UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended Commission File Number
December 31, 1996 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 Green Street, Greensboro, North Carolina 27401
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 910-691-3691
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on Which
Title of Each Class Registered
Common Stock (Par Value $1.25) New York, Midwest and
Pacific Stock Exchange
7.25% Automatic Common Exchange
Securities, Due January 21, 2000,
exchangeable into shares of
NationsBank Corporation common
stock or equivalent cash New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. (x)
Indicate by check mark 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 (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to the filing requirements for at least the past 90 days. Yes X No
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant: approximately $4 billion at March 1, 1997.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at March 1, 1997
Common Stock (Par Value $1.25 per share) 70,758,426
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to
be held May 5, 1997 are incorporated by reference into Part III and Exhibit 13
which excerpts pages 21 through 62 of the annual shareholders report for the
year ended December 31, 1996 are incorporated by reference into Part II.
<PAGE>
TABLE OF CONTENTS
Part I -Page-
Item 1. Business I-1
Item 2. Properties I-6
Item 3. Legal Proceedings I-7
Item 4. Submission of Matters to a Vote
of Security Holders I-7-I-8
Part II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters II-1
Item 6. Selected Financial Data II-1
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations II-1
Item 8. Financial Statements and Supplementary
Data II-1
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure II-2
Part III
Item 10. Directors and Executive Officers of
the Registrant III-1
Item 11. Executive Compensation III-1
Item 12. Security Ownership of Certain Beneficial
Owners and Management III-1
Item 13. Certain Relationships and Related
Transactions III-1
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K IV-1
Undertakings IV-1
Signatures IV-2 -IV-3
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business
Registrant was incorporated under the business laws of the State of North
Carolina in 1968 for the purpose of serving as a holding company with broad
powers to engage in business and to make investments. Registrant's principal
subsidiaries, which are wholly-owned, are Jefferson-Pilot Life Insurance
Company, Jefferson-Pilot Communications Company, of Greensboro, North Carolina
and Alexander Hamilton Life Insurance Company of America, of Farmington Hills,
Michigan. Through these and other subsidiaries, Registrant is primarily engaged
in the business of writing life and accident and health insurance and annuity
policies, operating radio and television facilities, and producing sports
programming. Further detail is provided in Management's Discussion and Analysis
of Financial Condition and Results of Operation.
In October 1995, the Registrant acquired Alexander Hamilton Life Insurance
Company of America and its wholly-owned subsidiary, Alexander Hamilton Capital
Management, Inc., from a subsidiary of Houshold International, Inc (HI). The
acquisition was effective as of October 1, and was completed through the merger
of Alexander Hamilton Life Insurance Company of America into a wholly-owned
Michigan domiciled life insurance subsidiary of the Company, which was thereupon
renamed Alexander Hamilton Life Insurance Company of America (AH Life). First
Alexander Hamilton Life Insurance Company (FAHL), which is domiciled in New
York, was acquired by AH Life effective October 1, 1995. AH Life Periodic
Payment Annuity (PPA) contracts, consisting primarily of structured settlements
and lottery business, and Corporate Owned Life Insurance (COLI), written prior
to the acquisition, as well as certain pre-acquisition credit life, accident and
health and other business written in conjunction with the lending activities of
Household, were 100% reinsured with affiliates of HI on a coinsurance basis. On
September 30, 1996, the Company recaptured a portion of the reinsured block of
business from HI. This transaction was completed by HI transferring
approximately $463 million in assets and reserves of $489 million to "AH
Michigan," a newly formed insurance subsidiary of AH Life.
On May 31, 1995, Jefferson-Pilot Life Insurance Company (JP Life) assumed
certain life insurance and annuity business of Kentucky Central Life Insurance
Company (KCL) in a transaction which was accomplished through an assumption
reinsurance agreement. KCL has operated under the control of the Kentucky
Insurance Commissioner since February 1993. The assumption reinsurance
agreement was part of a plan of rehabilitation for KCL that was approved by the
court of jurisdiction in August 1994 and subsequently appealed. Upon execution
of the agreement, assets consisting primarily of cash, debt securities, policy
loans and receivables with aggregate fair value of $872 million were transferred
to JP Life, and JP Life assumed liabilities with aggregate fair value of $1.096
billion. On November 30, 1996 the Company completed the KCL transaction by
assuming approximately 4,000 additional policies. The Company established
additional reserves of $112 million on these policies, released $78 million
liability established in 1995 and recorded an additional $40 million as deferred
policy acquisition costs.
On December 30, 1994, Jefferson-Pilot Title Insurance Company (JPT), a
wholly-owned subsidiary of the Registrant, entered into a reinsurance agreement
with First American Title Insurance Company (First American) under which JPT
ceded to First American its obligations and liabilities on all policies issued
I-1
<PAGE>
through that date. After the reinsurance agreement became effective, First
American purchased 100% of JPT's common stock.
On December 23, 1994, the
Registrant signed a definitive agreement to sell Jefferson-Pilot Fire & Casualty
Company (JPF&C) to Southern Guaranty Insurance Company, a subsidiary of
Winterthur U.S. Holdings. In preparation for the sale, JPF&C sold a portion of
its securities portfolio in the open market and transferred net assets carried
at approximately $32 million to its immediate parent company. After regulatory
approval, the sale was closed on April 3, 1995. Operations of these two
companies are disclosed as "Discontinued Operations" in the Registrants
Consolidated Financial Statements.
On February 14, 1995, substantially all of the assets and the media
industry data processing operations of Jefferson-Pilot Data Services, Inc.
(JPDS) were sold. Prior to the sale, JPDS was a part of the Company's
Communications business segment.
During 1996 Jefferson-Pilot Communications Company acquired two additional
FM radio stations in San Diego, CA, and in early 1997 it acquired an additional
FM station in Denver.
On February 23, 1997, Jefferson-Pilot Corporation ("JP Corp") signed a
definitive agreement to acquire all outstanding shares of Chubb Life Insurance
Company of America ("Chubb Life"), a New Hampshire Corporation, from The Chubb
Corporation ("Seller").
Chubb Life's life insurance 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, a
New Jersey corporation, and Chubb Sovereign Life Insurance Company, a New
Hampshire corporation. Chubb Life's other subsidiaries include Chubb Securities
Corporation, a full service NASD registered broker dealer.
The Stock Purchase Agreement provides for a purchase price of $875 million,
subject to certain potential adjustments, which are not expected to be material.
Seller has committed to, among other things, maintain a minimum adjusted
statutory capital and surplus of Chubb Life's life insurance operations.
Closing will occur as soon as regulatory approvals are obtained and is expected
to occur in the second quarter.
A dividend of up to $100 million may be paid by Chubb Life to Seller prior to
closing. A portion or all of the funds would be provided through dividends from
Chubb Life's insurance subsidiaries. Any such dividend from Chubb Life, if all
necessary approvals are obtained from state insurance regulators for such
dividends, would reduce the purchase price by the amount of such dividend.
JP Corp expects to finance the purchase primarily through internally available
resources, with approximately 75-80% from liquidation of invested assets, a
securities issuance similar to JP Corp's outstanding 7.25% Automatic Common
Exchange Securities Due January 21, 2000 (as to which the underlying securities
may include NationsBank Corporation and/or other common stocks), and proceeds
from the recently issued 8.14% Capital Securities, Series A. The balance is
expected to be funded from a combination of borrowings and a further issue of
Capital Securities. In excess of $200 million of the after tax proceeds will
come from the sale of securities which are currently held by Jefferson-Pilot
Life Insurance Company, which is applying for approval from the North Carolina
Department of Insurance to pay an extraordinary dividend to JP Corp.
I-2
<PAGE>
The parties to the Stock Purchase Agreement have committed to negotiate in good
faith to develop and enter into a mutually beneficial marketing arrangement that
would make available to JP Corp affiliates the property and casualty agency
distribution and certain bank distribution channels of Seller. These channels
have historically generated approximately 20% of Chubb Life's total production,
with the remainder generated principally by independent agents.
Synergies available from the acquisition are expected to result, when fully
realized over the next two or three years, in annual expense reductions
throughout the combined organization of $40 million (pre-tax). Although the
acquisition is not expected to have any significant effect on 1997 results, JP
Corp anticipates that the transaction will be accretive to earnings per share by
at least 8% when full synergies from both expense reductions and revenue
improvements are achieved net of related financing costs.
It is anticipated that a major base of operations for Chubb Life will be
retained in Concord, New Hampshire.
(b) Financial Information About Industry Segments
Industry segment information is presented in Note 15, Segment Information
of the Notes to Consolidated Financial Statements, which is incorporated by
reference in Item 8.
(c) Narrative Description of Business
Premiums derived from the principal products and services of Registrant's
continuing insurance subsidiaries and revenues from the Communications segment
for the years ended December 31, 1996, 1995, and 1994 are as follows (in
millions):
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Life insurance segment:
Individual life and annuity
premiums $ 179 $ 150 $ 104
Group life premiums 70 68 69
Interest-sensitive product
considerations 310 160 69
Other considerations 28 21 14
Life premiums and other
considerations $ 587 $ 399 $ 256
Accident and health premiums 407 411 399
$ 994 $ 810 $ 655
Communications segment:
Broadcast and media services
revenue $ 187 $ 164 $ 173
</TABLE>
The following is a brief description of the principal wholly-owned
subsidiaries of Registrant with a description of the principal products
provided and services rendered and the markets for, and methods of distribution
of, such products and services.
INSURANCE COMPANY SUBSIDIARIES
Jefferson-Pilot Life Insurance Company, a North Carolina insurance company,
commenced business operations in 1903. It is authorized to write insurance in
I-3
<PAGE>
49 states, the District of Columbia, the Virgin Islands and Puerto Rico. The
Company is primarily engaged in the writing of whole life, term, annuity, and
endowment policies on an individual ordinary basis, and group life and group
accident and health insurance policies. Accident and health insurance is also
written on an individual basis.
AH Life commenced business in 1977. It is authorized to write insurance in
49 states, the District of Columbia and Canada. This company is primarily
engaged in writing annuity and universal life policies.
FAHL began business operations in 1987, and was acquired as of October 1,
1995. It is authorized to write business in New York only and is primarily
engaged in writing annuity policies on an individual basis.
Life Insurance. Life policies offered by the insurance companies include
continuous and limited-pay life and endowment policies, universal life policies
and annuity contracts, retirement income plans, and level and decreasing term
insurance. On most policies, accidental death and disability benefits are
available in the form of riders. At times, substandard risks are accepted at
higher premiums. At December 31, 1996, approximately 3.33% of the ordinary
insurance in force, including reinsurance ceded, was represented by substandard
risks.
The companies market individual products through career and home service
agents, independent marketing organizations (IMO's), and personal producing
general agents (PPGA's). IMO's and PPGA's are intermediaries that sell
financial products and services through agents they have recruited. Group
products are marketed through group brokers, career agents and home service
agents. Individual health products are marketed through all of the Company's
sales forces and brokers.
Accident and Health Insurance. The insurance companies of the Registrant
write substantially all of their accident and health policies on a group
basis.
Group insurance is generally issued to employers covering their employees and to
associations covering their members.
Other Information Regarding Insurance Company Subsidiaries
Regulation. The insurance companies of the Registrant, in common with
other insurance companies, are subject to regulation and supervision in the
states in which they do business. Although the extent of such regulation
varies from state to state, generally the insurance laws establish supervisory
agencies with broad administrative powers relating to the granting and
revocation of licenses to transact business, the licensing of agents, approval
of the forms of policies used, the regulation of trade practices and market
conduct, form and content of required financial statements, reserve
requirements, permitted investments, the approval of dividends and, in
general, the conduct of all insurance activities.
The companies are also required under these laws to file detailed
annual reports with the supervisory agencies in the various states in which
each does business, and business and accounts are subject to examination
at any time by such agencies. Under the rules of the National Association
of Insurance Commissioners (NAIC) and the laws of the states of domicile,
the companies are examined periodically (usually at three-year intervals) by
the supervisory agencies of one or more of the states in which they do
business.
I-4
<PAGE>
Various states, including North Carolina, Michigan and New York, have
enacted insurance holding company legislation which requires the registration
of, and periodic reporting by, insurance companies licensed to transact
business within their respective jurisdictions and which are controlled by
other corporations. JP Life, AH Life and FAHL, as members of an "insurance
holding company system", have registered as such under all applicable state
statutes. In many instances, these statutes require prior approval by state
insurance regulators of intercorporate transfers of assets (including prior
approval of payment of extraordinary dividends by insurance subsidiaries)
within the holding company system, and of acquisitions of insurance companies.
Risk-based capital requirements and state guaranty fund laws are
discussed in the MD&A.
Competition. The insurance subsidiaries of the Registrant operate in a
highly competitive field which consists of a large number of stock, mutual
and other types of insurers. A large number of established insurance
companies compete in the states in which the companies transact business.
Many of these competing companies are mutual companies, which are considered
by some to have an advantage because of the fact that such companies write
participating policies exclusively, under which profits may inure to the
benefit of the policyholder. The companies provide participating policies
which are believed to be generally competitive with analogous policies offered
by mutual companies.
Certain insurance and annuity products also compete with other investment
vehicles. Marketing of annuities and other products by banks and other
financial institutions is increasing. Existing tax laws affect the taxation
of life insurance and many competing products. Various proposals for changes
have been made, some of which could adversely affect the taxation of certain
products, and thus impact their marketing and the volume of policies
surrendered.
Employees. As of December 31, 1996, the insurance subsidiaries of the
Registrant employed approximately 2,700 agents and employees and held
contracts with an additional 14,000 IMO agents and 9,000 PPGA's.
COMMUNICATIONS COMPANY SUBSIDIARIES
Jefferson-Pilot Communications Company (JPCC) owns and operates various
television and radio stations as well as Jefferson-Pilot Sports, a production
and syndication business, and Co-Opportunities, a co-op advertising consulting
business.
Television Operations
The television stations owned and operated by Jefferson-Pilot
Communications Company are WBTV, Charlotte, North Carolina; WWBT, Richmond,
Virginia; and WCSC, Charleston, South Carolina. WBTV, Channel 3, Charlotte,
is affiliated with CBS under a Network Affiliation Agreement expiring on
December 31, 1998. Absent cancellation by either party, the Agreement will be
renewed for successive two-year periods. WWBT, Channel 12, Richmond, is
affiliated with NBC under a Network Affiliation Agreement expiring August 15,
2002. Absent cancellation by either party, the Agreement will be renewed for
successive five-year periods. WCSC, Channel 5, Charleston, is affiliated with
CBS under a Network Affiliation Agreement expiring on December 31, 1998.
Absent cancellation by either party, the Agreement will be renewed for
successive two-year periods.
I-5
<PAGE>
Radio Operations
JPCC owns and operates one AM and one FM station in Atlanta, GA, one AM
and two FM stations in Charlotte, NC, two AM and three FM stations in Denver,
CO, one AM and two FM stations in Miami, FL and one AM and 3 FM stations in
San Diego, CA.
Other Information Regarding Communications Companies
Competition. The radio and television stations compete for programming,
talent, and revenues with other radio and television stations in their
respective market areas as well as with other advertising and entertainment
media. JPCC's other divisions compete with other vendors of similar products
and services.
Employees. As of December 31, 1996, JPCC and its subsidiaries employed
approximately 950 persons full time.
Federal Regulation. Television and radio broadcasting operations are
subject to the jurisdiction of the Federal Communications Commission ("FCC")
under the Communications Act of 1934, as amended (the "Act"). The Act
empowers the FCC, among other things, to issue, revoke, or modify broadcasting
licenses, assign frequencies, determine the locations of stations,
regulate the apparatus used by stations, establish areas to be served,
adopt such regulations as may be necessary to carry out the provisions of the
Act, and to impose certain penalties for violation of such regulations. The
Act, and Regulations issued thereunder, prohibit the transfer of a license or
of control of a licensee without prior approval of the FCC; restrict in
various ways the common and multiple ownership of broadcast facilities;
restrict alien ownership of licenses; and impose various other strictures on
ownership and operation.
Future broadcasting licenses will be granted for a period of eight years
for both television and radio and, upon application therefor and in the
absence of adverse claims as to the licensee's qualifications or performance,
will normally be renewed by the FCC for an additional term. All necessary
renewal applications have been timely filed, and renewals are expected in due
course.
(d) Foreign Operations
Substantially all of Registrant's and subsidiaries operations are
conducted within the United States.
Item 2. Properties
Registrant utilizes space and personnel of Jefferson-Pilot Life.
JP Life owns its home office consisting of a 20-story building and an adjacent
17-story building. These structures house insurance operations and provide
space for commercial leasing. JP Life also owns a supply and printing
facility, a parking deck and a computer center, all located on nearby
properties. It also owns 233 acres in Guilford County, North Carolina,
formerly home office of Pilot Life Insurance Company, and an Employees' Club
located in northwestern Guilford County, with approximately 500 acres of land
surrounding the Club. Office space is leased in Lexington, Kentucky for
operation of the Kentucky Central Life business assumed.
I-6
<PAGE>
AH Life owns an office building in Farmington Hills, Michigan, which is
used as its home office.
JPCC owns its three television studios and office buildings, owns most of
its radio studios and offices, and owns or leases radio towers.
Item 3. Legal Proceedings
JP Life is a defendant in a proposed class action suit, Romig v.
Jefferson-Pilot Life Insurance Company, filed on November 6, 1995 in the
Superior Court of Guilford County, NC. The suit alleges 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.
The Registrant and its subsidiaries are involved in other legal and
administrative proceedings and claims of various types, some of which include
claims for punitive damages. In recent years, the life insurance industry has
experienced increased litigation in which large jury awards including punitive
damages have occurred. Because of the considerable uncertainties that exist,
the Registrant cannot predict the outcome of pending or future litigation with
certainty. Based on consultation with the Registrant's legal advisers,
management believes that 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
specific period.
Environmental Proceedings. There are no material administrative
proceedings against the Company involving environmental matters.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Executive Officers of the Registrant
David A. Stonecipher, President and Chief Executive Officer, joined
the Registrant as President-Elect and CEO-Elect in September 1992, and became
President and CEO in March 1993. Prior to September 1992, he was associated
with the Life Insurance Company of Georgia and Southland Life Insurance
Company and their parent company, Georgia US, having last served as President
and CEO of Life Insurance Company of Georgia and Southland Life Insurance
Company, and President of Georgia US.
Dennis R. Glass, Senior Vice President, Chief Financial Officer and
Treasurer, joined the Registrant in October 1993. From 1991 to October 1993,
I-7
<PAGE>
he was associated with Protective Life Corporation, having last served as
Executive Vice President and CFO of the company. From 1983 to 1991, he was
associated with the Portman Companies, having last served as Executive Vice
President and CFO. Kenneth C. Mlekush, Senior Vice President, joined the
Registrant in January 1993. From 1989 through 1992, he was associated with
Southland Life Insurance Company and its parent, Georgia US, last serving as
President and Chief Operating Officer of Southland Life, and Executive Vice
President of Georgia US. E. Jay Yelton, Senior Vice President - Investments,
joined the Registrant in October 1993, and for more than five years prior
thereto was President of the Investment Centre. John D. Hopkins, Senior Vice
President and General Counsel, joined the Registrant in April 1993, and for
more than five years prior thereto was a partner in the Atlanta law firm of
King & Spalding.
William E. Blackwell, Executive Vice President of the Registrant and
President of JPCC, and C. Randolph Ferguson,Senior Vice President of the
Registrant and Executive Vice President - Group of JP Life, have served in
various executive capacities with JPC over the past five years.
There are no agreements or understandings between any executive officer
and any other person pursuant to which such executive officer was or is to be
selected as an officer. Executive officers hold office at the will of the
Board, subject to their rights under employment agreements listed as exhibits
to this Form 10-K.
I-8
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Common Stock Market Prices and Dividends on pages 21 and 22 of the
annual shareholder report for the year ended December 31, 1996, an excerpt of
which is included in Exhibit 13, are incorporated by reference in response to
this item.
Dividends to the Registrant from its insurance subsidiaries are subject to
state regulation, as more fully described in the Management Discussion and
Analysis incorporated by reference in Item 7.
Item 6. Selected Financial Data
The Selected Financial Data on pages 21 and 22 of the annual shareholder
report for the year ended December 31, 1996, an excerpt of which is included in
Exhibit 13, is incorporated by reference in response to this item.
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 25 through 36 of the annual shareholder report for the
year ended December 31, 1996, an excerpt of which appears in Exhibit 13, is
incorporated by reference in response to this item.
Item 8. Financial Statements and Supplementary Data
The report of independent auditors and the consolidated financial statements
included on pages 37 through 62 of the annual shareholder report for the year
ended December 31, 1996, an excerpt of which appears in Exhibit 13, are
incorporated by reference in response to this item.
The Quarterly Results of Operations on page 24 of the annual shareholder
report for the year ended December 31, 1996, an excerpt of which appears in
Exhibit 13, are incorporated by reference in response to this item.
II-1
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On February 12, 1996 the Registrant's Board of Directors, upon
recommendation of the Audit Committee, appointed Ernst & Young LLP as the
independent public accountants to audit the financial statements of the
Registrant and its consolidated subsidiaries for the fiscal year ending
December 31, 1996.
Previously, the financial statements have been audited by McGladrey &
Pullen, LLP ("McGladrey"). The change reflects the Corporation's increasing
size (assets more than doubled in 1995, principally through acquisitions) and
growing needs for nationwide life insurance industry resources for both
auditing and other services particularly those related to acquisitions. The
change was made following a selection process in which McGladrey chose not to
participate although it remained willing to serve as the auditors based on its
existing life insurance industry resources.
The balance of the disclosures required by Item 304 of Regulation S-K is
contained in the Registrant's Form 8-K's filed for February 12, 1996 and its
definitive proxy statement for the 1997 annual meeting.
II-2
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The information included under the heading "Election of Directors" in
the Registrant's definitive Proxy Statement for the Annual Meeting to be held
on May 5, 1997 (the "Proxy Statement") is incorporated herein by reference.
Executive Officers are described in Part I.
Information under the heading "Security Ownership" of the Proxy
Statement relating to the absence of any delinquent filers under Section 16(a)
of the Securities Exchange Act of 1934 is incorporated herein by reference.
Item 11. Executive Compensation
The information included under the heading "Executive Compensation"
in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information included under the heading "Security Ownership" in
the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information included under the heading "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement is incorporated
herein by reference.
III-1
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements -The response to this portion of Item 14 is
submitted as a separate section of this report. (See F-1.) List
and Index of Exhibits included on page F-19 of this report.
(b) No Form 8-K was filed in the fourth quarter 1996. A form 8-K was
filed for February 23, 1997, to report the agreement to acquire
Chubb Life Insurance Company of America.
(c) Exhibits are submitted as a separate section of this report.
(See F-19.)
(d) Financial Statement Schedules - The response to this portion
of Item 14 is submitted as a separate section of this report.
(See F-1.)
Undertakings
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into registrant's Registration Statements on
Form S-8 Nos. 2-36778 (filed March 23, 1970) and 2-56410 (filed May 12, 1976)
and 33-30530 (filed August 15, 1989), and in outstanding effective
registration statements on Form S-16 included in such S-8 filings:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
BY (SIGNATURE) /S/
(NAME AND TITLE) David A. Stonecipher
President and Director
(Also signing as Principal
Executive Officer)
DATE March 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
BY (SIGNATURE) /S/
(NAME AND TITLE) Dennis R. Glass
Senior Vice President and Treasurer
(Principal Financial Officer)
DATE March 29, 1997
BY (SIGNATURE) /S/
(NAME AND TITLE) Reggie D. Adamson
Senior Vice President, Finance
(Principal Accounting Officer)
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) William E. Blackwell, Director
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) Edwin B. Borden, Director
DATE March 29, 1997
IV-2
<PAGE>
SIGNATURES
(continued)
BY (SIGNATURE) *
(NAME AND TITLE) William H. Cunningham, Director
DATE March 29, 1997
BY (SIGNATURE) /S/
(NAME AND TITLE) C. Randolph Ferguson, Director
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) Robert G. Greer, Director
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) George W. Henderson, III
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) Hugh L. McColl, Jr., Director
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) E. S. Melvin, Director
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) William P. Payne, Director
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) Donald S. Russell, Jr., Director
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) Robert H. Spilman, Chairman
DATE March 29, 1997
BY (SIGNATURE) *
(NAME AND TITLE) Martha A. Walls, Director
DATE March 29, 1997
* By /S/
Robert A. Reed
Attorney in fact
IV-3
<PAGE>
Form 10-K - - Item 14(a)(1) and (2) and (d)
Jefferson-Pilot Corporation and Subsidiaries
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Jefferson-Pilot Corporation
and subsidiaries, included in the annual report of the registrant to its
shareholders for the year ended December 31, 1996, are incorporated by
Consolidated Balance Sheet - December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements - December 31, 1996
The following consolidated financial statement schedules of Jefferson-Pilot
Corporation and subsidiaries are included in Item 14(d).
Schedule I - Summary of Investments - Other Than
Investments in Related Parties F-1
Schedule II - Financial Statements of Jefferson-Pilot
Corporation:
Condensed Balance Sheets as of December 31, 1996 and 1995 F-2
Condensed Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 F-3
Condensed Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 F-4
Notes to Condensed Financial Statements F-5
Schedule III - Supplementary Insurance Information F-6
Schedule IV - Reinsurance F-7
Schedule V - Valuation and Qualifying Accounts F-8
Report of Independent Public Accountant Auditing
Significant Subsidiary F-9
List and Index of Exhibits F-10 - F-12
All other schedules required by Article 7 of Regulation S-X are not required
under the related instructions or are inapplicable and therefore have been
omitted.
F-0
<PAGE>
Jefferson-Pilot Corporation and Subsidiaries
Schedule I - Summary of Investments -
Other than Investments in Related Parties
December 31, 1996
In millions
<TABLE>
<S> <C> <C> <C>
Column A Column B Column C Column D
Amount
at Which
Shown in the
Consolidated
Type of Investment Cost (a) Value Balance Sheet
Debt securities:
Bonds and other debt instruments:
United States Treasury obligations
and direct obligations of U. S.
Government agencies $ 384 $ 400 $ 400
Federal agency issued collateralized
mortgage obligations 2,052 2,059 2,059
Obligations of states, municipalities
and political subdivisions (b) 183 182 182
Obligations of public utilities (b) 1,332 1,342 1,341
Corporate obligations (b) 5,586 5,629 5,604
Corporate private-labeled
collateralized mortgage obligations 893 913 913
Redeemable preferred stocks 54 51 51
Total debt securities $ 10,484 $10,576 $ 10,550
Equity securities:
Common stocks:
Public utilities $ 93 $ 213 $ 213
Banks, trust and insurance companies 4 95 95
Industrial and all other 100 597 597
Nonredeemable preferred stocks 22 24 24
Total equity securities 219 929 929
Mortgage loans on real estate (c) 1,350 1,323
Real estate acquired by foreclosure (c) 3 3
Other real estate held for investment 72 72
Policy loans 1,212 1,212
Other long-term investments 54 54
Total investments $ 13,394 $ 14,143
</TABLE>
a. Cost of debt securities is original cost, reduced by repayments
and adjusted for amortization of premiums and accrual of
discounts. Cost of equity securities is original cost. Cost of
mortgage loans on real estate and policy loans represents
aggregate outstanding balances. Cost of real estate acquired by
foreclosure is the originally capitalized amount, reduced by
applicable depreciation. Cost of other real estate held for
investment is depreciated original cost.
b. Differences between amounts reflected in Column B or Column C
and amounts at which shown in the consolidated balance sheet
reflected in Column D result from the application of SFAS 115,
Accounting for Certain Investments in Debt and Equity
Securities. A portion of bonds and debt securities are recorded
as investments held to maturity at amortized cost and a portion
are recorded as investments available for sale at fair value.
c. Differences between cost reflected in Column B and amounts at
which shown in the consolidated balance sheet reflected in
Column D result from valuation allowances.
F-1
<PAGE>
Jefferson-Pilot Corporation and Subsidiaries
Schedule II - Condensed Balance Sheets of Jefferson-Pilot Corporation
December 31, 1996 and 1995
In millions (except share information)
<TABLE>
<S> <C> <C>
ASSETS 1996 1995
Cash and investments :
Cash and cash equivalents $ 9 $ 3
Debt securities available for sale 12 13
Equity securities available for sale 53 54
Investment in subsidiaries 2,689 2,549
Other investments 2 2
Total cash and investments 2,765 2,621
Due from subsidiaries 3 -
Other assets 18 17
$ 2,786 $ 2,638
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable, bank $ 222 $ 230
Notes payable, ACES 148 132
Notes payable, subsidiaries 81 68
Payables and accruals 6 4
Due to subsidiaries - 7
Dividends payable 25 23
Income taxes payable (1) 4
Deferred income tax liabilities 8 14
Total liabilities 489 482
Commitments & contingent liabilities
Stockholders' equity :
Common stock, par value $1.25 per share,
authorized 1996:- 350,000,000;
1995 - 150,000,000 shares;
issued: 1996 - 70,746,233 shares;
1995 - 71,213,162 shares 88 89
Retained earnings, including equity in
undistributed net income of subsidiaries
1996 - $1,473; 1995 - $1,315 1,708 1,542
Net unrealized gains on securities available
for sale, less deferred income taxes 1996 -
$263; 1995 - $279 501 525
Total stockholders' equity 2,297 2,156
$ 2,786 $ 2,638
</TABLE>
See Notes to Condensed Financial Statements.
F-2
<PAGE>
Jefferson-Pilot Corporation and Subsidiaries
Schedule II - Condensed Statements of Income of Jefferson-Pilot Corporation
Years Ended December 31, 1996, 1995 and 1994
In millions
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Income:
Dividends from continuing subsidiaries:
Jefferson-Pilot Life Insurance Company $ 120 $ 169 $ 95
Jefferson-Pilot Communications Company 23 15 4
Other subsidiaries 13 22 4
156 206 103
Dividends from discontinued subsidiaries:
Jefferson-Pilot Fire & Casualty Company - 76 5
Jefferson-Pilot Title Insurance Company - - 20
- 76 25
Other investment income, including interest
from subsidiaries, net 3 1 13
Realized investment gains 2 - 21
Total income 161 283 162
Financing Costs 24 8 2
Other Expenses 20 3 11
Income before income taxes and
equity in undistributed net
income of subsidiaries 117 272 149
Income taxes (benefits) (15) (4) 8
Income before equity in
undistributed net income of
subsidiaries 132 276 141
Equity in undistributed net income of
continuing subsidiaries:
Jefferson-Pilot Life Insurance Company 80 32 100
Alexander Hamilton Life Insurance Company 60 18 -
Jefferson-Pilot Communications Company 5 7 15
Other subsidiaries, net 14 (9) (1)
159 48 114
Equity in undistributed net income of
discontinued subsidiaries:
Jefferson-Pilot Fire & Casualty
Company, reflects special
dividend of $76 in 1995 - (51) 2
Jefferson-Pilot Title Insurance
Company, reflects special
dividend of $19 in 1994 - - (18)
- (51) (16)
Net income available to common shareholders $ 291 $ 273 $ 239
</TABLE>
See Notes to Condensed Financial Statements.
F-3
PAGE
<PAGE>
Jefferson-Pilot Corporation and Subsidiaries
Schedule II - Condensed Statements of Cash Flows of Jefferson-Pilot Corporation
Years Ended December 31, 1996, 1995 and 1994
In millions
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Cash Flows from Operating Activities
Net income $ 291 $ 273 $ 239
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net income
of subsidiaries (159) 3 (98)
Noncash dividends received from
subsidiaries - (144) (18)
Realized investment gains (2) - (21)
Change in accrued items and other
adjustments, net (13) 17 12
Net cash provided by operating
activities 117 149 114
Cash Flows from Investing Activities
Sales of short-term investments, net - - 3
Purchases of investments (4) (264) -
Proceeds from sales of investments 6 404 22
Acquisition of Alexander Hamilton Life
Insurance Company - (527) -
Other investments in (returns from)
subsidiaries 7 (12) -
Collection of notes receivable - - 16
Other, net - (7) (2)
Net cash provided by (used in)
investing activities 9 (406) 39
Cash Flows from Financing Activities
Cash dividends (99) (89) (82)
Common stock reacquired (25) (52) (56)
Proceeds from external borrowings - 526 -
Repayments of external borrowings (8) (194) (10)
Borrowings from subsidiaries, net 12 69 -
Other - (2) (3)
Net cash (used in) provided
by financing activities (120) 258 (151)
Net increase in
cash and cash equivalents 6 1 2
Cash and cash equivalents:
Beginning 3 2 -
Ending $ 9 $ 3 $ 2
</TABLE>
See Notes to Condensed Financial Statements.
F-4
<PAGE>
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
Schedule II- Notes to Condensed Financial Statements
of Jefferson-Pilot Corporation
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying financial statements comprise a condensed
presentation of financial position, results of operations, and
cash flows of Jefferson-Pilot Corporation (the "Company") on a
separate-company basis. These condensed financial statements do
not include the accounts of the Company's majority-owned
subsidiaries, but instead include the Company's investment in
those subsidiaries, stated at amounts which are substantially
equal to the Company's equity in the subsidiaries' net assets.
Therefore the accompanying financial statements are not those of
the primary reporting entity. The consolidated financial
statements of the Company and its subsidiaries are incorporated
by reference in Form 10-K for the year ended December 31, 1996.
Additional information about(1) accounting policies pertaining to
investments and other significant accounting policies applied by
the Company and its subsidiaries, (2) debt and (3) commitments
and contingent liabilities are as set forth in Notes 1,7 and 17,
respectively, to the consolidated financial statements of Jefferson-Pilot
Corporation and subsidiaries which are incorporated by reference
in Form 10-K for the year ended December 31, 1996.
