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, 1997 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) 691-3691
(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, 1997 70,852,273
<PAGE>
JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
Part I. Financial Information
Consolidated Unaudited Condensed Balance Sheets
- September 30, 1997 and December 31, 1996 3
Consolidated Unaudited Condensed Statements of Income
- Three Months and Nine Months ended September 30, 1997
and 1996 4
Consolidated Unaudited Condensed Statements of Cash
Flows
- Nine Months ended September 30, 1997 and 1996 5
Notes to Consolidated Unaudited Condensed Financial
Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information 26
Signatures 26
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<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
(In Millions)
<CAPTION>
September 30 December 31
1997 1996
---------- ---------
<S> <C> <C>
Assets
Cash and Investments:
Debt securities available for sale, at fair value $ 9,901 $ 6,673
(amortized cost $9,634 and $6,607)
Debt securities held to maturity, at amortized cost 3,761 3,877
(fair value $3,820 and $3,903)
Equity securities available for sale, at fair value 902 906
(cost $105 and $196)
Equity securities trading portfolio, at fair value - 23
(cost $1 and $23)
Mortgage loans on real estate 1,587 1,323
Cash and all other investments 1,548 1,446
------- -------
Total cash and investments 17,699 14,248
Accrued investment income 217 166
Due from reinsurers 1,533 1,260
Deferred policy acquisition costs and value
of business acquired 1,380 934
Cost in excess of net assets acquired 233 86
Assets held in separate accounts 1,248 492
Accounts receivable, agents' balances and other assets 508 376
------- -------
$22,818 $17,562
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Policy liabilities $17,283 $13,619
Automatic Common Exchange Securities, Mandatorily
Exchangeable Debt Securities and other debt 582 370
Securities sold under repurchase agreements 160 244
Liabilities related to separate accounts 1,248 492
Tax liabilities 199 173
Accounts payable, accruals and other liabilities 377 314
------- -------
19,849 15,212
------- -------
Guaranteed preferred beneficial interest in
subordinated debentures ("Capital Securities") 300 -
------- -------
Mandatorily redeemable preferred stock 53 53
------- -------
Stockholders' Equity:
Common stock 92 88
Retained earnings 1,912 1,708
Net unrealized gains on securities 612 501
------- -------
2,616 2,297
------- -------
$22,818 $17,562
======= =======
See Notes to Consolidated Unaudited Condensed Financial Statements
</TABLE>
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<TABLE>
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
(In Millions Except Per Share Information)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Premiums and other considerations $ 307 $ 236 $ 836 $ 757
Net investment income 290 225 805 658
Realized investment gains 5 16 108 39
Communications operations 42 37 135 119
Other 13 1 21 3
----- ----- ------ ------
Total revenue 657 515 1,905 1,576
----- ----- ------ ------
Benefits and Expenses:
Insurance and annuity benefits 381 293 1,032 912
Insurance commissions 71 39 178 114
General, administrative and
other expenses 50 41 145 140
Communications operations 28 27 88 79
----- ----- ------ ------
Total benefits and expenses 530 400 1,443 1,245
----- ----- ------ ------
Income before income taxes 127 115 462 331
Provision for income taxes 41 40 154 112
----- ----- ------ ------
Net income 86 75 308 219
Dividends on Capital Securities 6 - 16 -
Dividends on mandatorily redeemable
preferred stock 1 1 2 2
----- ----- ------ ------
Net income available to common
stockholders $ 79 $ 74 $ 290 $ 217
===== ===== ====== ======
Average number of shares outstanding 70.9 71.1 70.8 71.2
Net Income Per Share of Common Stock:
Net income available to common
stockholders before realized
investment gains, net of income
taxes $1.06 $ .90 $ 3.10 $ 2.69
Realized investment gains,
net of income taxes .06 .14 .99 .35
----- ----- ------ ------
Net income available to common
stockholders $1.12 $1.04 $ 4.09 $ 3.04
===== ===== ====== ======
Dividends declared per common share $ .40 $ .36 $ 1.20 $ 1.08
===== ===== ====== ======
See Notes to Consolidated Unaudited Condensed Financial Statements
</TABLE>
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<TABLE>
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED
STATEMENTS OF CASH FLOWS
(In Millions)
<CAPTION>
Nine Months Ended
September 30
1997 1996
------ ------
<S> <C> <C>
Net cash provided by operations $454 $825
----- -----
Cash Flows from Investing Activities:
Investments purchased, net (163) (630)
Acquisitions of subsidiaries, net of cash received (758) -
Other investing activities 17 2
----- -----
Net cash used by investing activities (904) (628)
----- -----
Cash Flows from Financing Activities:
Issuance of Capital Securities 300 -
Net short-term borrowings (repayments) (111) 122
Issuance of Mandatorily Exchangeable Debt Securities 150 -
Cash dividends paid (85) (76)
Issuance (reacquisition) of common shares, net 4 (21)
Policyholder contract deposits, net 105 77
----- -----
Net cash provided by financing activities 363 102
----- -----
Increase (decrease) in cash and cash equivalents (87) 299
Cash and cash equivalents at beginning of period 105 123
----- -----
Cash and cash equivalents at end of period $ 18 $422
===== =====
Supplemental Cash Flow Information:
Income taxes paid $ 95 $ 41
===== =====
==
Interest paid $ 25 $ 25
===== =====
See Notes to Consolidate Unaudited Condensed Financial Statements
</TABLE>
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<PAGE>
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, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
2. Acquisition of Chubb Life Insurance Company of America
On May 13, 1997, Jefferson-Pilot Corporation (JP or the Company)
acquired all the outstanding shares of Chubb Life Insurance Company of
America (Chubb Life) from The Chubb Corporation (Seller). Chubb
Life's operations, principally universal life, variable universal life and
term insurance, are conducted nationwide through Chubb Life and its life
insurance subsidiaries, Chubb Colonial Life Insurance Company and
Chubb Sovereign Life Insurance Company. Another of Chubb Life's
subsidiaries, Chubb Securities Corporation, is a full service NASD
registered broker-dealer. Hereinafter, Chubb and its subsidiaries are
collectively referred to as "Chubb Life."
The cost of the acquisition consisted of $775 cash paid by JP to Seller,
plus other acquisition costs. In addition, Chubb Life paid a $100 special
dividend to Seller which was funded through liquidation of short-term
investments. The $775 was financed through the liquidation of invested
assets, various securities offerings (see Note 3) and the issuance of
commercial paper.
The acquisition, which was effective as of April 30, 1997 for financial
reporting and tax purposes, is being accounted for using the purchase
method. As a result, Chubb Life's results of operations from May 1, 1997
forward are included in the accompanying financial statements. The
purchase price has been allocated to Chubb Life's tangible and
identifiable intangible assets and liabilities based on management's
preliminary estimate of their respective fair values with the difference,
amounting to $150, allocated to cost in excess of net assets acquired (i.e.,
goodwill). Goodwill arising from the acquisition is being amortized over
a period of 35 years.
Under the Stock Purchase Agreement, there may be post closing
adjustments based on Closing Date Financial Statements to be provided by
Chubb Life. The allocation of the purchase price is subject to revision
when any post closing adjustments are known and when additional
information concerning asset and liability valuations is obtained.
-6-
<PAGE>
The following pro-forma financial information has been prepared
assuming that the Chubb Life acquisition had taken place at the beginning
of each period presented. The pro-forma information includes
adjustments for interest expense and foregone investment income that
would have resulted from financing the acquisition, amortization of
adjustments to fair value, amortization of value of business acquired and
cost in excess of net assets acquired, and related tax effects. The pro-
forma financial information is not necessarily indicative of results of
operations that would have been reported had the transaction actually been
completed on the dates assumed.
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
------ ------
<S> <C> <C>
Revenue $1,910 $2,001
====== ======
Net income available to common stockholders
before realized investment gains, net of
income taxes $ 231 $ 197
Realized investment gains, net of income taxes 24 29
------ ------
Net income available to common stockholders $ 255 $ 226
====== ======
Net Income Per Share of Common Stock:
Net income available to common stockholders
before realized investment gains, net of
income taxes $ 3.26 $ 2.76
Realized investment gains, net of income taxes 0.34 0.41
------ ------
Net income available to common stockholders $ 3.60 $ 3.17
====== ======
</TABLE>
On a pro-forma basis, net income available to common stockholders
before realized investment gains, net of income taxes, increased from
$219 to $231 for the nine months ended September 30, 1997, and
increased from $191 to $197 for the nine months ended September 30,
1996.
On a pro-forma basis, realized investment gains, net of income taxes, are
significantly lower than actual for the nine months ended September 30,
1997. The pro-forma amounts eliminate the effect of realized gains on
invested assets sold in 1997 to finance the Chubb Life acquisition.
3. Securities Offerings
In January and March 1997, respectively, the Company privately placed
$200 of 8.14% Capital Securities, Series A and $100 of 8.285% Capital
Securities, Series B. Net proceeds of $297 were invested until closing of
the Chubb Life acquisition, in major part by reducing short-term
borrowings under JP's ongoing commercial paper program. The Capital
Securities mature in the year 2046. However, they are redeemable prior to
maturity at the option of the Corporation beginning January 15, 2007. The
Capital Securities are supported by subordinated indebtedness of the
Corporation.
In April and June 1997, the Company issued Mandatorily Exchangeable
Debt Securities (referred to as MEDS) of $75 at 6.95% and $75 at 6.65%,
respectively. The MEDS are based on NationsBank Corporation common
stock. Annual interest is payable quarterly. The MEDS mature January
10, 2002 and represent senior indebtedness of the Corporation.
-7-
<PAGE>
The 6.95% MEDS issued in April had a principal amount of $55.55 per
security. Two weeks prior to, or at, maturity, the principal amount of the
MEDS will be mandatorily exchanged into either (1) a number of shares
of the common stock of NationsBank (stock) determined based on an
exchange rate reflecting the then trading price for the stock or (2) cash in
an amount of equal value, at the Company's option. Subject to
adjustments to reflect dilution, the exchange rate is equal to (1) 0.8264
shares if the stock price is at least $67.22, (2) a fractional share of the
stock having a value equal to $55.55 if the price is more than $55.55 but
less than $67.22 or (3) one share if the price is not more than $55.55.
The 6.65% MEDS had a principal amount of $66.625 per security. Two
weeks prior to, or at, maturity, the principal amount of the MEDS will be
mandatorily exchanged into either (1) a number of shares of the common
stock of NationsBank Corporation (stock) determined based on an
exchange rate reflecting the then trading price for the stock or (2) cash in
an amount of equal value, at the Company's option. Subject to
adjustments to reflect dilution, the exchange rate is equal to (1) 0.8264
shares if the stock price is at least $80.62, (2) a fractional share of the
stock having a value equal to $66.625 if the price is more than $66.625 but
less than $80.62 or (3) one share if the price is not more than $66.625.
The MEDS and the Automatic Common Exchange Securities (ACES) issued
during 1995 are collectively referred to as "Exchangeable Securities".
