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, 1996 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)
(910) 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 pre-
ceding 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, 1996 71,245,328
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JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
Part I. Financial Information
Consolidated Condensed Balance Sheets
- June 30, 1996 and December 31, 1995 3
Consolidated Condensed Statements of Income
- Three Months and Six Months Ended
June 30, 1996 and 1995 4
Consolidated Condensed Statements of Changes
in Retained Earnings
- Three Months and Six Months Ended
June 30, 1996 and 1995 5
Consolidated Condensed Statements of Changes
in Financial Condition
- Six Months Ended June 30, 1996 and 1995 6
Notes to Consolidated Condensed Financial
Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information 25
Signatures 26
2
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<TABLE>
PART I. FINANCIAL INFORMATION
JEFFERSON-PILOT CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Note 1)
<CAPTION>
June 30 December 31
Assets 1996 1995
(Unaudited)
<S> <C> <C>
Cash and investments:
Debt securities available for sale $ 6,231,636 $ 6,458,209
(amortized cost $6,318,905 and $6,208,347)
Debt securities held to maturity 3,732,682 3,527,404
(fair value $3,732,682 and $3,648,539)
Equity securities, trading 33,426 46,406
(cost $33,926 and $45,868)
Equity securities available for sale 846,484 816,344
(cost $198,215 and $207,128)
Mortgage loans 1,151,254 1,049,464
Cash and all other investments 1,314,434 1,392,772
Accrued investment income 153,217 156,532
Due from reinsurers 1,548,960 1,449,613
Deferred policy acquisition costs and value
of insurance in force 940,932 834,764
Goodwill 95,114 97,296
Assets held in separate accounts 422,797 345,530
Accounts receivable, agents' balances, and
other assets 282,651 303,678
$16,753,587 $16,478,012
Liabilities and Shareholders' Equity
Liabilities:
Policy liabilities $12,982,815 $12,721,574
Securities sold under repurchase agreements 276,927 196,040
Short-term borrowings and other debt 377,028 367,148
Separate account liabilities 422,797 345,530
Tax liabilities 168,674 254,424
Accrued expenses and other debt 349,760 387,237
14,578,001 14,271,953
Redeemable preferred stock 50,000 50,000
Shareholders' Equity:
Common stock 90,171 89,016
Retained earnings 1,633,654 1,542,344
Net unrealized gains on securities and
foreign currency translations, net 401,761 524,699
$16,753,587 $16,478,012
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
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<TABLE>
JEFFERSON-PILOT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Shares Outstanding and Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Insurance premiums $ 178,581 $ 158,678 $ 365,880 $ 309,842
Investment income, net 220,663 107,401 433,345 203,499
Communications 35,625 34,281 81,943 76,987
Other income 82,987 27,247 158,768 46,974
Realized investment gains 10,669 1,255 22,802 6,797
528,525 328,862 1,062,738 $ 644,099
Benefits and Expenses:
Policy benefits 305,152 183,014 619,362 348,010
Insurance commissions 37,064 25,734 76,084 47,849
Communications operations 23,289 23,542 52,088 51,349
General, administrative, and other
expenses 52,604 22,368 98,579 45,663
418,109 254,658 846,113 492,871
Income before income taxes 110,416 74,204 216,625 151,228
Provision for income taxes 37,203 23,083 72,448 48,235
73,213 51,121 144,177 102,993
Discontinued operations, net - 13,408 - 18,541
Net income 73,213 64,529 144,177 121,534
Dividends on preferred stock 878 - 1,698 -
Net income available to common
shareholders $ 72,335 $ 64,529 $ 142,479 $ 121,534
Average number of shares
outstanding 71,244,703 71,693,045 71,235,826 72,187,032
Income before gain from sales
of investments:
Continuing operations $ 0.92 $ 0.70 $ 1.79 $ 1.35
Discontinued operations - - - 0.03
Total 0.92 0.70 1.79 1.38
Gain from sales of investments,
net of income taxes:
Continuing operations 0.10 0.01 0.21 0.08
Discontinued operations - 0.19 - 0.22
Total 0.10 0.20 0.21 0.30
Net income per share of
Common Stock $ 1.02 $ 0.90 $ 2.00 $ 1.68
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
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<TABLE>
JEFFERSON-PILOT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN RETAINED EARNINGS
(In Thousands)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Balance at beginning of period $1,586,900 $1,475,222 $1,542,344 $1,441,132
Net income available to common
shareholders for the period 72,335 64,529 142,479 121,534
1,659,235 1,539,751 1,684,823 1,562,666
Cash dividends declared (25,581) 60 (51,169) (23,147)
Reacquisition of common stock,
net - (51,715) - (51,423)
Balance at end of period $1,633,654 $1,488,096 $1,633,654 $1,488,096
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
5
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<TABLE>
JEFFERSON-PILOT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN FINANCIAL CONDITION
(In Thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30
1996 1995
<S> <C> <C>
Net cash provided by operations $ 306,735 $ 40,141
Cash Flows from Investing Activities:
Investments purchased, net (428,638) (277,370)
Cash received from assumption reinsurance - 141,832
Other investing activities (425) 1,433
Net cash used by investing activities (429,063) (134,105)
Cash Flows from Financing Activities:
Short-term borrowings, net 85,737 21,157
Cash dividends to shareholders (50,007) (43,981)
Issuance of common stock, net 1,155 (52,657)
Policyholder contract deposits(withdrawals) 3,679 164,727
Net cash provided by financing activities 40,564 89,246
Decrease in cash and cash equivalents (81,764) (4,718)
Cash and cash equivalents at beginning of period 122,474 22,774
Cash and cash equivalents at end of period $ 40,710 $ 18,056
Supplemental Cash Flow Information:
Income taxes paid $ 30,681 $ 41,478
Interest paid on borrowed money $ 16,288 $ 8,746
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
6
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JEFFERSON-PILOT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated 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 three and six month periods ended June 30, 1996, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. These operating results include Alexander Hamilton Life Insurance Company
of America (AH Life) and the business assumed from Kentucky Central Life
Insurance Company (KCL) for the first six months of 1996, whereas comparable
1995 operating results do not include AH Life, but does include one months
results of operations for KCL. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1995. Certain prior year amounts
have been reclassified to conform with the current year presentation.