F-5
<PAGE>
Jefferson-Pilot Corporation and Subsidiaries
Schedule III - Supplementary Insurance Information For the Years Indicated
In millions
<TABLE>
<S> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E Column F
Deferred
policy
Acquisition Future Policy Deferred
Costs and Benefits and Revenue and Other Policy Premiums
Value of Policyholder Premiums Claims and Premiums
Business Contract Collected Benefits and Other
Segment Acquired Deposits in Advance Payable (b)Considers
As of or Year Ended
December 31, 1996
Life insurance $934 $13,082 $40 $497 $994
As of or Year Ended
December 31, 1995
Life insurance $835 $12,234 $34 $454 $810
As of or Year Ended
December 31, 1994
Life insurance $323 $ 3,125 $23 $415 $655
Discontinued
operations (a) 6 - - 71
Total $329 $ 3,125 $23 $486
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Column A Column G Column H Column I Column J
Amortization
of Deferred
Policy
Benefits, Acquisition
Claims, Costs and
Net Losses and Value of Other
Investment Settlement Business Operating
Segment Income Expenses Acquired Expenses (c)
As of or Year Ended
December 31, 1996
Life insurance $ 897 $1,211 $115 $ 189
Communications $ 1 - - $ 144
Corporate and other $ (5) - - $ 23
As of or Year Ended
December 31, 1995
Life insurance $ 528 $ 842 $ 54 $ 151
Communications $ (2) - - $ 124
Corporate and other $ 17 - - $ 16
As of or Year Ended
December 31, 1994
Life insurance $ 365 $ 628 $ 22 $ 121
Communications $ (2) - - $ 133
Corporate and other $ 12 - - $ 17
</TABLE>
a. Balance sheet information for discontinued operations relates to
operations classified in prior years as the "other insurance" segment.
b. Other policy claims and benefits payable include dividend
accumulations and other policyholder funds on deposit, policy
and contract claims (life and annuity and accident and health),
dividends for policyholders, casualty insurance unearned
premiums and losses payable and other policy liabilities.
c. Expenses related to the management and administration of investments
have been netted with investment income in the determination of net
investment income. Such expenses amounted to $55 in 1996, $38
in 1995,and $23 in 1994.
F-6
<PAGE>
Jefferson-Pilot Corporation and Subsidiaries
Schedule IV - Reinsurance For the Years Indicated
In millions
<TABLE>
<S> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of Amount
Other From Other Assumed to
Gross Amount Companies Companies Net Amount Net (b)
Year Ended Dec 31, 1996:
Life ins in force
at end of year $ 109,407 $ 30,486 $ 50 $ 78,971 0.1%
Premiums: (a) $ 1,156 $ 312 $ 2 $ 846 0.2%
Year Ended December 31, 1995:
Life insurance in force
at end of year $ 111,383 $ 32,860 $ 58 $ 78,581 0.1%
Premiums: (a) $ 804 $ 62 $ 1 $ 743 0.1%
Year Ended December 31, 1994:
Life insurance in force
at end of year $ 45,049 $ 2,739 $ 10 $ 42,320 -
Premiums: (a) $ 632 $ 15 $ - $ 617 -
</TABLE>
a. Included with life insurance premiums are premiums on ordinary life
insurance products and mortality charges on interest-sensitive products.
b. Percentage of amount assumed to net is computed by dividing the
amount in Column D by the amount in Column E.
F-7
<PAGE>
Jefferson-Pilot Corporation and Subsidiaries
Schedule V - Valuation and Qualifying Accounts December 31, 1996
In millions
<TABLE>
<S> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E
Additions
Charged to
Balance at Realized Balance at
Beginning Investment Charge to End
Description of Period Gains Other Accounts Deductionsof Period
Valuation allowance
for mortgage loans
on real estate $ 27 $ - $ - $ - $ 27
1995:
Valuation allowance
for mortgage loans
on real estate $ 2 $ 25 $ - $ - $ 27
1994:
Valuation allowance
for mortgage loans
on real estate $ 2 $ - $ - $ - $ 2
</TABLE>
F-8
<PAGE>
Report of Independent Public Accountants
To Alexander Hamilton Life Insurance Company of America:
We have audited the consolidated balance sheet of Alexander Hamilton Life
Insurance Company of America (a Michigan corporation and a wholly-owned
subsidiary of Jefferson-Pilot Corporation) and subsidiaries as of December 31,
1995 and the related consolidated statements of income, stockholder's
investment, and cash flows for the three months then ended (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alexander Hamilton Life
Insurance Company of America and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows for the three months then
ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule I - Summary of
Investments, Schedule III - Supplementary Insurance Information and Schedule
IV - Reinsurance, of Alexander Hamilton Life Insurance Company of America and
subsidiaries (not presented separately herein) are for purposes of complying
with the Securities and Exchange Commission's rules and are not part of the
basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan
March 26, 1997
F-9
<PAGE>
List and Index of Exhibits
Reference
Per Exhibit
Table Description of Exhibit -Page-
(2) (i) Plan of acquisition - Life and Health
Agreement in Connection with the
Rehabilitation of Kentucky Central
Life Insurance Company was included
in Form 10-Q for the period ended
September 30, 1994, and is incorporated
herein by reference. -
(ii) Stock Purchase Agreement by and among
Household Group, Inc., Household
International, Inc., Alexander Hamilton
Life Insurance Company of America, and
Jefferson-Pilot Corporation dated
August 9, 1995, was included in Form 8-K
October 6, 1995 and is incorporated herein
by reference. Confidential treatment
requested with respect to certain portions
thereof.) Exhibits set forth in the Stock
Purchase Agreement have been omitted and
will be furnished supplementally to the
Securities and Exchange Commission upon request. -
(iii) Stock Purchase Agreement dated as of February 23,
1997 between Jefferson-Pilot Corporation and The
Chubb Corporation (confidential treatment requested with
respect to certain portions thereof). Exhibits and
Schedules to the Stock Purchase Agreement are
omitted and are being furnished supplementally to the
Commission. -
(3) (i) Articles of Incorporation including
amendments thereto that have been
approved by shareholders was included
in Form 10-Q for the quarter ended
March 31, 1996, and are incorporated
herein by reference. -
(ii) By laws as currently in effect
were included in Form 8-K dated
November 14, 1994, and are
incorporated herein by reference. -
(4) (i) Amended and Restated Rights Agreement
dated November 7, 1994 between Jefferson-
Pilot Corporation and First Union National
Bank of North Carolina, as Rights Agent,
was included in Form 8-K dated November 14,
1994, and is incorporated herein by reference. -
(ii) Credit Agreement dated October 5, 1995
among the registrant and the banks named
therein, and NationsBank of Georgia, N.A.
as Agent, and Amendment No. 1 thereto dated
F-10
<PAGE>
August 29, 1996, are not being filed because
the total amount of borrowings available
thereunder does not exceed 10% of total
consolidated assets. The registrant agrees
to furnish a copy of the Credit Agreement and
Amendment No. 1 to the Commission upon request. -
(10) The following contracts and plans:
(i) Employment contract, between the
Registrant and David A. Stonecipher,
an executive officer of the Registrant,
was included in Form 10-K for the year
ended December 31, 1992, and is incorporated herein
by reference. -
(ii) Employment contract between the
Registrant and Kenneth C. Mlekush,
an executive officer of the Registrant,was included in
Form 10K for the year ended December 31, 1995, and is
incorporated herein by reference.
-
(iii) Employment contract between the
Registrant and John D. Hopkins,
an executive officer of the Registrant,
effective April 19, 1996 was included
in Form 10-Q for the first quarter of 1996
and is incorporated herein by reference. -
(iv) Employment contract between the
Registrant and E.J. Yelton,
an executive officer of the Registrant,
effective October 18, 1996. F-13
(v) Employment contract between the
Registrant and Dennis R. Glass,
an executive officer of the Registrant,
effective October 18, 1996. F-14
(vi) Long Term Stock Incentive Plan,
included as Exhibit 2 to the
March 24, 1995 Proxy Statement is
incorporated herein by reference. -
(vii) 1995 Nonemployee Directors Stock
Option Plan, included as Exhibit 3
to the March 24, 1995 Proxy Statement
is incorporated herein by reference. -
(viii) Jefferson-Pilot Life Insurance
Company Supplemental Benefit Plan
and Executive Special Supplemental
Benefit Plan was included in Form 10-K
for 1994, and is incorporated herein by
reference. -
(ix) Management Incentive Compensation
Plan for Jefferson-Pilot Corporation
and its insurance subsidiaries was
included in Form 10-K for 1995 and is
<PAGE> F-11
incorporated herein by reference. -
(x) Deferred Fee Plan for Non-Employee
Directors was included in Form 10-K
for the year ended December 31, 1994,
and is incorporated herein by reference. -
(11) Computation of Per Share Earnings
(Provided as part of the electronic filing). F-15
(13) Annual Report to Security Holders
(Excerpt of material contained on pages 21 through 62
of the Registrant's 1996 Annual Report are provided as
part of the electronic filing. Because the printed 1996
Annual Report is unavailable, we have included the
electronic excerpt contained in Exhibit 13.) F-16
(21) Subsidiaries of the Registrant
(Provided as part of the electronic filing.) F-17
(23) Accountants' Consents (Provided as part of
the electronic filing.) F-18 - F-20
(24) Form of Power of Attorney F-21
(27) Financial Data Schedule (Provided as part
of the electronic filing.) F-22
F-12
<PAGE>
EXHIBIT 10
November 1, 1996
Mr. E Jay Yelton
Executive Vice President
Jefferson-Pilot Life Insurance
P.O. Box 21008
Greensboro, NC 27420
Re: Employment Contract
Dear Jay:
As of October 17, 1996, your three-year employment contract with
Jefferson-Pilot Corporation expires. This letter will serve as a new
agreement for an additional three-year period beginning October 18, 1996. The
terms and conditions are outlined below.
1. Title: Executive Vice President for JP Life and Senior Vice
President for JP Corporation.
2. Report/Duties: You will devote your full time to all investment
activities.
3. Compensation:
a. Base Salary: Of $310,000 per annum subject to annual review for
increases.
b. Annual Bonus: Consistent with plan for key employees.
c. Stock Options: You will continue to be eligible for annual stock
option recommendations contingent upon satisfactory performance. Options
awarded will usually vest over a three-year period, but will become fully
vested upon completion of the three-year employment period contemplated by
this agreement.
This agreement is subject to final review and approval by the Jefferson-Pilot
Corporation Board Compensation Committee. If you agree with the above
outlined terms and conditions please sign the original and return it to me at
your earliest convenience. In consideration of your acceptance of this
agreement, you will be awarded stock options of 7,500 shares as of November
4,1996 which will become immediately vested.
Sincerely,
David A. Stonecipher
I hereby accept the terms outlined above.
/s/ E. Jay Yelton
F-13
<PAGE>
EXHIBIT 10
November 1, 1996
Mr. Dennis R. Glass
Executive Vice President
Jefferson-Pilot Life Insurance
P.O. Box 21008
Greensboro, NC 27420
Re: Employment Contract
Dear Dennis:
As of October 17, 1996, your three-year employment contract with
Jefferson-Pilot Corporation expires. This letter will serve as a new
agreement for an additional three-year period beginning October 18, 1996. The
terms and conditions are outlined below.
1. Title: Executive Vice President for JP Life and Senior Vice
President for JP Corporation.
2. Report/Duties: You will devote your full time to all Chief Financial
Officer activities and Annuity and Investment products operations.
3. Compensation:
a. Base Salary: Of $350,000 per annum (effective January 1, 1997)
subject to annual review for increases.
b. Annual Bonus: Consistent with plan for key employees and long term
incentives as they currently exist.
c. Stock Options: You will continue to be eligible for annual stock
option recommendations contingent upon satisfactory performance. Options
awarded will usually vest over a three-year period, but will become fully
vested upon completion of the three-year employment period contemplated by
this agreement.
This agreement is subject to final review and approval by the Jefferson-Pilot
Corporation Board Compensation Committee. If you agree with the above
outlined terms and conditions please sign the original and return it to me at
your earliest convenience. In consideration of your acceptance of this
agreement, you will be awarded stock options of 7,500 shares as of November
4,1996 which will become immediately vested.
Sincerely,
David A. Stonecipher
I hereby accept the terms outlined above.
/s/ Dennis R. Glass
F-14
<PAGE>
Exhibit 11 - Statement Re: Computation of Per Share Earnings
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1996 1995 1994
(In Thousands, except per share data)
Primary
Average shares outstanding 71,041 71,694 72,961
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 319 141 30
Total 71,360 71,835 72,991
Net Income $291,000 $273,000 $239,000
Per share amount $4.08 $3.80 $3.27
Fully Diluted
Average shares outstanding 71,041 71,694 72,961
Net effect of dilutive stock options -
based on the treasury stock method
using the year-end market price if
higher than the average market 312 141 30
Total 71,353 71,835 72,991
Net Income $291,000 $273,000 $ 239,000
Per share amount $4.08 $3.80 $3.27
</TABLE>
F-15
<PAGE>
Exhibit 13 - Annual Report to Security Holders
The following is an electronic excerpt from the Registrant's 1996 Annual Report,
consisting of material contained on pages 21 through 62 of that report. Such
pages include primarily the Registrant's audited financial statements and
independent auditor's report thereon, and managements discussion and analysis
of financial condition and results of operation.
F-16
<PAGE>
<TABLE>
<CAPTION>
Revenue by Sources
Jefferson-Pilot Corporation and Subsidiaries
(In Millions)
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Individual life .................... $ 927 $ 594 $ 410 $ 408 $ 389
Annuity and investment products .... 456 238 119 104 102
Group insurance .................... 513 513 497 475 475
------ ------ ------ ------ ------
Life Insurance ..................... 1,896 1,345 1,026 987 966
Communications ..................... 189 164 173 145 130
Parent and other ................... (7) 10 9 6 5
Realized investment gains .......... 47 49 61 54 46
------ ------ ------ ------ ------
Revenues, continuing operations .... 2,125 1,568 1,269 1,192 1,147
Discontinued operations ............ -- 36 65 54 56
------ ------ ------ ------ ------
Total Revenues ..................... $2,125 $1,604 $1,334 $1,246 $1,203
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Net Income by Sources
Jefferson-Pilot Corporation and Subsidiaries
(In Millions)
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Individual life ................... $ 155 $ 119 $ 93 $ 91 $ 87
Annuity and investment products ... 65 41 31 26 31
Group insurance ................... 25 38 44 41 39
------ ------ ------ ------ ------
Life Insurance .................... 245 198 168 158 157
Communications .................... 28 22 22 17 14
Parent and other .................. (10) 2 1 (2) (6)
Realized investment gains, net
of taxes ......................... 31 34 39 36 30
------ ------ ------ ------ ------
Net income, continuing operations . 294 256 230 209 195
Discontinued operations ........... -- 18 9 10 8
Dividends on preferred stock ...... (3) (1) -- -- --
Accumulated postretirement benefit
obligation, net .................. -- -- -- (24) --
Net Income $ 291 $ 273 $ 239 $ 195 $ 203
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Market Value Per Share of Common Stock
Jefferson-Pilot Corporation
(High and Low Prices by Quarters)
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Quarter ...... 58 1/4 -- 45 1/8 39 3/8 -- 34 3/4 33 3/8 -- 28 7/8 38 5/8 -- 30 3/8 26 1/8 -- 22 1/8
Second Quarter ..... 55 5/8 -- 50 1/4 39 1/2 -- 33 7/8 34 1/4 -- 31 1/8 38 1/2 -- 30 5/8 29 3/8 -- 23 5/8
Third Quarter ...... 55 1/8 -- 49 7/8 43 3/4 -- 35 7/8 36 3/4 -- 32 1/8 38 5/8 -- 32 3/8 28 5/8 -- 25 5/8
Fourth Quarter ..... 59 5/8 -- 51 3/8 48 1/8 -- 42 7/8 36 1/2 -- 33 5/8 36 -- 30 1/2 33 -- 24 3/4
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Summary of Selected Financial Data
Jefferson-Pilot Corporation and Subsidiaries
(In Millions Except Share Information)
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating income before initial FAS 106
application and gain from sales of investments:
Continuing operations .............................. $ 263 $ 222 $ 191 $ 173 $ 164
Discontinued operations ............................ -- 2 9 8 7
------- ------- ------ ------ -------
Operating income ..................................... 263 224 200 181 171
Gain from sales of investments, net of taxes:
Continuing operations .............................. 31 34 39 36 30
Discontinued operations ............................ -- 16 -- 2 2
------- ------- ------ ------ -------
Gain from sales of investments ....................... 31 50 39 38 32
------- ------- ------ ------ -------
Income before initial FAS 106 application ............ 294 274 239 219 203
Dividends on preferred stock ......................... (3) (1) -- -- --
Initial effect of FAS 106 ............................ -- -- -- (24) --
------- ------- ------ ------ -------
Net income applicable to common shareholders ......... $ 291 $ 273 $ 239 $ 195 $ 203
======= ====== ====== ====== ======
Income per share of common stock:
Operating income before initial FAS 106
application and gain from sales of investments:
Continuing operations .............................. $ 3.66 $ 3.09 $ 2.62 $ 2.31 $ 2.15
Discontinued operations ............................ -- 0.03 0.13 0.11 0.09
------- ------- ------ ------- -------
Operating income ..................................... 3.66 3.12 2.75 2.42 2.24
Gain from sales of investments, net of taxes:
Continuing operations .............................. 0.43 0.46 0.53 0.47 0.40
Discontinued operations ............................ -- 0.23 -- 0.02 0.02
------- ------- ------ ------- -------
Gain from sales of investments ....................... 0.43 0.69 0.53 0.49 0.42
------- ------- ------ ------- -------
Income before initial FAS 106 application ............ 4.09 3.81 3.28 2.91 2.66
Initial effect of FAS 106 ............................ -- -- -- (0.32) --
------- ------- ------ ------- ------
Net income ........................................... $ 4.09 $ 3.81 $ 3.28 $ 2.59 $ 2.66
======= ====== ====== ====== ======
Cash dividends paid on common stock .................. $ 100 $ 88 $ 82 $ 76 $ 66
======= ====== ====== ====== ======
Cash dividends paid per common share:
First quarter ...................................... $ .32 $ .29 $ .26 $ .23 $ .19
Second quarter ..................................... .36 .32 .29 .26 .23
Third quarter ...................................... .36 .32 .29 .26 .23
Fourth quarter ..................................... .36 .32 .29 .26 .23
------- ------- ------ ------- ------
Total .......................................... $ 1.40 $ 1.25 $ 1.12 $ 1.01 $ .87
======= ====== ====== ====== ======
Average common shares outstanding (thousands) ........ 71,074 71,694 72,961 75,375 76,426
======= ====== ====== ====== ======
Assets ............................................... $17,562 $16,478 $6,140 $5,641 $5,257
======= ====== ====== ====== ======
Debt and mandatorily redeemable preferred stock $ 423 $ 417 $ 29 $ 40 $ --
======= ======= ====== ====== ======
Stockholders' equity ................................. $ 2,297 $ 2,156 $1,733 $1,733 $1,668
======= ====== ====== ====== ======
Stockholders' equity per share of common stock ....... $ 32.47 $ 30.28 $23.84 $23.36 $22.05
======= ======= ====== ====== ======
</TABLE>
Note: All share information has been restated to reflect a December 1995
3-for-2 (50%) stock split effected in the form of a dividend. Cash
dividends per share may not add due to rounding related to this split.
22
<PAGE>
<TABLE>
<CAPTION>
Supplemental Insurance Information
Jefferson-Pilot Corporation and Subsidiaries
(In Millions)
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
New Life Insurance Written (Excludes Annuities):
Ordinary -- life and endowment ..................... $ 5,105 $ 3,929 $ 2,652 $ 1,692 $ 1,353
Ordinary -- term ................................... 2,914 1,414 1,054 800 814
------- ------- ------- ------- -------
Total individual life .............................. 8,019 5,343 3,706 2,492 2,167
Group .............................................. 2,725 3,582 3,199 4,621 2,840
------- ------- ------- ------- -------
Total new life insurance written ..................... $10,744 $ 8,925 $ 6,905 $ 7,113 $ 5,007
======= ======= ======= ======= =======
Life Insurance In Force (Excludes Annuities):
Ordinary -- life and endowment ..................... $58,244 $58,435 $15,559 $13,882 $13,133
Ordinary -- term ................................... 13,385 11,511 4,000 3,686 3,606
Weekly premium ..................................... 76 80 83 87 92
------- ------- ------- ------- -------
Total individual life .............................. 71,705 70,026 19,642 17,655 16,831
Group .............................................. 27,224 26,389 25,417 23,936 24,012
------- ------- ------- ------- -------
Total life insurance in force ........................ $98,929 $96,415 $45,059 $41,591 $40,843
======= ======= ======= ======= =======
Individual Insurance Premiums (Note):
First year life .................................... $ 240 $ 119 $ 43 $ 29 $ 25
Renewal and other life ............................. 437 263 169 166 162
Annuity ............................................ 607 380 250 175 140
Accident and health ................................ 21 24 28 28 26
------- ------- ------- ------- -------
Total individual insurance premiums .................. $ 1,305 $ 786 $ 490 $ 398 $ 353
======= ======= ======= ======= =======
Group Insurance Premiums (Note):
Group life & annuity ............................... $ 114 $ 88 $ 70 $ 64 $ 66
Group A & H ........................................ 386 387 371 358 358
Group A & H equivalents ............................ 238 285 307 282 305
------- ------- ------- ------- -------
Total group premiums and equivalents ................. $ 738 $ 760 $ 748 $ 704 $ 729
======= ======= ======= ======= =======
Group Net Income by Source:
Group life and annuity ............................. $ 10 $ 12 $ 10 $ 13 $ 18
Group A & H ........................................ 15 26 34 28 21
------- ------- ------- ------- -------
Total group net income ............................... $ 25 $ 38 $ 44 $ 41 $ 39
======= ======= ======= ======= =======
</TABLE>
Notes: Premiums are shown on FAS 60 basis. First year life premiums include
universal life single premiums.
23
<PAGE>
<TABLE>
<CAPTION>
Management's Presentation of Quarterly Financial Data
Jefferson-Pilot Corporation and Subsidiaries
Summarized quarterly financial data (unaudited) (In Millions Except Per Share Information)
1996
- ---------------------------------------------------------------------------------------------------------
March June September December
31 30 30 31
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues, including net investment income and
realized gains on investments .................. $ 534 $ 529 $ 515 $ 547
Benefits and expenses ............................ 428 418 400 436
Provision for income taxes ....................... 35 38 40 36
----- ----- ----- -----
Income from continuing operations ................ 71 73 75 75
Dividends on preferred stock ..................... (1) (1) (1) (1)
Net income available to common stockholders ...... $ 70 $ 72 $ 74 $ 74
----- ----- ----- ------
Per share of common stock ........................ $ .98 $1.02 $1.04 $1.05
===== ===== ===== =====
<CAPTION>
1995
- ---------------------------------------------------------------------------------------------------------
March June September December
31 30 30 31
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues, including net investment income and
realized gains on investments .................. $ 315 $329 $382 $544
Benefits and expenses ............................ 238 255 283 413
Provision for income taxes ....................... 25 23 34 44
----- ---- ---- ----
Income from continuing operations ................ 52 51 65 87
Discontinued operations, net of income taxes ..... 5 14 -- --
Dividends on preferred stock ..................... -- -- -- (1)
----- ----- ----- -----
Net income available to common stockholders ...... $ 57 $ 65 $ 65 $ 86
===== ===== ===== =====
Per share of common stock ........................ $ .79 $ .90 $ .92 $1.21
===== ===== ===== =====
<CAPTION>
1994
- ---------------------------------------------------------------------------------------------------------
March June September December
31 30 30 31
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues, including net investment income and
realized gains on investments ................... $ 307 $ 314 $ 313 $ 335
Benefits and expenses ............................. 228 228 226 239
Provision for income taxes ........................ 27 30 30 32
----- ----- ----- -----
Income from continuing operations ................. 52 56 57 64
Discontinued operations, net of income taxes ...... 2 2 2 4
----- ----- ----- -----
Net income available to common stockholders ....... $ 54 $ 58 $ 59 $ 68
===== ===== ===== =====
Per share of common stock ......................... $ .74 $ .80 $ .81 $ .93
===== ===== ===== =====
</TABLE>
24
<PAGE>
Management's Discussion and
Analysis of Financial Condition and Results of Operations
Jefferson-Pilot Corporation and Subsidiaries
Management's discussion and analysis of financial condition and results of
operations for the three years ended December 31, 1996 analyzes the results
of operations, consolidated financial condition, liquidity and capital
resources of Jefferson-Pilot Corporation and consolidated subsidiaries (JP
or Company). The discussion should be read in conjunction with the
Consolidated Financial Statements and Notes. All dollar amounts are in
millions except for per share amounts. All references to Notes are to
Notes to the Consolidated Financial Statements.
Company Profile
The Company 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 three
principal subsidiaries, Jefferson-Pilot Life Insurance Company (JP Life),
Alexander Hamilton Life Insurance Company of America (AH Life), and First
Alexander Hamilton Life (FAHL). Within the communications business
segment, JP operates television broadcasting stations (3) and radio
broadcasting stations (17), and provides sports and entertainment
programming. These operations are conducted through Jefferson-Pilot
Communications Company (JPCC).
JP's revenues are derived approximately 89% from Life Insurance (which
consists of 44% from Individual Life Products, 24% from Group Insurance
Products, and 21% from Annuity and Investment Products), 9% from
Communications (3% from television, 3% from radio, and 3% from sports and
entertainment) and 2% from the Parent. This composition has shifted more
towards Life Insurance in 1996 and 1995 as the result of acquisitions.
Acquisition Summary
JP's acquisition strategy is designed to deploy capital to enhance its core
business growth. The focus of such acquisitions is to increase
distribution, add product offerings, and provide economies of scale.
On February 23, 1997, the Company entered into an agreement with The
Chubb Corporation (Chubb) to acquire all outstanding shares of Chubb Life
Insurance Company of America (Chubb Life). 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.
The Chubb Life acquisition meets JP's strategic acquisition objectives.
The parties have committed to negotiate in good faith to develop and
enter into a mutually beneficial marketing arrangement that would make
available to JP affiliates the property and casualty agency distribution
channels of Chubb. These channels have historically generated
approximately 20% of Chubb Life's total production, with the remainder
generated principally by independent agents.
The purchase price is $875. Chubb has committed to maintain a minimum
adjusted Statutory capital and surplus of Chubb Life. Closing is expected
to occur in the second quarter of 1997 as soon as regulatory approvals are
obtained.
A dividend of up to $100 may be paid by Chubb Life to Chubb prior to
closing. A portion or all of the funds would be provided through dividends
from Chubb Life's insurance subsidiaries. Any such dividend from Chubb
Life, if all necessary approvals are obtained from state insurance
regulators for payment there of , would reduce the purchase price by the
amount of such dividend.
JP expects to finance the purchase primarily through internally
available resources including liquidation of invested assets, which may
include a securities issuance similar to JP's outstanding 7.25% Automatic
Common Exchange Securities Due January 21, 2000 (ACES), and available
proceeds from two recent issues of Capital Securities. The balance will be
funded from borrowings. In excess of $200 of the after tax proceeds will
come from the sale of securities which are currently held by JP Life, which
has applied for approval from the North Carolina Department of Insurance to
pay an extraordinary dividend to JP.
In October 1995, JP acquired AH Life and certain of its affiliates,
including FAHL, a New York stock life insurance company, from a subsidiary
of Household International, Inc. (HI). The acquisition included
substantially all of the life and single premium deferred annuity business
of AH Life and FAHL. Certain product classes, including credit life and
accident and health insurance, Corporate-Owned Life Insurance (COLI), and
periodic payment annuities (PPA), were not acquired but were 100% reinsured
back to affiliates of HI through coinsurance agreements.
On September 30, 1996, the Company recaptured a portion of the PPA
contracts from affiliates of HI. This recapture was completed through a
reinsurance transfer of $463.0 in assets to the Company. The Company
recorded reserves of $489.0 and other assets of $29.0, and issued $3.0 of
mandatorily redeemable preferred stock of one of the Company's life
insurance subsidiaries to HI.
On May 31, 1995, JP Life acquired a majority of the life insurance
and annuity business of Kentucky Central Life Insurance Company (KCL).
The acquisition was accomplished through an assumption reinsurance
agreement in which
25
<PAGE>
JP Life assumed non-cash assets of $932 (excluding deferred acquisition
costs) and recorded liabilities of $1,096. On November 30, 1996 the
Company completed the KCL transaction by assuming approximately 4,000
additional policies. The Company established additional reserves of $112
on these policies, released a $78 liability established in 1995 and
recorded an additional $40 as deferred policy acquisition costs.
Results of Operations
JP's consolidated net income available to common stockholders was $290.5,
$273.0 and $239.2 in 1996, 1995 and 1994, respectively. Net Income
available to common stockholders increased 6.4%, 14.1% and 9.1% in 1996,
1995, and 1994 respectively. Excluding the results of discontinued
operations from all years, income from continuing operations increased
14.2% in 1996, 10.7% in 1995 and 9.7% in 1994.
Included in net income are realized investment gains from the sale of
investments. JP's results before and after realized investment gains were:
1996 1995 1994
- ---------------------------------------------------------------------------
Income available to common stockholders
before realized investment gains:
Continuing operations ...................... $259.8 $221.3 $191.0
Discontinued operations .................... -- 2.2 9.2
------ ------ ------
Operating income ............................. 259.8 223.5 200.2
------ ------ ------
Realized investment gains (net of
applicable income taxes):
Continuing operations ..................... 30.7 33.1 38.9
Discontinued operations ................... -- 16.4 0.1
------ ------ ------
30.7 49.5 39.0
------ ------ ------
Net income available to common stockholders $290.5 $273.0 $239.2
====== ====== ======
Income before investment gains (operating income) increased 16.2%, 11.6%,
and 10.0% in 1996, 1995, and 1994 respectively.
Investment gains for all three years relate primarily to securities
that have been classified as "available for sale" since the adoption of
SFAS 115. Sources of realized gains and (losses) from continuing operations
for the last three years were:
1996 1995 1994
- ---------------------------------------------------------------------------
Common stocks ........................... $ 39.2 $ 62.9 $ 65.6
Bonds and other debt instruments ........ 2.9 (7.0) (9.5)
Other ................................... 4.5 (7.4) 5.2
------ ------ ------
Realized Investment Gains, gross ........ 46.6 48.5 61.3
Federal and state taxes ................. (15.9) (15.4) (22.4)
------ ------ ------
Realized Investment Gains, net .......... $ 30.7 $ 33.1 $ 38.9
====== ====== ======
JP holds a sizable portfolio of equity securities and debt securities
which, beginning in 1994, are partly categorized as "available for sale".
The cost and fair value of these equity and "available for sale" debt
portfolios were:
1996 1995 1994
- ---------------------------------------------------------------------------
Cost of equity securities held ......... $ 195.8 $ 207.4 $ 290.4
Fair value ............................. $ 906.3 $ 816.6 $ 718.0
Amortized cost of "available for sale"
debt securities ...................... $6,607.2 $6,208.3 $1,692.0
Fair value ............................. $6,672.9 $6,458.2 $1,606.9
======== ======== ========
Equity security holdings included approximately 4.2 shares of
NationsBank Corporation common stock,with a cost of $13.3 and a fair value
of $402.1 at December 31, 1996. The ACES, described later under Capital
Resources and in Note 7, are debt securities exchangeable at maturity for
shares of NationsBank at an exchange rate which permits JP to deliver
1,815,000 shares and discharge indebtedness of $147.9 which protects
against a drop in the share price below $72.50.
Earnings per common share increased 7.3% in 1996 to $4.09, 16.2% in
1995 to $3.81 and 26.6% in 1994 to $3.28. Earnings per common share
excluding net realized investment gains increased 17.3% in 1996 to $3.66,
13.5% in 1995 to $3.12 and 13.6% in 1994 to $2.75. The increase for all
years can be attributed to improved earnings and the impact of share
repurchases. Earnings per common share from continuing operations improved
15.2% in 1996 to $4.09, 12.7% in 1995 to $3.55, and 13.3% in 1994 to $3.15.
All share and per share amounts shown are adjusted, where appropriate, to
reflect a 50% stock dividend (3-for-2 stock split) in December 1995.
JP's plan of operations focuses on increasing revenues through
internal expansion and acquisitions. This plan has contributed to revenue
increases, excluding realized investment gains, of 36.8%, 25.9% and 6.1%
and revenue increases of 35.4%, 23.6% and 6.4%, including realized
investment gains, for the years 1996, 1995 and 1994 respectively.
Excluding acquisitions, revenues increased 3.6%, 5.9% and 6.1% in 1996,
1995 and 1994.
26
<PAGE>
Premiums, considerations and UL & Investment product charges
(excluding discontinued operations) increased 22.8% in 1996 to $994.4,
23.6% in 1995 to $810.0 and 4.4% in 1994 to $655.3. Life and annuity
premiums and considerations increased 47.2% in 1996 to $587.2, 55.7% in
1995 to $398.9 and 6.3% in 1994 to $256.2. In 1996, a 36.8% increase was
accomplished through the Company's acquisition strategy and 10.4% growth
through internal development, versus 37.2% and 18.5% in 1995. The internal
growth in JP Life is attributable to the successful implementation of its
Individual Life and Annuity and Investment Products business plans over the
last two years. The Individual Life business plan focuses on development
and growth of multiple distribution systems. The Annuity and Investment
Products business plan emphasizes growth through multiple distribution
systems, including financial institutions, independent agents, investment
professionals and broker/dealers. Accident and health premiums decreased
1.0% in 1996 to $407.2 compared to an increase of 3.0% in 1995 to $411.1
and 3.2% in 1994 to $399.1. Accident and health premium growth for such
years was modest due to a leveling in the rate of medical inflation in the
most recent two years.
Revenues from the Communications segment increased 15.3% in 1996 after
declining 4.8% in 1995 (due to the sale of assets of Jefferson-Pilot Data
Services), and increasing 19.0% in 1994. Without inclusion of this entity
in 1994 operating results, revenues increased 12.0% in 1995. Growth in all
three years was achieved as a result of acquisitions, market share
increases and a favorable economic environment.