4. Contingent Liabilities
Jefferson-Pilot Life Insurance Company is a defendant in a proposed class
action suit alleging deceptive practices, fraudulent and negligent
misrepresentation and breach of contract in the sale of certain life
insurance policies using policy performance illustrations which used then
current interest or dividend rates and insurance charges and illustrated that
some or all of the future premiums might be paid from policy values rather
than directly by the insured. The claimant's actual policy values exceeded
those illustrated on a guaranteed basis, but were less than those illustrated
on a then current basis due primarily to the interest crediting rates having
declined along with the overall decline in interest rates in recent years.
Unspecified compensatory and punitive damages, costs and equitable
relief are sought. While management is unable to make a meaningful
estimate of the amount or range of loss that could result from an
unfavorable outcome, management believes that it has made appropriate
disclosures to policyholders as a matter of practice, and intends to
vigorously defend its position.
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, but could have a material
adverse effect on the results of operations for a specified period.
5. Accounting Pronouncements
In February 1997 the FASB issued SFAS 128, "Earnings per Share",
which is effective for financial statement periods ending after December
15, 1997. SFAS 128 simplifies and increases comparability of earnings
per share calculations. The Company will adopt the new pronouncement
in the fourth quarter of 1997, at which time earnings per share calculations
for all periods presented will be restated to conform to SFAS 128.
Management does not expect the pronouncement to have a material impact
on reported per share amounts.
-8-
<PAGE>
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income", which is effective for fiscal years beginning after December 15,
1997. SFAS 130 sets standards for the reporting and display of
comprehensive income and its components in financial statements.
Application of the new rules will not impact the Company's financial
position or net income. The Company expects to adopt this
pronouncement in the first quarter of 1998, which will include the
presentation of comprehensive income for prior periods presented for
comparative purposes, as required by SFAS 130. The primary element of
comprehensive income applicable to the Company is changes in
unrealized gains and losses on securities classified as available for sale.
Also in June 1997, the FASB issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". This
pronouncement is effective for annual periods beginning after December
15, 1997, and for interim periods beginning in the following year. SFAS
131 requires disaggregated disclosures based on internal segments used by
a company in managing its business. Adoption will not impact the
Company's financial position or results of operation, but will require
additional footnote disclosures and may affect the presentation of
operating earnings by business segment.
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<PAGE>
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, 1997, 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, 1997 as compared to the same
periods ended September 30, 1996. This discussion supplements
Management's Discussion and Analysis in Form 10-K for the year ended
December 31, 1996, 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.
Company Profile
The Company (also referred to as JP) has two business segments:
Insurance and Communications. Within the Insurance segment, JP offers
Individual Life Insurance Products, Annuity and Investment Products, and
Group Insurance Products through the following subsidiaries: Jefferson-
Pilot Life Insurance Company (JP Life), Alexander Hamilton Life
Insurance Company of America (AH Life), First Alexander Hamilton Life
Insurance Company (FAHL), and recently acquired Chubb Life Insurance
Company of America (Chubb Life) and its subsidiaries, Chubb Colonial
Life Insurance Company (Colonial) and Chubb Sovereign Life Insurance
Company (Sovereign). Within the Communications business segment, JP
operates television and radio broadcasting stations and provides sports and
entertainment programming. These operations are conducted through
Jefferson-Pilot Communications Company (JPCC) and its subsidiaries.
Acquisition Summary
On May 13, 1997, the Company acquired Chubb Life and subsidiaries
(collectively referred to as "Chubb Life"). The discussion of this
acquisition and its financing contained in Note 2 on page 6 is incorporated
herein by reference.
In January 1997, JPCC acquired the assets of KQKS-FM in Denver for
$15 in cash.
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<PAGE>
RESULTS OF OPERATIONS
In the following discussion "operating income" means income from
operations before realized investment gains, but after dividends on Capital
Securities and mandatorily redeemable preferred stock, except where
otherwise indicated.
The following tables illustrate JP's results and earnings per share before
and after the inclusion of realized investment gains.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Consolidated Summary of Income
Operating income $75.1 $63.8 $219.2 $191.3
Realized investment gains, net 4.1 10.3 70.5 25.3
----- ----- ------ ------
Net income available to
common stockholders $79.2 $74.1 $289.7 $216.6
===== ===== ====== ======
Consolidated Earnings Per Share
Operating income $1.06 $ .90 $ 3.10 $ 2.69
Realized investment gains, net .06 .14 .99 .35
----- ----- ------ ------
Net income available to
common stockholders $1.12 $1.04 $ 4.09 $ 3.04
===== ===== ====== ======
Net Realized Investment Gains
Common stocks $ 1.3 $13.7 $100.0 $ 37.5
Bonds and preferred stocks 5.2 2.0 1.1 (.2)
Other (1.1) .1 6.6 1.3
----- ----- ------ ------
Total investment gains 5.4 15.8 107.7 38.6
Less applicable taxes 1.3 5.5 37.2 13.3
----- ----- ------ ------
Net realized investment gains $ 4.1 $10.3 $ 70.5 $ 25.3
===== ===== ====== ======
</TABLE>
Net income available to common stockholders increased 6.9% over the
prior year's third quarter to $79.2 and 33.7% over the prior year's first
nine months to $289.7. Operating income increased 17.7% to $75.1 for
the quarter and 14.6% to $219.2 for the nine months, due to increased
profitability in the Insurance segment. These results were achieved in
spite of declines in earnings in the Group Products class. Excluding the
earnings impact of the Chubb Life acquisition and related financing costs
as well as the Group Products earnings, operating income increased
6.3% over the third quarter of 1996 and 12.5% over the first nine months
of 1996.
Net realized gains increased approximately $45.2 over the prior year nine
months due to sales of investments to finance the acquisition of Chubb
Life.
Net income available to common stockholders reflects dividends on
Capital Securities, Series A and B, issued during the first quarter of 1997,
of $6.1 for the third quarter and $15.8 for the nine months. In addition,
dividends on mandatorily redeemable preferred stock of $2.8 were paid in
the first nine months of 1997 compared to $2.6 in 1996.
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<PAGE>
Earnings per share increased 7.7% and 34.5% for third quarter and the
first nine months of 1997, respectively, over the corresponding periods of
1996, due to the Chubb Life acquisition, the increased profitability and
realized gains noted above, and the reacquisition of shares in the third
quarter of 1996. Average shares outstanding during the first nine months
of 1997 declined 0.5% from the first nine months of 1996, due to the share
repurchase. On an operating income basis, earnings per share increased
17.8% and 15.2% for the third quarter and first nine months of 1997,
respectively, over the corresponding periods of 1996, due primarily to
improved operating results in the Insurance segment, including the impact
of the Chubb Life acquisition.
The increase in net investment income over the prior year of 28.9% for the
third quarter and 22.3% for the nine months was achieved principally
through the growth in invested assets, arising from the acquisition of
Chubb Life and from policyholder contract deposits. The increase in
other revenue for the third quarter and the year-to-date relates primarily to
revenues of Chubb Life's broker-dealer subsidiary.
Income tax provisions increased by 2.5% and 37.5% for the quarter and
the nine months ended September 30, 1997, respectively, compared to the
same periods in 1996 in correlation with the improvement in overall
results, including high realized investment gains during the first six
months of 1997. Effective tax rates remained relatively unchanged for all
periods presented.
A more detailed discussion of operating results by segment and product
follows.
Operating Earnings by Business Segment
Earnings on investments of the parent company, dividends on preferred
stock and Capital Securities, parent company operating expenses, interest
expense and consolidation entries are included in the "Other" category.
Substantially all corporate capital is allocated to the business segments.
The following table illustrates JP's results by segment and product class.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Consolidated Summary of Income
by Segment and Classes of Products
Insurance segment:
Individual Products $60.2 $37.1 $154.3 $111.5
Annuity and Investment Products 16.0 17.9 53.5 47.9
Group Products 2.1 5.5 12.4 20.6
----- ----- ------ ------
78.3 60.5 220.2 180.0
Communications segment 5.7 5.8 18.2 20.8
Other (8.9) (2.5) (19.2) (9.5)
----- ----- ------ ------
Operating income 75.1 63.8 219.2 191.3
Realized investment gains, net 4.1 10.3 70.5 25.3
----- ----- ------ ------
Net income available to
common stockholders $79.2 $74.1 $289.7 $216.6
===== ===== ====== ======
</TABLE>
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<PAGE>
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 a regional
marketing network, home service agents and financial institutions.
Operating results were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums, considerations,
and other income $193.6 $115.7 $476.0 $349.4
Net investment income 172.7 116.6 447.8 343.7
------ ------ ------ ------
Total revenues 366.3 232.3 923.8 693.1
Policy benefits 204.0 129.9 506.0 384.2
Expenses 69.8 45.3 181.1 139.2
------ ------ ------ ------
Total benefits and expenses 273.8 175.2 687.1 523.4
------ ------ ------ ------
Operating income before income taxes 92.5 57.1 236.7 169.7
Provision for income taxes 32.3 20.0 82.4 58.2
------ ------ ------ ------
Operating income $ 60.2 $ 37.1 $154.3 $111.5
====== ====== ====== ======
</TABLE>
Individual Products operating income increased $23.1 or 62.3% over the
third quarter of 1996 and $42.8 or 38.4% compared to the first nine
months of 1996. Excluding the Chubb Life acquisition, internal growth
resulted in operating income increases over the prior year of 6.7% and
10.4% for the third quarter and first nine months, respectively.
Excluding the impact of the Chubb Life acquisition, new first-year life
insurance premiums and receipts for policyholder accounts for the first
nine months of 1997 decreased $34.6 or 18.4% from the prior year nine
months, primarily due to a large bank owned life insurance case written in
1996. Renewal and single life premiums increased 4.8%, excluding
Chubb Life, for the first nine months of 1997. Including Chubb Life, total
premiums and receipts for policyholder accounts for life products
increased 48.4% to $767.3 for the first nine months of 1997.
Net investment income in 1997 increased $56.1 or 48.1% for the third
quarter and $104.1 or 30.3% for the first nine months, consistent with the
increase in policyholder fund balances and the acquisition of Chubb Life.
Average policyholder fund balances of interest sensitive products,
excluding Chubb Life, of $4,235 for the first nine months of 1997
represent an 8.8% increase over the $3,893 of average fund balances for
the same period in 1996.
Policy benefits, excluding Chubb Life, increased $4.6 or 3.5% over the
prior third quarter and $7.3 or 1.9% for the nine months. Increases in fund
balances resulted in interest credited to policyholder funds increasing $5.7
or 9.5% for the quarter and $16.3 or 9.4% for the nine months. While
death benefits for the third quarter were 0.1% higher than in 1996, year-to-
date death benefits declined 2.2%. In addition, surrender benefits on
traditional coverages have declined from the prior year by 16.8% and
14.6% for the quarter and the nine months, respectively, due to better
persistency in the career distribution channel and in the block of business
assumed from Kentucky Central Life (KCL) in 1995.