7
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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, 1996, changes in financial condition for the six months then
ended, and results of operations for the three and six months ended June 30,
1996 as compared to June 30, 1995. This discussion supplements Management's
Discussion and Analysis in Form 10-K for the year ended December 31, 1995. It
should be read in conjunction with the interim financial statements and notes
contained herein.
Jefferson-Pilot Corporation (JP or the Company) is a North Carolina holding
company which is engaged primarily in the business of writing life insurance,
health insurance, and annuities and in the communications businesses principally
through the following subsidiaries: Jefferson-Pilot Life Insurance Company
(JP Life), Alexander Hamilton Life Insurance Company of America (AH Life) and
Jefferson- Pilot Communications Company (JP Communications). In May, 1995,
JP Life assumed certain life insurance and annuity business of Kentucky
Central Life Insurance Company (KCL) in a transaction which was accomplished
through an assumption reinsurance agreement.
Included in net income available to common shareholders are realized
investment gains from sale of investments and preferred stock dividends of a
consolidated subsidiary. The following tables illustrate JP's results and
earnings per share before and after the inclusion of realized investment
gains.
Operating Earnings by Business Segment
JP's continuing business segments include Insurance and Communications.
Operating income of the business segments includes investment income but
excludes net realized investment gains. Operating income and losses of the
parent company, consolidation entries, and net realized investment gains are
included in the "other" category. Currently, all corporate capital is
allocated to the business segments.
8
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Consolidated Summary of Income
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
(In millions)
Income before realized
investment gains:
Continuing operations $ 65.3 $ 50.2 $127.6 $ 97.2
Discontinued operations - - - 2.2
Operating income 65.3 50.2 127.6 99.4
Realized investment gains,
net:
Continuing operations 7.0 .9 14.9 5.7
Discontinued operations - 13.4 - 16.4
Realized investment gains 7.0 14.3 14.9 22.1
Net income(1):
Continuing operations 72.3 51.1 142.5 102.9
Discontinued operations - 13.4 - 18.6
$ 72.3 $ 64.5 $142.5 $ 121.5
(1) Available to common shareholders.
Consolidated Earnings Per Share
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
Income before realized
investment gains:
Continuing operations $ 0.92 $ 0.70 $ 1.79 $ 1.35
Discontinued operations - - - 0.03
Operating income 0.92 0.70 1.79 1.38
Realized investment gains,
net:
Continuing operations 0.10 0.01 0.21 0.08
Discontinued operations - 0.19 - 0.22
Realized investment gains 0.10 0.20 0.21 0.30
Net Income:
Continuing operations 1.02 0.71 2.00 1.43
Discontinued operations - 0.19 - 0.25
$ 1.02 $ 0.90 $ 2.00 $ 1.68
9
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Net Realized Investment Gains
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
(In millions)
Investment gains from continuing
operations:
Stocks $13.1 $ 5.1 $23.8 $10.5
Bonds and mortgage loans (2.9) (5.8) (2.3) (23.3)
JP Data Services assets - - - 15.7
Other .4 2.0 1.3 3.9
Total investment gains from
continuing operations 10.6 1.3 22.8 6.8
Investment gains from discontinued
operations:
Stocks - - - 1.7
Bonds and mortgage loans - - - 3.0
JP Fire & Casualty - 15.6 - 15.6
Total investment gains from
discontinued operations - 15.6 - 20.3
Total investment gains 10.6 16.9 22.8 27.1
Less applicable federal and state taxes (3.6) (2.6) (7.9) (5.0)
$ 7.0 $14.3 $14.9 $22.1
Consolidated Summary of Income by Segment and Classes of Products
Income by segment and classes of products was:
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
(In millions)
Life insurance segment:
Individual Products $37.5 $25.0 $74.8 $49.6
Annuity and investment products 16.0 8.3 29.6 16.0
Group products 8.5 10.0 15.1 18.3
62.0 43.3 119.5 83.9
Communications segment 5.8 4.8 14.9 11.3
Discontinued Operations - - - 2.2
Other (1.6) 2.1 (5.2) 2.0
Operating Income 66.2 50.2 129.2 99.4
Net realized investment gains, net:
Continuing operations 7.0 .9 14.9 5.8
Discontinued operations - 13.4 - 16.3
Net income 73.2 64.5 144.1 121.5
Dividends on preferred stock .9 - 1.6 -
Net income available to common
shareholders $ 72.3 $ 64.5 $ 142.5 $ 121.5
10
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Results of Operations:
First Six Months of 1996 Compared to the First Six Months of 1995
Consolidated net income increased 17.3% over the prior year's first six months
to $142.5 million. Income before investment gains (operating income)
increased 28.4% to $127.6 million. Operating income from continuing
operations was 31.3% higher at $127.6 million. The increase in net income and
earnings from operations is partially due to the acquisition of AH Life and
the assumption of life business from KCL. Increased profitability on certain
lines of business, particularly life, annuity and investment products and
communications also contributed to this increase. For the first six
discontinued operations income included $2.2 million from Jefferson-Pilot
sold in the second quarter of 1995. Group product earnings were below prior
year results primarily due to lower earnings from conventional group accident
and health insurance product lines.