Total benefits, claims and expenses increased 41.7% in 1996, 28.9% in
1995 and 4.4% in 1994 primarily due to acquisitions. Excluding
acquisitions, the increases were 7.0%, 7.5%, and 4.4% in 1996, 1995 and
1994 respectively. Life benefits and credits to policyholder accounts
increased 7.1% in 1996, 13.9% in 1995 and 7.7% in 1994, reflecting the
growth in life business in force. Accident and health benefits increased
1.6% in 1996, 6.9% in 1995 and 1.1% in 1994 as growth in medical inflation
and utilization were moderate in that year. Net life insurance expenses
(after deferral of policy acquisition costs) increased 7.5% in 1996 and
4.5% in 1995 due to increased life productions ,and declined 3.1% in 1994
as the Company improved the economies of its Individual distribution
systems. Cost of Communications operations increased 15.4% in 1996,
declined 6.5% in 1995 due to the sale of Jefferson-Pilot Data Services, and
increased 20.7% in 1994 as a result of acquisitions of television and radio
properties as well as costs associated with higher overall revenues.
Operating income available to common stockholders (including
discontinued operations but excluding net realized investment gains)
increased 16.2% in 1996 to $259.8, 11.6% in 1995 to $223.5 and 10.0% in
1994 to $200.2, mainly due to acquisitions.
Income taxes from continuing operations (excluding net realized
investment gains) increased $23.0 or 20.9% in 1996, $7.7 or 6.6% in 1995
and $16.8 or 16.7% in 1994. Effective tax rates were 33.6%, 33.1% and
33.9% in 1996, 1995 and 1994, respectively. 1996's effective tax rate
increased as a result of a reduction in the percentage of tax-favored
investments. 1995's effective tax rate decreased because of recoveries and
reductions of prior years' taxes.
Operating Earnings By Business Segment
Operating income of the Life Insurance and Communications business segments
includes investment income but excludes net realized investment gains.
Operating income and losses of the parent company, consolidation entries
and net realized investment gains are included in the "other" category.
Currently, all corporate capital is allocated to the business segments.
The following table illustrates operating income by segments and
classes of products:
1996 1995 1994
- ---------------------------------------------------------------------------
Life Insurance:
Individual Life Products .............. $154.7 $118.5 $ 92.4
Annuity and Investment Products ....... 65.4 41.8 31.8
Group Products ........................ 25.0 37.7 44.2
------ ------ ------
245.1 198.0 168.4
Communications .......................... 28.2 23.6 22.0
Discontinued operations ................. -- 2.2 9.3
Other ................................... (13.5) (0.3) 0.6
------ ------ ------
Operating income available to
common stockholders .................... 259.8 223.5 200.3
Net realized investment gains ........... 30.7 49.5 38.9
------ ------ ------
Net income available to
common stockholders .................... $290.5 $273.0 $239.2
====== ====== ======
27
<PAGE>
Operating income from all business segments increased $36.3 or 16.2%
and $23.2 or 11.6% in 1995. Product lines contributing to the increase
were:
Increase/(Decrease)
1996 1995 1994
- ---------------------------------------------------------------------------
Life Insurance:
Individual Life Products ................. $36.2 $26.1 $ 1.7
Annuity and Investment Products .......... 23.6 10.0 5.4
Group Products ........................... (12.7) (6.5) 3.1
----- ----- -----
47.1 29.6 10.2
Communications ........................... 4.6 1.6 4.7
Other .................................... (13.2) (0.9) 2.1
----- ----- -----
Sub-total, before discontinued operations 38.5 30.3 17.0
Discontinued operations .................. (2.2) (7.1) 1.3
----- ----- -----
Total .................................... $36.3 $23.2 $18.3
===== ===== =====
Life Insurance
The Life Insurance segment includes Individual Life Products, Annuity and
Investment Products and Group Products.
Individual Life Products
The Individual Life Products distribution systems offer a wide array of
life and health insurance through a career agency force, independent agents
recruited through independent marketing organizations and regional
directors, home service agents and financial institutions. Operating
results were:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums and other considerations ........ $463.0 $294.4 $188.9 $184.8 $172.4
Net investment income .................... 464.1 298.9 216.8 218.3 212.5
------ ------ ------ ------ ------
Total revenues ........................... 927.1 593.3 405.7 403.1 384.9
------ ------ ------ ------ ------
Policy benefits .......................... 507.3 309.8 211.2 203.0 193.6
Expenses ................................. 184.2 107.8 57.3 67.0 71.3
------ ------ ------ ------ ------
Total benefits and expenses .............. 691.5 417.6 268.5 270.0 264.9
------ ------ ------ ------ ------
Operating income before income taxes ..... 235.6 175.7 137.2 133.1 120.0
Provision for income taxes ............... 80.9 57.2 44.8 42.8 33.7
------ ------ ------ ------ ------
Operating income ......................... $154.7 $118.5 $ 92.4 $ 90.3 $ 86.3
====== ====== ====== ====== ======
</TABLE>
Individual Life operating income improved 30.5% in 1996 and 28.2% in
1995. As a percentage of total revenues, operating income for Individual
Life Products was 16.7% in 1996 (23.4% without acquisitions), 20.0% in 1995
(23.5% without acquisitions) and 22.8% in 1994. Results for 1996 and 1995
were favorably influenced by acquisitions, improved mortality and earnings
on increased policyholder contract deposits. Expenses represented 19.9%,
18.2% and 14.1% of total revenues in 1996, 1995 and 1994, respectively. The
increase in 1996 and 1995's expense ratio is attributable to acquisitions.
Without acquisitions, 1996's expense ratio increased to 15.7% compared to
15.2% in 1995. Effective tax rates were 34.3%, 32.6% and 32.7% for 1996,
1995 and 1994 respectively. The effective rate increased over 1995 because
of the Company's larger percentage of fully taxable securities in the
investment portfolio.
Premiums and other considerations increased 57.3% in 1996 , 55.8% in
1995 and 2.2% in 1994. Increases in 1996 and 1995 reflect the Company's
strategy to achieve growth through new distribution sources as well as
acquisitions. Without acquisitions, premiums and considerations increased
6.6% in 1996 and 6.2% in 1995. Policy benefits increased 63.8% in 1996,
46.7% in 1995 (1.6% and (0.5%) without acquisitions, respectively) and 4.0%
in 1994. Exclusive of acquisitions, death benefits in 1996 were 3.8%
higher than in 1995, which had decreased 1.2% compared to 1994. Insurance
in force in 1996 increased 2.4% over the prior year compared to 1995's
14.3% increase over 1994. Expenses increased 70.9% in 1996 versus an 88.1%
increase in 1995 (7.4% and 11.0% without acquisitions respectively) after a
14.5% decline in 1994. The increases in 1996 and 1995 are primarily
related to acquisitions and growth of existing business.
Individual premiums and receipts for policyholder accounts were:
1996 1995 1994
- ---------------------------------------------------------------------------
First year life insurance premiums $240.6 $119.3 $ 43.3
Renewal and other life insurance premiums 436.9 263.2 169.2
Accident and health 21.2 24.2 27.6
------ ------ ------
$698.7 $406.7 $240.1
====== ====== ======
28
<PAGE>
First year life insurance premiums grew 101.7% in 1996 and 175.5% in
1995. Without acquisitions, first year premium receipts were up 81.5% in
1996 and 59.6% in 1995.
Individual life insurance written (as measured by face amount)
increased 50.0% (7.8% without acquisitions) in 1996 to $8,019 and 44.2% in
1995 to $5,343 (28.5% without acquisitions). The increase was led by gains
from the independent agents of 170.2% (63.1% excluding acquisitions).
Also, the establishment of a bank marketing distribution channel added $25
million to sales, while increases from career agents contributed 4.6%.
Annuity and Investment Products
Annuity and Investment Products include single and flexible premium
deferred annuities, variable annuities and single premium immediate
annuities. These products are offered through financial institutions,
independent agents, career agents, investment professionals and
broker/dealers. Operating results were:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums and other considerations ........ $ 66.5 $ 49.4 $ 14.8 $ 11.3 $ 10.0
Net investment income .................... 385.6 185.9 104.3 92.8 92.0
Other income ............................. 4.3 3.0 4.4 4.5 3.7
------ ------ ------ ------ ------
Total revenues ........................... 456.4 238.3 123.5 108.6 105.7
------ ------ ------ ------ ------
Policy benefits .......................... 316.6 158.4 63.9 57.6 53.2
Expenses ................................. 40.2 17.8 12.3 11.5 9.7
------ ------ ------ ------ ------
Total benefits and expenses .............. 356.8 176.2 76.2 69.1 62.9
------ ------ ------ ------ ------
Operating income before income taxes ..... 99.6 62.1 47.3 39.5 42.8
Provision for income taxes ............... 34.2 20.3 15.5 12.8 12.1
------ ------ ------ ------ ------
Operating income ......................... $ 65.4 $ 41.8 $ 31.8 $ 26.7 $ 30.7
====== ====== ====== ====== ======
</TABLE>
Operating income improved 56.5% in 1996, 31.4% in 1995, and 18.7% in
1994. Without the AH Life and KCL acquisitions, operating income was 2.0%
higher in 1996 and 5.3% higher in 1995. The increases reflect higher net
investment income due to increased assets under management and increasing
interest rate spreads. Annuity funds on deposit increased 5.0% to $6,415
in 1996 (8.9% to $1,419 without AH Life and KCL acquisitions) and 464.8% to
$6,111 (20.4% to $1,303 without AH Life and KCL acquisitions) in 1995.
During 1996, the average gross spread on general accounts improved 22 basis
points, increasing from 195 basis points in the first quarter to 217 basis
points in the fourth quarter. Net investment income grew 107.4% in 1996,
78.2% in 1995 and 12.4% in 1994. Without the AH Life and KCL acquisitions,
net investment income increased 7.5% in 1996 and 16.4% in 1995. Fixed
annuity receipts were $556.8, $379.7 and $250.0 in 1996, 1995 and 1994
respectively.
Benefits and expenses increased 102.5% in 1996, 131.2% in 1995 and
10.3% in 1994. Without the AH Life and KCL acquisitions, the increases
were 16.9% and 61.2% for 1996 and 1995, respectively. Effective tax rates
increased slightly year to year due to a lower level of investments held in
tax advantaged securities. Effective tax rates were 34.3% in 1996, 32.7%
in 1995 and 32.8% in 1994.
Group Products
Group Products provides, primarily in the Southeastern and Southwestern
United States, a wide range of insurance products for employers and their
employees. 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>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums and other considerations ........ $465.0 $466.2 $451.5 $431.5 $432.1
Net investment income .................... 48.0 46.9 44.9 43.4 42.6
Other income ............................. -- -- -- .3 .4
------ ------ ------ ------ ------
Total revenues ........................... 513.0 513.1 496.4 475.2 475.1
------ ------ ------ ------ ------
Policy benefits .......................... 387.0 374.2 352.8 341.1 350.3
Expenses ................................. 88.4 83.2 78.0 73.8 70.1
------ ------ ------ ------ ------
Total benefits and expenses .............. 475.4 457.4 430.8 414.9 420.4
------ ------ ------ ------ ------
Operating income before income taxes ..... 37.6 55.7 65.6 60.3 54.7
Provision for income taxes ............... 12.6 18.0 21.4 19.2 15.3
------ ------ ------ ------ ------
Operating income ......................... $ 25.0 $ 37.7 $ 44.2 $ 41.1 $ 39.4
====== ====== ====== ====== ======
Premiums and premium equivalents ......... $738.3 $760.3 $748.0 $704.3 $728.8
====== ====== ====== ====== ======
</TABLE>
Group Products operating income declined 33.7% in 1996 and 14.7% in
1995 after an increase of 7.5% in 1994. As a percentage of premiums and
other considerations, operating income for Group products was 5.4% in
1996, 8.1% in 1995 and 9.8% in 1994. Operating income from Group life and
annuity products declined 13.6% to $10.2 during 1996 due to adverse
mortality versus the 13.5% improvement to $11.8 in 1995 resulting from
improved mortality. Health results fell
29
<PAGE>
43.2% to $14.8 in 1996 compared to 1995's $25.9 which declined 23.4% from
1994. Health results reflect continued medical inflation and increased
utilization of small dollar health care services such as office visits and
pharmacy and lab tests. The Company has been investing in a proprietary
preferred provider network in North Carolina. This statewide network
covers 118 counties in North Carolina, Southern Virginia, and northern
South Carolina, replacing a less competitive rented network in those
regions. The goal is lower claims costs and administrative expenses. In
addition, the Company is exploring potential joint ventures with managed
care providers.
Communications
JPCC operates television and radio broadcast properties and produces
syndicated sports and entertainment programming. Operating results were:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Communications revenues .................. $189.4 $164.2 $172.5 $145.0 $129.7
------ ------ ------ ------ ------
Operating costs .......................... 130.9 113.4 120.8 100.1 93.6
Depreciation and amortization ............ 9.3 8.8 10.2 10.9 8.2
General expenses ......................... 3.8 3.0 5.3 6.5 3.6
------ ------ ------ ------ ------
Total expenses ........................... 144.0 125.2 136.3 117.5 105.4
------ ------ ------ ------ ------
Operating income before income taxes ..... 45.4 39.0 36.2 27.5 24.3
Provision for income taxes ............... 17.2 15.4 14.2 10.2 10.1
------ ------ ------ ------ ------
Operating income ........................ $ 28.2 $ 23.6 $ 22.0 $ 17.3 $ 14.2
====== ====== ====== ====== ======
</TABLE>
Operating income increased 19.5% in 1996, 7.3% in 1995 and 27.2% in
1994. A strong advertising environment in 1996 contributed to increases in
operating income for all three of JPCC's products. The Olympics and
political advertising contributed to increases at the Company's television
properties. Acquisition activity within JPCC's existing radio markets
contributed to the increases in radio broadcasting. 1995's increase in
core broadcasting earnings is attributable to both television and radio
properties, as well as refunds of federal income taxes and related
interest. In 1994, market share increases, particularly among radio
properties, a favorable sales environment in the broadcast media business,
acquisitions in new and existing markets, and increases in sports
production business contributed to the increase.
In early 1995, substantially all of the assets and the media services
operations of Jefferson-Pilot Data Services, Inc. (JPDS) were sold for
aggregate consideration approximating $33. Operating income of JPDS of
$1.3 in 1995 and $2.6 in 1994 is included in the Communications segment.
Earnings from the reinvestment of JPDS proceeds are included in the Other
segment for the periods subsequent to the sale. Operating income for JPDS
is shown in the Other segment for 1996. Excluding JPDS, operating income
increased 26.5% in 1996 and 14.9% in 1995.
Revenues increased 15.3% in 1996 after declining 4.8% in 1995 and
increasing 19.0 % in 1994. The radio and sports and entertainment
properties contributed significantly to the 1996 increase, growing by 22.5%
and 33.4%, respectively. Radio benefited from very favorable advertising
conditions, acquisitions and improved market shares. The majority of the
sports and entertainment increase was related to special sports programming
events during 1996 and increased collegiate sports revenues. Television
also grew in 1996 by 4.4%. This growth was attributable to strong demand
for political advertising, increased network compensation and strong market
growth. During 1995, television revenues improved 10.1%; radio 5.8% and
sports and entertainment 22.5%. Despite the decline in political revenues
from 1994, television benefited from strong market growth and improved
revenue shares in several key markets as well as the addition of sports
programming. Radio experienced strong growth in most markets, but this
gain was partially offset by a decline in market share in two major markets
due to increased competition.
Total expenses, as a percentage of revenues, has shown continuous
improvement, decreasing to 76.0%, 76.2% and 79.1% in 1996, 1995 and 1994
respectively. This favorable trend resulted from higher profit margins on
increased revenues.
Effective tax rates (including both federal and state income taxes) of
37.9% in 1996, 39.5% in 1995, and 39.2% in 1994 were influenced favorably
by refunds of Federal income taxes.
Discontinued Operations and Other
Discontinued Operations
Discontinued operations include the operations of Jefferson-Pilot Fire &
Casualty (JP F&C) and Jefferson-Pilot Title Insurance Company (JP Title).
These subsidiaries formerly comprised the "Other insurance" segment. In
early 1995, JP sold JP F&C for cash of $55 and recorded a gain on sale of
$16.4. JP Title was sold during the fourth quarter of 1994 for a small
gain. Earnings on proceeds from these sales are included in the Other
segment for 1995. The operations of both subsidiaries are segregated as
"Discontinued Operations" in the accompanying financial statements.
Operating income attributable to Discontinued Operations declined to $2.2
in 1995 as they were only included for a portion of the year, versus $9.3
million in 1994.
Other
Operating results categorized as "Other" include earnings on investments
held in the parent company and passive investment subsidiaries, reduced by
expenses of the Corporation and financing costs most notably those
associated with the debt
30
<PAGE>
incurred to finance acquisitions. The 1996 decrease reflects twelve months
of acquisition financing costs of $23.3. 1995's improvement was due to
earnings on cash sales proceeds of discontinued operations, offset by
acquisition financing costs of $5.2 for three months.
Consolidated Financial Position, Capital
Resources and Liquidity
JP's resources are primarily represented by investments related to its Life
Insurance segment, properties and other assets used in its Life Insurance
and Communications segments and investments backing corporate capital. The
Investments section reviews the Company's investment portfolio and key
strategies.
Total assets increased $1,084 or 6.6% in 1996 resulting from positive
cash flow from operations, $1,077; increases in net policyholder contract
deposits, $114; increased net borrowings, $40; offset by decreases for
dividend payments, $103; net stock reacquisitions, $21; and other net
decreases $23.
The Life Insurance segment defers the costs of acquiring new business,
including commissions, certain costs of underwriting and issuing policies
plus agency office expenses. Such amounts deferred were $669.2 and $543.3
at December 31, 1996 and 1995, an increase of 23.2%. In 1996 and 1995, the
carrying amount of deferred policy acquisition costs increased $52.1 and
$47.8 for net deferrals and $39.6 and $223.9 related to the KCL assumption
agreement, and increased in 1996 by $34.3 and decreased in 1995 by $51.5
due to changes in unrealized gains and losses.
Additionally, JP recorded Value of Business Acquired of $324.6 for the
acquisition of AH Life. This asset represents the actuarially-determined
present value of future gross profits for the businesses acquired,
discounted at a risk-adjusted rate of return and is amortized at a constant
rate based on the present value of the estimated gross profit amounts
expected to be realized over the life of the business. During 1996 and
1995, the balance was reduced respectively by $26.7 and $7.9 for net
amortization, ($1.0) and $1.2 for realized investment gains on investment
securities, ($23.9) and $24.0 for unrealized (gains)/losses on investment
securities, and in 1996 by a $24.9 purchase accounting adjustment.
Goodwill (representing the cost of acquired businesses in excess of
fair value of net assets) of $86.6 and $69.2 at December 31, 1996 and 1995
relates to acquisitions of AH Life and communication properties and is
being amortized over periods ranging from 5 to 40 years, with a dollar-
weighted average amortization period of approximately 25 years. Goodwill
as a percentage of shareholders' equity was 3.8% and 3.2% at year end 1996
and 1995.
Carrying amounts of goodwill, Value of Business Acquired and Deferred
Policy Acquisition Costs are regularly reviewed for indications of value
impairment, with consideration given to the financial performance of
acquired properties, future gross profits of insurance in force and other
factors. In 1996, goodwill was decreased $7.9 due to purchase accounting
adjustments.
At December 31, 1996 and 1995, JP had recorded reinsurance receivables
of $1,212.9 and $1,404.3 and policy loans of $878.8 and $828.5 which are
related to the businesses of AH Life that were coinsured with HI affiliates
as described earlier. HI has provided payment, performance and capital
maintenance guarantees with respect to the balances receivable. The
reduction in reinsurance receivables was primarily due to the recapture by
JP of a block of reinsured PPA policies in September 1996.
Capital Resources
Consolidated shareholders' equity was $2,297 and $2,156 at December 31,
1996 and 1995, including net unrealized gains on securities of $501.4 and
$524.7 respectively.
JP considers existing capital resources to be more than adequate to
support current business activities. The business plan places priority on
redirecting certain capital resources now invested in bonds and stocks into
its core businesses, which would be expected to produce higher returns over
time.
Long-term debt was $147.9 and $137.1 at December 31, 1996 and 1995.
In December 1995, JP completed a public offering of 1,815,000 unsecured
Automatic Common Exchange Securities Due January 21, 2000(ACES). Annual
interest of 7.25% is payable quarterly. At maturity JP will exchange the
ACES into shares of NationsBank Corporation common stock or equivalent
cash, as more particularly described in Note 7.
In January and March 1997, the Company privately placed $200 of 8.14%
Capital Securities Series A and $100 of 8.285% Capital Securities Series B
(Note 18). Net proceeds were invested in the interim before closing of the
Chubb Life acquisition, in major part by reducing outstandings under JP's
ongoing commercial paper program.
Short-term borrowings outstanding consisted of $222.3 and $230.0 in
commercial paper and line of credit borrowings at December 31, 1996 and
1995 respectively. The weighted average interest rates were 5.53% and
6.04% respectively. During 1995, JP utilized uncommitted bank lines of
credit to manage parent company cash flows. In October 1995, JP replaced
these lines with a $450, 364-day unsecured revolving credit agreement. In
1996 this agreement was reduced to $250, and the Company began issuing
commercial paper notes. Maximum commercial paper outstanding was $249.8
million during 1996. Short term borrowings peaked at $390 in 1995 and $90
during 1994.
JP has sold U.S. Treasury obligations under repurchase agreements,
accounted for as financing arrangements. Proceeds are used to purchase
securities with longer durations as an asset/liability management
strategy. Maximum outstanding during 1996 and 1995 were $281 and $265.
Securities at year-end were $241 at fair value and $235 at amortized cost
in 1996 and $196 at fair value and $188 at amortized cost for 1995.
31
<PAGE>
JP's capital adequacy is illustrated by the following table:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets .......................... $17,562 $16,478 $6,140 $5,641 $5,257
Total stockholders' equity ............ $ 2,297 $ 2,156 $1,733 $1,733 $1,668
Ratio of stockholders' equity to assets 13.1% 13.1% 28.2% 30.7% 31.7%
====== ====== ====== ====== ======
</TABLE>
The ratio of capital to assets remained steady in 1996 after declining
in 1995 as a result of acquisitions and internal growth, but will decline
further with the Chubb Life acquisition.
JP considers the capital requirements of its business segments in
determining the level of capital available for strategic development. The
Life Insurance segment, which employs the larger level of required capital,
is subject to regulatory constraints. Capital employed in the life
insurance companies is measured in accordance with statutory accounting
practices (SAP) which differ from generally accepted accounting principles
(GAAP) (see Notes 1 and 11).
The National Association of Insurance Commissioners (NAIC) has adopted
risk-based capital (RBC) levels for life insurers, requiring minimum levels
of statutory capital and surplus based on formulas related to investment
credit risk, insurance risk, interest rate risk and general business risk.
The Company's insurance subsidiaries currently have RBC well above required
levels.
JP Life and AH Life have been assigned the following claims paying
ratings by the following agencies:
JP Life AH Life
- ---------------------------------------------------------------------------
A.M. Best ........................... A++ A+
Standard & Poor's ................... AAA AAA
Duff and Phelps ..................... AAA AAA
Moody's ............................. Aa2 Aa3
Following the announced acquisition of Chubb Life, A.M. Best, Moody's,
and Duff and Phelps reaffirmed their claims paying ratings for both JP Life
and AH Life. Standard & Poor's has placed both companies on ratings watch
with negative implications.
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 risk-based capital 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.
Liquidity
Liquidity requirements are met primarily by positive cash flows from the
operations of JP Life, AH Life and other consolidated subsidiaries.
Overall sources of liquidity are sufficient to satisfy operating
requirements.
Consolidated cash provided by operations was $1,076.6, $320.8 and
$142.1 for 1996, 1995 and 1994. Cash flows provided from increases in
policyholder contract deposits were $114.3, $358.7 and $244.1 in 1996,
1995, and 1994. Net proceeds from short-term borrowing and securities sold
under repurchase agreements were $39.8, $129.9, and $256.5 (reflecting the
initial repurchase agreements) in 1996, 1995 and 1994. In 1996, 1995, and
1994 funds were used to purchase net investments of $1,123.9, $720.5, and
$513.9; to pay dividends of $102.8, $89.3, and $81.8; and for the net
repurchase of shares of $21.3, $52.4, and $55.7 in 1996, 1995 and 1994.
Primary sources of cash from the Life 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.
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'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 were $156.1 in 1996, $133.7 in 1995 and
$128.0 in 1994. JP Life has been the primary source of dividends
contributing $120.0 in 1996, $97.0 in 1995 and $94.5 in 1994. On a
statutory basis, 1996 and 1995 total dividends from JP Life to the parent
company of $120.0 and $423.7 included extraordinary dividends. 1995
dividends included shares in a former JP Life subsidiary, which holds most
of JP's shares in NationsBank. JP Life and AH Life are subject to North
Carolina and Michigan insurance laws respectively, which limit the amount
of dividends that may be paid without advance regulatory approval. To fund
its cash flow requirements for 1997 including the Chubb Life acquisition,
approval of extraordinary dividends of approximately $340.0 have been
requested. of which $40.0 was approved and was paid March 3, 1997.
Insurance statutes of the state of North Carolina limit dividends, which
may be paid without consent of the Insurance Commissioner to the lesser of
statutory earnings or 10% of statutory capital and surplus at the end of
the preceding year. To meet the Parent's cash
32
<PAGE>
flow requirements, JP Life intends to pay dividends after 1997 which will
not exceed statutory earnings but will require approval as an extraordinary
dividend. No common stock dividends from AH Life are planned for 1997.
Cash and short-term investments were $105.1 and $122.5 at December 31,
1996 and 1995. Additionally, debt and equity securities held by the
parent company and non-regulated subsidiaries with carrying amounts of
$482.8 and $391.7 at December 31, 1996 and 1995 are considered to be
sources of liquidity to support the Company's strategies. Approximately
40% of these securities are being sold to finance the Chubb Life
acquisition. Total trading securities and debt and equity securities
available for sale at December 31, 1996 were $7,601.8.
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. Management requires that credit and
interest rate risks be prudently managed and that sufficient liquidity be
maintained. Management focuses on option-adjusted yields as a measure of
anticipated performance, and on option-adjusted durations of assets and
liabilities as a measure of interest rate risk.
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.
JP held the following carrying amounts of investments:
December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------
Publicly-issued bonds ........... $ 8,249.4 58% $ 7,845.6 59%
Privately-placed bonds .......... 2,249.2 16 2,081.2 15
Commercial mortgage loans ....... 1,323.7 9 1,049.5 8
Common stock .................... 905.3 6 824.9 6
Policy loans .................... 1,211.7 8 1,151.9 9
Preferred stock ................. 74.6 1 95.7 1
Real estate ..................... 75.1 1 76.6 1
Cash, other invested assets ..... 159.4 1 164.2 1
--------- --- --------- ---
Total $14,248.4 100% $13,289.6 100%
========= === ========= ===
The strategy of identifying market sectors and niches that provide
investment opportunities to meet the portfolios' growth, quality and yield
requirements is expected to result in increasing percentages of private
placements and commercial mortgage loans.
JP's Investment Policy Statement (Policy) requires an average quality
fixed income portfolio (excluding mortgage loans) of "A" or higher.
Currently, the average quality is "AA", excluding mortgage loans. The
Policy also imposes limits on the amount of lower quality investments and
requires diversification by issuer and asset type. The Company monitors
"higher risk" investments for compliance with the Policy and for proper
valuation. Securities that experience other than temporary declines in
value are adjusted to net realizable values through a charge to earnings.
Commercial mortgage loans in default are carried at the net present value
of expected future cash flows. The Company has established a reserve to
account for impaired mortgage loans which was $27 for both years.
Carrying amounts of investments categorized as "higher risk" assets
were:
December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------
Bonds near or in default ....... $ 12.4 0.1% $ 12.5 0.1%
Bonds below investment grade ... 431.9 3.0 443.1 3.3
Mortgage loans 60 days
delinquent or in foreclosure .. 8.6 0.1 4.9 0.1
Mortgage loans restructured .... 14.1 0.1 19.0 0.1
Foreclosed properties .......... 2.8 -- 4.4 --
--------- ---- --------- ---
Sub-total, "higher risk assets" 469.8 3.3 483.9 3.6
All other investments .......... 13,778.6 96.7 12,805.7 96.4
--------- ---- --------- ---
Total cash and investments ..... $14,248.4 100.0% $13,289.6 100.0%
========= ===== ========= =====
The level of below investment grade bonds is specifically 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 which have the potential to be upgraded ("crossover
credits").
The 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 protect against yield curve changes
between identifying and closing mortgage loan and private placement
investments, and to modify the interest characteristics of certain blocks
of annuity contracts. 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. In 1996 and 1995 JP had limited involvement with
derivative financial instruments, using them to manage well-defined
interest rate risks. Interest rate swaps with a notional value of $253.7
and $125.0 are open as of December 31, 1996 and 1995 respectively.
Termination of these arrangements under
33
<PAGE>
current interest rates would result in potential exposure of $2.5. The net
amount paid or received under these arrangements is reflected as an
adjustment to investment income.
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 $7.2 in 1996 and $10.9 in 1995.
As discussed in the Liquidity section, securities are sold under
repurchase agreements as an asset/liability management strategy.
Collateralized Mortgage Obligations (CMO's) were:
December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------
Available for sale, at fair value:
Federal agency issued CMO's ......... $2,059.0 $ 1,856.1
Corporate private-labeled CMO's ..... 912.5 640.4
Total ............................... $2,971.5 $ 2,496.5
======== =========
The Company's investment strategy with respect to CMO's focuses on
actively-traded, less volatile issues that produce relatively stable cash
flows. CMO holdings consist predominantly of the least volatile Planned
Amortization Classes and sequential tranches of federal agency issuers. 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.
Net investment income grew 64.5% in 1996 to $893.0 versus 44.7% in
1995 to $542.8 and 4.0% in 1994 to $375.2. In 1996 and 1995, net investment
income grew 14.8% and 6.0% respectively without acquisitions, despite lower
investment yields experienced during the three year period. Such decline
is represented by the following table that presents Yield at Cost on bonds
and mortgages:
1996 1995 1994
- ---------------------------------------------------------------------------
March 31 ........................... 7.81% 8.12% 8.08%
June 30 ............................ 7.80 8.05 8.06
September 30 ....................... 7.72 7.99 8.03
December 31 ........................ 7.82 7.68 8.10
Growth in investment income was achieved by growth in invested assets
arising from policyholder contract deposits related to universal life and
annuity products, and from acquisitions. During 1996 and 1995,
policyholder contract deposits (excluding acquisitions) increased 12.8% to
$2,447 in 1996 and 17.5% to $2,169 in 1995. Annuities increased 9.0% to
$1,420 in 1996 and 20.4% to $1,303 as of December 31, 1995. During 1994,
these deposits increased 17.2% to $1,846, of which annuity funds comprised
$1,081, an increase of 22.0%. Total policyholder deposits (including
acquisitions) at year end were $11,560, of which $6,415 were annuity funds.
Asset/Liability Management
The asset/liability management process focuses primarily on the management
of interest rate risk. One measure of this risk is a comparison of asset
and liability durations. Duration measures the sensitivity of asset and
liability values to changes in interest rates. JP monitors the duration 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, consisting of Finance, Investment and
Actuarial senior management. The committee continually monitors and
refines the portfolio with a goal of prudently balancing profitability and
risk both for each insurance line, and in the aggregate.
Separate asset portfolios have been established for different
insurance products. Various modeling and analytical systems are employed
in analyzing the lines assets and liabilities. Option-adjusted liability
durations have been developed using stochastic actuarial projections of
liability cash flows. In addition, the Investment Department's models
measure the assets' effective duration and produce other analytical
measures necessary for portfolio management. The Company also considers the
timing of the cash flows arising from the assets and liabilities under
different interest rate scenarios. Management intends that option-adjusted
durations for interest sensitive portfolios such as universal life and
annuities remain prudently matched. A wider tolerance is permitted for
non-interest sensitive (traditional) portfolios. At December 31, 1996 and
1995, 74.0% and 75.4% of life insurance invested assets at amortized cost
were held for interest-sensitive portfolios and 26.0% and 24.6% were held
for traditional portfolios and corporate capital and surplus.
34
<PAGE>
External Trends and Forward Looking Information
JP operates largely in the U. S. Financial Services market, which is
subject to general economic conditions in the U.S. During 1996 the U.S.
economy showed signs of improvement and growth evidenced by strong bond
and stock markets and a stronger U.S. dollar. Soft market conditions have
continued to plague the insurance industry. The industry also is affected
by increased merger and acquisition activity.
In the face of flat premium growth, the U.S. insurance industry has
experienced an increasing number of mergers, acquisitions, consolidations
and sales of business lines. These activities have been driven by a need
to reduce costs of distribution and by the need to increase economies of
scale in the face of growing competition from larger consolidating
traditional insurers, from non-traditional players such as banks,
securities brokers and mutual funds and from HMO's and managed care
providers. JP has grown at a rate faster than the overall industry because
of acquisitions, its strong financial position, superior claims paying
ratings, and efforts to increase distribution sources.
Inflation and Interest Rate Risks
During 1996, ten year U.S. Treasury rates increased approximately 84 basis
points versus a 224 point decline in 1995. Since JP's assets and
liabilities are largely monetary in nature, the Company's financial
position is impacted by changes in the general interest rate environment.
Interest rate increases in 1996 and declines during 1995 contributed to the
decrease in unrealized gains on securities available for sale, net of
deferred taxes, in 1996 of $23.3 and the increase in 1995 of $294.0.
The Company's recent growth in assets and liabilities is largely
attributable to increases in interest-sensitive products. Because JP earns
profits on the basis of investment spreads, changes in interest rates may
also affect results of operations. In a rising interest rate environment,
competitive pressures may make it difficult for the Company to sustain the
spreads on its interest sensitive portfolio of insurance products, thereby
prompting policyholders to withdraw funds prematurely (disintermediation
risk). In a falling interest rate environment, the risk of prepayment on
fixed securities increases, thereby causing funds to be reinvested at lower
yields (prepayment risk). The Company manages these risks by adjusting
interest crediting rates, at least on an annual basis, to reflect the yield
of its investment portfolio and assumptions for pricing and profitability
and prudently matching assets and liabilities.