Excluding Chubb Life, 1997 expenses were down $11.4 or 25.2% for the
third quarter and $19.8 or 14.2% for the nine months. General and
administrative expenses have declined due to efficiencies realized from
the integration of purchased businesses. Amortization of deferred
acquisition costs on the KCL block declined $10.7 or 31.1% for the first
nine months, due to improved persistency in the block.
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<PAGE>
Annuity and Investment Products
Annuity and Investment Products (also referred to as the AIP business
segment) offers its products through financial institutions, independent
agents, career agents, investment professionals and broker-dealers.
Operating results were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums, considerations,
and other income $ 23.1 $ 7.4 $ 47.9 $ 59.6
Net investment income 111.4 95.2 326.7 279.9
------ ------ ------ ------
Total revenues 134.5 102.6 374.6 339.5
Policy benefits 86.0 65.6 242.0 236.4
Expenses 23.2 9.5 49.7 30.1
------ ------ ------ ------
Total benefits and expenses 109.2 75.1 291.7 266.5
------ ------ ------ ------
Operating income before income taxes 25.3 27.5 82.9 73.0
Provision for income taxes 9.3 9.6 29.4 25.1
------ ------ ------ ------
Operating income $ 16.0 $ 17.9 $ 53.5 $ 47.9
====== ====== ====== ======
</TABLE>
Operating income decreased 10.6% or $1.9 from the third quarter of 1996
and increased 11.7% or $5.6 over the first nine months of the prior year.
The addition of the Chubb Life companies did not result in a material
contribution to AIP operating income. However, funding of the Chubb
Life acquisition involved a reallocation of corporate capital which reduced
AIP's net investment income by $0.7 and $1.2, net of tax, for the third
quarter and nine months, respectively. This reduction, along with non-
recurring expenses related to the relocation of back office functions from
Michigan to Greensboro, resulted in the third quarter decline in operating
results over the prior year. For the year-to-date period, favorable
operating income effects from the increase in assets under management
more than offset the third quarter decline. Average assets under
management (net of reinsurance) increased 19.6% to $5,825.4 from the
first nine months of 1996 as a result of internal growth, the third quarter
1996 recapture of a block of periodic payment annuities from affiliates of
Household International, Inc. (Household) and the Chubb Life AIP assets
under management of $355.1.
Fixed annuity receipts for the first nine months of 1997 were $474.7
compared to $412.2 for the same period in 1996. Fixed annuity benefits
and surrenders as a percentage of beginning fund balances were 11.6%
and 10.0% in the first nine months of 1997 and 1996, respectively.
Annuity surrenders may increase as the percentage of the business that can
be withdrawn by policyholders without incurring a surrender charge
increases.
Reported spreads (the difference between yield on the investment portfolio
less interest credited to policyholders) on general account products were
relatively flat compared to the prior year for both the third quarter and
the nine months.
-14-
<PAGE>
Excluding Chubb Life, premiums, considerations and other income
increased $3.8 or 51.4% from the third quarter of 1996 and decreased
$30.3 or 50.8% for the nine months. The year-to-date decline occurred on
record sales of single premium immediate annuities in the first half of
1996 and increased competition in that market in the first half of 1997.
Chubb Life's broker-dealer subsidiary has contributed $17.7 of revenue
since the acquisition. Net investment income increased $16.2 or 17.0%
and $46.8 or 16.7%, for the quarter and year, respectively, as assets under
management increased. Also, the average investment yield increased 4
basis points to 7.44% for the third quarter of 1997 as compared to the
third quarter of 1996. On a year to date basis, average investment yields
were 7.46% in 1997, an improvement of 4 basis points over the yield for
the first nine months of 1996.
Policy benefits, excluding Chubb Life, increased $13.4 or 20.4% for the
third quarter and decreased $5.2 or 2.2% for the nine months, as the
change in policy reserves decreased commensurate with fewer sales of
single premium immediate annuities. This decrease was partially offset by
an increase in credited interest corresponding to higher levels of
policyholder fund balances. Excluding Chubb Life, expenses increased
$1.4 or 14.7% for the quarter and $0.3 or 1.0% on a year to date basis.
General and administrative expenses, excluding Chubb Life, were up $1.4
or 35.7% over the prior year third quarter and were up 21.0% year-to-date
due in part to the relocation of back office functions. Chubb Life
expenses of $19.3 since the acquisition consist primarily of broker/dealer
commissions related to sales of variable rate products.
Group Products
Group Products provides 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums, considerations,
and other income $102.9 $114.4 $333.9 $351.9
Net investment income 11.7 11.8 36.0 35.6
------ ------ ------ ------
Total revenues 114.6 126.2 369.9 387.5
Policy benefits 90.6 97.4 284.2 291.7
Expenses 20.8 20.1 67.0 64.4
------ ------ ------ ------
Total benefits and expenses 111.4 117.5 351.2 356.1
------ ------ ------ ------
Operating income before income
taxes 3.2 8.7 18.7 31.4
Provision for income taxes 1.1 3.2 6.3 10.8
------ ------ ------ ------
Operating income $ 2.1 $ 5.5 $ 12.4 $ 20.6
====== ====== ====== ======
</TABLE>
-15-
<PAGE>
Overall, Group operating income declined $3.4 or 61.8% in the third
quarter of 1997 compared to 1996 as a result of difficult industry
conditions in the accident and health insurance lines. On a year to date
basis, operating income remains behind prior year results by $8.2 or
39.8%. As a percentage of total revenues, operating income was 3.4% for
the first nine months in comparison to 5.3% for the same period in 1996.
Premiums continue to decline due to the competitive environment and as a
result of policy lapses, caused in part by rate increases. For the first nine
months of 1997, policy benefits as a percentage of premiums,
considerations and other income increased to 85.1% from 82.9%.
The favorable mortality trend noted in the first half of 1997 continues to
have a positive impact on life results. Group life and annuity results
improved 6.3% to $2.7 for the third quarter and 36.5% to $9.3 for the first
nine months of 1997. Life premiums increased $1.0 during the nine
months, primarily due to growth in existing cases.
Group accident and health results of $3.1 for the nine months were down
77.5% from the same period of 1996. Third quarter results of $(0.6) were
$3.6 lower than in 1996. Conventional medical coverages continue to be
impacted by increased utilization of health care services and medical
inflation, which escalated during the third quarter. Rate increases have
partially mitigated these factors. Favorable medical experience in
alternatively-funded medical coverages in 1996 has returned to more
typical levels in 1997. Disability results improved slightly over the
second quarter of 1997, but remain below the prior year due to an increase
in the new claims rate and a decrease in the claims termination rate.
Communications
JPCC operates television and radio broadcast properties and produces
syndicated sports and entertainment programming. Operating results
were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Communications revenues $42.7 $40.7 $135.2 $120.2
Net investment income
(interest expense) (.9) (0.6) (4.0) 1.8
------ ------ ------- -------
Total revenues 41.8 40.1 131.2 122.0
Operating costs 28.1 27.0 88.4 79.1
Depreciation and amortization 2.8 2.4 8.7 6.9
General expenses 1.3 1.0 3.4 2.8
------ ------ ------- -------
Total expenses 32.2 30.4 100.5 88.8
------ ------ ------- -------
Operating income before income taxes 9.6 9.7 30.7 33.2
Provision for income taxes 3.9 3.9 12.5 12.4
------ ------ ------- -------
Operating income $ 5.7 $ 5.8 $ 18.2 $ 20.8
====== ====== ======= =======
</TABLE>
Operating income from the Communications segment declined $2.6 or
12.5% compared to the first nine months of 1996. Results for 1997 and
1996 were positively impacted by interest income of $0.3 and $2.6,
respectively, on income tax refunds. Excluding the impact of these
refunds, operating income for the first nine months of 1997 were 1.6%
behind 1996, due to the substantial Olympic and political revenues in
1996. Net investment income in 1997 reflects interest expense on debt to
finance acquisitions made since June 30, 1996, versus income from the tax
refund in 1996. Operating income for the third quarter was 1.7% less than
in 1996, with revenues and expenses increasing primarily due to
acquisitions.
-16-
<PAGE>
Net sale of time for the Radio division increased 20.4% and 24.4% for the
third quarter and first nine months of 1997, respectively. These increases
were the result of acquisitions and a favorable advertising environment.
On a same station basis, adjusting for the effect of the late 1996
acquisitions in San Diego and the early 1997 acquisition in Denver, nine
month Radio revenues are up 9.8% while broadcast cash flows are up
9.2%.
Due to continued strong audience levels and the favorable advertising
environment, Television properties generated a 10.0% increase in
revenues over the third quarter and first nine months of 1996. This trend
is expected to continue at a similar pace. Although cost of sales were up
13.0% consistent with the increase in net sales, operating expenses were
relatively flat on a year-to-date basis resulting in a 22.7% increase in
broadcast cash flow.
Revenue from Sports operations decreased 4.1% over the prior year's first
nine months as a result of non-recurring Olympic revenues realized in
1996. Cost of sales increased 10.2% primarily as a result of producing a
greater number of lower margin events, resulting in a 31.7% decrease in
broadcast cash flow. Third quarter 1997 results were $1.5 below the prior
year, due to non-recurring Olympic programming in 1996.
Total expenses increased 5.9% over the third quarter and 13.2% over the
first nine months of 1996 primarily due to the acquisition of radio
properties and the increase in the number of Sports events. On a year-to-
date basis, expenses as a percent of communications revenues increased
from 73.9% for 1996 to 74.3% for 1997, with the increase attributable to
amortization of intangibles due to acquisitions.
Other
Activities of the parent company and passive investment affiliates,
financing expenses on Corporate debt and debt securities including
Capital Securities and mandatorily redeemable preferred stock, and
federal and state income taxes not otherwise allocated to business
segments are reported in the "Other" category. The following table
summarizes the operating results:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings on investments $ 4.5 $ 4.9 $ 16.8 $15.2
Interest expense on debt and
Exchangeable Securities (9.5) (6.2) (17.9) (18.5)
Operating expenses (3.8) (2.7) (13.5) (11.3)
Federal and state income
tax benefits 6.9 2.3 14.0 7.6
----- ------ ------- ------
(1.9) (1.7) (0.6) (7.0)
Dividends on Capital Securities
and mandatorily redeemable
preferred stock (7.0) (0.8) (18.6) (2.5)
------ ------ ------- ------
Operating income $(8.9) $(2.5) $(19.2) $(9.5)
====== ====== ======= ======
</TABLE>
-17-
<PAGE>
Earnings on investments declined during the third quarter of 1997 due to
investment sales to fund acquisitions. Interest expense and dividends on
Capital Securities and mandatorily redeemable preferred stock increased
for the same reason. Operating expenses represent costs incurred to fund
corporate activities and will fluctuate based on the level of those
activities. Federal and state income tax benefits include the tax
benefits of preferred dividends on Capital Securities, which are recorded
gross of related tax effects.