Earnings per share increased 19.1% during the first six months of 1996, due to
acquisitions and improved results of core business. Earnings per common share
from continuing operations excluding net realized investment gains increased
31.4%. Earnings per common share from continuing operations increased 39.9%.
Average shares outstanding during the first half of 1996 and 1995 were 71.2
and 72.2 million, respectively, adjusted for a 3-for-2 stock split in
December, 1995.
JP's plan of operation focuses on growing revenues through internal expansion
and acquisitions. The internal growth in JP Life is attributable to the
successful implementation of its Individual and Annuity and Investment
Products business plans. A focus on multiple distribution sources has
resulted in growth in premium receipts from primarily universal life and
annuity products.
Revenues from continuing operations increased 65.0% to $1,062.7 million over
the same period of the prior year. Excluding realized investment gains,
revenues increased 63.2% to $1,039.9 million. Total premiums, considerations,
and other income (excluding discontinued operations) increased 48.3%. Receipts
on universal life and most annuity products do not flow through income in the
year of receipt but are included in the liability for policyholder contract
deposits. During the first half of 1996, policyholder contract deposits, net
of surrenders, increased 1.7% to $10,955.9 million of which annuity funds
comprised $6,081.5 million. In the first six months of 1995, policyholder
contract deposits increased 6.7% to $2,851.6 million including $1,210.4
million in annuity funds. Annuity and investment product receipts have grown
more slowly in 1996 due to the impact of a decline in long-term interest
rates on fixed annuity sales which lead to increased competition from products
such as certificates of deposit. Group accident and health premiums increased
3.3% in the first half of 1996 to $196.8 million compared to $190.4 million
in 1995. Accident and health premiums have increased in spite of increased
terminations caused by renewals implemented to improve profitability of
accident and health products due to competition. Revenues from the
Communications segment increased 6.4% due to strong market growth in most
radio markets combined with increased collegiate sports revenues and
advertising revenues associated with Olympic programming.
11
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Net investment income, which is included in operating income, grew 113.0% over
the same period of the prior year to $433.3 million, due primarily to
acquisitions of AH Life and KCL.
Net investment gains for the same period, net of income taxes, were $14.9
million as compared to $22.1 million last year. In 1995, gains on the sale of
Jefferson-Pilot Data Services assets and JP Fire & Casualty of $11.1 and $16.4
million, respectively, were included in realized investment gains.
Total policy benefits, claims and expenses increased 71.7% over the same
period last year to $846.1 million. Insurance commissions were 59.0% higher
than in the prior year period. Operating expenses increased 55.3%. The
increase in these insurance segment expenses is directly attributable to the
acquisition of AH Life, KCL, and growth of life business in force. Costs of
Communications operations increased 1.4% due to growth in sales.
Income taxes from continuing operations increased $24.2 million, or 50.2%
versus the same period of the prior year due primarily to the higher level of
income. Effective tax rates increased to 33.4% versus 31.91% for the same
period in 1995, due to a higher effective tax rate being accrued on AH Life
operations in 1996. The effective tax rate for the same period in 1995 was
reduced by the Company having higher tax than book basis in assets sold by JP
Data Services.
Insurance
The Insurance segment is comprised of the following product classes:
Individual Products, Annuity and Investment Products, and Group Products.
Individual Products
The Individual Products distribution system offers a wide array of life and
health insurance through a career agency force, independent agents recruited
through independent marketing organizations and regional directors, home
service agents, and financial institutions. Operating results were:
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
(In millions)
Premiums, considerations,
and other income $ 116.1 $ 51.3 $ 233.8 $ 100.9
Net investment income 117.6 63.1 230.3 117.5
Total revenues 233.7 114.4 464.1 218.4
Policy benefits 125.4 56.5 254.2 108.2
Expenses 51.5 21.9 96.7 38.1
Total benefits and expenses 176.9 78.4 350.9 146.3
Operating income before
income taxes 56.8 36.0 113.2 72.1
Provision for income taxes 19.3 11.0 38.4 22.5
Operating income $ 37.5 $ 25.0 $ 74.8 $ 49.6
12
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Individual Products operating income increased 50.8% versus the first six
months of 1995. As a percentage of total revenues, operating income of the
Individual unit was 16.1% in 1996 versus 22.7% in 1995. This decrease is due
to acquisitions with a higher concentration of annuities.
New first year life insurance premiums rose 294.3% or $96.9 million for the
first half of 1996 as a result of acquisitions. Accident and health premiums
declined 29.7% or $3.9 million for the first half of 1996, which is reflective
of the Company's strategy to improve the profitability of this line of
business.