Medical inflation and utilization of medical services affect the
profitability of health products offered through the Individual and Group
distribution systems. In the event that premium rates are not adequately
adjusted in anticipation of medical trends, profitability of health
insurance products is adversely affected.
Environmental Liabilities
JP is exposed to environmental regulation and litigation as a result of
ownership of investment real estate and property and casualty and
Communications subsidiaries. Actual loss experience has been minimal and
exposure to environmental losses is considered by the Company to be
insignificant.
Regulatory and Legal Environment
Prescribed or permitted Statutory Accounting Principles (SAP) may vary
between states and between companies. The (NAIC) is in the process of
codifying SAP to promote standardization of methods, which might result in
changes in statutory accounting practices for the Company. Such changes
are not expected to impact the Company's statutory capital requirements
significantly.
Assessments by state guaranty associations are made to cover losses to
policyholders of insolvent or rehabilitated insurance companies.
Assessments may be partially recovered through a reduction in future
premium taxes in most states. The Company has accrued for expected
assessments net of estimated future premium tax deductions.
In recent years, the life insurance industry has experienced increased
litigation in which large jury awards including punitive damages have
occurred. JP is involved in various legal and administrative proceedings
and claims of various types, some of which include claims for punitive
damages. Because of the considerable uncertainties that exist, the Company
cannot predict the outcome of pending or future litigation with certainty.
It is possible that results of operations in a particular period could be
materially affected by certain legal proceedings. Based on consultation
with legal advisers, management does not believe that resolution of pending
legal proceedings will have a material adverse effect on the Company's
financial position or liquidity.
Accounting Pronouncements
In October 1995 the FASB issued SFAS 123 "Accounting for Stock-Based
Compensation" which became effective in 1996. SFAS 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans and allows entities to continue to measure compensation
cost for the plans using the intrinsic value-based method prescribed by
Accounting Principles Board (APB) Opinion 25 "Accounting for Stock Issued
to Employees", or to adopt a fair value-based measurement method. Entities
that do not elect to adopt a fair value-based method are required to make
pro-forma disclosures of net income and income per share as if the fair
value-based method had been applied. Such pro-forma amounts are likely to
be less than the corresponding amounts presented in the Company's future
statements of net income if the APB 25 method is continued.
35
<PAGE>
The pro forma impact of adopting SFAS 123 is shown below:
1996 1995
- ---------------------------------------------------------------------------
Pro forma net income available to
common stockholders ............................ $288,467 $271,778
Pro forma earnings per share available
to common stockholders ......................... $4.06 $3.79
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 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.
36
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
Jefferson-Pilot Corporation
Greensboro, North Carolina
We have audited the accompanying consolidated balance sheet of
Jefferson-Pilot Corporation and subsidiaries as of December 31, 1996, and
the related consolidated statements of income, stockholders' equity and
cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit. The consolidated financial statements of Jefferson-Pilot
Corporation and subsidiaries for the years ended December 31, 1995 and 1994
were audited by predecessor auditors, whose report dated February 6, 1996
expressed an unqualified opinion on those statements and included an
explanatory paragraph that related to the change in the Company's method of
accounting for certain investments in debt and equity securities discussed
in Notes 1 and 3 to these financial statements. The consolidated financial
statements for the year ended December 31, 1995 of Alexander Hamilton Life
Insurance Company of America and subsidiaries were audited by other
auditors whose report was furnished to the predecessor auditors, and the
predecessor auditors' opinion, insofar as it related to the amounts
included for Alexander Hamilton Life Insurance Company of America and
subsidiaries, is based solely on the report of the other auditors. The
consolidated financial statements of Alexander Hamilton Life Insurance
Company of America and subsidiaries reflect total assets and revenue
constituting 53% and 9%, respectively, of the related consolidated totals
for 1995.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above
present fairly, in all material respects, the financial position of
Jefferson-Pilot Corporation and subsidiaries as of December 31, 1996, and
the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
Greensboro, North Carolina
March 14, 1997
37
<PAGE>
Consolidated Balance Sheets
Jefferson-Pilot Corporation and Subsidiaries
December 31
--------------------
(Dollar Amounts in Millions Except Per Share Information) 1996 1995
- --------------------------------------------------------------------------------
Assets
Investments:
Debt securities available for sale, at fair value
(amortized cost 1996 -- $6,607; 1995 -- $6,208) ...... $ 6,673 $ 6,458
Debt securities held to maturity, at amortized cost
(fair value 1996 -- $3,903; 1995 -- $3,649) .......... 3,877 3,527
Equity securities available for sale, at fair value
(cost 1996 -- $196; 1995 -- $207) .................... 906 816
Equity securities trading portfolio, at fair value
(cost 1996 -- $23; 1995 -- $46) ...................... 23 46
Mortgage loans on real estate ........................ 1,323 1,049
Policy loans ......................................... 1,212 1,152
Real estate .......................................... 75 77
Other investments .................................... 54 42
------- -------
Total investments ................................ 14,143 13,167
Cash and cash equivalents .............................. 105 122
Accrued investment income .............................. 166 157
Accounts receivable and agents' balances ............... 96 101
Due from reinsurers .................................... 1,260 1,450
Property and equipment ................................. 112 110
Deferred policy acquisition costs and
value of business acquired ........................... 934 835
Cost in excess of net assets acquired .................. 86 69
Assets held in separate accounts ....................... 492 346
Other assets ........................................... 168 121
------- -------
$17,562 $16,478
======= =======
See Notes to Consolidated Financial Statements
38
<PAGE>
Consolidated Balance Sheets (continued)
Jefferson-Pilot Corporation and Subsidiaries
December 31
-------------------
(Dollar Amounts in Millions Except Per Share Information) 1996 1995
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Policy liabilities:
Future policy benefits ............................... $ 1,509 $ 1,453
Policyholder contract deposits ....................... 11,573 10,781
Dividend accumulations and other
policyholder funds on deposit ...................... 181 182
Policy and contract claims ........................... 226 199
Dividends for policyholders .......................... 19 19
Deferred revenue and premiums collected in advance ... 40 34
Other ................................................ 71 54
------- -------
Total policy liabilities ......................... 13,619 12,722
Debt:
Commercial paper and revolving credit borrowings .... 222 230
Automatic common exchange securities and other debt . 148 137
Securities sold under repurchase agreements ........... 244 196
Currently payable income taxes......................... -- 40
Deferred income tax liabilities ....................... 173 215
Liabilities related to separate accounts .............. 492 346
Accounts payable, accruals and other liabilities ...... 314 386
------- -------
Total liabilities ............................... 15,212 14,272
------- -------
Commitments and contingent liabilities
Mandatorily redeemable preferred stock ................ 53 50
Stockholders' equity:
Common stock, par value $1.25 per share: authorized
1996 -- 350,000,000 shares; 1995 -- 150,000,000
shares; issued and outstanding 1996 -- 70,746,233
shares; 1995 -- 71,213,162 shares ................. 88 89
Retained earnings ................................... 1,708 1,542
Net unrealized gains on securities .................. 501 525
------- -------
2,297 2,156
------- -------
$17,562 $16,478
======= =======
39
<PAGE>
Consolidated Statements of Income
Jefferson-Pilot Corporation and Subsidiaries
Year Ended December 31
(Dollar Amounts in Millions ---------------------------
Except Per Share Information) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue
Premiums and other considerations ................. $ 994 $ 810 $ 655
Net investment income ............................. 893 543 375
Realized investment gains ......................... 47 48 61
Communications operations ......................... 187 164 173
Other ............................................. 4 3 5
------ ------ ------
Total revenues .................................... 2,125 1,568 1,269
------ ------ ------
Benefits and Expenses
Insurance and annuity benefits .................... 1,211 842 628
Insurance commissions ............................. 153 109 72
General and administrative ........................ 174 134 118
Insurance taxes, licenses and fees ................ 39 29 23
Net deferral of policy acquisition costs .......... (52) (48) (41)
Net amortization of value of business acquired .... 26 8 --
Communications operations ......................... 131 113 121
------ ------ ------
Total benefits and expenses ....................... 1,682 1,187 921
------ ------ ------
Income from continuing operations
before income taxes .............................. 443 381 348
Income taxes ...................................... 149 125 118
------ ------ ------
Income from continuing operations ................. 294 256 230
Income from discontinued operations, net of
income taxes
Income from operations prior to disposal ........ -- 2 9
Gain on disposal ................................ -- 16 --
------ ------ ------
-- 18 9
------ ------ ------
Net income ........................................ 294 274 239
Dividends on mandatorily redeemable preferred stock 3 1 --
------ ------ ------
Net income available to common stockholders ....... $ 291 $ 273 $ 239
====== ====== ======
Income Per Share of Common Stock
Income from continuing operations available to
common stockholders ............................ $ 4.09 $ 3.55 $ 3.15
Income from discontinued operations:
Income from operations prior to disposal ....... -- .03 .13
Gain on disposal ............................... -- .23 --
------ ------ ------
Net income available to common stockholders ...... $ 4.09 $ 3.81 $ 3.28
====== ====== ======
See Notes to Consolidated Financial Statements
40
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Jefferson-Pilot Corporation and Subsidiaries
Net Unrealized Net
Capital in Gains Unrealized Total
(Dollar Amounts in Millions Common Excess of Retained on Equity Gains on Stockholders'
Except Per Share Information) Stock Par Value Earnings Securities Securities Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ................. $62 $-- $1,339 $332 $ -- $ 1,733
Change in accounting principle
effective January 1, 1994 ............ -- -- -- (332) 433 101
Net income ............................. -- -- 239 -- -- 239
Common dividends $1.15 per share ....... -- -- (83) -- -- (83)
Common stock issued .................... 1 7 -- -- -- 8
Common stock reacquired ................ (2) (7) (54) -- -- (63)
Decrease during year ................... -- -- -- -- (202) (202)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ............... 61 -- 1,441 -- 231 1,733
Net income ............................. -- -- 274 -- -- 274
Common dividends $1.28 per share ....... -- -- (91) -- -- (91)
Preferred dividends .................... -- -- (1) -- -- (1)
Common stock issued .................... -- 1 -- -- -- 1
Common stock reacquired ................ (2) (1) (51) -- -- (54)
Three-for-two common stock split ....... 30 -- (30) -- -- --
Increase during year ................... -- -- -- -- 294 294
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 ............... 89 -- 1,542 -- 525 2,156
Net income ............................. -- -- 294 -- -- 294
Common dividends $1.40 per share ....... -- -- (102) -- -- (102)
Preferred dividends .................... -- -- (3) -- -- (3)
Common stock issued .................... -- 1 -- -- -- 1
Common stock reacquired ................ (1) (1) (23) -- -- (25)
Decrease during year ................... -- -- -- -- (24) (24)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ............... $88 $-- $1,708 $ -- $501 $2,297
=============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
41
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Jefferson-Pilot Corporation and Subsidiaries
Year Ended December 31
-------------------------
(Dollar Amounts in Millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ............................................... $ 294 $ 274 $239
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in policy liabilities other than deposits ....... 336 9 (16)
Credits to policyholder accounts, net .................. 355 145 27
Deferral of policy acquisition costs, net .............. (52) (68) (41)
Change in receivables and asset accruals ............... 134 (43) (10)
Change in payables and expense accruals ................ 50 70 (12)
Realized investment gains and gain on
disposal of discontinued operations .................. (45) (69) (62)
Other .................................................. 5 3 17
------ ----- ----
Net cash provided by operating activities .......... 1,077 321 142
------ ----- ----
Cash Flows from Investing Activities
Securities available for sale:
Sales .................................................. 500 1,257 779
Maturities, calls and redemptions ...................... 1,050 301 98
Purchases .............................................. (1,916) (1,602) (817)
Securities held to maturity:
Sales .................................................. -- -- 7
Maturities, calls and redemptions ...................... 226 34 123
Purchases .............................................. (575) (58) (577)
Repayments of mortgage loans ............................. 115 96 71
Mortgage loans originated ................................ (389) (291) (173)
Decrease (increase) in policy loans, net ................. (60) (108) 8
Cash received in assumption reinsurance transaction ...... -- 164 --
Cash paid for insurance business acquired, net ........... -- (505) --
Purchase of intangibles .................................. (58) (1) (17)
Other investing activities, net .......................... (17) (7) (16)
------ ----- ----
Net cash used in investing activities .................. (1,124) (720) (514)
------ ----- ----
Cash Flows from Financing Activities
Policyholder contract deposits ........................... 1,404 741 362
Withdrawals of policyholder contract deposits ............ (1,290) (382) (118)
Decrease in notes payable, net ........................... -- (29) (10)
Borrowings under short-term credit facilities ............ 222 395 --
Repayments under short-term credit facilities ............ (230) (165) --
Issuance of automatic common exchange securities ......... -- 131 --
Proceeds (payments) from securities sold under
repurchase agreements .................................. 48 (71) 267
Cash dividends paid ...................................... (103) (89) (82)
Common stock transactions, net ........................... (24) (52) (56)
Other financing activities, net .......................... 3 20 --
------ ----- ----
Net cash provided by financing activities .......... 30 499 363
------ ----- ----
Net increase (decrease) in cash and cash equivalents (17) 100 (9)
Cash and cash equivalents, beginning ..................... 122 22 31
------ ----- ----
Cash and cash equivalents, ending ........................ $ 105 $ 122 $ 22
====== ===== ====
See Notes to Consolidated Financial Statements
</TABLE>
42
<PAGE>
Notes to Consolidated Financial Statements
Note 1.
Nature of Operations and Significant Accounting Policies
Nature of Operations
Jefferson-Pilot Corporation (the Company) operates in the life insurance
and communications industries. Life insurance, accident and health
insurance and annuities are currently marketed to individuals and
businesses in the United States through the Company's principal life
insurance subsidiaries: Jefferson-Pilot Life Insurance Company (JP Life),
Alexander Hamilton Life Insurance Company of America (AH Life), and First
Alexander Hamilton Life Insurance Company (FAHL). Subsequent to year end,
the Company entered into an agreement to acquire Chubb Life Insurance
Company of America (see Note 18). Communications operations are conducted
by Jefferson-Pilot Communications Company (JPCC) and consist of radio and
television broadcasting, through facilities located in strategically
selected markets in the Southeastern and Western United States, and sports
program production.
Principles of Consolidation
The consolidated financial statements include the accounts of Jefferson-
Pilot Corporation and all of its subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). The
insurance subsidiaries also submit financial statements to insurance
industry regulatory authorities. Those financial statements are prepared
on the basis of statutory accounting practices (SAP) and are significantly
different from financial statements prepared in accordance with GAAP.
See Note 11.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities as of
the date of the financial statements, and the reported amounts of revenue
and expenses for the reporting period. Those estimates are inherently
subject to change and actual results could differ from those estimates.
Included among the material (or potentially material) reported amounts and
disclosures that require extensive use of estimates are asset valuation
allowances, policy liabilities, deferred policy acquisition costs, value of
business acquired and the potential effects of resolving litigated matters.
Cash and Cash Equivalents
The Company includes with cash and cash equivalents its holdings of highly
liquid investments which mature within three months of the date of
acquisition.
Debt and Equity Securities
Debt and equity securities are classified as either 1) securities held to
maturity, stated at amortized cost; 2) trading securities, stated at fair
value with unrealized gains and losses reflected in income; or 3)
securities available for sale, stated at fair value with net unrealized
gains and losses included in a separate component of stockholders' equity,
net of deferred income taxes and adjustments to deferred policy
acquisition costs and value of business acquired.
Prior to adopting FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, as of January 1, 1994, all debt
securities were stated at amortized cost less allowances for other-than-
temporary declines in value. Upon adoption of Statement No. 115, debt
securities classified as available for sale were adjusted to aggregate fair
value and those equity securities that were previously stated at the lower
of aggregate cost or market were adjusted to market value.
Amortization of premiums and accrual of discounts on investments in
debt securities are reflected in earnings over the contractual terms of the
investments in a manner that produces a constant effective yield. Realized
gains and losses on dispositions of securities are determined by the
specific-identification method.
Mortgage and Policy Loans
Mortgage loans on real estate are stated at unpaid balances, net of
allowances for unrecoverable amounts. Policy loans are stated at their
unpaid balances.
Real Estate and Other Investments
Real estate not acquired by foreclosure is stated at cost less accumulated
depreciation. Real estate acquired by foreclosure is stated at the lower
of depreciated cost or fair value minus estimated costs to sell. Real
estate, primarily buildings, is depreciated principally by the straight-
line method over estimated useful lives generally ranging from 30 to 40
years. Accumulated depreciation was $37 million and $21 million at
December 31, 1996 and 1995, respectively. Other investments are stated at
equity, or the lower of cost or market, as appropriate.
43
<PAGE>
Note 1.
Nature of Operations and Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost and depreciated principally by
the straight-line method over their estimated useful lives, generally 30 to
50 years for buildings and approximately 10 years for other property and
equipment. Accumulated depreciation was $129 million and $105 million at
December 31, 1996 and 1995, respectively.
Deferred Policy Acquisition Costs and Value of Business Acquired
Costs related to obtaining new business, including commissions, certain
costs of underwriting and issuing policies and certain agency office
expenses, all of which vary with and are primarily related to the
production of new business, have been deferred.
Deferred policy acquisition costs for traditional life insurance
policies are amortized over the premium paying periods of the related
contracts using the same assumptions for anticipated premium revenue that
are used to compute liabilities for future policy benefits. For universal
life and annuity products, these costs are amortized at a constant rate
based on the present value of the estimated future gross profits to be
realized over the terms of the contracts, not to exceed 25 years.
Value of business acquired represents the actuarially determined
present value of anticipated profits to be realized from life insurance and
annuity business purchased, using the same assumptions used to value the
related liabilities. Amortization of the value of business acquired occurs
over the related contract periods, using current crediting rates to accrete
interest and a constant amortization rate based on the present value of
expected future profits.
The carrying amounts of deferred policy acquisition costs and value of
business acquired are adjusted for the effect of realized gains and losses
and the effects of unrealized gains or losses on debt securities classified
as available for sale. Both deferred policy acquisition costs and value of
business acquired are reviewed periodically to determine that the
unamortized portion does not exceed expected recoverable amounts. No
impairment adjustments have been reflected in earnings of any year
presented.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired is amortized on a straight-line basis
over periods of 5 to 40 years. Accumulated amortization was $14 million
and $12 million at December 31, 1996 and 1995, respectively. Carrying
amounts are regularly reviewed for indications of value impairment, with
consideration given to financial performance and other relevant factors.
Separate Accounts
Separate account assets and liabilities represent funds segregated by the
Company for the benefit of certain policyholders who bear the investment
risk. The separate account assets and liabilities, which are equal, are
recorded at fair value. Policyholder account deposits and withdrawals,
investment income and realized investment gains and losses are excluded
from the amounts reported in the Consolidated Statements of Income. Fees
charged on policyholders' deposits are included in other revenue.
Recognition of Revenue
Premiums on traditional life insurance products are reported as revenue
when received unless received in advance of the due date.
Premiums on accident and health, and disability insurance are reported
as earned, over the contract period. A reserve is provided for the portion
of premiums written which relate to unexpired coverage terms.
Revenue from universal life-type and annuity products includes charges
for the cost of insurance, for initiation and administration of the policy,
and for surrender of the policy. Revenue from these products is recognized
in the year assessed to the policyholder, except that any portion of an
assessment which relates to services to be provided in future years is
deferred and recognized over the period during which services are provided.
Recognition of Benefits and Expenses
Benefits and expenses, other than deferred policy acquisition costs,
related to traditional life, accident and health, and disability insurance
products are recognized when incurred in a manner designed to match them
with related premiums and spread income recognition over expected policy
lives. For universal life-type and annuity products, benefits include
interest credited to policyholders' accounts, which is recognized as it
accrues.
Future Policy Benefits
Liabilities for future policy benefits on traditional life and disability
insurance are computed by the net level premium valuation method based on
assumptions about future investment yield, mortality, morbidity and
persistency. Estimates about future circumstances are based principally on
historical experience and provide for possible adverse deviations.
Policyholder Contract Deposits
Policyholder contract deposits consist of policy values that accrue to
holders of universal life-type contracts and annuities. The liability is
determined using the retrospective deposit method and consists of policy
values that accrue to the benefit of the policyholder, before deduction of
surrender charges.
44
<PAGE>
Note 1.
Nature of Operations and Significant Accounting Policies (continued)
Policy and Contract Claims
The liability for policy and contract claims consists of the estimated
amount payable for claims reported but not yet settled, claims incurred
during the year but reported subsequent to the date of the consolidated
balance sheet, and an estimate of claims incurred but not reported, which
is based on historical experience, adjusted for trends and circumstances.
Management believes that the recorded liability is sufficient to provide
for the associated claims adjustment expenses.
Reinsurance Balances and Transactions
Reinsurance receivables include amounts related to paid benefits and
estimated amounts related to unpaid policy and contract claims, future
policy benefits and policyholder contract deposits. The cost of
reinsurance is accounted for over the terms of the underlying reinsured
policies using assumptions consistent with those used to account for the
policies.
Participating Policies
Participating life policies approximate the following percentages of
ordinary life insurance in force and ordinary life insurance premium
revenue as of December 31, 1996, 1995 and 1994 and for the years then
ended, respectively:
1996 1995 1994
---------------------------------------------------------------
Ordinary life insurance in force ..... 4% 4% 12%
Ordinary life premium revenue ........ 8% 21% 22%
The amount of dividends to be paid on participating policies is determined
annually by the Board of Directors. Anticipated dividends are accounted
for as a planned contractual benefit in computing the value of future
policy benefits.
Stock Based Compensation
The Company accounts for stock incentive awards in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly,
recognizes no compensation expense for stock option awards when the option
price is equal to the market value of the stock at the date of award.
Income Taxes
The Company and its subsidiaries file a consolidated life/nonlife federal
income tax return. Deferred income taxes are recorded on the differences
between the tax bases of assets and liabilities and the amounts at which
they are reported in the consolidated financial statements. Recorded
amounts are adjusted to reflect changes in income tax rates and other tax
law provisions as they become enacted.
Income Per Share of Common Stock
Income per share of common stock is based on the weighted-average
number of common shares outstanding. The weighted-average number of shares
outstanding was 71,074,030 in 1996, 71,693,816 in 1995 and 72,960,533 in
1994.
Reclassifications
Certain amounts reported in prior years' consolidated financial statements
have been reclassified to conform with the presentations adopted in the
current year. These reclassifications have no effect on net income or
stockholders' equity of the prior years.
New Accounting Pronouncements
The FASB issued Statement No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, which requires an
entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when
control has been surrendered in accordance with the criteria provided in
the Statement. The Company will apply the new rules prospectively to
transactions beginning in the first quarter of 1997. Based on current
circumstances, the Company believes the application of the new rules will
not have a material impact on its financial position or results of
operations.
Note 2. Certain Significant Transactions
Assumption Reinsurance Transaction
On May 31, 1995, the Company assumed certain life insurance and annuity
business of Kentucky Central Life Insurance Company (KCL) in a transaction
which was accomplished through an assumption reinsurance agreement. Upon
execution of the agreement, assets consisting primarily of cash, debt
securities, policy loans and receivables with aggregate fair value of $872
million, including $164 million of cash, were transferred to the Company,
and the Company assumed liabilities with aggregate fair value of $1.096
billion. The difference between the fair values of assets received and
liabilities assumed was recorded as deferred policy acquisition costs.
At December 31, 1995, further participation options in the assumption
reinsurance agreement remained available to approximately 4,000 KCL
policyholders. The Company had recorded a $78 million liability at
December 31, 1995, pending resolution of the policyholder option process.
Total assets received on May 31, 1995 included $78 million of assets
associated with these additional policies.
45
<PAGE>
Note 2. Certain Significant Transactions (continued)
On November 30, 1996, the Company completed the KCL transaction by assuming
the additional 4,000 policies. The Company established additional reserves
of $112 million on these policies, released the $78 million liability
established in 1995, and recorded an additional $40 million of deferred
policy acquisition costs.
Business Acquisitions
Effective October 1, 1995, the Company acquired Alexander Hamilton Life
Insurance Company of America (AH Life) and First Alexander Hamilton Life
Insurance Company (FAHL) from Household International, Inc. (Household).
The businesses acquired included substantially all of the life insurance
and single premium deferred annuity contracts of AH Life and FAHL that were
in force on the acquisition date. AH Life Periodic Payment Annuity (PPA)
contracts, consisting primarily of structured settlements and lottery
business, and Corporate-Owned Life Insurance (COLI) written prior to the
acquisition, as well as certain pre-acquisition credit life, accident and
health and other (Affiliated) business written in conjunction with the
lending activities of Household, were 100% reinsured with affiliates of
Household on a coinsurance basis. The aggregate purchase price of $575
million was paid $475 million in cash and $50 million in mandatorily
redeemable preferred stock of AH Life, plus the purchase from Household of
a $50 million surplus note of AH Life. The transaction included the
assumption of $7.872 billion of liabilities and the receipt of assets with
a fair value of $8.072 billion (including $20 million in cash). The
acquisition resulted in value of business acquired of $325 million, and
cost in excess of net assets acquired of $50 million. This acquisition was
accounted for as a purchase, and the results of operations of the acquired
companies have been included in the consolidated operations of the Company
since the date of acquisition.
The following pro forma financial information has been prepared
assuming that the acquisition of AH Life and FAHL had taken place at the
beginning of each year presented (in millions except per share amounts).
1995 1994
-------------------------------------------------------------------
(Unaudited)
Revenue ...................................... $1,726 $1,418
Income from continuing operations ............ 280 261
Net income available to common stockholders .. 295 267
Net income per common share .................. 4.11 3.66
-------------------------------------------------------------------
In July 1996, JPCC purchased substantially all of the broadcast assets
of radio station KIFM-FM in San Diego, California for $29 million in cash.
In October 1996, JPCC purchased substantially all of the outstanding
capital stock of San Diego Broadcasting Corporation, a California
corporation that owns and operates radio station KBZT-FM in San Diego,
California, for $30 million in cash. The acquisitions resulted in cost in
excess of net assets acquired of $26 million. These acquisitions were
accounted for as purchases, and the results of operations of the acquired
companies have been included in the consolidated operations of the Company
since the respective dates of acquisition. Pro forma financial information
for these acquisitions has not been presented, as the pro forma impact on
consolidated operations for 1996 and 1995 is not significant.
Discontinued Operations
Discontinued operations include the property and casualty and title
insurance subsidiaries which formerly comprised the Company's other
insurance business segment.
On April 3, 1995, the Company sold Jefferson-Pilot Fire & Casualty
Company (JPF&C) for $55 million. The Company realized a gain of $16
million from the disposition of JPF&C, net of income taxes of $4 million.
On December 30, 1994, the Company sold Jefferson-Pilot Title Insurance
Company (JPT) for approximately $1 million. An insignificant gain was
realized on this transaction.
Revenue of the discontinued operations prior to the dispositions for
the years ended December 31, 1995 and 1994 was $16 million and $65 million,
respectively. Net income prior to the dispositions for the years ended
December 31, 1995 and 1994 was $2 million (net of an insignificant amount
of income taxes) and $9 million (net of $2 million of income taxes).
Other Dispositions
On February 14, 1995, substantially all of the assets and the media
industry data processing operations of Jefferson-Pilot Data Services, Inc.
(JPDS) were sold for approximately $33 million, resulting in a pre-tax gain
of approximately $16 million. Prior to the sale, JPDS was a part of the
Company's communications business segment. JPDS net income prior to the
disposition for 1995 and 1994 amounted to $1million and $3 million,
respectively.
Supplemental Cash Flow Information of Dispositions
A summary of supplemental cash flow information resulting from disposals in
1995 follows (in millions):
Disposal of noncash assets ............ $56
Disposal of liabilities ............... (50)
---
Cash received less cash paid .......... $ 6
46
<PAGE>
Note 3. Investments
Summary Cost and Fair Value Information
Aggregate amortized cost, aggregate fair value, and gross unrealized gains
and losses are as follows (in millions):
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale carried at fair value
U. S. Treasury obligations and direct obligations of U.S.
Government agencies ........................................... $ 384 $ 17 $ (1) $ 400
Federal agency issued collateralized mortgage obligations ....... 2,052 25 (18) 2,059
Obligations of states and political subdivisions ................ 167 1 (2) 166
Corporate obligations ........................................... 3,057 48 (21) 3,084
Corporate private-labeled collateralized mortgage obligations ... 893 27 (7) 913
Redeemable preferred stocks ..................................... 54 1 (4) 51
------ ---- ---- ------
Subtotal, debt securities ....................................... 6,607 119 (53) 6,673
Equity securities ............................................... 196 714 (4) 906
------ ---- ---- ------
Securities available for sale ................................... $6,803 $833 $(57) $7,579
====== ==== ==== ======
Held to maturity carried at amortized cost
Obligations of state and political subdivisions ................. $ 16 $ 1 $ (1) $ 16
Corporate obligations ........................................... 3,861 68 (42) 3,887
------ ---- ---- ------
Debt securities held to maturity ................................ $3,877 $ 69 $(43) $3,903
====== ==== ==== ======
<CAPTION>
December 31, 1995
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale carried at fair value
U. S. Treasury obligations and direct obligations of U.S.
Government agencies ........................................... $ 483 $ 37 $ -- $ 520
Federal agency issued collateralized mortgage obligations ....... 1,775 87 (6) 1,856
Obligations of states and political subdivisions ................ 290 6 -- 296
Corporate obligations ........................................... 2,998 120 (32) 3,086
Corporate private-labeled collateralized mortgage obligations ... 601 41 (1) 641
Redeemable preferred stocks ..................................... 61 1 (3) 59
------ ---- ---- ------
Subtotal, debt securities ....................................... 6,208 292 (42) 6,458
Equity securities ............................................... 207 610 (1) ,816
------ ---- ---- ------
Securities available for sale ................................... $6,415 $902 $(43) $7,274
====== ==== ==== ======
Held to maturity carried at amortized cost
Federal agency issued collateralized mortgage obligations ....... $ 41 $ 1 $ -- $ 42
Corporate obligations ........................................... 3,486 148 (27) 3,607
------ ---- ---- ------
Debt securities held to maturity ................................ $3,527 $149 $(27) $3,649
====== ==== ==== ======
</TABLE>
47
<PAGE>
Note 3. Investments continued
Contractual Maturities
Aggregate amortized cost and aggregate fair value of debt securities as of
December 31, 1996, according to contractual maturity date, are as indicated
below (in millions). Actual future maturities will differ from the
contractual maturities shown because the issuers of certain debt securities
have the right to call or prepay the amounts due the Company, with or
without penalty.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less .......................... $ 141 $ 141 $ 157 $ 158
Due after one year through five years ............ 842 854 687 692
Due after five years through ten years ........... 1,571 1,585 1,136 1,135
Due after ten years through twenty years ......... 318 326 301 292
Due after twenty years ........................... 274 291 36 36
Amounts not due at a single maturity date ........ 3,407 3,425 1,560 1,590
------ ------ ------ ------
6,553 6,622 3,877 3,903
------ ------ ------ ------
Redeemable preferred stocks ...................... 54 51 -- --
------ ------ ------ ------
$6,607 $6,673 $3,877 $3,903
====== ====== ====== ======
</TABLE>
Investment Concentration, Risk and Impairment
Investments in debt and equity securities include approximately 1,300
issuers, with only one corporate issuer representing more than one percent
of the aggregate reported amounts of these investments. Included with
equity securities available for sale is an investment in common stock of
NationsBank Corporation of $402 million (3.5%) and $288 million (2.7%) as
of December 31, 1996 and 1995, respectively. Debt securities considered
less than investment grade approximated 4.3% and 4.7% of the total debt
securities portfolio as of December 31, 1996 and 1995, respectively.
The Company's mortgage loan portfolio is comprised primarily of
conventional real estate mortgages collateralized by retail (46%),
apartment (18%), industrial (11%), and hotel and office (9% each)
properties. Mortgage loan underwriting standards emphasize the credit
status of a prospective borrower, quality of the underlying collateral and
conservative loan-to-value relationships. Approximately 45% of stated
mortgage loan balances as of December 31, 1996 are due from borrowers in
South Atlantic states and approximately 23% are due from borrowers in West
South Central states. No other geographic region represents as much as 10%
of December 31, 1996 mortgage loans.
At December 31, 1996 and 1995, the recorded investment in mortgage
loans that are considered to be impaired was $81 million and $78 million,
respectively. Delinquent loans outstanding as of December 31, 1996 and
1995 totaled $9 million and $8 million, respectively. The related
allowance for credit losses was $27 million at December 31, 1996 and 1995.
The average recorded investment in impaired loans during the years ended
December 31, 1996 and 1995 was $79 million each year. For the years ended
December 31, 1996 and 1995, the Company recognized interest income on
impaired loans of $8 million each year using the cash basis method.
Recorded investments in impaired loans and related interest income in 1994
were less than the amounts as of and for the year ended December 31, 1995.