CONSOLIDATED FINANCIAL POSITION, CAPITAL RESOURCES
AND LIQUIDITY
JP's resources consist primarily of investments related to its Insurance
segment, properties and other assets used in its Insurance and
Communications segments and investments backing corporate capital. The
Investments section reviews the Company's investment portfolio and key
strategies.
Total assets increased $5,256 or 29.9% during the first nine months of
1997. Excluding Chubb Life's total assets of $4,839 as of September 30,
1997, the increase was 2.4%. The 2.4% growth represents cash provided
by operating activities and net financing activities offset by the
consideration paid for Chubb Life and cash dividends paid to
shareholders. Excluding Chubb Life, policyholder fund balances
increased $246 or 2.1% from year end. Asset values also increased during
the nine months due to changes in market values of "available for sale"
investments.
The Insurance segment defers the costs of acquiring new business,
including commissions, certain costs of underwriting and issuing policies,
and agency office expenses. Deferred acquisition costs were $719 at
September 30, 1997, which includes $21 related to Chubb Life, versus
$669 at December 31, 1996, an increase of 7.5%. The balance increased
by $146 for newly capitalized costs and was decreased by amortization of
$68 and by $28 for the effect of net unrealized investment gains and
losses.
Value of business acquired (VOBA) represents the actuarially-determined
present value of future gross profits of each business acquired. This asset
was $661 at September 30, 1997 versus $265 at December 31, 1996, an
increase of $396. VOBA of $482 related to Chubb Life was recorded at
the purchase. Total net amortization for the first nine months of 1997 was
$19 and the asset was further decreased by $67 for the effect of net
unrealized investment gains and losses.
Cost in excess of net assets acquired (goodwill) was $233 at September
30, 1997 and $86 at December 31, 1996. Goodwill of $150 was recorded
as of the Chubb Life purchase date. The pre-Chubb Life goodwill relates
to the acquisitions of AH Life and Communications properties. As of
September 30, 1997 the remaining amortization period of goodwill was 32
years, on a weighted-average basis. Goodwill as a percentage of
stockholders' equity was 8.9% at September 30, 1997 and 3.7% at
December 31, 1996.
JP had reinsurance receivables of $1,230 and $1,185 at September 30,
1997 and December 31, 1996 respectively, and policy loans of $835 and
$879 as of each date, which relate to businesses of AH Life that are 100%
coinsured to Household, in connection with the acquisition of AH Life
from Household in 1995. Household has provided payment, performance
and capital maintenance guarantees with respect to the balances
receivable. JP also had a recoverable of $97 at September 30, 1997 from a
single reinsurer related to a block of business of Chubb Life that is 50%
reinsured. JP and the reinsurer are joint and equal owners of $192 in
securities which support the block.
-18-
<PAGE>
Capital Resources
Stockholders' Equity
JP's capital adequacy is illustrated by the following table:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------ ------
<S> <C> <C>
Total assets $22,818 $17,562
Total stockholders' equity 2,616 2,297
Ratio of stockholders' equity to assets 11.5% 13.1%
</TABLE>
The Company's ratio of capital to assets declined as a result of the
increase in total assets due to the Chubb Life acquisition. Stockholders'
equity includes net unrealized gains on securities of $612 at September 30,
1997 and $501 at December 31, 1996.
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, such as the Chubb Life acquisition,
which would be expected to produce higher returns over time. Such
available invested resources declined substantially with the Chubb Life
acquisition.
The Insurance segment is subject to regulatory constraints. The National
Association of Insurance Commissioners (NAIC) has adopted risk-based
capital (RBC) levels for life insurers, requiring minimum levels of
statutory capital based on formulas related to investment and business
risks. The Company's insurance subsidiaries, including the Chubb Life
companies, currently have statutory RBC levels well above required
levels. The NAIC is in the process of codifying statutory accounting
principles. Based on a preliminary review of the draft accounting
principles currently available, the Company does not expect the
codification to have a materially adverse impact on statutory surplus of its
life insurance subsidiaries.
In managing its capital position, JP measures required capital for each of
its major product lines in a manner similar to methods utilized by
regulatory authorities for RBC requirements. Capital is allocated to
product lines in amounts which management believes are prudent and
necessary to cover all risks inherent in the book of business. Management
also focuses on investment quality and other indications of capital
adequacy, such as operating leverage, capital and surplus ratios and the
ratio of higher risk assets as a percentage of statutory capital and surplus.
Management believes that the ratios it employs are more conservative than
those prevailing in the life insurance industry.
JP Life, AH Life and Chubb Life have been assigned the following ratings
by the following agencies:
<TABLE>
<CAPTION>
JP Life AH Life Chubb Life
<S> <C> <C> <C>
A.M. Best A++ A++ A+
Standard & Poor's AAA AAA AA
Duff and Phelps AAA AAA AAA
Moody's Aa2 Aa3 -
</TABLE>
-19-
<PAGE>
Following the announced acquisition of Chubb Life, A.M. Best, Standard
and Poor's, Moody's, and Duff and Phelps all reaffirmed their ratings for
both JP Life and AH Life.
Debt and Exchangeable Securities
The following table delineates the Company's outstanding debt and
Exchangeable Securities:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------ ------
<S> <C> <C>
Automatic Common Exchange Securities (ACES),
(cost $132) $187 $148
Mandatorily Exchangeable Debt Securities (MEDS),
(cost $150) 145 -
Other 3 -
---- ----
Total long-term 335 148
---- ----
Commercial paper 194 222
Other 53 -
---- ----
Total short-term 247 222
---- ----
Total Exchangeable Securities and other debt $582 $370
==== ====
</TABLE>
In April 1997, the Company privately placed $75 of 6.95% MEDS and in
June 1997, the Company privately placed $75 of 6.65% MEDS. The
discussion of these issuances contained in Note 3 on page 7 is
incorporated herein by reference.
The ACES and MEDS are carried at fair value, which fluctuates based on
the market value of NationsBank stock. Changes in the carrying value of
these securities (which amounted to a year to date increase of $39 for
ACES and a decrease of $5 for MEDS), net of deferred income taxes, are
recorded to net unrealized gains on securities in stockholders' equity.
Chubb Life had outstanding debt of $55 as of the effective date of the
purchase and $56 as of September 30, 1997. Of this amount, $53
represents borrowings on a $60 short-term revolving line of credit with a
bank that facilitates a special insurance funding program for
policyholders.
While the Company has made no commitments for additional financing,
additional securities may be issued to finance acquisitions or for other
corporate purposes.
JP has sold U. S. Treasury obligations under repurchase agreements
involving various counterparties, accounted for as financing arrangements.
Proceeds are used to purchase securities with longer durations as an
asset/liability management strategy.
-20-
<PAGE>
Capital Securities
In January and March 1997, the Company privately placed $200 of 8.14%
Capital Securities A and $100 of 8.285% Capital Securities Series B. Net
proceeds were temporarily invested prior to closing of the Chubb Life
acquisition, in major part by reducing short-term borrowings under JP's
ongoing commercial paper program.
Liquidity
Liquidity requirements are met primarily by positive cash flows from the
operations of insurance subsidiaries and other consolidated subsidiaries.
Overall sources of liquidity are sufficient to satisfy operating
requirements.
Consolidated cash provided by operations for the third quarter and first
nine months of 1997 were $196 and $454, respectively, and $518 and
$825 for the corresponding periods of 1996. Prior year third quarter and
year-to-date cash flows from operations were impacted by cash of
approximately $462 received in conjunction with the retrocession
assumption of periodic payment annuities from Household.
The Company used cash of $758 during the second quarter of 1997 to
purchase Chubb Life. Such amount represents the purchase price less
cash held by Chubb Life at the acquisition date. Exclusive of the $758,
net cash provided/(used) in investing activities was $(191) and $(146) for
the three month and nine month periods ended September 30, 1997,
respectively. For the third quarter and first nine months of 1996, such
amounts were $(199) and $(628), respectively. The variation in the year-
to-date amounts reflects the 1997 liquidation of investments in the months
preceding the Chubb Life acquisition, with the proceeds used to partially
fund the acquisition. The majority of the liquidation process was
completed during 1997's first quarter.
Proceeds from the issuance of securities were $450 for the nine months of
1997 (MEDS of $150 during second quarter and Capital Securities of
$300 during first quarter). Net borrowings/(repayments) from short-term
debt and securities sold under repurchase agreements were $(65) and $37
for the third quarter of 1997 and 1996, respectively. Net
borrowings/(repayments) from short-term borrowing and securities sold
under repurchase agreements were $(111) and $122 for the first nine
months of 1997 and 1996, respectively. The 1997 amounts reflect
maturities of securities sold under reverse repurchase agreements and the
fact that in 1997 cash available for short-term investing was instead used
to pay down short-term borrowings. Cash inflows/(outflows) from
changes in policyholder contract deposits were $(8) and $74 for the third
quarter of 1997 and 1996, respectively, and $105 and $77, respectively,
for the first nine months of each year. Chubb Life contributed $127
toward the 1997 net inflow of policyholder deposits. Cash was used to
pay common dividends of $(85) and $(76) during the first nine months of
1997 and 1996, respectively.
Primary sources of cash from the Insurance segment are premiums, other
insurance considerations, receipts for policyholder accounts, investment
sales and maturities and investment income. Primary uses of cash include
payment of insurance benefits, operating expenses, withdrawals from
policyholder accounts, costs related to acquiring new business, income
taxes and investment purchases.
-21-
<PAGE>
Primary sources of cash from the Communications segment are revenues
from advertising and sports and entertainment production. Primary uses
of cash include payment of agency commissions, cost of sales, operating
expenses and income taxes.
In order to meet the parent company's dividend payments, debt servicing
obligations and other expenses, internal dividends are received from the
subsidiary companies. Total internal cash dividends paid to the parent
company from its subsidiaries during the first nine months were $382 in
1997 and $117 in 1996. JP Life has been the primary source of dividends.
Of the 1997 dividends to JP by its subsidiaries, $219 from JP Life was
specifically to assist in funding the Chubb Life acquisition. 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. Because
of the extraordinary dividends paid by JP Life and Chubb Life during the
second quarter of 1997, any future dividends by these companies through
April 1998 will require regulatory approval. During that period the
Company estimates it will seek regulatory approval for JP Life dividends
of $35. The Company has no reason to believe that such approval will be
withheld.
Cash and short-term investments were $18 and $105 at September 30,
1997 and December 31, 1996, respectively. Additionally, fixed income
and equity securities held by the parent company and non-regulated
subsidiaries were $560 and $483 at September 30, 1997 and December 31,
1996, respectively. These securities, less the $332 (at September 30,
1997) of NationsBank stock which supports the Exchangeable Securities,
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 September 30, 1997 were $10,803.
