fair value and amortized cost of $486 and $452 during the first
nine months of 2001 versus $415 and $404 as of December 31, 2000.
At September 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 September 30, 2001.
At September 30, 2001 and December 31, 2000, net advances from subsidiaries were
$433 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
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of cash include payment of agency commissions, cost of sales, operating expenses
and income taxes.
Cash provided by operations was $590 and $302 for the nine months of 2001 and
2000. The increase of $288 reflects changes in payables and receivables related
to the timing of investment commitments, partially offset by higher policy
acquisition costs.
Net cash used in investing activities was $1,220 and $492 for the nine months of
2001 and 2000, with the increase due to significant increases from policyholder
deposits and opportunistic purchases of higher yielding securities funded by
commercial paper issuance and repurchase agreements.
Net cash provided by financing activities was $713 and $189 for the nine months
of 2001 and 2000. Cash inflows from policyholder contract deposits net of
withdrawals were $870 and $477 for the nine months of 2001 and 2000. The 2001
increase is a result of the significant increase in policyholder deposits and
the decrease in annuity surrenders. Short-term borrowings (including commercial
paper and repurchase agreements) increased by $85 for the nine months of 2001
primarily driven by the repurchase of common stock and asset/liability
management activities.
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 nine months were $259 in 2001 and $575 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 where it is needed.
Cash and cash equivalents were $109 and $26 at September 30, 2001 and December
31, 2000. This increase over year-end reflected a desire to maintain more
liquidity after the uncertainty of the September 11th event. Additionally,
fixed income and equity securities held by the parent company and non-regulated
subsidiaries were $522 at September 30, 2001 and $549 at December 31, 2000.
These securities, including $150 (at September 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 September 30, 2001 and
December 31, 2000 were $14,782 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.
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The carrying value of JP's holdings were as follows:
September 30, 2001 December 31, 2000
------------------ -----------------
Publicly-issued bonds $ 13,384 59.9% $ 12,006 58.5%
Privately-placed bonds 4,230 19.0 4,073 19.8
Mortgage loans on real property 2,979 13.3 2,771 13.5
Common stock 504 2.3 549 2.7
Policy loans 935 4.2 923 4.5
Preferred stock 31 0.1 31 0.2
Real estate 133 0.6 135 0.7
Other 22 0.1 11 -
Cash and equivalents 109 0.5 26 0.1
-------- ------- -------- -------
Total $ 22,327 100.0% $ 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
quality is "A1". The Policy also imposes limits on the amount of lower quality
investments and requires diversification by issuer and asset type. During the
first nine months of the year, especially subsequent to the September 11th
event, several bonds were downgraded to "below-investment grade". The Company
closely monitors "higher risk" investments for compliance with the Policy and
for proper valuation, including our investments in industries directly affected
by the September 11th event. Specific industries affected by the September 11th
event, in which the company holds fixed income investments, include airline,
lodging and hospitality. 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:
September 30, 2001 December 31, 2000
------------------ -----------------
Bonds near or in default $ 40 0.2% $ 21 0.1%
Bonds below investment grade 930 4.2 751 3.7
Mortgage loans 60 days
delinquent or in foreclosure 1 - 1 -
Mortgage loans restructured 9 - 10 -
Foreclosed properties - - 2 -
-------- ------- -------- -------
Subtotal, "higher risk assets" 980 4.4 785 3.8
All other investments 21,347 95.6 19,740 96.2
-------- ------- -------- -------
Total cash and investments $ 22,327 100.0% $ 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-
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defined interest rate risks and equity-indexed risks associated with certain
annuity products. Interest rate swaps with a current notional value of $133
were open as of September 30, 2001. During the third quarter, interest rate
swaps with a combined notional value of $50 expired.
Mortgage backed securities (including Collateralized Mortgage Obligations) at
September 30, which are included in debt securities Available for Sale, were as
follows:
September 30 December 31
2001 2000
------------ -----------
Federal agency issued mortgage backed securities $ 3,263 $ 2,492
Corporate private-labeled mortgage backed
securities 2,411 2,230
------------ -----------
Total $ 5,674 $ 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.
MARKET RISK EXPOSURES
With respect to the Company's exposure to market risks, see management's
comments in the 2000 Form 10-K. In response to the continuing weakening economy
and possibility of a deep recession, especially in light of the September 11th
terrorist event, the Federal Reserve has taken the unprecedented step of
lowering interest rates ten different times during 2001. The Federal Reserve
rate cutting activity far surpassed the projected range of interest rates
utilized in the sensitivity analysis in the Form 10-K. JP's exposure to
interest rate sensitivity is generally limited to interest rates on its short-
term debt and the interest rate margins implicit in the insurance portfolio.
Year-to-date, short-term market interest rates have declined approximately 400
basis points, which is 300 basis points more than the 100 basis points decline
utilized in the Form 10-K. This market decline of approximately 400 basis
points has not been fully reflected in the nine months of 2001, as a substantial
amount of the short-term debt was in place or rolled over before the full rate
reductions were in effect. A substantial amount of the short-term debt will
mature in the fourth quarter; and, if the debt were rolled over at the current
rates, it would indicate a reduction of $2.1 for the last quarter as compared to
the effective rate of JP's short-term debt during the first nine months of 2001.
The insurance portfolio, however, would not be significantly impacted by the
additional decrease in interest rates beyond 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.
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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 risk that we might fail to successfully complete our strategy
for substantially increasing life insurance sales; general economic conditions;
the impact on the economy from any further terrorist activities; competitive
factors, including pricing pressures, technological developments, new product
offerings and the emergence of new competitors; interest rate trends and
fluctuations; changes in federal and state taxes (including estate taxes);
changes in the regulation of the financial services industry; or changes in
other laws and regulations and their impact.
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 on Form 8-K
There were none filed during the third 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/Theresa M. Stone
(Name and Title) Theresa M. Stone, Executive Vice President,
Chief Financial Officer and Treasurer
Date November 13, 2001
By (Signature) /s/Reggie D. Adamson
(Name and Title) Reggie D. Adamson, Senior Vice President - Finance
(Principal Accounting Officer)
Date November 13, 2001
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