48
<PAGE>
Note 3. Investments (continued)
Changes in Net Unrealized Gains on Securities
Changes during the three year period ended December 31, 1996 in amounts
affecting net unrealized gains included in the separate component of
stockholders' equity, reduced by deferred income taxes, are as follows (in
millions):
<TABLE>
<CAPTION>
Net Unrealized Gains (Losses)
-----------------------------------
Debt Equity
Securities Securities Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gains on equity securities held by insurance subsidiaries
as of December 31, 1993 ............................................... $ -- $332 $332
Effect of adopting Statement No. 115 as of January 1, 1994:
Increase in stated amount of securities ................................. 106 70 176
Decrease in deferred policy acquisition costs ........................... (15) -- (15)
Increase in deferred income tax liabilities ............................. (32) (28) (60)
---- ---- ----
Increase in net unrealized gains included in stockholders' equity ......... 59 42 101
Other changes during year ended December 31, 1994:
Decrease in stated amount of securities ................................. (192) (150) (342)
Increase in deferred policy acquisition costs ........................... 26 -- 26
Decrease in deferred income tax liabilities ............................. 52 62 114
---- ---- ----
Decrease in net unrealized gains included in stockholders' equity ......... (55) (46) (101)
---- ---- ----
Net unrealized gains (losses) on securities available for sale as of
December 31, 1994 ................................................... (55) 286 231
Change during year ended December 31, 1995:
Increase in stated amount of securities ................................. 335 181 516
Decrease in value of business acquired and deferred policy
acquisition costs ..................................................... (65) -- (65)
Increase in deferred income tax liabilities ............................. (91) (66) (157)
---- ---- ----
Increase in net unrealized gains included in stockholders' equity ......... 179 115 294
---- ---- ----
Net unrealized gains on securities available for sale as of
December 31, 1995 .................................................... 124 401 525
Change during year ended December 31, 1996:
(Decrease) increase in stated amount of securities ...................... (184) 102 (82)
Increase in value of business acquired and deferred policy
acquisition costs ..................................................... 58 -- 58
Decrease (increase) in deferred income tax liabilities .................. 48 (37) 11
Increase in carrying value of ACES (Note 7) ............................... -- (11) (11)
---- ---- ----
(Decrease) increase in net unrealized gains included in
stockholders' equity .................................................. (78) 54 (24)
---- ---- ----
Net unrealized gains on securities available for sale as of
December 31, 1996 ..................................................... $ 46 $455 $501
==== ==== ====
<CAPTION>
Net Investment Income
The details of investment income, net of investment expenses, follow (in millions):
Year ended December 31
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on debt securities ............................................... $744 $408 $260
Dividends on preferred stocks ............................................. 7 5 5
Dividends on common stocks ................................................ 18 23 28
Interest on mortgage loans ................................................ 109 79 63
Interest on policy loans .................................................. 21 15 12
Real estate income ........................................................ 14 10 9
Other investment income ................................................... 15 15 9
---- ---- ----
Investment income of life insurance operations ............................ 928 555 386
Investment income of other companies ...................................... 20 26 12
---- ---- ----
Total investment income ................................................... 948 581 398
Investment expenses ....................................................... (55) (38) (23)
---- ---- ----
Net investment income ..................................................... $893 $543 $375
==== ==== ====
</TABLE>
49
<PAGE>
Note 3. Investments continued
Investment expenses include salaries, taxes, interest, expenses of
maintaining and operating investment real estate, real estate depreciation
and other allocated costs of investment management and administration.
Realized Gains and Losses
The details of realized investment gains (losses) follow (in millions):
Year ended December 31
1996 1995 1994
- ---------------------------------------------------------------------------
Debt securities ............................... $(1) $(4) $(10)
Preferred stocks .............................. 4 (3) 1
Common stocks ................................. 39 63) 66
Other ......................................... 5 (8) 4
--- --- ---
Realized investment gains ..................... $47 $48 $61
=== === ===
Information about gross realized gains and losses on available for sale
securities transactions follows (in millions):
Year ended December 31
1996 1995 1994
- ---------------------------------------------------------------------------
Gross realized:
Gains ........................................ $66 $54 $61
Losses ....................................... (15) (27) (24)
--- --- ---
Net realized gains on available for sale
securities .................................. $51 $27 $37
=== === ===
Trading Securities
In 1995, the Company established a portfolio of trading securities for the
primary purpose of writing covered call options in expectation of enhanced
total returns from option premiums, market appreciation and dividends
received. The change in net unrealized holding gains and losses on trading
securities included in 1996 and 1995 income was not significant.
Other Information
A held to maturity security with amortized cost of $5 million was
transferred to the available for sale category during 1995 and held to
maturity securities with amortized cost of $8 million were sold during
1994, both due to significant declines in the credit worthiness of the
issuers. Related recognized losses were not significant.
On November 30, 1995, the Company transferred certain debt securities
between the held to maturity and available for sale classifications
concurrent with the adoption of additional Statement No. 115 implementation
guidance, which permitted a one time reassessment of the appropriateness of
the classification of securities held. This reassessment resulted in
available for sale debt securities with fair value of $393 million and
amortized cost of $380 million being transferred to the held to maturity
classification. The excess of transfer date fair value of individual
securities over their amortized cost, and the related unrealized net
holding gain, is amortized over the period to maturity. In addition, held
to maturity debt securities with an amortized cost of $620 million and a
fair value of $633 million were transferred to the available for sale
classification, increasing unrealized net holding gains by $13 million.
During 1996, 1995 and 1994 JP Life transferred securities classified
as available for sale to the Company's defined benefit pension plans.
Equity securities with cost of $5 million and fair value of $27 million
were transferred during 1996, and gains of $22 million were recognized.
Equity securities with cost of $7 million and fair value of $33 million
were transferred during 1995, and gains of $26 million were recognized.
The transfer in 1994 included debt securities with amortized cost of $49
million and equity securities with a cost of $8 million. The securities
transferred in 1994 had an aggregate fair value of $75 million on the date
of transfer and gains of $18 million were recognized.
50
<PAGE>
Note 4. Derivatives
Use of Derivatives
The Company's investment policy permits the use of derivative financial
instruments such as interest rate swaps in certain circumstances. The
following summarizes open interest rate swaps (notional amounts in
millions):
December 31
1996 1995
- --------------------------------------------------------------------------------
Receive-fixed swaps held as hedges of direct investments:
Notional amount ........................................... $209 $125
Average rate received ..................................... 5.66% 5.28%
Average rate paid ......................................... 5.55% 5.72%
Receive-fixed swaps held as hedges of anticipated investments
Notional amount ........................................... $ 15 $ --
Average rate received ..................................... 6.91% --
Average rate paid ......................................... 5.56% --
Receive-fixed swaps held to modify annuity crediting rates
Notional amount ........................................... $ 30 $ --
Average rate received ..................................... 6.78% --
Average rate paid ......................................... 5.56% --
Hedging Direct Investments
Interest rate swaps are used to reduce the impact of interest rate
fluctuations on specific floating-rate direct investments. Interest is
exchanged periodically on the notional value, with the Company receiving
the fixed rate and paying various short-term LIBOR rates on a net exchange
basis. The net amount received or paid under these swaps is reflected as
an adjustment to investment income. For hedges of investments classified
as available for sale, net unrealized losses, net of the effects of income
taxes and the impact on deferred policy acquisition costs and the value of
business acquired, are not significant and are included in net unrealized
gains on securities available for sale in stockholders' equity as of
December 31, 1996.
Hedging Anticipated Investments
Interest rate swaps are used to hedge anticipated investment transactions,
protecting against changes in the yield curve during the time period
between identifying and closing mortgage loan and private placement
investments. These investments were made in the fourth quarter of 1996 and
will continue during early 1997. Hedges are terminated on the date the
related investment is closed. Until termination of a hedge, interest is
exchanged periodically on the notional value, with the Company receiving a
fixed rate and paying various short-term LIBOR rates on a net exchange
basis. The net amount received or paid under these swaps is deferred.
Upon termination of a swap, the realized gain or loss on the closed hedge
is also deferred The deferred amounts are amortized into income over the
average duration of the related investment. Deferred hedging gains as of
December 31, 1996 were $1 million.
Modifying Annuity Crediting Rates
Interest rate swaps are used to modify the interest characteristics of
certain blocks of annuity contract deposits. Interest is exchanged
periodically on the notional value, with the Company receiving a fixed rate
and paying various short-term LIBOR rates on a net exchange basis. The net
amount received or paid under these swaps is reflected as an adjustment to
insurance and annuity benefits.
Credit and Market Risk
The Company is exposed to credit risk in the event of non-performance by
counterparties to swap agreements. The Company limits this exposure by
entering into swap agreements with counterparties having high credit
ratings and by regularly monitoring the ratings.
The Company's credit exposure on swaps is limited to the fair value of
swap agreements that are favorable to the Company. The Company does not
expect any counterparty to fail to meet its obligation; however, non-
performance would not have a material adverse effect on the Company's
financial position or results of operations.
The Company's exposure to market risk is mitigated by the offsetting
effects of changes in the value of swap agreements and the related direct
investments, anticipated investments and credited interest on annuities.
51
<PAGE>
Note 5. Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred Policy Acquisition Costs
Information about deferred policy acquisition costs follows (in millions):
Year ended December 31
1996 1995 1994
- ---------------------------------------------------------------------------
Beginning balance ............................. $543 $323 $272
Deferral:
Commissions ................................. 105 71 43
Other ....................................... 36 23 20
---- ---- ----
141 94 63
Amortization .................................. (89) (46) (22)
---- ---- ----
Net deferral reflected in expenses ............ 52 48 41
Addition for KCL assumption ................... 40 224 --
Adjustment related to unrealized (gains)
losses on debt securities .................... 34 (52) 10
---- ---- ----
Ending balance ................................ 669 543 323
Amounts related to discontinued property
and casualty insurance operations ............ -- -- 6
---- ---- ----
Ending balance ................................ $669 $543 $329
==== ==== ====
Value of Business Acquired
Information about the value of business acquired follows (in millions):
1996 1995
- ---------------------------------------------------------------------------
Beginning balance ..................................... $292 $ --
---- ----
Acquisition of AH Life and FAHL ....................... -- 325
---- ----
Interest accretion .................................... 6 5
Amortization .......................................... (32) (13)
---- ----
Net amortization reflected in expenses ................ (26) (8)
---- ----
Adjustment related to unrealized (gains) losses
on debt securities ................................... 24 (24)
Adjustment related to realized (gains) losses
on debt securities ................................... -- (1)
Adjustment related to purchase accounting ............. (25) --
---- ----
Ending balance ........................................ $265 $292
==== ====
In September 1996, the Company finalized its purchase accounting for the
acquisition of AH Life, and an adjustment to reduce the value of business
acquired was made for $25 million to reflect more appropriate lapse
assumptions.
Expected approximate amortization percentages relating to the value of
business acquired for the next five years are as follows:
Amortization
Year Percentage
----------------------------------------
1997 ........................... 10.2%
1998 ........................... 10.0%
1999 ........................... 9.3%
2000 ........................... 8.3%
2001 ........................... 7.3%
Note 6. Policy Liabilities Information
Interest Rate Assumptions
The liability for future policy benefits associated with ordinary life
insurance policies has been determined using interest rate assumptions
which vary by year of issue and range from 3% to 9.9% for participating
policies, remaining level for all durations. For nonparticipating
policies, assumed interest rates grade uniformly over 20 to 30 years with
initial rates ranging from 3% to 9.75% and ultimate rates ranging from 3%
to 6%. Interest rate assumptions for weekly premium, monthly debit and
term life insurance products generally fall within the same ranges as those
pertaining to individual life insurance policies.
Credited interest rates for universal life-type products ranged from
4.2% to 6.75% in 1996, 5.75% to 6.75% in 1995 and 5% to 6.75% in 1994. The
average credited interest rates paid for universal life-type products were
6.03%, 6.19%, and 6.21% in 1996, 1995, and 1994, respectively. For annuity
products, credited interest rates generally ranged from 4.4% to 8.65% in
1996, 4.5% to 14.75% in 1995 and 5% to 6.5% in 1994.
52
<PAGE>
Note 6. Policy Liabilities Information (continued)
Mortality and Withdrawal Assumptions
Assumed mortality rates are generally based on experience multiples applied
to select and ultimate tables commonly used in the industry. Withdrawal
assumptions for individual life insurance policies are based on historical
company experience and vary by issue age, type of coverage and policy
duration.
For immediate annuities issued prior to 1987, mortality assumptions
are based on blends of the 1971 Individual Annuity Mortality Table and the
1969-71 U. S. Life Tables. For similar products issued after 1986,
mortality assumptions are based on blends of the 1983a and 1979-81 U. S.
Life Tables.
Accident and Health, and Disability Insurance Liabilities Activity
Activity in the liabilities for accident and health, and disability
insurance benefits, including reserves for future policy benefits and
unpaid claims and claim adjustment expenses, is summarized below (in
millions):
1996 1995 1994
- ---------------------------------------------------------------------------
Balance as of January 1 ....................... $274 $266 $262
Less reinsurance recoverables ................. 15 12 11
---- ---- ----
Net balance as of January 1 ................... 259 254 251
Amount incurred:
Current year ................................ 401 403 398
Prior years ................................. (63) (73) (89)
---- ---- ----
338 330 309
Less amount paid:
Current year ................................ 246 242 228
Prior years ................................. 91 82 78
---- ---- ----
337 324 306
---- ---- ----
Net balance as of December 31 ................. 260 260 254
Plus reinsurance recoverables ................. 27 14 12
---- ---- ----
Balance as of December 31 ..................... $287 $274 $266
==== ==== ====
Balance as of December 31 included with:
Future policy benefits ...................... $156 $131 $117
Policy and contract claims .................. 131 143 149
---- ---- ----
$287 $274 $266
==== ==== ====
The Company uses conservative estimates for determining its liability
for accident and health, and disability benefits, which are based on
historical claim payment patterns and attempt to provide for potential
adverse changes in claim patterns and severity. Lower than anticipated
claims resulted in adjustments to the liability for accident and health,
and disability benefits in each of the years presented.
Note 7. Debt
Commercial Paper and Revolving Credit Borrowings
In October 1995, the Company entered into a bank credit agreement for $450
million of unsecured 364-day revolving credit. In August 1996, the credit
agreement was amended to reduce the bank commitment to $250 million and to
extend the maturity to five years. The Company has the option to borrow at
various interest rates. Since the Company established commercial paper
arrangements in September 1996, the credit agreement principally supports
the issuance of commercial paper, which has various maturity dates but none
in excess of 90 days. If the Company is not able to remarket its
commercial paper on the respective maturity dates, the Company intends to
borrow a like amount under the credit agreement. The weighted-average
interest rate for commercial paper borrowings outstanding of $222 million
at December 31, 1996 was 5.53%. The weighted-average interest rate of the
$230 million of revolving credit outstanding as of December 31, 1995 was
6.04%.
Automatic Common Exchange Securities
In December 1995, the Company publicly sold 1,815,000 unsecured 7.25%
Automatic Common Exchange Securities (ACES) Due January 21, 2000, having a
principal amount of $72.50 per security. In the 30 days prior to, or at,
maturity, the principal amount of the ACES 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.
Subject to adjustments to reflect dilution, the exchange rate is equal to
(1) 0.8333 shares if the stock price is at least $87, (2) a fractional
share of the stock having a value equal to $72.50 if the price is more than
$72.50 but less than $87 or (3) one share if the price is not more than
$72.50. At December 31, 1995, the carrying value of the ACES obligation
was $132 million. At December 31, 1996, the carrying value was increased
by $16 million to $148 million due to an increase in the market value of
NationsBank stock to $97.75 per share as of that date. The change in the
carrying value, net of deferred income taxes, was charged against net
unrealized gains in stockholders' equity.
53
<PAGE>
Note 7. Debt (continued)
Interest
Cash payments for interest attributable to debt arrangements, including
securities sold under repurchase agreements, totaled $37 million in 1996,
$23 million in 1995 and $9 million in 1994. Interest expense totaled $39
million, $22 million and $11 million for 1996, 1995 and 1994, respectively.
Note 8. Mandatorily Redeemable Preferred Stock
Mandatorily redeemable nonvoting floating rate preferred stock (with a par
value of $100 per share) authorized, issued and outstanding shares at
December 31, 1996 and 1995 totaled 530,000 and 500,000, respectively.
Dividends on $50 million of redeemable preferred stock issued by AH Life in
1995 are cumulative at LIBOR plus 1.25% per annum. Beginning April 6,
1998, any holder may require AH Life to redeem its shares at par plus
accrued dividends. Beginning October 6, 2000, AH Life may redeem the
preferred stock at par plus accrued dividends. An additional $3 million of
mandatorily redeemable nonvoting floating rate preferred stock was issued
in September 1996 related to the PPA recapture (Note 14), with similar
terms and the respective redemption dates being April 1, 1999 and October
1, 2001.
Note 9. Stockholders' Equity
Preferred Stock
The Company has 20,000,000 shares of preferred stock authorized (none
issued) with the par value, dividend rights and other terms to be fixed by
the Board of Directors, subject to certain limitations on voting rights.
Common Stock
On May 6, 1996, the shareholders approved an amendment to the articles of
incorporation that increased the number of authorized shares of common
stock from 150 million to 350 million.
On November 6, 1995, the Board authorized a three-for-two common stock
split which was effected as a 50% stock dividend distributed on December
22, 1995 to shareholders of record as of December 8, 1995. The split-
adjusted value of fractional shares was paid in cash. The par value of
additional shares issued, which totaled $30 million, was reclassified from
retained earnings to common stock during 1995. All share and per share
information gives retroactive effect to the stock split.
Changes in the number of shares outstanding are as follows:
Year ended December 31
1996 1995 1994
- ------------------------------------------------------------------------------
Shares outstanding, beginning ..... 71,213,162 72,674,060 74,194,456
Shares issued under stock plans ... 33,071 32,749 489,238
Shares reacquired ................. (500,000) (1,493,647) (2,009,634)
---------- ---------- ----------
Shares outstanding, ending ........ 70,746,233 71,213,162 72,674,060
========== ========== ==========
Shareholders' Rights Plan
Under a shareholders' rights plan, one common share purchase right is
attached to each share of the Company's common stock. The plan becomes
operative in certain events involving an offer for or the acquisition of
15% or more of the Company's common stock by any person or group.
Following such an event, each right, unless redeemed by the Board, entitles
the holder (other than the acquiring person or group) to purchase for an
exercise price of $123.33 an amount of common stock of the Company, or in
certain circumstances stock of the acquiring company, having a market value
of twice the exercise price. Approximately 70 million shares of common
stock are reserved for the amended rights plan. The rights expire on
November 7, 2004 unless extended by the Board, and are redeemable by the
Board at a price of $.01 per right at any time before they become
exercisable.
Note 10. Stock Incentive Plans
Long Term Stock Incentive Plan
Under the Long Term Stock Incentive Plan (Employees' Plan), a Committee of
disinterested directors may award nonqualified or incentive stock options
and stock appreciation rights, and make grants of the Company's stock, to
employees of the Company and certain full-time life insurance agents.
Stock grants may be either restricted stock or unrestricted stock
distributed upon the achievement of performance goals established by the
Committee.
A total of 3,028,801 shares are available for future issuance for the
Employees' Plan as of December 31, 1996. The option price may not be less
than the market value of the Company's common stock on the date awarded.
Options are exercisable for periods determined by the Committee, not to
exceed ten years from the award date, and vest over periods determined by
the Committee. Awards of restricted and unrestricted stock grants are
limited to 10% of the total shares reserved for the Plan. The Employees'
Plan will terminate as to further awards on May 1, 2005, unless terminated
by the Board at an earlier date.
Non-Employee Directors' Plan
Under the Non-Employee Directors' Stock Option Plan (Directors' Plan),
165,375 shares of the Company's common stock are available for future
issuance as of December 31, 1996. Under the Directors' Plan, nonqualified
stock options are
54
<PAGE>
Note 10. Stock Incentive Plans (continued)
automatically awarded, at market prices on specified award dates. The
options vest over a period of one to three years, and terminate ten years
from the date of award, but are subject to earlier termination under
certain circumstances. The Directors' Plan will terminate as to further
awards on March 31, 1999.
Summary Stock Option Activity
Summarized information about the Company's stock option activity, and
related information for the three years in the period ended December 31
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- -------------------------- -------------------------
Weighted-
Average
Exercise Exercise Exercise
Price Price Price
Options Per Share Options Per Share Options Per Share
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year . 906,343 $33.59 463,780 $17.11 -$37.33 780,280 $15.28 -$37.33
Granted ....................... 542,875 53.68 483,000 36.42 - 37.33 193,500 30.09 - 34.75
Exercised ..................... (25,172) 54.11 (26,025) 17.11 - 36.42 (489,238) 15.28 - 26.83
Forfeited ..................... (12,778) 32.07 (14,412) 26.83 - 30.08 (20,762) 15.28 - 26.83
--------- ------ ------- -------------- ------- --------------
Outstanding end of year ....... 1,411,268 41.40 906,343 26.17 - 37.33 463,780 17.11 - 37.33
========= ====== ======= ============= ======= ==============
Exercisable at end of year .... 637,643 33.93 494,593 26.17 - 37.33 290,054 17.11 - 37.33
Weighted-average fair value of
options granted during the year $11.07
</TABLE>
As of December 31, 1996 there are outstanding options for: (a) 870,893
shares with exercise prices ranging from $26.17 to $37.33, a weighted-
average exercise price of $33.78, and a weighted-average remaining
contractual life of 6.9 years (options on 607,643 of these shares are
exercisable, and have a weighted-average exercise price of $32.97); (b)
540,375 shares with exercise prices ranging from $46.75 to $57.50, a
weighted-average exercise price of $53.68, and a weighted-average remaining
contractual life of 9.2 years (options on 30,000 of these shares are
exercisable, and have a weighted-average exercise price of $53.50).
Pro Forma Information
Pro forma information regarding net income and earnings per share is
required by FASB Statement 123, Accounting for Stock-Based Compensation,
which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December
31, 1994 under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for
1996 and 1995, respectively: risk-free interest rates of 5.9% and 7.6%;
volatility factors of the expected market price of the Company's common
stock of 0.17; and a weighted-average expected life of the option of 10
years. For purposes of this calculation, dividends are assumed to increase
at a rate of 10% annually.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not provide a reliable single measure of the fair value
of the Company's options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in millions except per share
amounts):
Year ended December 31
1996 1995
- ---------------------------------------------------------------------------
Pro forma net income available to
common stockholders ............................... $288 $272
Pro forma earnings per share available
to common stockholders ............................ $4.06 $3.79
Because Statement No. 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1997.
Note 11. Statutory Financial Information
The Company's life insurance subsidiaries prepare financial statements on
the basis of statutory accounting practices (SAP) prescribed or permitted
by the insurance departments of their states of domicile. Prescribed SAP
include a variety of publications of the National Association of Insurance
Commissioners (NAIC) as well as state laws, regulations and administrative
rules. Permitted SAP encompass all accounting practices not so prescribed.
The impact of permitted accounting practices on statutory capital and
surplus is not significant for the life insurance subsidiaries.
55
<PAGE>
Note 11. Statutory Financial Information (continued)
The principal differences between SAP and generally accepted
accounting principles (GAAP) as they relate to the financial statements of
the subsidiaries are (1) policy acquisition costs are expensed as incurred
under SAP, whereas they are deferred and amortized under GAAP, (2) the
value of business acquired is not capitalized under SAP but is under GAAP,
(3) amounts collected from holders of universal life-type and annuity
products are recognized as premiums when collected under SAP, but are
initially recorded as contract deposits under GAAP, with cost of insurance
recognized as revenue when assessed and other contract charges recognized
over the periods for which services are provided, (4) the classification
and carrying amounts of investments in certain securities are different
under SAP than under GAAP, (5) the criteria for providing asset valuation
allowances, and the methodologies used to determine the amounts thereof,
are different under SAP than under GAAP, (6) the timing of establishing
certain reserves, and the methodologies used to determine the amounts
thereof, are different under SAP than under GAAP, (7) no provision is made
for deferred income taxes under SAP, and (8) certain assets are not
admitted for purposes of determining surplus under SAP.
A comparison of net income and statutory capital and surplus of the
life insurance subsidiaries determined on the basis of SAP to net income
and stockholder's equity of these life insurance subsidiaries on the basis
of GAAP is as follows (in millions):
1996 1995 1994
- --------------------------------------------------------------------------------
Statutory Accounting Practices
Reported net income for the year ended December 31 $ 253 $ 501 $ 158
Statutory capital and surplus as of December 31 .. $1,218 $1,112 $ 972
====== ====== ======
Generally Accepted Accounting Principles
Net income for the year ended December 31 ........ $ 261 $ 221 $ 195
Stockholder's equity as of December 31 ........... $2,181 $2,114 $1,430
====== ====== ======
The insurance statutes of the states of domicile limit the amount of
dividends that the life insurance subsidiaries may pay annually without
first obtaining regulatory approval. Generally, the limitations are based
on a combination of statutory net gain from operations for the preceding
year, 10% of statutory surplus at the end of the preceding year, and
dividends and distributions made within the preceding twelve months. At
December 31, 1996, the life insurance subsidiaries could pay dividends of
$22 million without regulatory approval.
Risk-Based Capital ("RBC") requirements promulgated by the NAIC
require life insurers to maintain minimum capitalization levels that are
determined based on formulas incorporating credit risk pertaining to its
investments, insurance risk, interest rate risk and general business risk.
As of December 31, 1996, the life insurance subsidiaries' adjusted capital
and surplus exceeded their authorized control level RBC.
Note 12. Income Taxes
Income taxes as reported in the consolidated statements of income are as
follows (in millions):
Year ended December 31
1996 1995 1994
- --------------------------------------------------------------------------------
Current expense ...................................... $132 $116 $110
Deferred expense ..................................... 17 9 8
--- --- ---
Income taxes reported with income from
continuing operations ............................... 149 125 118
Income taxes reported with income from
discontinued operations ............................. -- 4 1
--- --- ---
Aggregate reported income taxes ...................... $149 $129 $119
==== ==== ====
A reconciliation of the federal income tax rate to the Company's effective
income tax rate, computed based on income from continuing operations follows:
Year ended December 31
1996 1995 1994
- --------------------------------------------------------------------------------
Federal income tax rate ............................ 35.0% 35.0% 35.0%
Reconciling items:
Tax exempt interest and dividends
received deduction ............................. (4.1) (2.0) (1.9)
Other increases, net ............................. 2.7 -- .8
---- ---- ----
Effective income tax rate .......................... 33.6% 33.0% 33.9%
==== ==== ====
56
<PAGE>
Note 12. Income Taxes (continued)
The tax effects of temporary differences that result in significant deferred
tax assets and deferred tax liabilities are as follows (in millions):
December 31
1996 1995
- -----------------------------------------------------------------------------
Deferred tax assets:
Difference in policy liabilities .................... $352 $330
Obligation for postretirement benefits .............. 7 12
Deferred compensation ............................... 17 14
Other deferred tax assets ........................... 28 14
---- ----
Gross deferred tax assets ............................. 404 370
Deferred tax liabilities:
Net unrealized gains on securities .................. 263 280
Deferral of policy acquisition costs and
value of business acquired ........................ 243 237
Deferred gain recognition for income tax purposes ... 16 17
Differences in investment bases ..................... 15 20
Depreciation differences ............................ 6 8
---- ----
Other deferred tax liabilities ...................... 34 23
---- ----
Gross deferred tax liabilities ........................ 577 585
---- ----
Net deferred income tax liability ..................... $173 $215
==== ====
Cash payments for income taxes totaled $162 million, $105 million and $127
million in 1996, 1995 and 1994, respectively.
Federal income tax returns for all years through 1992 are closed. In
the opinion of management, recorded income tax liabilities adequately provide
for all remaining open years.
Under prior federal income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable investment income
was not taxed, but was set aside in a special tax account designated as
"Policyholders' Surplus". The Company has approximately $91 million of
untaxed "Policyholders' Surplus" on which no payment of federal income taxes
will be required unless it is distributed as a dividend, or under other
specified conditions. The Company does not believe that any significant
portion of the account will be taxed in the foreseeable future and no related
deferred tax liability has been recognized. If the entire balance of the
account became taxable under the current federal rate, the tax would
approximate $32 million.
Note 13. Retirement Benefit Plans
Pension Plans
The Company and its subsidiaries have defined benefit pension plans covering
substantially all employees and full-time life insurance agents. The plans
provide benefits based on annual compensation and years of service. The
plans are noncontributory and are funded through group annuity contracts with
JP Life. The assets of the plans are those of the related contracts, and are
primarily held in separate accounts of JP Life. The funding policy is to
contribute annually no more than the maximum amount deductible for federal
income tax purposes.
The components of pension expense were as follows (in millions):
Year ended December 31
1996 1995 1994
- -----------------------------------------------------------------------------
Service cost, benefits earned during the year ... $ 6 $ 6 $ 6
Interest cost on projected benefit obligation ... 13 12 13
Actual return on plan assets .................... (27) (37) (13)
Net amortization and deferral ................... 9 20 (4)
--- --- ---
Pension expense ................................. $ 1 $ 1 $ 2
=== === ===
57
<PAGE>
Note 13. Retirement Benefit Plans (continued)
The following table sets forth the funded status of the plans and amounts
as of December 31 recognized in the consolidated balance sheets (in
millions):
1996 1995
- ---------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefit obligation ............................. $201 $205
---- ----
Accumulated benefit obligation .......................... $205 $208
==== ====
Projected benefit obligation ............................ $235 $224
Plan assets at fair value ............................... 294 276
---- ----
Plan assets in excess of projected benefit obligation ... 59 52
Unrecognized net gain ................................... (46) (40)
Unrecognized transition net asset ....................... (17) (19)
Unrecognized prior service cost ......................... 8 9
---- ----
Prepaid pension cost .................................... $ 4 $ 2
==== ====
During 1995, the Company recognized pension plan curtailment gains of $2
million with the sale of the assets and operations of JPDS and the sale of
JPF&C (see Note 2).
Certain assumptions used in determining the funded status of the plans were
as follows:
1996 1995 1994
- ----------------------------------------------------------------------------
Discount rate .................................. 7% 7% 7.75%
Expected long-term rate of return on plan assets 8% 8% 8%
Rate of increase in compensation levels ........ 5% 5% 5.75%
Benefits provided to retirees by annuity contracts issued by JP Life
approximated $15 million in 1996, $11 million in 1995 and $11 million in
1994.
Other Postretirement Benefit Plans
The Company sponsors contributory health care and life insurance benefit
plans for eligible retired employees, qualifying retired agents and certain
surviving spouses. Substantially all of the Company's employees and
qualifying agents may become eligible for these benefits if they reach
retirement age or become disabled while employed by the Company and meet
certain years-of-service requirements. Most of the postretirement health
care and life insurance benefits are provided through JP Life. The Company
contributes to a welfare benefit trust from which future benefits will be
paid. The Company accrues the cost of providing postretirement benefits
other than pensions during the employees' active service periods.
The components of nonpension postretirement benefits expense were as follows
(in millions):
Year ended December 31
1996 1995 1994
- ----------------------------------------------------------------------------
Service cost, benefits earned during the year .... $1 $1 $1
Interest cost on accumulated benefit obligation .. 2 2 2
Actual return on plan assets ..................... (1) -- --
Net amortization and deferral .................... (1) (2) (2)
--- --- ---
Nonpension postretirement benefits expense ....... $1 $1 $1
=== === ===
58
<PAGE>
Note 13. Retirement Benefit Plans (continued)
The following table sets forth the funded status of the Company's
postretirement health care and life insurance plans as of December 31
recognized in the consolidated balance sheets (in millions):
1996 1995
- ---------------------------------------------------------------------------
Plan assets at fair value ................................ $ 7 $ 5
Accumulated postretirement benefit obligation:
Retirees and surviving spouses ......................... 23 20
Fully eligible active .................................. 3 2
Other active participants .............................. 6 6
---- ----
32 28
---- ----
Accumulated postretirement benefit obligation
in excess of plan assets ............................... (25) (23)
Unrecognized prior service benefit ....................... (10) (11)
Unrecognized net loss .................................... 4 1
---- ----
Accrued postretirement benefit cost ...................... $(31) $(33)
==== ====
Curtailment gains totaling $1 million were recognized during 1995,
substantially all of which resulted from the sale of the assets and
operations of JPDS (see Note 2).
Certain assumptions used in determining the funded status of the plans were
as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
Discount rate .................................. 7.5% 7% 8%
Expected long-term rate of return on plan assets 9% 9% 9%
Benefits do not take into consideration compensation increases. The
Company's postretirement health care plan limits annual benefit increases
to a maximum rate of 4%. Because future health care cost trend rates of 4%
have been assumed in determining the accumulated postretirement benefit
obligation as of December 31, 1996, future health care cost increases
exceeding 4% per year will have no effect on the Company's obligation.
Defined Contribution Plan
Effective January 1, 1995, the Company adopted defined contribution
retirement plans covering most employees and full time agents. The Company
matches a portion of participant contributions and makes profit sharing
contributions to a fund that acquires and holds shares of the Company's
common stock. Plan assets are invested under a group variable annuity
contract issued by JP Life. Expenses were $3 million and $2 million during
1996 and 1995, respectively.
Note 14. Reinsurance
The Company attempts to reduce its exposure to significant individual
claims by reinsuring portions of certain individual life insurance policies
and annuity contracts written. The Company reinsures the portion of an
individual life insurance risk in excess of the Company's retention, which
ranges from $300,000 to $1,000,000 for various individual life and annuity
products. The Company also attempts to reduce exposure to losses that may
result from unfavorable events or circumstances by reinsuring certain
levels and types of accident and health insurance risks underwritten. JP
Life assumes portions of the life and accident and health risks
underwritten by certain other insurers on a limited basis, but amounts
related to assumed reinsurance are not significant to the consolidated
financial statements.
AH Life and FAHL reinsured 100% of the PPA, COLI and Affiliated
business written prior to their acquisition with affiliates of Household on
a coinsurance basis. Balances are settled monthly, and AH Life is
compensated by the reinsurers for administrative services related to the
reinsured business. On September 30, 1996, the Company recaptured a
portion of the PPA reinsurance from affiliates of Household. This
recapture was completed by Household's transferring approximately $463
million of assets and $489 million of reserves to the Company. The Company
also established a $29 million deferred tax asset on this recapture, and
issued $3 million of mandatorily redeemable preferred stock of one of the
Company's life insurance subsidiaries to Household (see Note 8). The
amount due from reinsurers as reported in the consolidated balance sheet
includes $1.213 billion and $1.404 billion due from the Household
affiliates under these reinsurance agreements at December 31, 1996 and
1995, respectively.
Assets related to the reinsured PPA and COLI business have been placed
in irrevocable trusts formed to hold the assets for the benefit of AH Life
and FAHL and are subject to investment guidelines which identify (1) the
types and quality standards of securities in which new investments are
permitted, (2) prohibited new investments, (3) individual credit exposure
limits and (4) portfolio characteristics. Household has unconditionally
and irrevocably guaranteed, as primary obligor, full payment and
performance by its affiliated reinsurers. AH Life has the right to
terminate the PPA and COLI reinsurance agreements by recapture of the
related assets and liabilities if Household does not take a required action
under the guarantee agreements within 90 days of a triggering event. AH
Life has the option to terminate the PPA and COLI reinsurance agreements on
the seventh anniversary of the acquisition, by recapturing the related
assets and liabilities at an agreed-upon price or their then current fair
values as independently determined.