Year 2000 Conversion Costs
The Company has been analyzing the Year 2000 computer systems
problem since 1995. During the course of this analysis the Company has
ascertained that failure to alleviate Year 2000 systems problems could
result in a material disruption to the Company's operations in the year
2000. A centralized oversight and project management process has been
put into place to facilitate compliance of all Company information systems
prior to the end of 1999. The assessment phase of the Year 2000 effort
(including mainframe and alternative systems) is complete for the majority
of systems and several have been brought into Year 2000 compliance.
The remainder of this effort is expected to be completed over the next
eighteen months utilizing internal and external resources, with remaining
external costs estimated at approximately $10.
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 the various types 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.
-22-
JP held the following carrying amounts of investments:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
-------- --------
<S> <C> <C> <C> <C>
Publicly-issued bonds $11,212 63.3% $ 8,249 57.9%
Privately-placed bonds 2,416 13.7 2,249 15.8
Commercial mortgage loans 1,587 9.0 1,323 9.3
Common stock 893 5.0 906 6.4
Policy loans 1,410 8.0 1,212 8.5
Preferred stock 44 0.2 75 0.5
Real estate 73 0.4 75 0.5
Cash and other invested assets 64 0.4 159 1.1
------- ----- ------- -----
Total $17,699 100.0% $14,248 100.0%
======= ===== ======= =====
</TABLE>
The strategy of identifying market sectors and niches that provide
investment opportunities to meet the portfolios' growth, quality and yield
requirements is expected to continue to result in increasing percentages of
private placements and commercial mortgage loans, which as a percentage
of total investments declined in 1997 due to the Chubb Life acquisition.
Carrying amounts of investments categorized as "higher risk" assets were:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
-------- --------
<S> <C> <C> <C> <C>
Bonds near or in default $ 2 0.0% $ 12 0.1%
Bonds below investment grade 690 3.9 432 3.1
Mortgage loans 60 days
delinquent or in foreclosure 6 - 9 -
Mortgage loans restructured 13 0.1 14 0.1
Foreclosed properties 6 - 3 -
------- ----- ------- -----
Sub-total, higher risk assets 717 4.0 470 3.3
All other investments 16,982 96.0 13,778 96.7
------- ----- ------- -----
Total cash and investments $17,699 100.0% $14,248 100.0%
======= ===== ======= =====
</TABLE>
The level of below investment grade bonds, which has increased slightly
during 1997, is within the maximum limitations authorized by the Finance
Committee. JP attempts to identify well structured private placements
offering enhanced yields and public non-investment grade bonds in the
highest tier of ratings just below investment grade.
The investment policy permits the use of derivative financial instruments
such as futures contracts and interest rate swaps in conjunction with
specific direct investments. The Company uses interest rate swaps to
protect against interest rate fluctuations, to modify the interest
characteristics of certain blocks of annuity contracts, and, on occasion, to
protect against yield curve changes between identifying and closing
mortgage loan and private placement investments. As in all investments,
the Company is exposed to credit risks when entering into swap
agreements. The Company limits credit risk by entering into agreements
with multiple counterparties having high credit ratings. The Company's
actual use of derivative financial instruments has been limited, using them
to manage well-defined interest rate risks. Interest rate swaps with a
notional value of $201 and $254 were open as of September 30, 1997 and
December 31, 1996, respectively. Termination of these arrangements
under then current interest rates would result in a potential gain of $3.
The periodic cash settlements under these arrangements are reflected as an
adjustment to investment income.
-23-
<PAGE>
JP sells call options on selected common stock holdings to reduce the
market risk of these equities and as an additional source of investment
returns. Premiums received from these options are applied to reduce the
basis of the shares called or are recorded as investment income upon
expiry. The Policy permits a portfolio up to $50 in trading securities
shares for the primary purpose of writing covered call options to enhance
returns. Considerations received were $2 in the first nine months of 1997
and $7 for the year ended December 31, 1996. Currently this program is
not being utilized.
Collateralized Mortgage Obligations (CMO's) were:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
-------- --------
<S> <C> <C>
Available for sale, at fair value:
Federal agency issued CMO's $2,307 $2,059
Corporate private-labeled CMO's 1,421 913
------ ------
Total $3,728 $2,972
====== ======
</TABLE>
The Company's investment strategy with respect to CMO's focuses on
actively-traded, less volatile issues that produce relatively stable cash
flows. The majority of CMO holdings are sequential tranches of federal
agency issuers. Chubb Life had CMO's of $783 at September 30, 1997,
resulting in the overall increase since year end 1996. The CMO 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.
Due to the high quality and liquid nature of these investments, the
Company believes that the impairment risks associated with these
securities are no greater than those applicable to direct agency or
corporate issues.
Asset/Liability Management
The asset/liability management process focuses primarily on the
management of interest rate risk. JP monitors the duration (a measure of
sensitivity to interest rate changes) of insurance liabilities compared to the
duration of assets backing the insurance lines. Responsibility for this
monitoring lies with JP's Asset/Liability Management Committee, which
monitors and refines the portfolio with a goal of prudently balancing
profitability and risk. Separate asset portfolios have been established for
different insurance products. The Company also considers the timing of
the cash flows arising from the assets and liabilities under different
interest rate scenarios.
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 1996 Form 10-K. Reference is made to
the earlier discussion of the NAIC's initiative to codify statutory
accounting principles (see Capital Resources).
-24-
<PAGE>
Consolidation in the life insurance industry is expected to continue, and
there is an increasing possibility of federal legislation in 1998 that would
allow banks, insurance companies and investment banks to affiliate.
During the third quarter of 1997, ten year U.S. Treasury rates decreased
approximately 37 basis points after having remained relatively flat for the
first six months of the year. As a result, unrealized gains on fixed income
securities increased during the third quarter. Further, throughout the first
nine months of 1997, competitive forces in the fixed income markets have
resulted in compression of risk premiums over Treasury securities that can
be earned on new investments. In a falling interest rate environment, the
risk of prepayment on some fixed income securities increases, causing
funds to be reinvested at lower yields. The Company limits this risk by
concentrating the bond portfolio on non-callable securities and through
careful selection of CMO's that are structured to minimize cash flow
volatility. In addition, the Company reviews interest crediting rates, at
least on an annual basis. Where appropriate, the Company adjusts
crediting rates to reflect the yield of its investment portfolio and its
assumptions for pricing and profitability and to prudently match assets and
liabilities. As is typical in the industry, the Company's life and annuity
products contain minimum rate guarantees regarding interest credited. For
interest sensitive life products the minimum rates range from
approximately 4.0% to 6.0%, with an approximate weighted average of
4.5%. For annuity products, the minimum rates range from 3.0% to 5.5%,
with the greatest concentration in the 3.5% to 4.0% range.
Falling interest rates can also impact demand for the Company's products,
as bank certificates of deposit with no surrender charges and higher
average returns from equity markets may become more attractive to
potential customers as well as to existing policyholders.
Accounting Pronouncements
See Note 5 on page 8, which is incorporated herein by reference.
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
JP are or may be viewed as forward looking. Although the Company has
used appropriate care in developing any such forward looking
information, forward looking information involves risks and uncertainties
that could significantly impact actual results. These risks and
uncertainties include, but are not limited to, the matters discussed in
"External Trends and Forwarding Looking Information" and other risks
detailed from time to time in the Company's SEC filings; to the risks that
the business and/or operations of Chubb Life may deteriorate due to the
acquisition, and that JP might fail to successfully complete synergistic
strategies for cost reductions and for growth in sales of products of Chubb
Life and other insurance subsidiaries through all existing and acquired
distribution channels; and more generally, to: general economic
conditions; competitive factors, including pricing pressures, technological
developments, new product offerings and the emergence of new
competitors; interest rate trends and fluctuations; and changes in federal
and state laws and regulations, including, without limitation, changes in
financial services industry or tax laws and regulations. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future developments or
otherwise.
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<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
or liquidity of the Company, but could have a material adverse effect on
the results of operations for a specified period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) (iii) Employment Agreement between the Registrant and David
A. Stonecipher, President and Chief Executive Officer,
effective September 15, 1997.
(27) Financial Data Schedule
(b) Reports of Form 8-K
The following reports on Form 8-K were filed during the third quarter of
1997:
(i) For May 13, 1997, Form 8-K/A-1 providing pro-forma financial
statements related to the Chubb Life acquisition.
(ii) For February 23, 1997, Form 8-K/A-1 updating Item 7, Exhibit 2
because the Registrant no longer seeks confidential treatment for
certain provisions of the Stock Purchase Agreement previously
redacted. A corresponding amendment to the Form 10-K for
1996 was also filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERSON-PILOT CORPORATION
By (Signature) /s/Dennis R. Glass
(Name and Title) Dennis R. Glass, Executive Vice President,
Chief Financial Officer and Treasurer
Date November 14, 1997
By (Signature) /s/Reggie D. Adamson
(Name and Title) Reggie D. Adamson, Senior Vice President-Finance
(Principal Accounting Officer)
Date November 14, 1997
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<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), made and entered into
as of the 15th day of September, 1997 (the "Effective Date"), by and
between DAVID A. STONECIPHER, an individual resident of the
State of North Carolina ("Stonecipher"), and JEFFERSON-PILOT
CORPORATION, a North Carolina corporation (the "Company");
W I T N E S S E T H :
WHEREAS, Stonecipher is employed by the Company
pursuant to that certain Employment Agreement, dated August 11,
1992 (the "Prior Agreement"); and
WHEREAS, the Company and Stonecipher wish to enter into
this Agreement to supersede the Prior Agreement in its entirety;
NOW, THEREFORE, in consideration of the premises and
the mutual promises and agreements contained herein, the parties
hereto, intending to be legally bound, hereby agree as follows:
Section 1. Employment.
(a) Employment. The Company hereby
employs Stonecipher as the Company's President and Chief
Executive Officer. (The Company and its subsidiaries are referred to
herein collectively as "JP.") Stonecipher shall be the principal
executive officer of the Company, having responsibility for and
authority over the conduct of the business and operations of JP,
subject only to the control of the Company's Board of Directors and
applicable law.
(b) Duties. Stonecipher shall render full-
time services to the Company and devote his best efforts to the
performance and discharge of his duties and responsibilities in a
manner that promotes the best interests of JP. Stonecipher represents
and warrants to the Company that he is not a party to or otherwise
bound by any indenture, agreement, or other instrument which may
in any way restrict or affect him in the performance of his duties
hereunder.