Policy benefits (including reserve increases) increased $146.0 million, or
134.7%, reflective of the growth of business in force and acquisitions.
Expenses also increased 153.8% as a result of acquisitions.
Annuity and Investment Products
Annuity and Investment Products are offered through financial institutions,
independent agents, career agents, investment professionals and
broker/dealers. Operating results were:
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
(In millions)
Premiums, considerations,
and other income $ 26.6 $ 15.5 $ 50.1 $ 21.6
Net investment income 93.2 30.1 184.7 58.6
Total revenues 119.8 45.6 234.8 80.2
Policy benefits 85.3 31.5 170.8 52.1
Expenses 10.2 2.2 19.0 4.7
Total benefits and expenses 95.5 33.7 189.8 56.8
Operating income before
income taxes 24.3 11.9 45.0 23.4
Provision for income taxes 8.3 3.6 15.4 7.4
Operating income $ 16.0 $ 8.3 $ 29.6 $ 16.0
Operating income for annuity and investment products increased 85.0% or $13.6
million from the first six months of 1995 is primarily due to the AH Life
acquisition. Policy benefits increased 227.8% or $118.7 million which
is directly attributable to the increase in funds on deposit. Total expenses
increased 304.3% due primarily to amortization of value of business in force
coupled with increased general and administrative expenses.
13
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Annuity funds on deposit increased 0.2% to $6,081.5 million compared to an
increase of 11.8% in the first half of 1995 to $1,210.4 million. Annuity
receipts were $254.3 million compared to $166.0 million for the same period
in 1995. Profitability was unfavorably impacted by surrenders and their
attendant impact on the amortization of deferred acquisition costs.
Benefits and surrenders as a percentage of beginning fund balances were
6.5% compared to 5.2% for the same period in 1995.
Group Products
Group Products provide a wide range of group insurance products for employers
and their employees, primarily in the Southeast and Southwest. It offers
conventionally-insured and alternatively-funded medical benefits as well as a
variety of life, disability income, dental, and retirement plans.
Operating results were:
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
(In millions)
Premiums, considerations,
and other income $ 117.0 $ 117.6 $ 237.5 $ 232.3
Net investment income 12.2 11.8 23.8 23.5
Total revenues 129.2 129.4 261.3 255.8
Policy benefits 94.4 94.2 194.3 187.7
Expenses 22.0 20.9 44.3 41.4
Total benefits and expenses 116.4 115.1 238.6 229.1
Operating income before
income taxes 12.8 14.3 22.7 26.7
Provision for income taxes 4.3 4.3 7.6 8.4
Operating income $ 8.5 $ 10.0 $ 15.1 $ 18.3
Group operating income declined 17.5% in the first six months of 1996 when
compared to the same period of the prior year. As a percentage of premiums
and other considerations, operating income for Group products was 6.4% in
1996's first six months and 7.9% in the 1995 period. Group Life and Annuity
results declined 32.7% to $4.3 million as a result of adverse mortality.
Health and disability results of $10.9 million were 8.8% lower than in the
first six months of 1996 due to lower earnings on conventional medical
coverages resulting from increased utilization of health care services,
primarily smaller dollar services such as office visits, pharmacy and lab
tests, and continued medical inflation. The Company has been investing in
developing a proprietary preferred provider network in North
Carolina and additional medical management capabilities.
14
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Group life and annuity policy benefits increased 3.4% while premium income
declined 2.8%. Group expenses increased 8.8%
Communications
JP Communications operates television and radio broadcast properties and
produces syndicated sports and entertainment programming. Operating results
were:
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
(In millions)
Communications revenues $ 35.6 $ 34.3 $ 81.9 $ 77.0
Operating costs 23.2 23.6 52.1 51.4
Depreciation and amortization 2.2 2.2 4.5 4.7
General expenses .7 .6 1.8 2.1
Total expenses 26.1 26.4 58.4 58.2
Operating income before
income taxes 9.5 7.9 23.5 18.8
Provision for income taxes 3.7 3.1 8.6 7.5
Operating income $ 5.8 $ 4.8 $ 14.9 $ 11.3
Operating income from the Communications segment increased 32.7% compared to
the first six months of 1995. Profit improvement was attributable to the
sports and entertainment and broadcast properties, all benefitting from a
strong advertising environment.
Revenues increased 6.4% from the first six months of 1995. All media outlets
contributed to this growth. Radio growth was attributable to strong market
growth in most markets combined with increased market share at several
locations. The majority of the growth experienced by sports and entertainment
was due to increased collegiate sports revenues and advertising revenues
associated with Olympic programming.
Total expenses increased $0.2 million, or 0.3%. Total expenses including
costs of sales, as a percentage of revenues, decreased to 71.3% at June 30,
1996 compared to 75.6% at June 30, 1995. While sales increased, expenses did
not increase correspondingly leading to greater profit margins.
Other
Operating results categorized as "other" include parent company expenses and
earnings on investments. Financing costs related to acquisitions resulted in
the company reporting a loss of $5.2 million while having income of $2.0
million for the first six months of 1995.
15
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Second Quarter of 1996 Compared to Second Quarter of 1995
Consolidated net income available to common shareholders increased 12.1% over
the prior year's second quarter, primarily due to results of acquired
operations, growth in life insurance and annuity results, and increased
profitability from the Communications segment, partially offset by lower Group
Product results. Net income from continuing operations increased 41.5% from
the prior year's quarter. Operating income increased 31.9% to $66.2 million.