59
<PAGE>
Note 14. Reinsurance (continued)
Reinsurance contracts do not relieve an insurer from its primary
obligation to policyholders. Therefore, the failure of a reinsurer that is
party to a contract with a subsidiary to discharge its reinsurance
obligations could result in a loss to the affected subsidiary. The Company
regularly evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk related to reinsurance activities. No
significant credit losses have resulted from the reinsurance activities of
the subsidiaries during the three years ended December 31, 1996.
The effects of reinsurance on total premiums and other considerations and
total benefits are as follows (in millions):
Year ended December 31
1996 1995 1994
- ------------------------------------------------------------------------------
Premiums and other considerations, before effect
of reinsurance ceded .......................... $1,314 $872 $670
Less premiums and other considerations ceded ... 320 62 15
------ ---- ----
Net premiums and other considerations .......... $ 994 $810 $655
====== ==== ====
Benefits, before reinsurance recoveries ........ $2,696 $901 $642
Less reinsurance recoveries .................... 1,485 59 14
------ ---- ----
Net benefits ................................... $1,211 $842 $628
====== ==== ====
Note 15. Segment Information
The Company's operations are conducted principally through the following
business segments:
Life insurance -- Life insurance operations include the writing of
individual and group life insurance, accident and health insurance,
disability insurance and annuity products.
Communications -- Communications operations consist principally of
radio and television broadcasting and sports program production.
Amounts related to all operations which do not constitute reportable
business segments have been combined with realized investment gains and
consolidating adjustments in the lines described as "Corporate and other".
Corporate operations consist of certain management and treasury activities
and include income, gains and expenses that have not been allocated to
reportable business segments. Amounts related to the discontinued other
insurance segment are not included in segment information pertaining to
results of operations. Depreciation and amortization includes amortization
of cost in excess of net assets acquired and amortization of other
intangible assets related to communications operations, but does not
include depreciation of real estate investments, amortization of deferred
policy acquisition costs or amortization of value of business acquired.
Certain information about reportable business segments follows (in
millions):
Year ended December 31
1996 1995 1994
- ------------------------------------------------------------------------------
Revenue
Life Insurance ................................ $ 1,897 $ 1,345 $1,026
Communications ................................ 187 166 173
Corporate and other ........................... 41 57 70
------- ------- ------
Consolidated .................................. $ 2,125 $ 1,568 $1,269
======= ======= ======
Income from continuing operations before income taxes
Life Insurance ................................ $ 373 $ 294 $ 250
Communications ................................ 45 39 36
Corporate and other ........................... 25 48 62
------- ------- ------
Consolidated .................................. $ 443 $ 381 $ 348
======= ======= ======
Identifiable assets at December 31
Life Insurance ................................ $16,827 $15,912 $5,654
Communications ................................ 212 142 149
Discontinued operations ....................... -- -- 146
Corporate and other ........................... 523 424 191
------- ------- ------
Consolidated .................................. $17,562 $16,478 $6,140
======= ======= ======
Depreciation and amortization
Life Insurance ................................ $ 10 $ 6 $ 5
Communications ................................ 9 9 10
Corporate and other ........................... 1 1 --
------- ------- ------
Consolidated .................................. $ 20 $ 16 $ 15
======= ======= ======
60
<PAGE>
Note 15. Segment Information (continued)
Additions to property and equipment totaled $20 million in 1996, $30
million in 1995 (including amounts resulting from the AH Life acquisition)
and $17 million in 1994. Included in the preceding amounts are additions
related to the communications industry segment totaling $12 million, $7
million and $14 million in 1996, 1995 and 1994, respectively. Other
additions to property and equipment related primarily to the life insurance
segment. During 1995, equity securities carried at $327 million were
transferred from the life insurance segment to the corporate segment.
Note 16. Disclosures About Fair Value of Financial Instruments
The carrying values and fair values of financial instruments as of December
31 are summarized as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Debt securities available for sale ................ $6,673 $6,673 $6,458 $6,458
Debt securities held to maturity .................. 3,877 3,903 3,527 3,649
Equity securities available for sale .............. 906 906 816 816
Equity securities trading portfolio ............... 23 23 46 46
Mortgage loans .................................... 1,323 1,353 1,049 1,133
Policy loans ...................................... 1,212 1,204 1,152 1,154
Financial Liabilities
Annuity contract liabilities in accumulation phase 4,836 4,639 4,815 4,596
Commercial paper and revolving credit borrowings .. 222 222 230 230
ACES and other debt ............................... 148 165 137 138
Securities sold under repurchase agreements ....... 244 244 196 196
Mandatorily redeemable preferred stock ............ 53 53 50 50
</TABLE>
The fair values of cash, cash equivalents, balances due on account from
agents, reinsurers and others, and accounts payable approximate their
carrying amounts as reflected in the consolidated balance sheets due to
their short-term maturity or availability. Assets and liabilities related
to the Company's separate accounts are reported at fair value in the
accompanying consolidated balance sheets.
The fair values of debt and equity securities have been determined
from nationally quoted market prices and by using values supplied by
independent pricing services and discounted cash flow techniques. These
fair values are disclosed together with carrying amounts in Note 3.
The fair value of the mortgage loan portfolio has been estimated by
discounting expected future cash flows using the interest rate currently
offered for similar loans.
The fair value of policy loans outstanding for traditional life
products has been estimated using a current risk-free interest rate applied
to expected future loan repayments projected based on historical repayment
patterns. The fair values of policy loans on universal life-type and
annuity products approximate carrying values due to the variable interest
rates charged on those loans.
Annuity contracts issued by the Company do not generally have defined
maturities. Therefore, fair values of the Company's liabilities under
annuity contracts, the carrying amounts of which are included with
policyholder contract deposits in the accompanying consolidated balance
sheets, are estimated to equal the cash surrender values of the underlying
contracts.
The fair values of commercial paper and revolving credit borrowings
approximate their carrying amounts due to their short-term nature and
interest rates approximating those currently available. Similarly, the
fair value of the liability for securities sold under repurchase agreements
approximates its carrying amounts, which amounts include accrued interest.
The fair value of the ACES is based on its nationally quoted market price.
The fair value of the Company's mandatorily redeemable preferred stock
approximates its stated amount because its dividend rate is adjustable.
Interest rate swaps that hedge direct investments classified as
available for sale are recorded at fair value (1996 -- loss of $1 million;
1995 -- no hedges) and are included in the carrying value of debt
securities available for sale. The fair value of interest rate swaps that
hedge direct investments classified as held to maturity, that hedge
anticipated transactions and that hedge annuity contract deposits (1996 --
$0; 1995 -- loss of $2 million) have not been recorded on the balance
sheet.
Note 17. Commitments and Contingent Liabilities
The Company routinely enters into commitments to extend credit in the form
of mortgage loans and to purchase certain debt instruments for its
investment portfolio in private placement transactions. The fair value of
outstanding commitments to fund mortgage loans and to acquire debt
securities in private placement transactions, which are not reflected in
the consolidated balance sheets, approximates $222 million as of December
31, 1996.
The Company leases electronic data processing equipment and field
office space under noncancelable operating lease agreements. The lease
terms generally range from three to five years. Neither annual rent nor
future rental commitments are significant.
61
<PAGE>
Note 17. Commitments and Contingent Liabilities (continued)
JPCC has commitments for purchases of syndicated television
programming, future sports programming rights, and guaranteed revenues of
approximately $101 million as of December 31, 1996. These commitments are
not reflected as an asset or liability in the accompanying 1996
consolidated balance sheet because these programs are not currently
available for use.
JP Life 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 specific period.
Note 18. Subsequent Events
Radio Station Acquisition
On January 9, 1997, JPCC purchased the assets and operations of a radio
station in Denver for $15 million, bringing the number of Denver radio
stations owned to four.
Sale of Capital Securities
On January 21, 1997 and March 11, 1997, Jefferson-Pilot Capital Trust A and
Jefferson-Pilot Capital Trust B (Trusts) sold $200 million of 8.14%
Capital Securities, Series A and $100 million of 8.285% Capital Securities,
Series B (Capital Securities), respectively, in offerings pursuant to SEC
Rule 144A. The Company purchased all of the Common Securities of the
Trusts, which are Delaware Business Trusts that are treated as
subsidiaries. Proceeds were used by the Trusts to purchase from the
Company its unsecured Junior Subordinated Deferrable Interest Debentures
8.14% Series A and 8.285% Series B (Debentures) which mature, respectively,
on January 15, 2046 and March 1, 2046. The Capital Securities are subject
to mandatory redemption upon repayment of the Debentures. The Debentures
are callable after 10 years with a declining premium, or earlier with a
make whole payment upon the occurrence of an adverse tax event or
investment company event. The Company also has the right to distribute the
Debentures to holders of Capital Securities in liquidation of the Trusts.
Semi-annual distributions on the Capital Securities will be recorded as
preferred stock dividends.
Agreement to Acquire Chubb Life Insurance Company of America
On February 23, 1997, the Company entered into an agreement with The Chubb
Corporation (Chubb) to acquire all outstanding shares of Chubb Life
Insurance Company of America (Chubb Life) for $875 million. 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. Closing is expected to occur as soon as
regulatory approvals are obtained, in the second quarter of 1997.
A dividend of up to $100 million may be paid by Chubb Life to Chubb
prior to closing. A portion or all of the funds would be provided through
dividends from Chubb Life's insurance subsidiaries. Any such dividend from
Chubb Life, if all necessary approvals are obtained from state insurance
regulators for such dividends, would reduce the purchase price by the
amount of such dividend.
The Company expects to finance the purchase primarily through
internally available resources including liquidation of invested assets,
which may include a securities issuance similar to the Company's
outstanding ACES, and available proceeds from the two recent issues of
Capital Securities. The balance will be funded from borrowings. In excess
of $200 million of the after tax proceeds is expected to come from the sale
of securities which are currently held by JP Life, which is applying for
approval from the North Carolina Department of Insurance to pay an
extraordinary dividend to the Company.
62
<PAGE>
Exhibit 21
As of 12/31/96
Jefferson-Pilot Corporation (North Carolina corp.)
Alexander Hamilton Life Insurance Company of America (Michigan corp.)
AH (Michigan) Life Insurance Company (Michigan corp.)
Alexander Hamilton Capital Management, Inc. ( Michigan corp.)
Alexander Hamilton Variable Insurance Trust (Massachusetts business
trust)
First Alexander Hamilton Life Insurance Company (New York corp.)
ETRE Capital Corp. (Delaware corp.)
GARCO Capital Corp. (Delaware corp.)
HARCO Capital Corp. (Delaware corp.) (See note 2)
Omega Jefferson Pilot Seguros de Vida S.A. (Argentina corp.)
JP Investment Management Company (North Carolina corp.)
Jefferson-Pilot Communications Company (North Carolina corp.)
Jefferson-Pilot Communications Company of California (North Carolina corp.
San Diego Broadcasting Corporation (California corp.)
Jefferson-Pilot Communications Company of Virginia (Virginia corp.)
WCSC, Inc. (South Carolina corp.)
Tall Tower, Inc. (South Carolina corp.)
Jefferson-Pilot Health Care Delivery Systems, Inc. (North Carolina corp
Community Choice of North Carolina, Inc. (North Carolina
Medselect, Inc. (North Carolina corp.)
Jefferson-Pilot Investments, Inc. (North Carolina corp.)
Jefferson-Pilot Investor Services, Inc. (North Carolina corp.)
Jefferson-Pilot Investor Services of Nevada, Inc. (Nevada corp.)
Jefferson-Pilot Life Insurance Company (North Carolina corp.)
Jefferson Standard Life Insurance Company (North Carolina corp.)
Jefferson-Pilot Property Insurance Company (North Carolina co
Notes: (1) Each indentation reflects another tier of ownership. All
entities more than 50% owned are listed.
(2) The immediate parent owns 100% of the voting securities of each
entity except that HARCO owns 70% of Omega.
F-17
<PAGE>
EXHIBIT 23 - Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Jefferson-Pilot Corporation of our report dated March 14, 1997, included
in the 1996 Annual Report to Shareholders of Jefferson-Pilot Corporation.
Our audit also included the financial statement schedules of Jefferson-Pilot
Corporation listed in Item 14(a). These schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based
on our audit. In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference of our report dated
March 14, 1997 with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedules included in this
Annual Report (Form 10-K) of Jefferson-Pilot Corporation in the following
Registration Statements:
Form S-8, No.s 2-36778, 2-56410, and 33-30530, pertaining to the Long
Term Stock Incentive Plan and predecessor stock plans, and outstanding
effective registration statements on Form S-16 included in such
S-8 filings;
Form S-8, No. 33-56369, pertaining to the JP Teamshare Plan;
Form S-8, No. 33-64137, pertaining to the 1995 Non-Employee Directors'
Stock Option Plan;
Form S-3, No. 33-63521, pertaining to the debt securities and warrants to
purchase securities.
Ernst & Young LLP
Greensboro, North Carolina
March 27, 1997
F-18
<PAGE>
EXHIBIT 23
ACCOUNTANT'S CONSENT
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K of Jefferson-Pilot Corporation for the
year ended December 31, 1995, into the Company's previously filed Registration
Statement File Nos. 2-36778, 2-56410, 33-30530, 33-56369, 33-641
Arthur Andersen LLP
Detroit, Michigan
March 27, 1997
F-19
<PAGE>
EXHIBIT 23
ACCOUNTANT'S CONSENT
As independent public accountants, we hereby consent to the incorporation of
our report incorporated by reference in this Form 10-K of Jefferson-Pilot
Corporation for the year ended December 31, 1995, into the Company's previously
filed Registration Statement File Nos. 2-36778, 2-56410, 33-30530, 33-56369,
33-64137, and 33-63521.
McGLADREY & PULLEN LLP
Greensboro, North Carolina
March 27, 1997
F-20
<PAGE>
EXHIBIT 24 - Form of Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and / or
director of Jefferson-Pilot Corporation, a North Carolina holding company,
does hereby constitute and appoint Robert A. Reed, John D. Hopkins and
J. Gregory Poole, and each of them, with full power of substitution to appoint
any other Senior Officer, Vice President, Secretary or Assistant Secretary of
the Corporation, as his true and lawful attorney and agent, to do any and all
acts and things and to execute any and all instruments which said attorney and
agent may deem necessary or advisable to enable the said Corporation to comply
with the Securities Exchange Act of 1934, as amended, and any rules, regulations
and requirements of the Securities Exchange Commission in respect thereof,
in connection with the filing of the Annual Report for the year 1996 on Form
10-K, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as officer and / or director of the said Corporation
to the Form 10-K or to any amendment thereto filed with the Securities and
Exchange Commission and to any instrument or document filed as part of, as an
exhibit to or in connection with, said Form 10-K or amendment; and the
undersigned does hereby ratify and confirm as his own act and deed all that said
attorney and agent (or the subsititute) shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents this ____ day
of March, 1997.
------------------------
Name:
F-21
CONFORMED COPY
(With Certain Provisions Redacted)
STOCK PURCHASE AGREEMENT
dated as of
February 23, 1997
between
JEFFERSON-PILOT CORPORATION
and
THE CHUBB CORPORATION
relating to the purchase and sale
of
100% of the Common Stock
of
Chubb Life Insurance Company of America
[CONFIDENTIAL TREATMENT REQUESTED] INDICATES THE PORTIONS OF THIS AGREEMENT THAT
HAVE BEEN OMITTED PURSUANT TO A REQUEST BY THE CHUBB CORPORATION FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC").
SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE SEC.
<PG$PCN>
TABLE OF CONTENTS
----------------------
PAGE
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions...................................................1
ARTICLE 2
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale.............................................7
SECTION 2.02 Closing.......................................................7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
SECTION 3.01. Corporate Existence and Power.................................8
SECTION 3.02. Corporate Authorization.......................................9
SECTION 3.03. Governmental Authorization...................................10
SECTION 3.04. Non-Contravention............................................10
SECTION 3.05. Capitalization...............................................10
SECTION 3.06. Ownership of Shares..........................................11
SECTION 3.07. Subsidiaries.................................................11
SECTION 3.08. Financial Statements.........................................11
SECTION 3.09. Absence of Certain Changes...................................12
SECTION 3.10. No Undisclosed Material Liabilities..........................15
SECTION 3.11. Material Contracts...........................................15
SECTION 3.12. Litigation...................................................16
SECTION 3.13. Compliance with Laws and Court Orders........................16
SECTION 3.14. Finders' Fees................................................17
SECTION 3.15. Insurance Filings............................................17
SECTION 3.16. Insurance Business...........................................19
SECTION 3.17. ERISA Representations........................................20
SECTION 3.18. Property.....................................................21
SECTION 3.19. Environmental Matters........................................21
SECTION 3.20. Guaranty Fund Assessments....................................22
SECTION 3.21. Actuarial Analysis...........................................22
SECTION 3.22. Investments; Defaults........................................22
SECTION 3.23. Separate Accounts............................................23
SECTION 3.24. Funds........................................................23
SECTION 3.25. Employees and Compensation...................................23
<PG$PCN>
PAGE
SECTION 3.26. Producers for the Company and the Insurance Subsidiaries.....24
SECTION 3.27. Insurance....................................................25
SECTION 3.28. Full Disclosure..............................................25
SECTION 3.29. Company Trademarks; Software.................................25
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
SECTION 4.01. Corporate Existence and Power................................26
SECTION 4.02. Corporate Authorization......................................26
SECTION 4.03. Governmental Authorization...................................26
SECTION 4.04. Non-Contravention............................................26
SECTION 4.05. Purchase for Investment......................................27
SECTION 4.06. Litigation...................................................27
SECTION 4.07. Finders' Fees................................................27
SECTION 4.08. Financing....................................................27
ARTICLE 5
COVENANTS OF SELLER
SECTION 5.01. Conduct of the Company.......................................27
SECTION 5.02. Access to Information........................................28
SECTION 5.03. Notices of Certain Events....................................28
SECTION 5.04. Other Offers.................................................29
SECTION 5.05. Non-Solicitation.............................................29
SECTION 5.06. Computer Services and Software...............................29
SECTION 5.07. Minimum Statutory Net Worth..................................30
SECTION 5.08. Special Dividend.............................................30
SECTION 5.09. Noncompetition Agreement.....................................31
SECTION 5.10. Other Agreements.............................................32
SECTION 5.11. Cross-Defaults...............................................32
SECTION 5.12. Portfolio Management.........................................32
ARTICLE 6
COVENANTS OF BUYER
SECTION 6.01. Confidentiality..............................................32
SECTION 6.02. Access.......................................................33
SECTION 6.03. Compliance with Section 15 of the 1940 Act...................33
<PG$PCN>
PAGE
ARTICLE 7
COVENANTS OF BUYER AND SELLER
SECTION 7.01. Reasonable Efforts...........................................34
SECTION 7.02. Further Assurances...........................................34
SECTION 7.03. Public Announcements.........................................34
SECTION 7.04. Intercompany Accounts........................................34
SECTION 7.05. Service Marks, Trademarks and Trade Names....................35
SECTION 7.06. Purchase of Mainframe Computer...............................35
SECTION 7.07. Reports......................................................36
SECTION 7.08. Joint Marketing Arrangements.................................36
SECTION 7.09. Post-Closing Review of Minimum Statutory Equity Amount.......36
SECTION 7.10. Certain Transition Arrangements..............................38
ARTICLE 8
TAX MATTERS
SECTION 8.01. Definitions..................................................38
SECTION 8.02. Tax Representations..........................................40
SECTION 8.03. Tax Covenants................................................41
SECTION 8.04. Termination of Existing Tax Sharing Agreements...............44
SECTION 8.05. Tax Sharing..................................................44
SECTION 8.06. Cooperation on Tax Matters...................................44
SECTION 8.07. Indemnification by Seller....................................45
SECTION 8.08. Survival.....................................................47
ARTICLE 9
EMPLOYEES AND EMPLOYEE BENEFITS
SECTION 9.01. Pension Plans................................................47
SECTION 9.02. Individual Account Plans.....................................47
SECTION 9.03. Other Employee Plans and Benefit Arrangements................48
SECTION 9.04. Plans Following the Closing..................................49
SECTION 9.05. Third Party Beneficiaries....................................50
ARTICLE 10
CONDITIONS TO CLOSING
SECTION 10.01. Conditions to Obligations of Buyer and Seller................50
SECTION 10.02. Conditions to Obligation of Buyer............................51
SECTION 10.03. Conditions to Obligation of Seller...........................52
<PG$PCN>
PAGE
ARTICLE 11
SURVIVAL; INDEMNIFICATION
SECTION 11.01. Survival....................................................52
SECTION 11.02. Indemnification.............................................53
SECTION 11.03. Procedures; Exclusivity.....................................55
SECTION 11.04. [CONFIDENTIAL TREATMENT REQUESTED]...........................56
SECTION 11.05. Procedures for Certain Litigation...........................57
SECTION 11.06. Limitation of Indemnification...............................58
ARTICLE 12
TERMINATION
SECTION 12.01. Grounds for Termination.....................................59
SECTION 12.02. Effect of Termination.......................................60
ARTICLE 13
MISCELLANEOUS
SECTION 13.01. Notices.....................................................60
SECTION 13.02. Amendments and Waivers......................................61
SECTION 13.03. Expenses....................................................61
SECTION 13.04. Successors and Assigns......................................61
SECTION 13.05. Governing Law...............................................62
SECTION 13.06. Jurisdiction................................................62
SECTION 13.07. WAIVER OF JURY TRIAL........................................62
SECTION 13.08. Counterparts; Third Party Beneficiaries.....................62
SECTION 13.09. Entire Agreement............................................62
EXHIBITS AND SCHEDULES
Exhibit I Form of Opinion of Robert Rusis, Esq., General Counsel for Seller
Exhibit II Form of Opinion of Shanley & Fisher, P.C., New Jersey Counsel
for Seller
Exhibit III Form of Opinion of Davis Polk & Wardwell, Special Counsel for
Seller
Exhibit IV Form of Opinion of King & Spalding, Special Counsel for Buyer
<PG$PCN>
Schedule 3.01(a) Corporate Existence and Power
Schedule 3.01(b) Certificates of Authority
Schedule 3.01(c) Pending Licenses
Schedule 3.03 Governmental Authorizations of Seller
Schedule 3.04 Non-Contravention
Schedule 3.07 Subsidiaries
Schedule 3.09 Certain Changes
Schedule 3.11 Material Contracts
Schedule 3.12 Litigation
Schedule 3.13 Violations
Schedule 3.15(a) Holding Company Reports
Schedule 3.15(b) Statutory Insurance Statements
Schedule 3.15(b)(iii) Fines and Penalties
Schedule 3.15(d) Reports of Examination
Schedule 3.16 Insurance Business
Schedule 3.17 Employee Plans and Benefit Arrangements
Schedule 3.19 Environmental Matters
Schedule 3.22 Investments; Defaults
Schedule 3.23 Separate Accounts
Schedule 3.24 Funds
Schedule 4.03 Governmental Authorizations of Buyer
Schedule 5.06(a) Computer Services Agreement
Schedule 5.06(b) Form of List of Software Contracts
Schedule 5.09 Noncompetition
Schedule 7.04 Intercompany Accounts
Schedule 7.05 Certain Company Trademarks
Schedule 8.02 Tax Representations
<PG$PCN>
STOCK PURCHASE AGREEMENT
AGREEMENT dated as of February 23, 1997 between Jefferson-Pilot
Corporation, a North Carolina corporation ("Buyer"), and The Chubb
Corporation, a New Jersey corporation ("Seller").
W I T N E S S E T H :
WHEREAS, Seller is the record and beneficial owner of the Shares and
desires to sell the Shares to Buyer, and Buyer desires to purchase the Shares
from Seller, upon the terms and subject to the conditions hereinafter set forth;
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. (a) The following terms, as used herein,
have the following meanings:
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with,
such Person; provided that neither the Company nor any Subsidiary shall be
considered an Affiliate of Seller.
"Balance Sheet" means the unaudited consolidated balance sheet of the
Company and its Subsidiaries as of September 30, 1996 prepared in conformity
with generally accepted accounting principles applied on a consistent basis.
"Balance Sheet Date" means September 30, 1996.
"Benefit Arrangement" means any written employment, severance or
similar contract, arrangement or policy, or any written plan or arrangement
providing for severance benefits, insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits, deferred
compensation, profit-sharing, bonuses, stock options, equity-based pay, stock
appreciation rights or other forms of incentive compensation or post-retirement
insurance, compensation or benefits that (i) is not an Employee Plan, (ii) is
entered
<PG$PCN>
into or maintained, as the case may be, by Seller or any of its ERISA Affiliates
and (iii) covers any employee or former employee of the Company or any
Subsidiary.
"Capital Accumulation Plan" means the Capital Accumulation Plan of The
Chubb Corporation, Chubb & Son Inc. and Participating Affiliates.
"CASC" means Chubb America Service Corporation, a New Hampshire
corporation.
"Chubb Colonial" means Chubb Colonial Life Insurance Company, a New
Jersey corporation.
"Chubb Life America" is a service mark for the Company, Chubb Colonial
and Chubb Sovereign.
"The Chubb Life Companies" is a service mark for the Company, Chubb
Colonial and Chubb Securities Corporation.
"Chubb Securities Material Adverse Effect" means an event, occurrence
or condition which would prevent Chubb Securities Corporation, a wholly-owned
subsidiary of the Company, from operating its business in the ordinary course.
"Chubb Sovereign" means Chubb Sovereign Life Insurance Company, a
New Hampshire corporation.
"CIAC" means Chubb Investment Advisory Corporation, a Tennessee
corporation.
"Closing Date" means the date of the Closing.
"Company" means Chubb Life Insurance Company of America, a New
Hampshire corporation.
"Defined Contribution Excess Plan" means the Defined Contribution
Excess Benefit Plan of The Chubb Corporation, Federal Insurance Company,
Vigilant Insurance Company and Chubb Life Insurance Company of America.
"Employee Plan" means any "employee benefit plan", as defined in
Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by Seller or any of its ERISA
Affiliates and (iii) covers any employee or former employee of the Company or
any Subsidiary.
<PG$PCN>
"Environmental Laws" shall mean all federal, state, local and foreign
laws, statutes, ordinances, rules, regulations, principles of common law,
orders, decrees, judgments and injunctions relating to pollution, the
environment, natural resources, nuclear power production or Hazardous
Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statue thereto, and the rules and regulations
promulgated thereunder.
"ERISA Affiliate" of any entity means any other entity which, together
with such entity, would be treated as a single employer under Section 414 of the
Code.
"Excess Pension Plan" means the Pension Excess Benefit Plan of The
Chubb Corporation, Chubb & Son Inc. and Participating Affiliates.
"Hazardous Substances" means any waste, pollutant, hazardous substance,
toxic substance, hazardous waste, special waste, nuclear substance or waste,
radioactive substance or waste, petroleum and petroleum-derived substance or
waste, with respect to any of such items to the extent regulated under, or
defined by, any Environmental Laws.
"HSR Act" means the Hart-Scott Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"Individual Account Plans" means the Capital Accumulation Plan and The
Chubb Corporation Employee Stock Ownership Plan.
"Insurance Subsidiaries" means Chubb Colonial and Chubb Sovereign.
"Investment Company" has the meaning assigned to it in the Investment
Company Act of 1940, as amended.
"Investment Contracts" means each contract or agreement, as in effect
on the date hereof, relating to the rendering by CIAC of investment advisory or
management services, including without limitation all sub-advisory services.
"Lien" means, with respect to any property or asset, any mortgage,
lien, pledge, charge, security interest, encumbrance or other adverse claim of
any kind in respect of such property or asset other than (i) Liens arising by
operation of law and in the ordinary course of business, such as mechanics',
carriers' or materialmen's liens (none of which would materially impair or
interfere with the use or operation of such property or asset); (ii) Liens for
Taxes which are either
<PG$PCN>
not delinquent or are being contested in good faith; and (iii) Liens which
secure indebtedness for borrowed money reflected on the Balance Sheet. For the
purposes of this Agreement, a Person shall be deemed to own subject to a Lien
any property or asset which it has acquired or holds subject to the interest of
a vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such property or asset.
"Material Adverse Effect" means a material adverse effect on the
condition (financial or otherwise), business, assets or results of operations of
the Company and the Subsidiaries, taken as whole.
"Multiemployer Plan" means each Employee Plan that is a multiemployer
plan, as defined in Section 3(37) of ERISA.
"NASD" means the National Association of Securities Dealers.
"NOLHGA" means National Organization of Life and Health Guaranty
Associations.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PLI" means Personal Lines Insurance Brokerage, Inc., a wholly-owned
subsidiary of Seller.
"Pension Plan" means the Pension Plan of The Chubb Corporation, Chubb
& Son Inc. and Participating Affiliates 1985.
"Person" means an individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Reference Rate" means a rate per annum equal to the prime rate
announced from time to time by Morgan Guaranty Trust Company of New York.
"Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leeching or migration into
the indoor or outdoor environment or into or out of any property, including the
movement of Hazardous Substances through or in the air, soil, surface water,
ground water or property.
"Required Jurisdictions" means the jurisdictions set forth on Schedule
3.03 hereto.
<PG$PCN>
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means all of the issued and outstanding shares of the capital
stock of the Company.
"Subsidiary" means each Insurance Subsidiary, CIAC, and each of the
other Subsidiaries listed on Schedule 3.07 hereto.
"Title IV Plan" means an Employee Plan, other than a Multiemployer
Plan, subject to Title IV of ERISA.
"Transferred Employee" means each individual who, as of the Closing
Date, is employed (including persons absent from active service by reason of
illness, short-term disability or leave of absence, whether paid or unpaid) by
the Company or any Subsidiary; provided, that an individual who is employed as
of the Closing Date by the Company or any Subsidiary, but on such date is absent
from active service by reason of short-term disability and subsequently begins
to receive long-term disability benefits under the Seller's long-term disability
plan shall not be considered a Transferred Employee for the period commencing on
the date such individual begins to receive long-term disability benefits under
Seller's long-term disability plan.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
Term Section
- ---- -------
Accounting Referee 8.01
Acquisition Proposal 5.04
Applicable Tax Rate 8.01
Arbiter 7.09(e)
Basket 8.01
Buyer Recitals
Buyer Plan 9.02
Claim Indemnified Parties 11.02(a)
Chubb Trademarks 7.05
Claims 11.05(a)
[CONFIDENTIAL TREATMENT REQUESTED] 11.02(a)(iii)(A)
Closing 2.02
Closing Date Statutory Statements 7.09(a)
Code 8.01
<PG$PCN>
Company Securities 3.05(b)
Company Trademarks 3.29(a)
Computer Services Agreement 5.06(a)
Conversion Date 5.06(a)
Damages 11.02(a)
Direct Rollover 9.02
Disputed Amounts 7.09(e)
Dispute Notice 7.09(e)
Dispute Notice Date 7.09(e)
Employees 8.03(d)
Federal Tax 8.01
Final Arbiter 7.09(e)
Funds 3.24
Geographic Area 5.09(c)
Holding Company Reports 3.15(a)
Indemnifiable Tax 8.01
Indemnified Party 11.03(a)
Indemnifying Party 11.03(a)
Life Insurance Companies 5.09(a)
Loss 8.07(a)
M&R Analysis 3.21
Minimum Statutory Equity Amount 5.07
1940 Act 3.23
Post-Closing Tax Period 8.01
Potential Claim 11.04
Pre-Closing Tax Period 8.01
Price Allocation Schedule 8.03(f)
Producer Plans 3.26(a)
Producers 3.26(a)
Purchase Price 2.01
Referee 11.05(e)
Reinsurance Association Agreement Schedule 3.04
Required Disposition 5.09(a)
Returns 8.02(a)
Scheduled Products 5.09(c)
Section 338 Benefit 8.03(f)
Section 338 Cost 8.03(f)
Section 338(h)(10) Election 8.03(f)
Seller Recitals
Seller Group 8.01
Seller Stock Option 8.03(d)
Separate Accounts 3.23
Software 3.29(b)
<PG$PCN>
Statutory Insurance Statements 3.15(b)
Statutory Financial Statements 3.15(c)
Straddle Period 8.01
Subsidiary Securities 3.07(b)
Tax 8.01
Tax Asset 8.01
Tax Sharing Agreement 8.01
Taxing Authority 8.01
Temporary Difference 8.07(b)
Trademark License Agreement 7.05
Transition Period 5.06
ARTICLE 2
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale. Upon the terms and subject to the
conditions of this Agreement, Seller agrees to sell to Buyer and Buyer agrees to
purchase from Seller, the Shares at the Closing. The purchase price for the
Shares (the "Purchase Price") is $875,000,000 in cash, less any amounts paid by
the Company to Seller in accordance with Section 5.08. If the Closing shall not
have occurred on or before June 30, 1997, interest shall accrue on the Purchase
Price at the Reference Rate from and including July 1, 1997 to, but excluding,
the Closing Date. Such interest shall be calculated daily on the basis of a year
of 365 days and the actual number of days elapsed. The Purchase Price, together
with any accrued interest thereon, shall be paid as provided in Section 2.02.
SECTION 2.02. Closing. The closing (the "Closing") of the purchase and
sale of the Shares hereunder shall take place at the offices of Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York on the last business day of
the month in which the conditions set forth in Article 10 are satisfied, or at
such other time or place as Buyer and Seller may agree. At the Closing:
(a) Buyer shall deliver to Seller:
(i) the Purchase Price, together with any accrued interest thereon, in
immediately available funds by wire transfer to an account of Seller with a bank
in New York City designated by Seller, by notice to Buyer, not later than two
business days prior to the Closing Date (or if not
<PG$PCN>
so designated, then by certified or official bank check payable in
immediately available funds to the order of Seller in such amount); and
(ii) the opinion, certificates and other documents set forth in
Section 10.03 of this Agreement.