Section 2. Term. The employment of Stonecipher hereunder
shall commence as of the Effective Date and shall continue until the
earlier of (a) December 31, 2002, or (b) the occurrence of any of the
following events:
(i) The death of Stonecipher or the
Company's termination of Stonecipher's employment hereunder by
reason of Stonecipher's total disability (total disability meaning (for
purposes of this Section 2(b)(i) and Sections 4.1(c), 4.2 and 5.6
hereof) the inability of Stonecipher (as determined by a physician
proposed by the Company and reasonably acceptable to Stonecipher)
to perform substantially all of his normal activities as the Company's
Chief Executive Officer for a continuous period of 210 days by
reason of Stonecipher's mental or physical disability);
(ii) The Company's termination of
Stonecipher's employment hereunder, upon prior written notice to
Stonecipher, for "good cause." For the purposes of this Agreement,
good cause for termination of Stonecipher's employment shall exist
only (A) if Stonecipher is convicted of or pleads guilty to any felony
or any act of fraud or embezzlement, or (B) if Stonecipher has
engaged in conduct or activities involving moral turpitude materially
damaging to the property, business or reputation of JP, or (C) if
Stonecipher breaches this Agreement in any material respect and fails
to cure said breach within ten (10) days after notice thereof from the
Company or any representation or warranty made by him in this
Agreement shall be incorrect in any material respect, or (D) if
Stonecipher persistently fails or refuses to obey any written direction
of the Company's Board of Directors not inconsistent with this
Agreement, or (E) if Stonecipher embezzles or knowingly, and with
intent, misappropriates, any property of JP or unlawfully appropriates
any corporate opportunity of JP;
(iii) (A) The Company's termination
of Stonecipher's employment hereunder, effective thirty (30) days
after written notice of termination is given to Stonecipher, in the
absence of any circumstance constituting good cause, or (B)
Stonecipher's termination of his employment hereunder, effective
thirty (30) days after written notice of termination is given to the
Company, in the absence of any circumstance described in Section
2(b)(iv) hereof.
(iv) Stonecipher's termination of his
employment hereunder, effective thirty (30) days after written notice
of termination is given to the Company, if, prior to the giving of such
notice, (A) a "Change of Control of the Company" (as hereinafter
defined) has occurred, (B) Stonecipher is not reelected or is removed
as the President and Chief Executive Officer of the Company, (C)
Stonecipher is not reelected or is removed as a Director of the
Company, (D) any action is taken by the Company or the Board of
Directors of the Company that has the effect of divesting Stonecipher,
or materially interfering with the exercise by Stonecipher, of
authority as the principal executive officer of the Company to
supervise and control the management of JP (subject only to the
control of the Board of Directors of the Company and applicable law,
it being acknowledged by Stonecipher that as President and Chief
Executive Officer he shall at all times be subject only to the control
of the Company's Board of Directors and applicable law and that the
exercise of such control by the Board of Directors shall not be
considered as action that is proscribed by this Section 2(iv)(D)), (E)
the Company breaches this Agreement in any material respect and
fails to cure such breach within ten (10) days after notice thereof
from Stonecipher or any representation or warranty of the Company
in this Agreement shall be incorrect in any material respect, or (F) the
Company fails to obtain the assumption of this Agreement by any
successor to the Company or its business (whether by merger,
consolidation, transfer of assets, or otherwise). For the purposes
hereof, a "Change of Control of the Company" shall be deemed to
have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act")) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing twenty-five (25%) percent or
more of the combined voting power of the Company's then
outstanding securities; (ii) at any time a majority of the Board of
Directors of the Company consists of individuals whose nominations
for election by the Company's stockholders were reasonably opposed
by Stonecipher; (iii) the Company or Jefferson-Pilot Life Insurance
Company shall sell substantially all of its assets in a transaction that
was opposed by Stonecipher; (iv) there shall be consummated any
consolidation or merger of the Company that was opposed by
Stonecipher and in which the Company is not the continuing or
surviving corporation or as a result of which the holders of the
Company's capital stock immediately prior to the consummation of
the transaction do not have substantially the same proportionate
ownership of such capital stock immediately after consummation of
the transaction; or (v) the shareholders of the Company approve any
plan or proposal for the liquidation or dissolution of the Company.
Section 3. Compensation: Expenses.
3.1 Base Salary. Stonecipher shall be paid a salary
(the "Base Salary") during the term of his employment hereunder at
a rate of not less than Nine Hundred Thousand Dollars ($900,000)
per calendar year. The Base Salary shall be paid to Stonecipher in
equal monthly installments, less applicable withholding taxes. The
Base Salary shall be reviewed annually in good faith by the
Compensation Committee of the Board of Directors of the Company,
and may be increased by the Company as deemed appropriate after
such review.
3.2 Annual Bonuses. Not later than ten (10) days
after the meeting of the Compensation Committee of the Company's
Board of Directors on the second Monday in February in each of
calendar years 1998, 1999, 2000, 2001, 2002, and 2003, the
Company shall pay Stonecipher additional cash compensation (less
applicable withholding taxes) with respect to the preceding calendar
year (a "Bonus Year") in an amount computed in accordance with
Section 3.3 hereof.
3.3 Annual Bonus Computation. The additional cash
compensation payable under Section 3.2 hereof with respect to a
Bonus Year shall be in an amount equal to a portion of the Base
Salary for such Bonus Year determined as follows:
(a) JP's income from operations
(disregarding realized capital gains and losses), as reflected in JP's
audited financial statements ("Operating Income"), per share of
common stock for the year immediately preceding the Bonus Year
(the "Prior Year's Operating EPS") shall be subtracted from JP's
Operating Income per share of common stock for the Bonus Year. If
the result is negative, no additional compensation shall be payable,
and no further computation will be necessary.
(b) The amount determined in clause (a)
above shall be divided by the Prior Year's Operating EPS. If the
result is less than 0.05 (that is, the growth in Operating Income per
share is less than 5%), no additional compensation shall be payable,
and no further computation will be necessary.
(c) If the amount determined in clause (b)
above is .05 or greater, the amount shall be obtained by straight line
interpolation between applicable points shown in the table under (d)
below.
(d) The amount determined in clause (c)
above shall be multiplied by the Base Salary for the Bonus Year, and
the result obtained shall be the additional compensation paid to
Stonecipher with respect to such Bonus Year.
In making the foregoing computation, appropriate adjustments shall
be made for any stock splits and dividends, so that the Company's
Operating Income per share of common stock for consecutive years
is properly comparable. Without limiting the foregoing, the
following table illustrates the application of the foregoing provisions:
Percentage Increase in Percentage of Base
Operating Income Per Share Salary Paid as Bonus
less than 5% 0%
5% 30%
10% 55%
15% 110%
more than 15% 110%
Notwithstanding the provisions of this Section 3.3, either Stonecipher
or the Compensation Committee of the Board of Directors of the
Company may propose adjustments to the annual bonus in light of
extraordinary transactions or circumstances that affect materially the
Company's income, and any such adjustment agreed to by both
Stonecipher and the Compensation Committee of the Company's
Board of Directors shall be given effect.
3.4 Adjustment Based on Audited Financial
Statements. The parties acknowledge that the Company's audited
financial statements might not be available when the annual bonuses
under Section 3.2 and 3.3 above are to be calculated and paid. In that
event the annual bonus will initially be calculated and paid on the
basis of the Company's internal statements for the Bonus Year. If the
amount of the bonus ultimately determined to be due for any Bonus
Year on the basis of the Company's audited financial statements
differs from the bonus that was initially paid for such Bonus Year,
Stonecipher shall promptly refund the amount of any excess, or the
Company shall promptly pay Stonecipher an additional amount equal
to any deficiency.
3.5 Death. If Stonecipher dies while employed
hereunder, the amount of the additional compensation that would
have been paid to him under the applicable provisions of Sections 3.2
through 3.4 hereof with respect to the calendar year during which his
death occurred shall be multiplied by a fraction, the numerator of
which is the number of months in such calendar year prior to the
month during which his death occurred, and the denominator of
which is 12. The dollar amount so obtained shall be paid to
Stonecipher's wife, or to such different person as Stonecipher
designates in writing.
3.6 Expenses. The Company shall reimburse
Stonecipher for all reasonable business expenses (including costs
associated with Stonecipher's obtaining and maintaining membership
in business and social clubs reasonably acceptable to the Company)
incurred by Stonecipher in the course of performing his duties
hereunder, provided that such expenses are itemized and presented to
the Company in writing in a form then prescribed by the Company in
its general policies relating to reimbursement of employee business
expenses.
Section 4. Additional Employment Benefits.
4.1 Insurance Coverage
(a) Health. The Company shall provide
Stonecipher with the same health insurance coverage as is provided
to other senior executives as a group from the date of his termination
of employment with his prior employer through the later of age 65 or
the date such coverage ordinarily terminates for senior executives as
a group. The Company's obligation to provide such coverage shall
include (i) payment of the cost (excluding premiums and copayments
in the amount ordinarily paid by senior executives) of Stonecipher's
participation in the group health plan maintained by the Company,
(ii) payment of any COBRA premiums required to provide coverage
during any waiting period under the Company's existing group health
plan, (iii) payment of any expenses incurred for medical treatment
that is not covered under the Company's group health plan because
of a pre-existing condition clause, (iv) waiver of any service
requirements for eligibility for post-retirement coverage, and (v)
payment of the cost to age 65 of a conversion policy providing
coverage substantially similar to the coverage under the Company's
group health plan, in the event that coverage under the Company's
group health plan terminates before age 65.
(b) Life. The Company shall provide
Stonecipher with group life insurance coverage in an amount equal
to at least one and one-half times the amount of the Base Salary in
effect from time to time during employment, plus life insurance
coverage after termination of his employment in an amount that is in
keeping with the Company's customary plan for senior executives and
is equal to at least one-half of the amount of Stonecipher's Company
provided coverage on the date his employment terminates. In
addition, Stonecipher shall have the option to purchase additional
coverage during his employment equal to one-half of the Base Salary
in effect from time to time at the employee group rate.
(c) Long Term Disability. The Company
shall provide Stonecipher with an annual long term disability benefit
equal to at least 60% of his Base Salary in effect on the date
Stonecipher's employment terminates because of a total disability.
Such benefit shall be paid in substantially equal monthly installments
starting with the first day of the month following the month in which
his employment terminates and ending with the payment made for the
month immediately preceding the date that retirement benefit
payments commence pursuant to Section 5 hereof. Such benefit shall
be provided in addition to the coverage provided under subsections
(a) and (b) of this Section 4.1.
(d) Other. The Company shall provide
Stonecipher with coverage under any and all insurance plans and
arrangements maintained by JP for its senior executives as a group.
4.2 Stock Options. Simultaneously with the
execution and delivery of this Agreement, the Company shall grant
Stonecipher non-qualified options to purchase 100,000 shares of the
Company's common stock, and on a mutually agreeable date in
January 1998 the Company shall grant Stonecipher non-qualified
options to purchase 100,000 shares of the Company's common stock.