Earnings per common share increased 13.3% over the prior year's second quarter
as a result of acquisitions. Earnings per common share excluding net realized
investment gains increased 31.4%. Earnings per common share from continuing
operations improved 43.7%.
Revenues increased 60.7% to $528.5 million over the same quarter of the prior
year. Excluding realized investment gains, revenues increased 58.1% to $517.9
million for the second quarter of 1996. Premium and annuity considerations
increased 12.5% to $178.6 million. During the second quarter of 1996,
policyholder contract deposits, net of surrenders, increased to $10,955.9
million of which annuity funds comprised $6,081.5 million. In the second
quarter 1995 policyholder contract deposits increased to $2,851.6 million with
$1,210.4 million in annuity funds. Annuity and investment products receipts
have grown more slowly in 1996 due to lower long-term interest rates which
resulted in competition from products such as certificates of deposit.
Accident and health premiums decreased 4.1% to $99.2 million compared
to an increase of 2.2% in 1995 to $103.4 million. Accident
and health premiums have declined due to actions taken to improve
profitability of accident and health products.
Net investment income grew 105.5% over the prior year's quarter to $220.7
million primarily due to acquisitions.
Total benefits and expenses increased 64.2% over the second quarter of 1995 to
$418.1 million. In 1995, total benefits and expenses increased 11.4% to
$254.7 million. Life benefits and credits to policyholder accounts increased
166.4% over the prior year reflecting acquisitions and the growth of life
business in force. Group accident and health benefits were 5.7% higher in the
second quarter of 1996 than in the second quarter of 1995 due to more claims
experience in Group conventional medical and disability coverages. Net life
insurance expenses (after deferral of policy acquisition costs) increased
84.2% in 1996 due to operations of acquired businesses.
Income taxes for continuing operations increased $14.1 million or 61.2% over
the same quarter of the prior year. Effective tax rates from continuing
operations increased to 33.7% at June 30, 1996 versus 31.1% at June 30, 1995
due to a higher effective tax rate being accrued on AH Life operations.
16
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Insurance
Individual Products
Individual operating income improved 50.0% versus the second quarter of 1995
primarily due to the positive impact of acquired operations. New first-year
life insurance premiums and receipts for policyholder accounts rose 175.6%
compared to an increase of 92.7% in 1995 and resulted in correspondingly
higher levels of reserves.
Policy benefits including increases in reserves increased 121.9% in 1996's
second quarter, reflecting acquisitions and growth of business in force.
Death benefits were 91.2% higher than in the 1995 quarter. Mortality
experience declined 6.9% due to increased death claims. Expenses increased
135.2% primarily due to acquisitions.
Annuity and Investment Products
Annuity and Investment Products operating income improved 92.8% versus the
second quarter of 1995 due to the acquisition of AH Life and planned internal
growth.
Annuity receipts were $104.4 million for the second quarter of 1996 compared
to $80.5 million for the same period in 1995. Profitability was unfavorably
impacted by increased surrenders and their attendant impact on the
amortization of deferred acquisition costs. Benefits and surrenders as a
percentage of beginning fund balances were 3.0% in the second quarter of 1996
compared to 2.6% for the same period in 1995.
Group Products
Group operating income declined 15.0% when compared to the second quarter of
1995. As a percentage of premiums and other considerations, operating income
was 7.3% in 1996's second quarter and 8.5% for the 1995 period.
Premium revenue for the second quarter remained flat, while expenses increased
5.3% or $1.1 million due primarily to investments made in developing a
proprietary preferred provider network in North Carolina and in additional
medical management capabilities. Both of these initiatives are intended to
result in greater cost efficiencies and increased competitive advantage.
Communications
Operating income from the Communications segment increased 20.8% over the 1995
quarter. Profit improvement was attributable to sports and entertainment
production and broadcast properties, all benefitting from a strong advertising
environment.
17
<PAGE>
Revenues for the quarter grew 3.8% from the 1995 quarter. Radio and
television improved 13.7% and 4.4%, respectively. Radio growth was
attributable to strong market growth in most markets combined with increased
market share at several locations. Television growth resulted from strong
market gains including demand for political advertising coupled with increases
in audience shares at all locations.
Total expenses, as a percentage of revenues, improved to 73.3% compared to
77.0% for the 1995 period, due to increased profit margins associated with the
higher sales levels.
Other
Other income declined to ($1.6) million versus $2.1 million for the 1995
second quarter due primarily to financing costs of $6.5 million
offset by an increase in net investment income of $1.1 million resulting from
the transfer of Nationsbank stock from JP Life to a passive investment
subsidiary.
CONSOLIDATED FINANCIAL POSITION, CAPITAL RESOURCES, AND LIQUIDITY
JP's resources consist primarily of investments related to its Life Insurance
segment, properties and other assets used in its Life Insurance and
Communications segments and investments backing corporate capital.
Total assets were $16,754.0 million at June 30, 1996 compared to $16,478.0
million at December 31, 1995, an increase of $276.0 million or 1.7%. Primary
sources for asset growth were increases in cash provided by operating
activities ($306.7 million), separate account assets ($77.3 million), and net
borrowings ($90.8 million). These sources were offset by cash dividends paid
to shareholders of $50 million. Asset values also declined $201.1 million due
primarily to changes in market values of assets held in the "available for
sale" category resulting from increases in interest rates. In early August,
rates had declined to slightly below those at December 31.