(b) Seller shall deliver to Buyer:
(i) certificates for the Shares duly endorsed or accompanied by stock
powers duly endorsed in blank, with any required transfer stamps
affixed thereto;
(ii) true copies of the articles of incorporation and by-laws of each
of Seller, the Company and the Subsidiaries;
(iii) the complete stock books, stock ledgers, minute books and
corporate seals of the Company and the Subsidiaries and the stock
certificates evidencing ownership of the Subsidiaries;
(iv) the opinions, certificates and other documents set forth in
Section 10.02 of this Agreement; and
(v) resignations of such directors and officers (from their offices
as such) of the Company and the Subsidiaries as Buyer may
request.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date hereof that:
SECTION 3.01. Corporate Existence and Power. (a) Each of Seller and the
Company is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now conducted. Except as disclosed on Schedule
3.01(a), the Company is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where such qualification is
necessary, except for those jurisdictions where failure to be so qualified would
not reasonably be expected to have a Material Adverse Effect. Seller has
heretofore made available to Buyer true and complete copies of the certificate
of incorporation and bylaws of Seller and the Company as currently in effect.
The minutes of the Board of Directors', any
<PG$PCN>
investment committees' and stockholders' meetings and the stock books of the
Company and the Subsidiaries, all of which have been previously made available
to Buyer, are the complete and correct records of such Board of Directors',
investment committee's and stockholders' meetings and stock issuances from, in
the case of such minutes, December 31, 1993 through and including the date
hereof and reflect all transactions through and including the date hereof
required to be contained in such records, and all such meetings were duly
called.
(b) Attached hereto as Schedule 3.01(b) is a complete and accurate list
of all jurisdictions where the Company and each of the Insurance Subsidiaries
has written or is qualified to write insurance; a list of all licenses and
permits held by the Company and each of the Insurance Subsidiaries issued by any
insurance authority of any such jurisdiction; and a description of the classes
and lines of businesses the Company and each of the Insurance Subsidiaries is
authorized to write in each jurisdiction. The Company's and each of the
Insurance Subsidiaries' authority to write the classes and lines of insurance
business reflected on said schedule is not restricted in any material respect,
and neither the Company nor any of the Insurance Subsidiaries is a party to any
agreement with any state insurance regulatory official limiting the Company's or
such Insurance Subsidiary's ability to make full use of the licenses or permits
which have been issued to it or requiring the Company and the Insurance
Subsidiaries to comply with regulatory standards, procedures or requirements
different from those applicable to companies with licenses or permits identical
to those issued to the Company or such Insurance Subsidiary. The licenses and
permits listed on Schedule 3.01(b) constitute all licenses and permits material
to the conduct of their business, as it is now conducted and will be conducted
prior to the Closing. Excluding the Company's license in Taiwan, all such
licenses and permits are in full force and effect, and there are no reasonable
grounds to believe that any such license or permit will not, in the ordinary
course, be renewed upon its expiration.
(c) Attached hereto as Schedule 3.01(c) is a complete and accurate list
of all jurisdictions in which the Company or any Insurance Subsidiary currently
has applications for licenses, permits or certificates of authority pending.
Schedule 3.01(c) also sets forth the current status of all such applications.
SECTION 3.02. Corporate Authorization. The execution, delivery and
performance by Seller of this Agreement are within Seller's corporate powers and
have been duly authorized by all necessary corporate action on the part of
Seller. This Agreement constitutes a valid and binding agreement of Seller
enforceable in accordance with its terms, except as (i) the enforceability
hereof may be limited by bankruptcy, insolvency, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and (ii) the
availability of equitable remedies may be limited by equitable principles of
general applicability.
<PG$PCN>
SECTION 3.03. Governmental Authorization. The execution, delivery and
performance by Seller of this Agreement require no action by or in respect of,
or filing with, any governmental body, agency, or official other than (i)
compliance with any applicable requirements of the HSR Act, (ii) the approvals
or non-disapprovals of the Required Jurisdictions, and (iii) any such action or
filing as to which the failure to make or obtain would not reasonably be
expected to have a Material Adverse Effect or a Chubb Securities Material
Adverse Effect.
SECTION 3.04. Non-Contravention. The execution, delivery and
performance by Seller of this Agreement do not and will not (i) violate the
certificate of incorporation or bylaws of Seller or the Company or any
Subsidiary, (ii) assuming compliance with the matters referred to in Section
3.03, violate any applicable law, rule, regulation, judgment, injunction, order
or decree or alter or, except as set forth on Schedule 3.04, impair any license,
franchise, permit or other similar authorization held by Seller or the Company
or any Subsidiary, (iii) except as disclosed on Schedule 3.04, require any
consent or other action by any Person under, constitute a default under, or give
rise to any right of termination, cancellation or acceleration of any right or
obligation of Seller or the Company or any Subsidiary or to a loss of any
benefit to which the Company or any Subsidiary is entitled under, any agreement
or other instrument binding upon Seller or the Company or any Subsidiary or
their properties or assets or (iv) result in the creation or imposition of any
Lien on any asset of the Company or any Subsidiary, except, in the case of
clauses (iii) and (iv), to the extent that any such violation, failure to obtain
any such consent or other action, default, right, loss or Lien would not
reasonably be expected to have a Material Adverse Effect.
SECTION 3.05. Capitalization. (a) The authorized capital stock of the
Company consists of 600,000 shares of common stock, par value $5.00 per share.
As of the date hereof, there are 600,000 shares outstanding.
(b) The Shares have been duly authorized and validly issued and are
fully paid and non-assessable. Except as set forth in this Section 3.05, there
are no outstanding (i) shares of capital stock or voting securities of the
Company, (ii) securities of the Company convertible into or exchangeable for
shares of capital stock or voting securities of the Company or (iii) options or
other rights to acquire from the Company, or other obligation of the Company to
issue, any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company (the items in
clauses (i), (ii) and (iii) being referred to collectively as the "Company
Securities"). There are no outstanding obligations of the Company or any
Subsidiary to repurchase, redeem or otherwise acquire any Company Securities.
<PG$PCN>
SECTION 3.06. Ownership of Shares. Seller is the record and beneficial
owner of the Shares, free and clear of any Lien and any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of the Shares), and will transfer and deliver to Buyer at the Closing
valid title to the Shares free and clear of any Lien and any such limitation or
restriction.
SECTION 3.07. Subsidiaries. (a) Each Subsidiary is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, has all corporate power and authority to own,
lease and operate its properties and to carry on its business as now conducted.
Each Subsidiary is duly qualified to do business as a foreign corporation and is
in good standing in each jurisdiction where such qualification is necessary,
except for those jurisdictions where failure to be so qualified would not
reasonably be expected to have a Material Adverse Effect. All Subsidiaries and
their respective jurisdictions of incorporation are identified on Schedule 3.07.
No later than 10 days after the date hereof, Seller shall deliver to Buyer an
amendment to Schedule 3.07 which shall set forth the authorized and outstanding
shares of capital stock of each Subsidiary.
(b) All of the outstanding capital stock of, or other voting securities
or ownership interests in, each Subsidiary, is owned by the Company, directly or
indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other voting securities or ownership
interests). There are no outstanding (i) securities of the Company or any
Subsidiary convertible into or exchangeable for shares of capital stock or other
voting securities or ownership interests in any Subsidiary or (ii) options or
other rights to acquire from the Company or any Subsidiary, or other obligation
of the Company or any Subsidiary to issue, any capital stock or other voting
securities or ownership interests in, or any securities convertible into or
exchangeable for any capital stock or other voting securities or ownership
interests in, any Subsidiary (the items in clauses (i) and (ii) being referred
to collectively as the "Subsidiary Securities"). There are no outstanding
obligations of the Company or any Subsidiary to repurchase, redeem or otherwise
acquire any outstanding Subsidiary Securities.
SECTION 3.08. Financial Statements. The audited consolidated balance
sheets of the Company and its Subsidiaries as of December 31, 1994 and December
31, 1995 and the related consolidated statements of income and cash flows for
each of the years ended December 31, 1994 and December 31, 1995 and the Balance
Sheet and the related unaudited consolidated statements of income and cash flows
in the nine months ended September 30, 1996 present fairly, in all material
respects, the consolidated financial position of the Company or any Subsidiary
as of the dates thereof and their consolidated results of operations and
<PG$PCN>
changes in the consolidated financial position for the periods then
ended in conformity with generally accepted accounting principles applied on a
consistent basis, except as set forth in the notes, exhibits or schedules
thereto (subject, in the case of any unaudited statements, to normal year-end
adjustments). Promptly after they become available, but in no event later than
May 15, 1997, Seller will deliver to Buyer audited consolidated balance sheets
of the Company and its Subsidiaries at December 31, 1996 and consolidated
statements of income, cash flows and changes in stockholder's equity for the
year then ended, and the notes thereto, and will deliver as soon as they are
available interim financial statements of the Company and its Subsidiaries as of
the end of each subsequent quarter and for the quarter and year then ended, in
each case prepared in accordance with generally accepted accounting principles
applied on a consistent basis.
SECTION 3.09. Absence of Certain Changes. Since the Balance Sheet Date,
except (i) as disclosed on Schedule 3.09 and (ii) for the transactions
contemplated hereby, the business of the Company and each Subsidiary has been
conducted in the ordinary course consistent with past practices and there has
not been:
(i) any event, occurrence, development or state of circumstances or
facts which has had a Material Adverse Effect or a Chubb
Securities Material Adverse Effect, other than those resulting
from changes in general conditions (including laws and
regulations) applicable to the industry, or general economic
conditions;
(ii) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of
the Company, or any repurchase, redemption or other acquisition
by the Company or any Subsidiary of any outstanding shares of
capital stock or other securities of, or other material ownership
interests in, the Company or any Subsidiary, or the issuance by
the Company or any Subsidiary of any capital stock or the
issuance or grant by the Company or any Subsidiary of any option,
warrant, call, commitment, subscription, right to purchase or
contract of any character relating to its authorized or issued
capital stock or any securities convertible into, relating to or
based on its capital stock;
(iii) any amendment of the articles of incorporation or by-laws or
similar governing instruments or outstanding security of the
Company or any Subsidiary;
(iv) any incurrence, assumption or guarantee by the Company or any
Subsidiary of any indebtedness for borrowed money in excess of
$100,000;
<PG$PCN>
(v) any creation or assumption by the Company or any Subsidiary of
any Lien on any asset other than in the ordinary course of
business;
(vi) any making of any loan, advance or capital contributions to or
investment of any nature in any Person other than loans, advances
or capital contributions to or investments in wholly-owned
Subsidiaries and portfolio transactions made, in each case, in
the ordinary course of business;
(vii) any reported damage, destruction or other casualty loss affecting
the business or assets of the Company or any Subsidiary which
after giving effect to any applicable insurance payment has had a
Material Adverse Effect;
(viii) any transaction or commitment made, or any contract or agreement
entered into, by the Company or any Subsidiary relating to its
material assets or business (including the acquisition or
disposition of any assets) or any relinquishment by the Company
or any Subsidiary of any contract or other right, in either case,
involving more than $1,000,000 over its noncancellable term,
other than transactions and commitments contemplated by this
Agreement;
(ix) any change in any method of accounting or accounting practice by
the Company or any Subsidiary, except for any such change after
the date hereof required by law or by reason of a concurrent
change in generally accepted accounting principles, or any change
in any actuarial or reserving standard or any change in
depreciation or amortization policies or rates adopted by it;
(x) any (A) employment, deferred compensation, severance, retirement
or other similar agreement entered into with any director or
officer of the Company or any Subsidiary (or any amendment to any
such existing agreement), (B) grant of any severance or
termination pay to any director or officer of the Company or any
Subsidiary, or (C) change in compensation or other benefits
payable to any director or officer of the Company or any
Subsidiary pursuant to any severance or retirement plans or
policies thereof, except for enhanced vesting, if any, relating
to awards outstanding under Seller's Long-Term Stock Incentive
Plans and under the Pension Plan and Individual Account Plans;
provided that no such enhanced vesting shall result in any
liability or obligation to the Company, any Subsidiary or Buyer;
<PG$PCN>
(xi) any labor dispute, other than routine individual grievances, or,
to the knowledge of Seller, any activity or proceeding by a
labor union or representative thereof to organize any employees
of the Company or any Subsidiary, or any lockouts, strikes,
slowdowns, work stoppages or, to the knowledge of Seller, any
threats thereof by or with respect to any employees of the
Company or any Subsidiary;
(xii) except as referenced in subsection (x) of this Section 3.09 and
except for customary wage or salary increases for employees and
customary compensation increases for agents, any increase in the
compensation payable or to become payable to any employee or
agent or any increase in any bonus, insurance, severance,
pension or other Benefit Arrangement or Employee Plan for such
employees or agents or any employment, consulting, severance or
other similar contract entered into, except for (a) at will
employment arrangements and (b) contracts with agents, in each
case entered into in the ordinary course of business consistent
with past practice;
(xiii) any change in its underwriting standards, retention limits or
administrative practices with respect to additions to (new
business) or deletions from (policy terminations) any policy
master files;
(xiv) any change in interest rates credited on life insurance or
annuity policies, except for such changes that the Company deems
reasonably necessary consistent with past practice to respond to
competitive factors;
(xv) any change in systems of internal accounting controls that could
reasonably be expected to increase the risk of a Material
Adverse Effect;
(xvi) any amendment to any form of the contracts with Producers or
Producer Plans referred to in Section 3.26(a);
(xvii) any transaction or commitment made to acquire or dispose of any
real property; or
(xviii) any agreement, understanding or commitment to take any action
described in this Section 3.09.
SECTION 3.10. No Undisclosed Material Liabilities. There are no
liabilities of the Company or any Subsidiary of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, other
than:
<PG$PCN>
(a) liabilities provided for on the consolidated balance sheet of the
Company and its Subsidiaries dated December 31, 1995, or disclosed in the notes
thereto;
(b) liabilities incurred in the ordinary course of business since
December 31, 1995 that have not had and are not reasonably expected to have a
Material Adverse Effect; and
(c) liabilities or other obligations disclosed in, or related to,
contracts or other matters disclosed in this Agreement or any Schedule to this
Agreement.
SECTION 3.11. Material Contracts. (a) Except as disclosed on Schedule
3.11, and except, in the case of Section 3.11(a)(i), (ii) and (vii), for any
agreements that are terminable on not more than 60 days notice and without the
payment of any penalty by, or any other material consequence to, the Company or
any Subsidiary, neither the Company nor any Subsidiary, to the best of their
knowledge, is a party to or bound by:
(i) any lease not made in the ordinary course of business which
involves payments of more than $150,000 per year or extends
beyond December 31, 1999;
(ii) any agreement for the purchase of materials, supplies, goods,
services, equipment or other assets not made in the ordinary
course of business which individually does not exceed $250,000;
(iii) any agreement relating to indebtedness for borrowed money or the
deferred purchase price of property (in either case, whether
incurred, assumed, guaranteed or secured by any asset), except
any such agreement entered into in the ordinary course of
business with an aggregate outstanding principal amount not
exceeding $25,000;
(iv) any material partnership, joint venture or other similar
agreement or arrangement;
(v) any material agency, dealer, sales representative, marketing or
other similar agreement not made in the ordinary course of
business;
(vi) any material agreement or arrangement with Seller or any of its
Affiliates; or
<PG$PCN>
(vii) any other agreement not made in the ordinary course of business
that is material to the Company and the Subsidiaries taken as a
whole.
(b) Except for agreements which are disclosed as terminable on Schedule
3.11, each agreement disclosed in any Schedule to this Agreement to which the
Company or any Subsidiary is a party is a valid and binding agreement of the
Company or a Subsidiary, as the case may be, and is in full force and effect,
and neither the Company nor any Subsidiary is, nor to the knowledge of Seller is
any other party thereto, in default or breach in any material respect under the
terms of any such agreement, except for such defaults or breaches which would
not reasonably be expected to have a Material Adverse Effect or a Chubb
Securities Material Adverse Effect.
SECTION 3.12. Litigation. Except as set forth on Schedule 3.12, there
is no action, suit, investigation or proceeding pending against, or to the
knowledge of Seller threatened against or affecting, Seller, the Company or any
Subsidiary before any court or arbitrator or any governmental or regulatory
body, agency or official which would reasonably be expected to result in costs
or losses in excess of $100,000 in any single instance against or on behalf of
the Company or any Subsidiary, or any officer, employee or director thereof in
such individual's capacity as officer, employee or director of the Company or
any Subsidiary or involving any of their properties or businesses, whether at
law or in equity. [
CONFIDENTIAL TREATMENT REQUESTED
] Further, except as set forth on Schedule
3.12, there are no outstanding judgments, orders, decrees, stipulations or
awards (whether rendered by a court, administrative agency, or by arbitration,
pursuant to a grievance or other procedures) against or relating to the Company
or any Subsidiary which contain any remaining restrictions or obligations to
perform. There is no pending or, to the best knowledge of the Seller, the
Company and the Subsidiaries, any threatened action, proceeding or investigation
with respect to the Company, any Subsidiary or any other Person which questions
the validity of this Agreement or the transactions contemplated hereby, could
prevent or materially adversely affect any action taken to be taken pursuant
hereto or which could reasonably be expected to result in any revocation,
suspension or limitation of any regulatory authority of the Company or any
Subsidiary.
SECTION 3.13. Compliance with Laws and Court Orders. Except as
disclosed on Schedule 3.13 and 3.15(b)(iii), since December 31, 1993, the
Company and each Subsidiary has complied in all material respects with its
obligation to make all required filings or reports with governmental or
regulatory bodies and has complied in all material respects with all laws,
rules, regulations,
<PG$PCN>
licensing requirements and orders applicable to the Company or such Subsidiary
or the operation of their respective businesses, and there has been no written
assertion received, and no elected officer has received any oral notice, from
any party responsible for the administration or enforcement thereof that the
Company or any Subsidiary has violated any such laws, rules, regulations,
requirements or orders. All filings and reports to governmental or regulatory
authorities have been true, complete and accurate in all material respects. This
Section does not cover any environmental matters, for which Section 3.19 is
solely applicable.
SECTION 3.14. Finders' Fees. Except for Goldman, Sachs & Co., whose
fees will be paid by Seller, there is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on behalf
of Seller or the Company or any Subsidiary who might be entitled to any finder's
fee or commission in connection with the transactions contemplated by this
Agreement.
SECTION 3.15. Insurance Filings. (a) Holding Company Reports. Schedule
3.15(a) contains a true and complete list of all annual holding company reports
("Holding Company Reports") which the Company and each Insurance Subsidiary has
filed with or submitted to the insurance regulatory authorities of New Jersey,
New Hampshire and California (and certain other jurisdictions) since December
31, 1993.
(b) Statutory Insurance Statements. Schedule 3.15(b) contains a true
and complete list of all annual and quarterly statements ("Statutory Insurance
Statements") which the Company and each Insurance Subsidiary has filed (or
caused to be filed) with or submitted to the insurance regulatory authorities of
New Jersey, New Hampshire and California and in each other jurisdiction in which
such company is an admitted insurer since December 31, 1993. Except as indicated
therein or in the reports of examination referred to Section 3.15(d), (i) no
material deficiencies have been asserted to the Company or any such Insurance
Subsidiary by any such regulatory authority with respect to such filings or
submissions; (ii) neither the Company nor any such Insurance Subsidiary has
submitted any response with respect to material comments from such insurance
regulatory authorities concerning such filings, submissions or reports of
examination; (iii) since December 31, 1993 and except as disclosed on Schedule
3.15(b)(iii), no fine or penalty in excess of $500 has been imposed on the
Company or any Insurance Subsidiary by any such insurance regulatory authority;
and (iv) no deposits have been made by the Company or any Insurance Subsidiary
with any such insurance regulatory authority which were not shown in the most
recent annual Statutory Insurance Statement of the Company and each of the
Insurance Subsidiaries. The Company has delivered to Buyer true and complete
copies of the Statutory Insurance Statements.
<PG$PCN>
(c) Statutory Financial Statements. The statutory financial statements
("Statutory Financial Statements") of the Company and of each Insurance
Subsidiary which are included in the Statutory Insurance Statements present
fairly, in all material respects, the statutory financial condition of the
Company and of each Insurance Subsidiary as of the dates thereof and the
statutory results of its operations and other data contained therein for each of
the years then ended in conformity with required or permitted statutory
insurance accounting requirements and practices which have been applied on a
consistent basis, except as set forth in the notes, exhibits or schedules
thereto.
Seller shall deliver to Buyer as soon as they are filed such interim or
annual Statutory Financial Statements that may be required to be filed with any
state departments of insurance on behalf of the Company or any Insurance
Subsidiary, and such Statutory Financial Statements to be delivered hereafter
will present fairly, in all material respects, the statutory financial condition
of the Company and each Insurance Subsidiary as of such date and the statutory
results of operations of the Company and each Insurance Subsidiary for the
period then ended, in accordance with required or permitted statutory insurance
accounting requirements and practices which have been applied on a consistent
basis, except as set forth in the notes, exhibits or schedules thereto.
(d) Reports of Examination. Schedule 3.15(d) contains a true and
complete list of the Reports of Examination as to Condition for the Company and
each Insurance Subsidiary, constituting the most recent National Association of
Insurance Commissioners Zone Examination for the Company and any such Insurance
Subsidiary under applicable insurance laws, true and complete copies of which
have been delivered to Buyer.
(e) Reserves, etc. The amounts shown in the Statutory Insurance
Statements as reserves and liabilities for past and future insurance policy
benefits, losses, claims and expenses under insurance policies as of the end of
each such year were computed in accordance with commonly accepted actuarial
standards consistently applied, were fairly stated in accordance with sound
actuarial principles, were based on actuarial assumptions which were in
accordance with those called for in policy provisions and met the requirements
of the insurance laws of New Jersey, New Hampshire, New York and California, as
applicable, and such amounts shown on the Statutory Insurance Statements filed
after the date hereof and on or prior to the Closing Date will be so computed
and based and will meet all such requirements. No other state has objected to
such Statutory Insurance Statements as filed.
SECTION 3.16. Insurance Business. (a) Reinsurance. All material
contracts, arrangements, treaties and agreements to which the Company or any
<PG$PCN>
Insurance Subsidiary is a party with respect to reinsurance applicable to
insurance in force (including grace periods and other extensions) on the date of
this Agreement, a list of which is included on Schedule 3.16, and all such
material contracts, arrangements, treaties and agreements under which the
Company or any such Insurance Subsidiary has any obligation to cede insurance,
are valid, binding and in full force and effect in accordance with their terms.
To the best knowledge of Seller, the Company is generally in good standing under
its reinsurance agreements with respect to the reporting of business to be ceded
and the timely payment of premiums. Neither the Company nor any Insurance
Subsidiary is, and, to the best knowledge of Seller, no other party thereto is,
in material default of any provision thereof and, except as set forth on
Schedule 3.16, no such material agreement contains any provision providing that
the other party thereto may terminate the same by reason of the transactions
contemplated by this Agreement or any other provision which would be altered or
otherwise become applicable by reason of such transactions.
Except as provided for in the Statutory Financial Statements as of and
for the year ended December 31, 1995, or as set forth on Schedule 3.16, all
reinsurance represented by reinsurance treaties to which the Company or any
Insurance Subsidiary is a party represents an admitted asset or reduction of
loss reserves of the Company or the Insurance Subsidiary in the respective
Statutory Financial Statements and their carrying values have been described in
conformity with statutory accounting principles in accordance with values
described by the National Association of Insurance Commissioners, when
appropriate, consistent with the prior reporting practices of the Company and
the Insurance Subsidiaries. Except as set forth on Schedule 3.16, (i) no consent
from any assuming reinsurer under any of such reinsurance treaties is required
in order for Seller to validly and effectively sell the Shares to Buyer as
provided hereunder, and (ii) the termination of any reinsurance treaty between
or among the Company and any Insurance Subsidiary will not result in adverse tax
consequences to the Company or any Insurance Subsidiary.
(b) Insurance Policy Forms and Rates. Except as set forth on Schedule
3.16, each insurance policy or certificate form, as well as any related
application form, written advertising material and rate or rule currently
marketed by the Company and each Insurance Subsidiary, the use or issuance of
which requires filing or approval, has been appropriately filed, and if
required, approved by the insurance regulatory authorities of New Jersey and New
Hampshire (and any other state in which such policies and forms are required to
be filed). To the knowledge of the Company, all such policies and certificates,
forms, applications, advertising materials and rates or rules are in compliance
in all material respects with all applicable laws and regulations.
<PG$PCN>
(c) No Policy Dividends. Except as set forth on Schedule 3.16, no
provision in any policy in force gives policyholders the right to receive
dividends or distributions on their policies (other than accruals of interest on
cash values or as claim benefits) or otherwise share in the benefits, revenue or
profits of the Company or any Insurance Subsidiary, provided that the practice
in certain instances of making premium refunds based upon group policyholder
loss experience shall not violate the representation contained in this sentence.
Except as set forth on Schedule 3.16, and except as paid in the ordinary course
of business, none of the Insurance Subsidiaries or the Company is liable to pay
commissions upon the renewal of any insurance policy nor is it a party to any
agreement providing for the collection of insurance premiums payable to the
Company or any such Insurance Subsidiary by any other person.
(d) Threats of Cancellation. Except as set forth on Schedule 3.16,
since December 31, 1995, no policyholder or related group of policyholders or
persons or entities producing insurance business which accounted for five
percent or more of the gross income of the Company and the Insurance
Subsidiaries for the year ended December 31, 1995 has or have, at its or their
initiative, terminated or threatened to terminate in writing its or their
relationship with the Company or any such Insurance Subsidiary.
(e) Underwriting Standards. Each of the Company and the Insurance
Subsidiaries have complied in all material respects with its respective
underwriting standards and, with respect to insurance contracts reinsured in
whole or in part, such insurance contracts conform in all material respects to
the standards agreed to with the reinsurer in the related reinsurance,
coinsurance or other similar contracts.
SECTION 3.17. ERISA Representations. (a) Schedule 3.17 identifies each
Employee Plan. Seller has furnished or made available to Buyer copies of the
Employee Plans and all amendments thereto together with (i) the most recent
annual report prepared in connection with any Employee Plan (Form 5500
including, if applicable, Schedule B thereto) and (ii) the most recent actuarial
valuation report prepared in connection with any Employee Plan.
(b) Neither the Seller nor any ERISA Affiliate of Seller has incurred,
or reasonably expects to incur prior to the Closing Date, any liability under
Title IV of ERISA arising in connection with the complete or partial termination
of, or complete or partial withdrawal from, any plan covered or previously
covered by Title IV of ERISA that could become a liability of the Buyer or any
of its ERISA Affiliates after the Closing Date.
(c) Each Employee Plan that is intended to be qualified under Section
401(a) of the Code has received a favorable determination letter from the
Internal
<PG$PCN>
Revenue Service. Each Employee Plan which is not a Multiemployer Plan has been
maintained in substantial compliance with its terms and with the requirements
prescribed by any and all applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Code. No Employee Plan is a
Multiemployer Plan.
(d) Schedule 3.17 identifies each Benefit Arrangement. Seller has
furnished or made available to Buyer copies or descriptions of each Benefit
Arrangement. Each Benefit Arrangement has been maintained in substantial
compliance with its terms and with the requirements prescribed by any and all
applicable statutes, orders, rules and regulations.
SECTION 3.18. Property. (a) All of the real property owned by the
Company and its Subsidiaries is shown on its Balance Sheet, except with respect
to any acquisitions or dispositions of property since the Balance Sheet Date
that are disclosed on Schedule 3.09, and each of the Company and its
Subsidiaries has good and marketable title to all such real property, and to
such personal property (other than leased property referred to in Section
3.18(b)) as is necessary to conduct its business as presently conducted, free
and clear of any Lien, covenant or other restriction which would materially and
adversely affect the Company's or any of its Subsidiaries' ability to conduct
their respective business as such business is currently conducted.
(b) Each of the Company and its Subsidiaries has the right to use and
possess all property currently leased to it, with such rights being evidenced by
valid and enforceable leases.
(c) Except for the equipment described in Section 7.06 and the
computer software referred to in Section 5.06(b), all of the personal property
necessary for the Company and each of the Subsidiaries to conduct its business
as presently conducted is under the possession or control of the Company or such
Subsidiary.
SECTION 3.19. Environmental Matters. Except as set forth on Schedule
3.19:
(a) The Company and the Subsidiaries are in compliance in all material
respects with all Environmental Laws.
(b) With respect to any properties owned, leased or operated by the
Company or any Subsidiary, to the knowledge of the Seller, the Company and the
Subsidiaries there has been no Release or threatened Release of Hazardous
Substances in violation of Environmental Laws that would reasonably be expected
to result in a Material Adverse Effect.
<PG$PCN>
(c) Neither the Company nor any Subsidiary has received any claim,
notice or advice from a Person (i) asserting that the Company or the
Subsidiaries are or may be liable for (A) personal injury, (B) property damage
or (C) cleaning up Hazardous Substances on, under, in or migrating from such
properties, in each case arising under Environmental Laws or (ii) that (A)
Hazardous Substances are or may be migrating onto or under such properties or
(B) such properties are or may be subject to any environmental investigation or
evaluation by any Person.
SECTION 3.20. Guaranty Fund Assessments. Each of the Company and the
Insurance Subsidiaries has fully reserved in its respective Statutory Financial
Statements as of and for the nine months ended September 30, 1996 for any
present or future guaranty fund assessments, up to the amount reserved for in
accordance with the calculations of NOLHGA, relating to any rehabilitation,
conservatorship or insolvency known to exist as of the date hereof, as reported
by the most recent NOLHGA survey dated April 1, 1996.
SECTION 3.21. Actuarial Analysis. Seller has delivered to Buyer a true
and complete copy of the Actuarial Evaluation Report of Milliman & Robertson,
Inc. as of September 30, 1996, the Roll Forward Analysis as of February 10,
1997, and any other information prepared by Milliman & Robertson and generally
made available to prospective purchasers of the Company (the "M&R Analysis").
The information furnished to Milliman & Robertson, Inc. in connection with the
preparation of the M&R Analysis was accurate in all material respects; provided
that no representation or warranty is made with respect to projections of future
economic events, future expenses, new business production levels or future
management actions. The assumptions utilized in making such projections were
arrived at in good faith and Seller believes that they were reasonable when
made.
SECTION 3.22. Investments; Defaults. Seller has previously delivered to
Buyer a complete list of all investments owned, directly or indirectly, by the
Company and the Subsidiaries as of December 31, 1996. Schedule 3.22 also
contains a list of all bankruptcies, restructured assets, nonperforming assets,
foreclosures and defaults known to the Seller, the Company or any of the
Subsidiaries with respect to the investments as of December 31, 1996. Except as
set forth on Schedule 3.22, no liability will inure to the Company or any
Subsidiary under any ISDA Master Swap Agreement to which the Company or any
Subsidiary is a party as a result of the transactions contemplated by this
Agreement.
SECTION 3.23. Separate Accounts. Each separate account maintained by
the Company or an Insurance Subsidiary is listed on Schedule 3.23 (collectively,
the "Separate Accounts"). Each Separate Account is duly and validly established
<PG$PCN>
and maintained under the laws of its state of formation and is either excluded
from the definition of an investment company pursuant to Section 3(c)(11) of the
Investment Company Act of 1940, as amended (the "1940 Act") or is duly
registered as an investment company under the 1940 Act. Each such Separate
Account, if registered, is operated in compliance in all material respects with
the 1940 Act, has filed all reports and amendments of its registration statement
required to be filed, has filed all annual reports on Form N-SAR with the SEC,
has filed all notices, including Form 24f-2, and paid all fees in connection
with shares or units sold, and has been granted all exemptive relief necessary
for its operations as presently conducted. The insurance contracts under which
the Separate Account assets are held are duly and validly issued and are either
exempt from registration under the Securities Act pursuant to Section 3(a)(2) of
the Securities Act or were sold pursuant to an effective registration statement
under the Securities Act, and any such registration statement is currently in
effect to the extent necessary to allow the appropriate Company or Insurance
Subsidiary to receive contributions under such policies.
SECTION 3.24. Funds. Each of the mutual funds presently sponsored or
intended to be sponsored by the Company or an Insurance Subsidiary is listed on
Schedule 3.24 (the "Funds"). Except as listed on Schedule 3.24, (i) each Fund is
or will be duly registered with the SEC as an open-end management investment
company under the 1940 Act, (ii) each Fund is or will be in material compliance
with the 1940 Act and the SEC regulations promulgated thereunder, including the
requirements to file semi-annual or annual reports on N-SAR with the SEC, (iii)
all shares of the Funds are or will be duly registered under the Securities Act
and any applicable state securities law, and (iv) each of the Funds is or will
be duly incorporated and in good standing under the laws of the state of its
incorporation or is or will be a validly existing business trust under the laws
of the jurisdiction in which it was formed.
SECTION 3.25. Employees and Compensation. (a) Each of the Company and
the Subsidiaries has complied in all material respects with all applicable
rules, laws and regulations concerning wages, bonuses, discrimination in
employment, disabilities, family and medical leave, immigration, wrongful
termination, worker's compensation for injury or sickness, collective
bargaining, OSHA and other employment matters and made, in a timely manner,
true, complete and accurate filings (in all material respects) required in
connection therewith by any federal, state or local governmental unit or agency.
Except for items 9, 12 and 13 of Schedule 3.09, there are no employment
contracts with any employee of the Company or any Subsidiary and the employment
of each employee of the Company and the Subsidiaries is terminable at will by
the Company and the Subsidiaries without restriction, penalty or payment of any
kind, other than payments with respect to liabilities reflected on the financial
statements of the
<PG$PCN>
Company and the Subsidiaries as of and for the year ended December 31, 1995 and
for services actually performed, non-material payments for accrued benefits and
the severance plan referred to on Schedule 3.17 or as may be provided for under
federal, state or local laws, rules or regulations.
(b) The employees of the Company and the Subsidiaries are not
represented by a labor organization, none of the Company or the Subsidiaries is
a signatory to a collective bargaining agreement with any labor organization, no
union claims to represent any such employees and, to the best knowledge of
Seller, no union organizing effort is or within the last three years has been
underway involving employees of the Company or any Subsidiary.
SECTION 3.26. Producers for the Company and the Insurance Subsidiaries.