Such options shall be granted under the Jefferson-Pilot Corporation
Stock Option Plan and shall be granted pursuant to documentation
reasonably satisfactory to Stonecipher and the Company, but in any
event shall have an exercise price per share equal to the fair market
value of a share of the Company's common stock on the date of grant,
and shall become exercisable (a) on December 31, 1998, as to options
to purchase 33,333 shares (if Stonecipher's employment has not
previously terminated under Section 2(b)(ii) or Section 2(b)(iii)(B)
hereof), (b) on December 31, 1999, as to options to purchase 33,333
shares (if Stonecipher's employment has not previously terminated
under Section 2(b)(ii) or Section 2(b)(iii)(B) hereof), (c) on
December 31, 2000, as to options to purchase 33,334 shares (if
Stonecipher's employment has not previously terminated under
Section 2(b)(ii) or Section 2(b)(iii)(B) hereof), and (d) on December
31, 2002 (or, if earlier, Stonecipher's death or total disability or a
Change of Control of the Company), as to options to purchase
100,000 shares, if (x) Stonecipher's employment has not previously
terminated under Section 2(b)(ii) or Section 2(b)(iii)(B) hereof and
(y) unless (A) this condition is waived by the Company, or (B)
Stonecipher previously dies or becomes totally disabled, or (C) there
previously has been a Change of Control of the Company,
Stonecipher has served through December 30, 2002 as the Company's
chief executive officer. The exercise period for each such option
shall expire ten years from date of grant (whether or not Stonecipher
is employed). Such documentation also shall provide that
Stonecipher may, but shall not be required to, establish and maintain
a Stock Purchase Savings Account under the plan. The Company
agrees that (and agrees, to the extent necessary, to execute and
deliver amendments to the documentation granting such stock
options, to provide that) (i) with respect to all stock options held by
Stonecipher at the Effective Date, Stonecipher shall be deemed to
have completed his employment contract upon the execution of this
Agreement, so that all such options shall be fully vested on the
Effective Date, (ii) with respect to all stock options granted to
Stonecipher in February 1998 for 1997 performance, Stonecipher
shall be deemed to have completed his employment contract upon the
execution of this Agreement, so that all such options shall be fully
vested at the time they are granted, and (iii) with respect to stock
options granted to Stonecipher after February 1998 that by their terms
fully vest upon the completion of the option holder's employment
contract, Stonecipher shall be deemed to have completed his
employment contract on December 31, 2000 (unless Stonecipher's
employment has previously terminated under Section 2(b)(ii) or
Section 2(b)(iii)(B) hereof).
4.3 Automobile. The Company shall, at no cost to
Stonecipher, provide to Stonecipher a company-owned automobile
(or shall pay the costs associated with Stonecipher's acquiring an
automobile) of a quality reasonably acceptable to the Company. The
Company shall pay, or reimburse Stonecipher for, all costs associated
with operating, maintaining and insuring such automobile, provided
that such expenses are itemized and presented to the Company in
writing in a form then prescribed by the Company in its general
policies relating to reimbursement of employee business expenses.
4.4 Indemnification. With respect to any liability or
expense in any proceeding arising out of Stonecipher's (a) status as
a director, officer, employee or agent of the Company, or (b) service,
at the request of the Company, as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise or as a trustee, committee member or
administrator of an employee benefit plan, the Company shall
indemnify Stonecipher to the maximum extent that the Company
offers indemnification to its directors generally, as the Company's
policy regarding indemnification of directors may be modified from
time to time. Such indemnification shall be provided regardless of
the capacity in which Stonecipher was named in the proceeding (i.e.
whether as director, officer, employee, agent or other capacity
described in the preceding sentence). Expenses incurred by
Stonecipher in connection with any proceeding subject hereto shall
be paid by the Company upon submission of statements therefor,
upon receipt of an undertaking by or on behalf of Stonecipher to
repay such amounts if it ultimately is determined that he is not
entitled to be indemnified by the Company against such expenses.
4.5 Vacation. Stonecipher shall be entitled to five (5)
weeks paid vacation annually in accordance with the Company's
normal vacation policy applicable to senior executive employees.
Section 5. Retirement Benefits.
5.1 Amount. The Company shall pay Stonecipher an
annual retirement benefit that is equal to a percentage of the
"Average Total Compensation." The "Average Total Compensation"
shall be the quotient obtained by dividing three (3) into the sum of
the Base Salary plus the additional compensation paid pursuant to
Sections 3.2 through 3.4 hereof with respect to each of the "Three
Highest Years." The "Three Highest Years" are those three calendar
years of the five calendar years most recently preceding the date of
Stonecipher's termination of employment (which shall include the
calendar year in which Stonecipher's employment terminates if his
employment terminates on the last day of a calendar year) for which
such sum is greatest. Such percentage shall equal 67% in the event
Stonecipher continues to work until he reaches age 65 and, if
Stonecipher's employment terminates before he reaches age 65, such
percentage shall be reduced by two (2) percentage points for each full
year that his termination of employment precedes the date he reaches
age 65. If Stonecipher's termination of employment occurs on a date
other than his birthday, the two (2) percentage point reduction shall
be prorated on a monthly basis.
5.2 Form. (a) Such retirement benefit shall
commence as of the date elected pursuant to Section 5.3 hereof and
shall be paid monthly in the form of a single life annuity over
Stonecipher's life or, at Stonecipher's option, an actuarially equivalent
joint and survivor annuity or actuarially equivalent life annuity over
Stonecipher's life and the life of his designated beneficiary or
beneficiaries with a ten-year period certain benefit for his designated
beneficiary or beneficiaries; provided, however, that Stonecipher
shall have the right to receive all or part of the present value of his
single life annuity (i) in a single lump sum payment, or (ii) in five to
ten annual installments, or (iii) in any combination thereof, as elected
by Stonecipher in Section 5.2(b) hereof or, if he desires to change
such election, as thereafter elected by Stonecipher, provided he files
the election in writing with the Company at least one (1) year before
the date as of which his benefit is otherwise scheduled to commence
pursuant to Section 5.3 hereof. If Stonecipher chooses the
installment payment option in the foregoing clause (ii), then, as of the
date his single life annuity benefit otherwise was scheduled to
commence pursuant to Section 5.3 hereof, the Company shall credit
the present value of his single life annuity which he has elected to
receive in installments to a bookkeeping account maintained by the
Company. The balance in such account shall be increased or reduced
by the Company from time to time (but no less often than the date as
of which each installment is to be paid) to reflect the changes that
would have occurred in the balance in such account if the Company
had invested such amount in the Standard and Poors 500 Index
mutual fund managed by The Vanguard Group, assuming
reinvestment of all distributions that would have been made by such
fund. The first installment payment shall be made as of the first
anniversary of the date on which Stonecipher's single life annuity
benefit otherwise was scheduled to commence pursuant to Section
5.3 hereof and payments thereafter shall be made as of each such
anniversary date thereafter until all installments have been paid, with
subsequent installments being paid to Stonecipher's estate if he dies
before all installments are paid. The amount of each installment
payment shall be equal to the then balance in such account,
multiplied by a fraction, the numerator of which is one (1), and the
denominator of which is one plus the number of subsequent
installment payments to be made. For purposes of this Agreement,
(i) the present value shall be determined by using the insurance
industry's standard 1983 Group Annuity Mortality Table (the
"Table") and an interest rate (the "Rate") equal to the average (for the
365 days prior to payment) yield of ten-year U. S. Treasury Notes (as
reported over such period in The Wall Street Journal or any successor
to such publication) (or, if more favorable to Stonecipher, the group
annuity mortality table and interest rate (before expenses) then in
general use by the Company for the public sale of individual
annuities shall be the "Table" and the "Rate" for purposes hereof),
and (ii) the term "joint and survivor annuity" shall mean an annuity
payable for Stonecipher's life and, if he dies before his survivor
annuitant, a 50%, 75% or 100% survivor annuity payable to such
survivor for such person's life, (iii) the term "life annuity with a ten-
year period certain" shall mean an annuity payable for the life of
Stonecipher and, if Stonecipher dies before payments have been
made for ten years, with continued payments to his designated
beneficiary for the balance of such ten-year period, and (iv) an
actuarially equivalent benefit shall be determined using the Table and
the Rate.
(b) Effective as of the Effective Date, Stonecipher
hereby elects to receive thirty-five percent (35%) of the present value
of his single life annuity in a lump sum payment and thirty-five
percent (35%) of the present value of his single life annuity in ten
installments, with the balance payable as a single life annuity, subject
to offset pursuant to Section 5.4. Such election is subject to change
by Stonecipher as provided in Section 5.2(a).
5.3 Timing. (a) Such retirement benefit shall be paid,
or benefit payments shall commence, in the form elected pursuant to
Section 5.2 hereof, as of the first day of the month immediately
following Stonecipher's 65th birthday; provided, however, that
Stonecipher shall have the right at any age to elect that the payment
of his benefit commence after the later of the date he reaches age 56
or his employment terminates, under Section 5.3(b) hereof or, if he
desires to change such election, as thereafter elected by Stonecipher,
provided such election is filed in writing with the Company at least
one (1) year before his employment terminates. If the payment of
Stonecipher's retirement benefit begins before age 60 pursuant to
such an election, such benefit shall be reduced by three (3%) percent
for each full year that the benefit commencement date precedes
Stonecipher's 60th birthday. In the event that benefits commence as
of a date other than Stonecipher's birthday, the three (3%) percent
reduction factor shall be prorated on a monthly basis. For example,
if Stonecipher terminates employment on his 58th birthday and has
elected to have his benefit payments commence on the first day of the
month thereafter, his retirement benefit will be calculated by
multiplying 94% (a 6% reduction based on benefit commencement
two years before age 60 and the 3% per year reduction factor) by the
retirement benefit calculated under Section 5.1 hereof.
(b) Effective as of the Effective Date, Stonecipher
hereby elects that the payment of his benefits shall commence on the
day his employment terminates. Such election is subject to change by
Stonecipher as provided in Section 5.3(a).
5.4 Offset for Other Retirement Benefits. In the event
that the retirement benefits payable to Stonecipher under the
Retirement Plan of Life Insurance Company of Georgia or other
"defined benefit plans," as defined in Section 3(35) of the Employee
Retirement Income Security Act of 1974, as amended from time to
time ("Defined Benefit Plans"), of Life Insurance Company of
Georgia ("LOG Plans"), and the Jefferson-Pilot Life Insurance
Company Employees' Retirement Plan or other Defined Benefit Plans
of JP ("J-P Plans") are paid in the same form and at the same time as
the retirement benefits under this Section 5, then the annual benefit
payable under Section 5 hereof each year shall be offset by the dollar
amount paid to Stonecipher under the LOG Plans and the J-P Plans
in such year. In the event that the retirement benefits payable under
the LOG Plans and the J-P Plans are not paid in the same form or are
not paid at the same time, then the retirement benefits under this
Section 5 shall be offset by the actuarial equivalent of the benefit
expected to be paid to Stonecipher under the LOG Plans and the J-P
Plans. The actuarial equivalent benefit shall be determined by using
the Table and the Rate.
5.5 Death Benefit. In the event of Stonecipher's death
prior to the commencement of the retirement benefit described in
Section 5.1, the Company hereby agrees to pay a death benefit to
Stonecipher's estate that is equal to the present value of the single life
annuity benefit Stonecipher would have received under Section 5.1
through 5.4 if he had retired on the date of his death, based on the
assumption that Sonecipher had elected under Section 5.2 hereof to
receive his entire retirement benefit in the form of a single life
annuity.