Deferred acquisition costs for the Life Insurance segment were $608.7 million
at June 30, 1996 and $543.3 million at December 31, 1995, an increase of $65.4
million or 12.0%. During the first half of 1996, the balance was reduced by
$44.1 million for net amortization, offset by additional acquisition expenses
capitalized of $65.2 million, increased by $44.3 million for the effect of net
unrealized investment losses.
Value of Insurance In Force was $332.3 million at June 30, 1996 and $291.5
million at December 31, 1995, an increase of $40.8 million or 14.0%. During
the first half of 1996, the balance was reduced by $14.8 million for net
amortization, offset by $2.1 million by additional commission costs
capitalized and increased by $53.5 million for the effect of net unrealized
investment losses.
Goodwill of $95.1 million at June 30, 1996 and $97.3 million at December 31,
1995 relates to acquisitions of AH Life and Communications properties.
Goodwill as a percentage of shareholders' equity was 4.5% at June 30, 1996 and
December 31, 1995.
18
<PAGE>
JP has recorded reinsurance receivables of $1,494.9 million and $1,404.3
million and policy loans of $810.0 million and $828.5 million at June 30, 1996
and December 31, 1995, respectively. These reinsurance receivables and policy
loans are related to the businesses of AH Life not acquired by JP. This
business is 100% coinsured to Household International, which has provided
payment, performance, and capital maintenance guarantees with respect to the
balances receivable.
Capital Resources
JP's financial strength is among the highest of its peer companies.
Consolidated shareholders' equity was $2,125.6 million at June 30, 1996 and
$2,156.1 million at December 31, 1995. Shareholders' equity includes net
unrealized gains or losses on securities available for sale and cumulative
foreign currency translations of $401.8 million at June 30, 1996 and $524.7
million at December 31, 1995. During the first half of 1996, fair values of
securities classified as available for sale, net of deferred taxes, deferred
acquisition costs and value of insurance in force effect, decreased $126.6
million compared to an increase of $259.1 million in the first half of 1995.
JP considers existing capital resources to be more than adequate to support
the current level of its business activities.
Long-term debt outstanding was $137.0 million at June 30, 1996 and $137.1
million at December 31, 1995. Short-term debt outstanding was $240.0 million
at June 30, 1996 and $230.0 million at December 31, 1995. While it has made
no commitments for additional financing, the Company may issue additional
long-term debt securities to finance acquisitions or for other corporate
purposes.
During 1996 and 1995, the Company sold U.S. Treasury obligations under
repurchase agreements involving various counterparties. Proceeds were used to
purchase securities with longer durations as an asset/liability management
strategy. The repurchase agreements were accounted for as financing
arrangements. The maximum amounts outstanding during the first six months of
1996 and 1995 were $277.0 million and $267.0 million, respectively.
Securities subject to open repurchase agreements at quarter-end were $277.0
million at fair value and $270.0 million at amortized cost for 1996 and $196.0
million at fair value and $188.0 million at amortized cost as of December 31,
1995.
JP's capital adequacy is illustrated by the following table:
June 30, 1996 December 31, 1995
(In millions)
Total assets $16,754 $16,478
Total shareholders' equity $2,126 $2,156
Ratio of shareholders' equity to assets 12.7% 13.1%
19
<PAGE>
The Company's ratio of capital to assets declined during the second quarter of
1996 primarily due to decreases in fair values of securities available for
sale.
Liquidity
JP's liquidity requirements are met primarily by cash flows from the
operations of JP Life, AH Life, JP Communications and other consolidated
subsidiaries.
Net cash provided by operations through June 30, 1996 and 1995 was $306.7
million and $40.1 million. The significant increase in cash provided by
operations is due primarily to increases in policyholder liabilities ($120.3
million) and amounts credited to policyholder accounts ($180.6 million). Cash
flows provided from net increases in policyholder contract deposits were $3.7
million and $164.7 million for the six months of 1996 and 1995, respectively.
Net borrowings under short-term facilities were $85.7 million and $21.2
million for the first six months of 1996 and 1995, respectively. These
sources of funds were used to purchase net investments of $429.1 million and
$134.1 million, and to pay dividends to shareholders of $50.0 million and
$44.0 million for the 1996 and 1995 periods, respectively. Management
believes that its overall sources of liquidity will continue to be sufficient
to satisfy both its operating requirements and parent company expenses.
Dividends paid to the parent company from its subsidiaries were $77.1
million and $45.0 million during the first half of 1996 and 1995,
respectively. JP Life is the primary source of dividends. JP Life is subject
to North Carolina laws and AH Life is subject to Michigan laws. Both states
limit the amount of dividends that may be paid without first obtaining the
approval of the respective State's Insurance Commissioner. Because of the
extraordinary dividends paid by JP Life and AH Life in 1995, dividends paid by
either company prior to the fourth quarter of 1996 will require regulatory
approval. The second quarter 1996 dividend of $30.0 million from JP Life was
approved and paid. No common stock dividends from AH Life are planned for
1996.
Dividend payments on the $50 million floating rate preferred stock issued by
AH Life to Household also require advance approval prior to
October 2, 1996, and all interest payments on the $50 million AH Life surplus
note held by a JP subsidiary also require advance approval.