5.6 Disability Benefit. In the event of Stonecipher's
termination of employment as a result of total disability, his
retirement benefit under Section 5 hereof shall be calculated under
Section 5.1, shall be paid in the form elected pursuant to Section 5.2,
and shall be paid at the time elected pursuant to Section 5.3, except
that Stonecipher shall have the right to make an election under
Section 5.3 no later than six (6) months before his employment
terminates, instead of one (1) year before his employment terminates.
5.7 Source of Benefits. The retirement benefits
payable under this Agreement shall be paid by the Company from its
general assets. Stonecipher shall have no right, interest, or claim
whatsoever to the payment of a benefit from any person other than
the Company, and shall have no right or interest whatsoever that is
superior in any manner to the right of any other general and
unsecured creditor of the Company. Stonecipher shall have no right
to assign, alienate, pledge or otherwise encumber the retirement
benefits payable under this Agreement, and any attempt to do so shall
be void.
5.8 Participation in Other Plans. Stonecipher shall
participate in all retirement plans (qualified or non-qualified) and all
deferred compensation arrangements maintained by the Company in
which other senior executives participate as a group.
Section 6. Payments and Other Actions In Certain Events.
(a) If the Company terminates
Stonecipher's employment hereunder pursuant to Section 2(b)(iii) in
the absence of any circumstance constituting "good cause" (as
defined in Section 2(b)(ii)), then the following provisions shall
govern:
(i) Immediately upon the
effectiveness of such termination of employment, the Company shall
make a lump sum cash payment to Stonecipher in an amount equal to
the aggregate Base Salary that would have been paid to Stonecipher
under the terms hereof after the date of termination of employment
through the earlier of December 31, 2002, or the third anniversary of
such termination of employment (based on the assumption that the
Base Salary as in effect immediately prior to the date of termination
was the Base Salary through the earlier of such dates).
(ii) Immediately upon the
effectiveness of such termination of employment, the Company shall
make a lump sum cash payment to Stonecipher in an amount equal to
one-half of the maximum additional compensation that could have
been paid to Stonecipher, pursuant to Sections 3.2 through 3.4, and
pursuant to any long-term incentive compensation plan of the
Company otherwise applicable to Stonecipher immediately prior to
such termination of employment, after the date of termination of
employment had his employment hereunder continued through the
earlier of December 31, 2002, or the third anniversary of such
termination of employment.
(iii) The retirement benefits
provided for in Section 5 hereof shall become payable, and for
purposes of computing Stonecipher's benefits under Section 5.1
hereof, Stonecipher shall be treated as if his employment continued
through December 31, 2002, and such benefits shall be paid to him
at such time and in such form as elected by Stonecipher pursuant to
Sections 5.2 and 5.3 hereof; unless Stonecipher elects during the ten-
day period immediately following the date his employment
terminates to receive the present value (as determined in accordance
with Section 5.2 hereof) of such retirement benefit in a single lump
sum payment, which payment shall be made on the first anniversary
of the last day of such ten-day election period.
(iv) The provisions of Section 4.1
that by their terms apply after termination of Stonecipher's
employment shall apply in accordance with their terms after a
termination or other event to which this Section 6(a) applies.
(v) Any stock options previously
granted under Section 4.2 hereof (other than those referred to in
Section 4.2(d)) shall remain outstanding and shall become
immediately exercisable in full and shall continue to be exercisable
for ten (10) years after date of grant.
(b) If Stonecipher terminates his
employment hereunder pursuant to Section 2(b)(iv), he shall receive
all the payments and benefits described in Section 6(a) above, and if
such termination is pursuant to Section 2(b)(iv)(A) all of the options
granted pursuant to Section 4.2(d) shall immediately vest; provided,
however, that if Stonecipher terminates his employment pursuant to
Section 2(b)(iv)(B), (C) or (D), and the event described in the
applicable Section 2(b)(iv)(B), (C) or (D) occurred as a result of
circumstances constituting "good cause" (as defined in Section 2(b)
(ii)), then Stonecipher shall be entitled to all the payments and
benefits described in Section 6(a) above other than the payment
described in Section 6(a)(ii).
(c) If Stonecipher's employment is
terminated by the Company pursuant to Section 2(b)(ii) for good
cause, Stonecipher shall be entitled to all the payments and benefits
described in Section 6(a) above other than the payment described in
Section 6(a)(ii).
(d) If Stonecipher's employment terminates
pursuant to Section 2(b)(i) as a result of death or total disability,
Stonecipher shall be entitled to no further payments hereunder other
than any unpaid Base Salary (prorated) with respect to services
rendered prior to the effective date of termination, and other than the
benefits described in Sections 3.5 and 5.5 and payments under the life
insurance maintained pursuant to Section 4.1(b) (in the event of
death), or the benefits and payments described in 4.1(a), 4.1(b),
4.1(c), and 5.6 (in the event of total disability). In addition, following
termination of his employment as a result of death or total disability,
Stonecipher shall continue to receive benefits under all insurance
plans and arrangements for which he receives coverage under Section
4.1(d), but only to the extent that the terms of those plans and
arrangements provide for continuation of coverage following
termination of a senior executive's employment as a result of death or
total disability.
(e) Stonecipher shall have no obligation to
seek other employment in the event of termination of his
employment, and no compensation or other benefits received by
Stonecipher from any other employment shall reduce or limit the
Company's obligation to make payments under this Section 6 except
to the extent set forth in Section 5.4.
Section 7. Representations of the Company. The Company
represents and warrants to Stonecipher that (a) this Agreement has
been duly executed and delivered by the Company, (b) the execution,
delivery and performance of this Agreement by the Company has
been duly authorized by all necessary corporate action on the part of
the Company, (c) this Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company
in accordance with its terms, and (d) the execution, delivery and
performance of this Agreement by the Company do not and will not
conflict with, violate, or constitute a breach of or default under, (i)
the Articles of Incorporation or Bylaws of the Company or any of its
subsidiaries, (ii) any provision of law or regulations applicable to the
Company or any of its subsidiaries, (iii) any provision of any
indenture, agreement or other instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or affected, with respect to which any such
conflict, violation, breach or default would render this Agreement
unenforceable or would have a material adverse effect on the
financial condition of the Company or any of its subsidiaries, and (e)
the Company has not received any legal advice contrary to the
representations and warranties set forth in this Section 7.
Section 8. Long-Term Incentive Compensation. The
Company has established a long-term incentive compensation
arrangement for Stonecipher (in addition to the annual bonus
arrangements in Section 3 hereof) that provides for annual incentive
compensation equal to a percentage of Base Salary equal to four (4)
times the compounded annual growth rate in JP's Operating Income
per share over a trailing three-year period, that requires a minimum
compounded annual growth rate of five (5%) percent in order for any
bonus to be paid, and that provides a maximum bonus in the event of
a compounded annual growth rate of fifteen (15%) percent.
Section 9. Confidentiality. All reports, recommendations,
advice, records, documents and other materials, whether written or in
any other media, and all copies thereof' prepared or obtained by
Stonecipher or coming into his possession during the course of his
employment with the Company, which relate to JP, shall be the sole
and exclusive property of JP, and Stonecipher shall, at the end of his
employment with the Company use his reasonable best efforts to
deliver promptly all such materials to JP. Such reports and the
information contained therein shall be and remain the sole property
of the Company. Following the termination of his employment with
the Company, Stonecipher shall not use for his own benefit or for the
benefit of others, nor divulge, furnish or make accessible to anyone
other than JP, its directors and officers, any knowledge or
information coming into Stonecipher's possession during the course
of his employment with JP with respect to the business of JP that is
reasonably considered by the Company's Board of Directors or senior
executives as confidential or secret. It is understood that information
that is publicly known or reported through no breach of this
Paragraph 9 shall not be considered confidential or secret.
Stonecipher expressly agrees that JP shall be entitled to injunctive
and/or other equitable relief to prevent an anticipatory or continuing
breach of this Section 9, or any part of this Section 9, and to secure
its enforcement. Nothing herein shall be construed as a waiver by JP
of any right it may now have or hereafter acquire to monetary
damages by reason of any injury to its property, business or
reputation or otherwise arising out of any wrongful act or omission
of Stonecipher hereunder.
Section 10. Miscellaneous.
10.1 Binding Effect. This Agreement shall inure to
the benefit of and shall be binding upon Stonecipher and his executor,
administrator, heirs, personal representative and assigns, and the
Company and its successors and assigns; provided, however, that
(except as expressly provided herein or in any applicable employee
benefit plans of the Company) neither party hereto may assign any of
its or his rights, or delegate any of its or his duties (except, in the case
of Stonecipher, customary delegation of executive authority not
inconsistent with this Agreement), hereunder without the prior
written consent of the other party.
10.2 Governing Law. This Agreement shall be
deemed to be made in, and in all respects shall be interpreted,
construed and governed by and in accordance with the laws of' the
State of North Carolina.
10.3 Certain Fees and Expenses. The Company shall
pay, following submission of statements therefor, the reasonable fees
and expenses of counsel incurred by Stonecipher in connection with
the negotiation and preparation of this Agreement and the
arrangements contemplated hereby. In the event of any litigation or
dispute arising from a claim brought by Stonecipher under Section 6
of this Agreement, if Stonecipher prevails the Company shall pay, or
reimburse Stonecipher for, all reasonable legal fees and expenses
incurred by Stonecipher in connection with such litigation or dispute.
10.4 Headings. The Section and paragraph headings
contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this
Agreement.
10.5 Notices. Unless otherwise agreed to in writing
by the parties hereto, all communications provided for hereunder
shall be in writing and shall be deemed to be given when delivered in
person or five (5) business days after being sent by first-class mail
and addressed as follows:
(a) If to Stonecipher:
10 Loch Ridge Court
Greensboro, NC 27408
(b) If to the Company, addressed to:
100 North Greene Street
Greensboro, North Carolina 27401
Attention: Corporate Secretary
or to such other person or address as shall be furnished in writing by
any party to the other prior to the giving of the applicable notice or
communication.
10.6 Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed to be an
original but all of which together shall constitute one and the same
instrument.
10.7 Entire Agreement. This Agreement supersedes
the Prior Agreement in its entirety as of the Effective Date. This
Agreement is intended by the parties hereto to be the final expression
of their agreement with respect to the subject matter hereof and is the
complete and exclusive statement of the terms thereof,
notwithstanding any representations, statements or agreements to the
contrary heretofore made. This Agreement may be modified only by
a written instrument signed by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the Effective Date.
JEFFERSON-PILOT CORPORATION
[CORPORATE SEAL]
By:__________________________
Name: _______________________
Title:_______________________
By:__________________________
Name:________________________
Title:_______________________
_____________________________(SEAL)
DAVID A. STONECIPHER
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