Cash and short-term investments were $40.7 million and $122.5 million at June
30, 1996 and December 31, 1995, respectively. Additionally, debt and equity
securities held by the parent company and non-regulated subsidiaries with
carrying amounts of $447.3 million and $391.7 million at June 30, 1996 and
December 31, 1995 are considered to be sources of liquidity to support the
Company's strategies. Total trading securities and debt and equity securities
available for sale at market value at June 30, 1996 and December 31, 1995 were
$7,111.5 million and $7,321.0 million, respectively.
20
<PAGE>
INVESTMENTS
Cash flows from operations are invested primarily in fixed income securities,
including publicly-issued bonds, privately-placed notes and bonds and
commercial mortgage loans.
JP held the following carrying amounts of investments:
June 30, 1996 December 31, 1995
(Dollars in Millions)
Publicly-issued bonds $7,984.5 $7,845.6
Privately-placed bonds 1,921.7 2,081.2
Mortgage loans 1,151.3 1,049.5
Common stock 891.5 855.8
Policy loans 1,142.6 1,151.9
Preferred stock 84.8 95.7
Real estate 80.5 76.6
Cash, other invested assets 53.0 134.3
Total $13,309.9 $13,290.6
Near-term strategies include identification of fixed income market sectors and
niches that provide investment opportunities to meet the portfolios' growth,
quality and yield requirements. As a result, the Company anticipates that
private placement and commercial mortgage loan production will increase these
categories as a percent of total assets, as happened in 1995 before the
acquisitions.
Carrying amounts of investments categorized as "higher risk" assets were as
follows:
June 30, 1996 December 31, 1995
(Dollars in millions)
Bonds, near or in default $ 19.7 0.2% $ 12.5 0.1%
Bonds below investment grade 436.1 3.3% 443.5 3.3%
Mortgage loans 61 days delinquent
or in foreclosure 4.6 - 8.3 0.1%
Mortgage loans restructured 14.4 0.1% 17.7 0.1%
Foreclosed properties 2.8 - 4.2 -
All other investments 12,832.3 96.4 12,804.4 96.4
Total cash and investments $13,309.9 100.0% $13,290.6 100.0%
Most of the bonds below investment grade were acquired for yield enhancement
pursuant to investment guidelines which limit their level.
The Company will continue to manage its credit risks in a prudent fashion with
due regard to regulatory constraints and efficient utilization of surplus.
21
<PAGE>
JP has not historically employed the use of derivative instruments to alter
investment or liability positions. AH Life has limited involvement with
derivative financial instruments and has not previously used them for trading
purposes, but generally to manage well-defined interest rate risks. Interest
rate swaps with a notional value of $182.3 million are open as of June 30,
1996, termination of which at current interest rates would result in an
immaterial settlement payment. The net amount paid or received under these
arrangements is reflected as an adjustment to investment income.
During 1995 and the first half of 1996, JP sold call options on selected
common stock holdings classified as available for sale to reduce the price
volatility of its equity investments and as an additional source of investment
returns. Pursuant to its equity policy, the Company maintains a portfolio up
to $50 million in trading securities for the primary purpose of writing
covered call options to enhance returns from option premiums, market
appreciation and dividends received. Option premiums received under this
program are recorded as investment income, together with realized and
unrealized gains on the portfolio. Premiums received from these options are
applied to reduce the basis of the shares called or are recorded as investment
income upon expiry. Considerations received were $4.9 million and $5.4
million during the first half of 1996 and 1995, respectively. Balances of
portfolios classified as "trading securities" were $33.4 million at June 30,
1996 and $46.4 million at December 31, 1995.
JP held the following CMO's:
June 30 December 31,
1996 1995
(In millions)
Available for sale, at fair value:
Federal agency issued CMO's $1,991.9 $1,856.1
Corporate private-labeled CMO's 611.9 640.4
Total $2,603.8 $2,496.5
The Company's investment strategy with respect to CMO's continues to focus on
actively traded, less volatile issues that produce relatively stable cash
flows.
JP monitors the duration of insurance liabilities for comparison to the
duration of assets backing the insurance lines. Separate asset portfolios
have been established for each insurance line. JP considers the duration
match for the respective portfolios as well as total assets and liabilities.
The Company also considers the timing of the cash flows arising from the
assets and liabilities under different interest rate scenarios. Management
intends that option-adjusted durations for interest sensitive portfolios such
as universal life and annuities remain prudently matched. A wider tolerance
is permissible for the non-interest sensitive (traditional) portfolios.
At June 30, 1996 and December 31, 1995, 73.1% and 75.4% of life insurance
invested assets at amortized cost were held for interest-sensitive portfolios.
22
<PAGE>
EXTERNAL TRENDS AND ECONOMIC FACTORS
JP operates largely in the U.S. financial services market, which is subject to
general economic conditions in the U.S. Over the past several years, these
conditions have exhibited signs of gradual improvement and slow growth.
Recent trends which have affected the Company include: rising interest rates;
a flattening yield curve, increased levels of mergers, consolidations and
reorganizations; and moderate increases in health care utilization and
inflation as a result of increased emphasis on managed care arrangements.
Growth of life and health insurance sales continues to be slow for most
insurance companies due to changing demographics and inefficient distribution
systems. A more slowly growing economy and increased competition from banks,
mutual funds, and other financial institutions for investable consumer dollars
also suppressed premium growth over the last few years. The Company believes
that it has experienced growth at a rate greater than the overall industry
because of acquisitions, its strong financial position and ratings, and
efforts to increase distribution sources.
Inflation and Interest Rate Risks
Interest rates have varied in response to concerns for inflationary pressures
in the U.S. economy. During 1995, 10 year treasury rates declined by
approximately 200 basis points, however, during the first half of 1996,
ten year U.S. Treasury rates increased by approximately 110 basis points.
Since JP's assets and liabilities are largely monetary in nature, the
Company's financial position is impacted by changes in the general interest
rate environment. Interest rate increases during 1996 and declines during
1995 contributed to the net decrease in unrealized gains on securities
available for sale in the first half of 1996 of $126.6 million and the net
increase in the same period of 1995 of $155.0 million. Interest rate changes
can affect the Company's net worth either positively or negatively since
fixed income securities available for sale are recorded at fair values but
corresponding liabilities are not adjusted to fair values.
The Company's recent growth in assets and liabilities is largely attributable
to increases in interest-sensitive products. Because JP earns profits on the
basis of investment spreads, changes in interest rates may also affect results
of operations. In a rising interest rate environment, competitive pressures
may make it difficult for the Company to sustain the spreads on its interest-
sensitive portfolio of insurance products. Durations of the Company's assets
and liabilities may also be adversely impacted by changes in interest rate.
Medical inflation and utilization of medical services affect the profitability
of health products offered through the Individual and Group distribution
systems. In the event that premium rates cannot be adjusted in anticipation
of medical trends or due to competitive pressures, profitability of health
insurance products may be adversely affected.
23
<PAGE>
Mergers, Acquisitions and Consolidations
The U.S. insurance industry has experienced an increasing number of mergers,
acquisitions, consolidations and sales of certain business lines. These
consolidations have been driven by a need to reduce costs of distribution and
maintain business in force. Additionally, increased competition, health care
reform, regulatory capital requirements and technology costs have also
contributed to the level of consolidation in the industry. These forces are
expected to continue as is the level of industry consolidation.
Legal Environment
In recent years, the life insurance industry has experienced increased
litigation in which large jury awards including punitive damages have
occurred. JP is involved in various legal and administrative proceedings and
claims of various types, some of which include claims for punitive damages.
Because of the considerable uncertainties that exist, the Company cannot
predict the outcome of pending or future litigation with certainty. It is
possible that results of operations in a particular period could be materially
affected by certain legal proceedings. Based on consultation with the
Company's legal advisers, management does not believe that resolution of
pending legal proceedings will have a material adverse effect on the Company's
financial position or liquidity.
Forward Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. Certain information contained herein, or in
any other written or oral statements made by or on behalf of the Company are
or may be viewed as forward looking. Although the Company has used appropriate
care in developing any such forward looking information, forward looking
information involves risks and uncertainties that could significantly
impact actual results.
These risks and uncertainties include, but are not limited to, the matters
discussed in this section "External Trends and Economic Factors: and the
other risks detailed from time to time in the Company's SEC filings and, more
generally, to: general economic conditions; competitive factors, including
pricing pressures, technological developments, new product offerings and the
emergence of new competitors; interest rate fluctuations; and changes in
federal and state laws and regulations, including without limitation changes
in financial services industry or tax laws and regulations. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future
developments or otherwise.
24
<PAGE>
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
of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Form 8-K/A amending the report on Form 8-K dated February 16, 1996 and
Amendment No. 2 to that same Form 8-K were filed in connection with a
change in Registrant's certifying accountant to Ernst & Young LLP for the
fiscal year ending December 31, 1996.
25
<PAGE>
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) ________________________________
(Name and Title) Dennis R. Glass, Treasurer
Date August 14, 1996
________________________________
(Name and Title) Reggie D. Adamson,
Senior Vice President
(Principal Accounting Officer)
Date August 14, 1996
<PAGE> 26
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 6,231,636
<DEBT-CARRYING-VALUE> 3,732,682
<DEBT-MARKET-VALUE> 3,732,682
<EQUITIES> 879,910
<MORTGAGE> 1,151,254
<REAL-ESTATE> 80,589
<TOTAL-INVEST> 13,269,206
<CASH> 40,710
<RECOVER-REINSURE> 1,548,960
<DEFERRED-ACQUISITION> 940,932
<TOTAL-ASSETS> 16,753,587
<POLICY-LOSSES> 12,689,178
<UNEARNED-PREMIUMS> 40,038
<POLICY-OTHER> 52,011
<POLICY-HOLDER-FUNDS> 201,588
<NOTES-PAYABLE> 653,955
0
50,000
<COMMON> 90,171
<OTHER-SE> 2,035,415
<TOTAL-LIABILITY-AND-EQUITY> 16,753,587
365,880
<INVESTMENT-INCOME> 433,345
<INVESTMENT-GAINS> 22,802
<OTHER-INCOME> 158,768
<BENEFITS> 619,362
<UNDERWRITING-AMORTIZATION> 59,069
<UNDERWRITING-OTHER> (67,325)
<INCOME-PRETAX> 216,625
<INCOME-TAX> 72,448
<INCOME-CONTINUING> 144,177
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<NET-INCOME> 144,177
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