(a) Seller has provided to Buyer true, accurate and complete copies of the forms
of all agreements, including all amendments or modifications thereof since
December 31, 1993, with agents, brokers or others that have the authority to
generate business for the Company or any of the Insurance Subsidiaries,
including the authority to bind the Company or a Subsidiary to a contract for
insurance (the "Producers"). Items 28-32, 34, 37-42 and 49 of Schedule 3.11
constitute a list of all other plans, programs and practices, whether written or
oral, maintained or contributed to by the Company or any Insurance Subsidiary in
effect as of the date hereof which presently provide or are reasonably likely to
provide in the future benefits or compensation in excess of $25,000 individually
to or on behalf of Producers or former Producers of the Company or any Insurance
Subsidiary (excluding any promotional contests for Producers as to which the
aggregate amounts payable thereunder do not exceed $100,000) ("Producer Plans"),
copies of which have previously been furnished to Buyer. Except as set forth in
the forms and in the items referred to in the preceding sentence, each such
Producer Plan may be terminated within 90 days of the giving of notice without
any liability whatsoever to any person whomsoever except payment to or on behalf
of any Producers or former Producers (other than commissions accrued prior to
such termination and vested renewals) of an amount less than or equal to $25,000
or, in the aggregate for all such Producers or former Producers, of an amount
less than or equal to $250,000.
(b) To the best knowledge of Seller, the Company and the Subsidiaries
there is no, and since the Balance Sheet Date there has not been any, condition
or state of fact (excluding the transactions contemplated by this Agreement and
external political and economic conditions) which is reasonably likely to affect
the Company's and the Subsidiaries' relations with the Producers in a manner
which would have a Material Adverse Effect, and no Producer or group of
Producers, the loss of whom would have a Material Adverse Effect, has notified
the Company or any Subsidiary since the Balance Sheet Date of his or their
intent to (i) terminate
<PG$PCN>
his or their relationship with the Company or any Subsidiary or (ii) make any
demand for material payments or modifications of his or their arrangements with
the Company or any Insurance Subsidiary.
SECTION 3.27. Insurance. The Company and the Subsidiaries have been and
are insured by licensed insurers with respect to their properties and the
conduct of their business in such amounts and against such risks as are
reasonable in relation to their business, and the Company will use commercially
reasonable efforts to maintain such insurance in force at least through the
Closing Date.
SECTION 3.28. Full Disclosure. There is no fact or condition known to
senior management of Seller, the Company or any Subsidiary which has not been
disclosed to Buyer in writing which has had a Material Adverse Effect or to the
knowledge of senior management of Seller, the Company or any Subsidiary could
reasonably be expected to have a Material Adverse Effect.
SECTION 3.29. Company Trademarks; Software. (a) Schedule 7.05 sets
forth a complete and accurate list of all material trademarks, trade names and
applications therefor, other than the Chubb Trademarks (as defined in Section
7.05), owned by the Company or any Subsidiary (collectively, the "Company
Trademarks"). The Company Trademarks are free of any Liens and are all those
which are necessary to the conduct of the business of the Company as now
conducted other than the Chubb Trademarks. None of the Company Trademarks are
licensed to the Company by a third party. The Company Trademarks and the Chubb
Trademarks are not the subject of any pending or, to the knowledge of Seller,
threatened litigation. The consummation of the transactions contemplated by this
Agreement will not result in the loss or impairment of any of the Company
Trademarks or result in any requirement of new or additional royalties,
licensing fees, relicensing fees or other expenses. Neither the Seller, the
Company nor any Subsidiary knows of any use by others of the Company Trademarks.
(b) The Company and its Subsidiaries have valid and enforceable rights
to use all the computer software necessary for the operation of their business
as currently conducted (the "Software"). The transfer of ownership of the
Company and the Subsidiaries contemplated by this Agreement will not limit or
impair the rights of the Company and its Subsidiaries to use material Software
owned or directly licensed by the Company and its Subsidiaries.
.
<PG$PCN>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the date hereof that:
SECTION 4.01. Corporate Existence and Power. Buyer is a corporation
duly incorporated, validly existing and in good standing under the laws of North
Carolina and has all corporate powers and all material governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for those licenses, authorizations, permits,
consents and approvals the absence of which would not, individually or in the
aggregate, have an adverse effect on Buyer's ability to consummate the
transactions contemplated hereby.
SECTION 4.02. Corporate Authorization. The execution, delivery and
performance by Buyer of this Agreement are within the corporate powers of Buyer
and, except for any required approval by Buyer's stockholders, have been duly
authorized by all necessary corporate action on the part of Buyer. This
Agreement constitutes a valid and binding agreement of Buyer enforceable in
accordance with its terms, except as (i) the enforceability hereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and (ii) the availability of
equitable remedies may be limited by equitable principles of general
applicability.
SECTION 4.03. Governmental Authorization. The execution, delivery and
performance by Buyer of this Agreement require no action by or in respect of, or
filing with, any governmental body, agency or official other than (i) compliance
with any applicable requirements of the HSR Act, (ii) the approvals or non-
disapprovals set forth on Schedule 4.03, and (iii) any such action or filing as
to which the failure to make or obtain would not, individually or in the
aggregate, have an adverse effect on Buyer's ability to consummate the
transactions contemplated hereby.
SECTION 4.04. Non-Contravention. The execution, delivery and
performance by Buyer of this Agreement do not and will not (i) violate the
certificate of incorporation or bylaws of Buyer, (ii) assuming compliance with
the matters referred to in Section 4.03, violate any applicable law, rule,
regulation, judgment, injunction, order or decree or any license, franchise,
permit or other similar authorization held by Buyer or (iii) require any consent
or other action by any Person under, constitute a default under, or give rise to
any right of termination, cancellation or acceleration of any right or
obligation of Buyer under, any agreement or other instrument binding upon Buyer
or its properties or assets, except, in the case of clauses (ii) and (iii), to
the extent that any such violation,
<PG$PCN>
failure to obtain any such consent or other action, default, right or loss would
not reasonably be expected to have an adverse effect on Buyer's ability to
consummate the transactions contemplated hereby.
SECTION 4.05. Purchase for Investment. Buyer is purchasing the Shares
for investment for its own account and not with a view to, or for sale in
connection with, any distribution thereof. Buyer (either alone or together with
its advisors) has sufficient knowledge and experience in financial and business
matters so as to be capable of evaluating the merits and risks of its
investments in the Shares and is capable of bearing the economic risks of such
investment.
SECTION 4.06. Litigation. There is no action, suit, investigation or
proceeding pending against, or to the knowledge of Buyer threatened against or
affecting, Buyer before any court or arbitrator or any governmental body, agency
or official which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay the transactions contemplated by this Agreement.
SECTION 4.07. Finders' Fees. Except for Morgan Stanley & Co.
Incorporated whose fees will be paid by Buyer, there is no investment banker,
broker, finder or other intermediary which has been retained by or is authorized
to act on behalf of Buyer who might be entitled to any fee or commission from
Seller or any of its Affiliates upon consummation of the transactions
contemplated by this Agreement.
SECTION 4.08. Financing. Buyer has, or will have prior to the Closing,
sufficient cash, available lines of credit or other sources of immediately
available funds to enable it to make payment of the Purchase Price and any other
amounts to be paid by it hereunder.
ARTICLE 5
COVENANTS OF SELLER
Seller agrees that:
SECTION 5.01. Conduct of the Company. From the date hereof until the
Closing Date, except for the transactions contemplated hereby, Seller shall
cause the Company and each of its Subsidiaries to conduct their business in the
ordinary course and to use commercially reasonable efforts to preserve intact
their business organizations and relationships with third parties and to keep
available the services of its present officers and employees. Without limiting
the generality of the foregoing, from the date hereof until the Closing Date,
Seller will not permit the
<PG$PCN>
Company or any Subsidiary to adopt or propose any change to its certificate of
incorporation or bylaws. Except as otherwise agreed to by Buyer, Seller will
not, and will not permit the Company or any Subsidiary to, take any action the
effect of which would prevent any representation and warranty of Seller
hereunder from being accurate in any material respect at the Closing Date.
SECTION 5.02. Access to Information. From the date hereof until the
Closing Date, Seller will (i) give, and will cause the Company and each
Subsidiary to give, Buyer, its counsel, financial advisors, auditors and other
authorized representatives access during normal working hours to the offices,
properties, books and records of the Company and each Subsidiary, (ii) furnish,
and will cause the Company and each Subsidiary to furnish, to Buyer, its
counsel, financial advisors, auditors and other authorized representatives such
available financial and operating data and other information relating to the
Company or any Subsidiary as such Persons may reasonably request and (iii)
instruct the employees, counsel and financial advisors of Seller, Company and
the Subsidiaries to cooperate with Buyer in its investigation of the Company or
any Subsidiary. Notwithstanding the foregoing, Buyer shall not have access to
personnel records of the Company or any Subsidiary relating to: individual
performance or evaluation records, medical histories or other information, in
each such case which in Seller's good faith opinion is sensitive or the
disclosure of which could subject Seller to risk of liability.
SECTION 5.03. Notices of Certain Events. Seller shall promptly notify
Buyer of:
(i) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the
transactions contemplated by this Agreement;
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened against, relating to
or involving or otherwise affecting Seller, the Company or any
Subsidiary that, if pending on the date of this Agreement would
have been required to have been disclosed pursuant to Section
3.12 or that relate to the consummation of the transactions
contemplated by this Agreement; and
<PG$PCN>
(iv) notices of investigations, proceedings or regulatory actions
instituted or to be instituted against the Company or any
Subsidiary by governmental or regulatory agencies or
authorities.
SECTION 5.04. Other Offers. From the date hereof until the termination
of this Agreement or the Closing Date, whichever first occurs, Seller will not,
will cause the Company and the Subsidiaries not to, and will use its best
efforts to cause the officers, directors, employees or other agents of the
Seller, the Company and the Subsidiaries not to, directly or indirectly, (i)
take any action to solicit or initiate any offer or indication of interest from
any person with respect to any Acquisition Proposal (as hereinafter defined) or
(ii) engage in negotiations with or disclose any nonpublic information relating
to the Company or the Subsidiaries or afford access to the properties, books or
records of the Company or the Subsidiaries to any person that may be considering
making, or has made, an offer with respect to an Acquisition Proposal. For
purposes hereof, "Acquisition Proposal" means any proposal for a merger or other
business combination involving the Company or the Subsidiaries or the
acquisition of any equity interest in, or a substantial portion of the assets
of, the Company or any Subsidiary, other than the transactions contemplated by
this Agreement. Seller will, and will cause the Company to, terminate any
existing discussions or negotiations with any person (other than Buyer) relating
to any Acquisition Proposal.
SECTION 5.05. Non-Solicitation. Until [CONFIDENTIAL TREATMENT
REQUESTED], Seller agrees that, without the prior written consent of Buyer,
neither Seller nor any of its Affiliates will hire, or solicit to hire, any
Producers (only with respect to the Scheduled Products), officers, directors or
other employees of the Company or any Subsidiary; provided that Seller shall not
be prohibited from hiring or soliciting to hire (i) individuals whose employment
is terminated by the Company or any Subsidiary after the Closing Date and (ii)
any clerical or other individuals who are not officers and who respond to any
general solicitation.
SECTION 5.06. Computer Services and Software. (a) On or before the
Closing Date, Seller, for itself and on behalf of its Affiliates, shall enter
into a computer services agreement with the Company (the "Computer Services
Agreement") for the services and on the terms set forth on Schedule 5.06(a). The
Computer Services Agreement shall have a term of 12 months from the Closing Date
(subject to earlier termination at the sole option of Buyer upon 90 days prior
written notice, with the termination date of the Computer Services Agreement
being deemed the "Conversion Date").
(b) During the period beginning on the Closing Date and ending on the
Conversion Date (the "Transition Period"), Seller shall make available for use
by the Company and its Subsidiaries any Software not owned or directly licensed
by
<PG$PCN>
the Company and its Subsidiaries (other than the Software licensed pursuant to
the contract (x) with SunGard Corporation listed on Schedule 3.11 and (y)
referred to in Item 35 of Schedule 3.04). Seller shall (i)(A) obtain the
necessary consents to make such Software available in accordance with the
preceding sentence and (B) assign the licenses for such Software, or otherwise
obtain the benefit of use of such Software, for the Company and its Subsidiaries
following the Conversion Date (or, in each case, provide alternative software
which will permit the Company and its Subsidiaries to continue to operate their
business as currently conducted), and (ii) pay any costs, fees and expenses
incurred in connection therewith; provided, however, that any on-going,
periodic, or usage fees or royalties payable in connection with the use of such
Software by the Company or its Subsidiaries shall be paid by the Company or its
Subsidiaries. In the event that any Software licensed by the Company would
terminate as a result of the transactions contemplated by this Agreement, Seller
shall cause the Company to obtain any consents necessary to make such Software
available for use by the Company and its Subsidiaries during the Transition
Period or otherwise provide alternative Software which will permit the Company
and its Subsidiaries to continue to operate their business as currently
conducted.
(c) Seller shall deliver to Buyer, no later than sixty days following
the date hereof, a complete and accurate list, in the form of Schedule 5.06(b),
of all Software, which list shall indicate whether such Software is owned or
licensed directly by the Company or its Subsidiaries, together with copies of
all contracts relating thereto.
SECTION 5.07. Minimum Statutory Net Worth. Seller shall cause the sum
of the amount of the aggregate capital and surplus of the Company and the
aggregate asset valuation reserves and interest maintenance reserves of the
Company and the Insurance Subsidiaries at the Closing Date to be not less than
the sum of [CONFIDENTIAL TREATMENT REQUESTED], minus the amount of any special
dividend paid to Seller as contemplated by Section 5.08 (the "Minimum Statutory
Equity Amount").
SECTION 5.08. Special Dividend. Seller shall use commercially
reasonable efforts to cause the Company to declare and pay the maximum approved
special dividend to Seller, in an amount not exceeding $100,000,000, immediately
prior to Closing. Seller and Buyer shall cooperate (i) to seek any regulatory
approval which may be required for the payment of any such dividend (including
the payment of any dividend from the Insurance Subsidiaries), and (ii) to
identify mutually agreed upon U.S. government obligations which the Company or
its Subsidiaries shall sell in order to facilitate the payment of the special
dividend described in this Section 5.08. The Purchase Price (calculated prior to
the accrual
<PG$PCN>
of any interest thereon) shall be reduced by the amount of any dividend paid to
Seller pursuant to this Section 5.08.
SECTION 5.09. Noncompetition Agreement. [
CONFIDENTIAL TREATMENT REQUESTED
.
]
<PG$PCN>
[
CONFIDENTIAL TREATMENT REQUESTED
]
SECTION 5.10. Other Agreements. Except as otherwise provided in this
Agreement, Seller hereby agrees to assume and be responsible for any obligation
or liability relating to, arising under, or based upon (a) any contract or
agreement that Schedule 3.11 to this Agreement indicates may be terminated (or
amended to exclude the Company and the Subsidiaries) by Seller or its Affiliates
which is in fact terminated or so amended and (b) the agreements identified in
Item 19 of Schedule 3.11 to this Agreement.
SECTION 5.11. Cross-Defaults. Seller shall cause any contract or other
arrangement of the Company or any of its Subsidiaries which is subject to a
cross- default arising from any performance obligation of Seller or any of its
Affiliates (not including the Company or any of the Subsidiaries) to be
terminated or amended to remove any such cross-default provision prior to the
Closing Date, and Seller shall protect the Company and each Subsidiary from any
cost or charge to the Company or any Subsidiary resulting from such termination
or amendment.
SECTION 5.12. Portfolio Management. Seller agrees that with respect to
the investment portfolios of the Company and each Subsidiary it will cause the
Company and each Subsidiary to attempt to minimize the incurrence of capital
gains and, to the extent reasonably practicable, if capital gains are incurred,
to offset such gains with capital losses, it being understood that the
responsibility for management of the investment portfolios shall reside with the
Company and each Subsidiary.
ARTICLE 6
COVENANTS OF BUYER
Buyer agrees that:
SECTION 6.01. Confidentiality. Prior to the Closing Date and after any
termination of this Agreement, Buyer and its Affiliates will hold, and will use
their best efforts to cause their respective officers, directors, employees,
accountants, counsel, consultants, advisors and agents to hold, in confidence,
unless compelled to disclose by judicial or administrative process or by other
requirements of law, all confidential documents and information concerning the
Company or any Affiliate or Subsidiary furnished to Buyer or its Affiliates in
connection with the transactions contemplated by this Agreement, except to the
extent that
<PG$PCN>
such information can be shown to have been (i) previously known on a
nonconfidential basis by Buyer, provided that such information is not known by
Buyer to be subject to another confidentiality agreement with or other
obligation of secrecy to the Seller or the Company or any Subsidiary or any
other party, or (ii) becomes generally available to the public other than as a
result of a disclosure by Buyer or its directors, officers, employees, agents or
advisors, or (iii) becomes available to Buyer on a non-confidential basis from a
source other than the Seller or the Company or any Subsidiary or their advisors,
provided that such source is not known by Buyer to be bound by a confidentiality
agreement with or other obligation of secrecy to the Seller or the Company or
any Subsidiary or any other party. Buyer shall be responsible for any breach of
this Section 6.01 by any Persons to whom Buyer discloses any of the confidential
information which is subject to this Section. If this Agreement is terminated,
Buyer and its Affiliates will, and will use their best efforts to cause their
respective officers, directors, employees, accountants, counsel, consultants,
advisors and agents to, destroy or deliver to Seller, upon request, all
documents and other materials, and all copies thereof, obtained by Buyer or its
Affiliates or on their behalf from Seller or the Company or any Subsidiary in
connection with this Agreement that are subject to such confidence.
SECTION 6.02. Access. Buyer will cause the Company and each Subsidiary,
on and after the Closing Date, to afford promptly to Seller and its agents
reasonable access to their properties, books, records, employees and auditors to
the extent necessary to permit Seller to determine any matter relating to its
rights and obligations hereunder or to any period ending on or before the
Closing Date. To the extent necessary or helpful in connection with any tax or
other matters relating to any period ending on or before the Closing Date, Buyer
will furnish to Seller or permit the Seller and its agents to inspect and copy
all books and records of the Company and its Subsidiaries which relate to any
period prior to the Closing Date. Seller will hold, and will use its best
efforts to cause its officers, directors, employees, accountants, counsel,
consultants, advisors and agents to hold, in confidence, unless compelled to
disclose by an order of a court of final jurisdiction, all confidential
documents and information concerning the Company or any Subsidiary provided to
it pursuant to this Section.
SECTION 6.03. Compliance with Section 15 of the 1940 Act. Buyer
acknowledges that the Seller has entered into this Agreement in reliance upon
the benefits and protections provided by Section 15(f) of the 1940 Act. Buyer
agrees that Buyer (including its Affiliates) (i) shall not take any action that
would have the effect of causing Section 15(f) of the 1940 Act not to be met in
respect of this Agreement and the transactions contemplated hereby, and (ii)
shall not fail to take any action if the failure to take such action would have
the effect of causing
<PG$PCN>
Section 15(f) of the 1940 Act not to be met in respect of this Agreement and the
transactions contemplated hereby.
ARTICLE 7
COVENANTS OF BUYER AND SELLER
Buyer and Seller agree that:
SECTION 7.01. Reasonable Efforts. Subject to the terms and conditions
of this Agreement, Buyer and Seller will use commercially reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary or desirable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement including, without
limitation, (i) the obtaining of the approval or non-disapproval of the
Insurance Departments of the Required Jurisdictions and those set forth on
Schedule 4.03, (ii) the obtaining of the consents required under Items 1, 2 and
3 of Schedule 3.04 and, in connection therewith, consents to the election of
designees of Buyer as directors of the Funds or, with respect to Item 1 of such
Schedule, new Investment Contracts substantially in the form of CIAC's existing
Investment Contracts, with each Investment Company to which CIAC currently
provides investment advisory or management services and (iii) the compliance
with the filing and waiting period requirements of the HSR Act.
SECTION 7.02. Further Assurances. Seller and Buyer agree, and Seller,
prior to the Closing, and Buyer, after the Closing, agree to cause the Company
and each Subsidiary, to execute and deliver such other documents, certificates,
agreements and other writings and to take such other actions as may be necessary
or desirable in order to consummate or implement expeditiously the transactions
contemplated by this Agreement.
SECTION 7.03. Public Announcements. The parties agree to consult with
each other before issuing any press release or making any public statement with
respect to this Agreement or the transactions contemplated hereby and, except as
may be required by applicable law or any listing agreement with any national
securities exchange, will not issue any such press release or make any such
public statement prior to such consultation.
SECTION 7.04. Intercompany Accounts. All intercompany accounts between
the Seller or its Affiliates, on the one hand, and the Company or any
Subsidiary, on the other hand, as of the Closing shall be settled in accordance
with their terms or in the ordinary course consistent with past practice, as the
case may
<PG$PCN>
be, in the categories listed on Schedule 7.04 (which represent estimates of any
amounts outstanding as of December 31, 1996). From the date hereof through the
Closing Date, any changes in such accounts shall only be made in the ordinary
course of business consistent with past practice.
SECTION 7.05. Service Marks, Trademarks and Trade Names. On or prior to
the Closing Date, Seller shall cause the Company to take such action as is
necessary to cause all rights, including ownership and registration of any
trademark, trade name, service mark, logo design or other identifying mark or
symbol utilizing the stylized letter "C" or the name "Chubb" (collectively the
"Chubb Trademarks") to be conveyed and assigned to Seller, and Seller shall take
such action as is necessary to ensure that the ownership of and rights relating
to the trademarks listed on Schedule 7.05 shall remain with the Company and that
such trademarks shall be available for use by Buyer, the Company and its
Subsidiaries following the Closing Date. On or prior to the Closing Date, Seller
shall execute a royalty-free license (the "Trademark License Agreement") with
the Company to permit the Company and the Subsidiaries to continue to use any of
the Chubb Trademarks currently in use in the conduct of their businesses,
including but not limited to, the use of any contract materials, signs or policy
forms which contain any Chubb Trademarks, for a period of up to one year
following the Closing Date. As promptly as practicable following the Closing
Date, Buyer shall cause the Company and the Subsidiaries to take such action as
is necessary, including seeking all requisite regulatory and shareholder
approvals, to change, by deleting the name "Chubb" or the stylized letter "C"
therefrom, the product names, marketing materials, policy forms and materials
that utilize such name or stylized letter, and to cause the name "Chubb" to be
deleted from its name, from the name of each Subsidiary and from the name Chubb
America Fund, Inc. and Chubb Investment Funds, Inc.
SECTION 7.06. Purchase of Mainframe Computer. On the Closing Date,
Buyer shall purchase from Seller or its Affiliate, the mainframe computer and
all peripheral equipment (including without limitation tape and disk storage
units and all communications hardware) that is currently being utilized in
connection with the business of the Company and the Subsidiaries located in
Branchburg, New Jersey, which serves as the sole mainframe computer supporting
the Company's insurance operations, at a purchase price in an amount equal to
the average between its depreciated book value and its fair market value at the
Closing Date. The fair market value as of the Closing Date of the computer and
related equipment hereunder shall be agreed upon by Buyer and Seller as of a
date not later than the fifth business day preceding the Closing Date. If Buyer
and Seller do not reach such agreement, then Buyer and Seller shall jointly
select a third party expert to promptly make such fair market value
determination, which will be binding upon the parties. The purchase price of the
computer and the related
<PG$PCN>
equipment shall be paid on the Closing Date by wire transfer of immediately
available funds to an account designated in writing by Seller or its Affiliate.
Promptly after the Conversion Date, Buyer shall provide for the removal of the
mainframe computer from the Branchburg location.
SECTION 7.07. Reports. The Company shall from time to time furnish to
Buyer, promptly following the receipt by senior management of the Company or any
Subsidiaries (i) copies of all monthly management reports prepared for senior
management of the Company or any Subsidiary, (ii) copies of all monthly
financial statements and reports, and (iii) a copy of any report filed with any
insurance regulatory authority, which in each such case, shall be prepared in a
manner consistent with past practice.
SECTION 7.08. Joint Marketing Arrangements. Seller and Buyer each agree
that it will negotiate in good faith to develop and enter into a mutually
beneficial marketing arrangement that will make available to Buyer, the Company
and the Insurance Subsidiaries after the Closing Date, the property and casualty
agency distribution and bank distribution channels of Seller, including without
limitation the continued marketing of life insurance products through the
general agencies recruited by Seller prior to the date hereof.
SECTION 7.09. Post-Closing Review of Minimum Statutory Equity Amount.
(a) As soon as practicable, but in any event within 90 calendar days following
the Closing Date, the Company shall prepare and deliver to Seller and Buyer the
statements of assets, liabilities, surplus and other funds and summary of
operations and cash flows of the Company and each of the Insurance Subsidiaries
as of, and for the period beginning January 1, 1997 and ending on, the Closing
Date (or the most recent end of a month if the Closing Date is not the last
business day of a month) (the "Closing Date Statutory Statements"), which shall
be prepared in conformity with statutory insurance accounting requirements and
practices, consistently applied. The Closing Date Statutory Statements shall
present fairly, in all material respects, in accordance with statutory
accounting principles and practices consistently applied the financial position
of the Company and the Insurance Subsidiaries as of the Closing Date, and the
results of their operations for the period specified and ending on the Closing
Date (or the most recent end of a month if the Closing Date is not the last
business day of a month).
(b) Subsequent to the delivery of the Closing Date Statutory
Statements, Buyer shall give Seller and its accountants, actuaries, counsel and
other representatives reasonable access to the books and records of the Company
and the Insurance Subsidiaries in order to make such investigations as Seller
shall desire in conjunction with the evaluation by it of the Closing Date
Statutory Statements. During such period, Buyer shall permit Seller and its
representatives to
<PG$PCN>
consult with the respective employees, auditors, actuaries, attorneys and agents
of the Company and the Insurance Subsidiaries.
(c) The Closing Date Statutory Statements shall be deemed final upon
the earliest to occur of the date on which Seller and Buyer jointly agree that
the Closing Date Statutory Statements are final, the 31st day following the
delivery of the Closing Date Statutory Statements, if neither Seller nor Buyer
has notified the other of a dispute in amounts shown on the Closing Date
Statutory Statements, and the date on which all disputes relating to such
statements and calculations between Buyer and Seller are resolved in accordance
with Section 7.09(e).
(d) On the fifth business day following the date on which the Closing
Date Statutory Statements are deemed final, if the sum of the aggregate amount
of the capital and surplus of the Company plus the aggregate asset valuation
reserves and interest maintenance reserves of the Company and the Insurance
Subsidiaries, each as set forth in the Closing Date Statutory Statements, is
less than the Minimum Statutory Equity Amount, Seller shall pay to the Company,
by wire transfer, the amount of such difference, together with interest on any
such amount at the Reference Rate (based upon a 365-day year) from the Closing
Date to (but not including) the date of such payment.
(e) In the event that the Seller and Buyer do not agree to the
determination of the calculation set forth in Section 7.09(d) (the "Disputed
Amounts"), the disputing Party shall provide notice of such disagreement to the
other Party hereto (the "Dispute Notice", and the date of its delivery, the
"Dispute Notice Date"). The chief financial officer of Buyer and the chief
financial officer of Seller shall meet (by conference telephone call or in
person at a mutually agreeable site) within one week after notice of a
disagreement is given as provided above. The chief financial officers shall
attempt to make a final determination of the Disputed Amounts, and if the chief
financial officers reach agreement, any payments shall be made within five days
in accordance with such agreement. If the chief financial officers do not reach
agreement within a reasonable time, either or both of such chief financial
officers shall give notice of an impasse, in which case the chief executive
officer of Buyer and the chief executive officer of Seller shall meet (by
conference telephone call or in person at a mutually agreeable site) within one
week after notice of an impasse is given by the chief financial officers. If the
chief executive officers have hereto not reached agreement as to the Disputed
Amounts within a reasonable time, either chief executive officer may give notice
of an impasse, and such determination shall be promptly submitted to a
nationally recognized independent public accounting firm or a nationally
recognized actuarial firm (an "Arbiter") jointly selected by Seller and Buyer.
If Seller or Buyer do not agree upon the joint selection of an Arbiter within
five (5) business days following the notice of such impasse by the chief
executive officers, either Seller or Buyer
<PG$PCN>
may designate a proposed qualified Arbiter to the other by written notice.
Within five (5) business days such other Party shall either agree to the
proposed qualified Arbiter or propose a different Arbiter (failure to propose a
different Arbiter within such five business day period shall be deemed such
Party's agreement to the other Party's proposed Arbiter), and in the case in
which such Party has proposed a different Arbiter the two Arbiters so proposed
shall within five (5) business days thereafter select an Arbiter to make a final
determination of the Disputed Amounts. The Arbiter so selected by either Seller
and Buyer jointly or by the Arbiters (the "Final Arbiter") shall make its
determination of the Disputed Amounts solely in accordance with the terms of
this Agreement. The Parties shall cooperate fully in assisting the Final Arbiter
in calculating the Disputed Amounts and shall take such actions as necessary to
expedite and to cause the Final Arbiter to expedite such calculation. Each of
Seller and Buyer shall pay one-half of the total fees and expenses of the Final
Arbiter.
SECTION 7.10. Certain Transition Arrangements. Buyer and Seller will
cooperate to facilitate the transition to Buyer of the asset management services
and mortgage servicing currently provided to the Company and its Subsidiaries by
Affiliates of Seller.
ARTICLE 8
TAX MATTERS
SECTION 8.01. Definitions. The following terms, as used herein, have
the following meanings:
"Accounting Referee" means a nationally recognized accounting firm with
no material relationship with Buyer, Seller or their Affiliates, mutually
acceptable to both Buyer and Seller and chosen within five days of the date on
which the need to choose the Accounting Referee arises.
"Applicable Tax Rate" means (i) the maximum combined effective federal
and state corporate tax rate in effect at the time such adjustment is made by a
Taxing Authority, or (ii) in the case of a credit 100%.
"Basket" means the amount at any time equal to (a) $100,000 plus the
liability for Taxes excluding any amount attributable to deferred Taxes, if any,
provided for on the books and records of the Company and the Subsidiaries, minus
(b) any reductions (in the aggregate) made pursuant to Section 8.07 hereof.
"Code" means the United States Internal Revenue Code of 1986, as
amended.
<PG$PCN>
"Federal Tax" means any income Tax imposed under the Code.
"Indemnifiable Tax" means (i) any Tax related to a Pre-Closing Tax
Period and (ii) any liability for the payment of any amount of the type
described in the immediately preceding clause (i) as a result of the Company
being a member of the Seller Group.
"Post-Closing Tax Period" means any Tax period commencing after the
close of business on the Closing Date or the post-Closing portion of a Straddle
Period.
"Pre-Closing Tax Period" means any Tax period ending on or before the
Closing Date or the pre-Closing portion of a Straddle Period.
"Seller Group" means, with respect to federal income Taxes, the
affiliated group of corporations (as defined in Section 1504(a) of the Code) of
which Seller is a member and, with respect to state income or franchise Taxes,
the consolidated, combined or unitary group of which Seller or any of its
Affiliates is a member.
"Straddle Period" means any taxable period that includes the Closing
Date, but which does not terminate on such date.
"Tax" means (i) any tax imposed under Subtitle A of the Code and any
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, value added, transfer, franchise, profits, license,
withholding on amounts paid to or by the Company or any Subsidiary, payroll,
employment, excise, severance, stamp, capital stock, occupation, property,
environmental or windfall profit tax, premium, custom, duty or other tax,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest, penalty (including any payment made to any Taxing
Authority in connection with the failure to properly report any payment or
distribution of income to any recipient), addition to tax or additional amount
imposed by any governmental authority (a "Taxing Authority") responsible for the
imposition of any such tax (domestic or foreign), (ii) liability of the Company
or its Subsidiary for the payment of any amounts of the type described in (i) as
a result of being a member of an affiliated, consolidated, combined or unitary
group with any other corporation at any time on or prior to the Closing Date,
(iii) any payment paid to any Taxing Authority to secure any closing agreement,
or similar agreement, related to any violations of Sections 72, 817, 7702 or
7702A and (iv) liability of the Company or any Subsidiary for the payment of any
amounts as a result of being a party to any Tax Sharing Agreement or with
respect to the payment of any amounts of the type described in (i) or (ii) as a
result of any express or implied obligation to indemnify any other Person.
<PG$PCN>
"Tax Asset" means any net operating loss, net capital loss, investment
tax credit, foreign tax credit, charitable deduction or any other credit or tax
attribute which could reduce Taxes (including, without limitation, deductions
and credits related to alternative minimum Taxes).
"Tax Sharing Agreements" means all existing Tax sharing agreements or
arrangements (whether or not written) binding the Company or its Subsidiary
(including without limitation the Tax Sharing Agreement between and among the
Seller and the Company effective May 1, 1992 (the "Tax Sharing Agreement") and
any agreements or arrangements which afford any other person the benefit of any
Tax Asset of the Company or its Subsidiary, afford the Company or its Subsidiary
the benefit of any Tax Asset of any other person or require or permit the
transfer or assignment of income, revenues, receipts, or gains).
SECTION 8.02. Tax Representations. (a) Seller represents and warrants
to Buyer as of the date hereof and as of the Closing Date that, except as set
forth in the Balance Sheet (including the notes thereto) or on Annex 3.09 (ix)
or Schedule 8.02, (i) all Tax returns, statements, reports and forms
(collectively, the "Returns") required to be filed with any Taxing Authority on
or before the Closing Date with respect to any Pre-Closing Tax Period by, or
with respect to, the Company or any Subsidiary have been or will be timely filed
in accordance with all applicable laws; (ii) with respect to the Company and the
Subsidiaries, all such Returns for Pre-Closing Periods are or will be true and
complete in all material respects, (iii) the Company and the Subsidiaries have
timely paid all Taxes shown as due and payable on the Returns that have been
filed; (iv) the Company and the Subsidiaries have made or will on or before the
Closing Date make provision for all Taxes payable by the Company and the
Subsidiaries for any Pre-Closing Tax Period for which no Return has yet been
filed; (v) the charges, accruals and reserves for Taxes with respect to the
Company and the Subsidiaries reflected on the Balance Sheet are adequate to
cover the Tax liabilities accruing through the date thereof; and (vi) there is
no action, suit, proceeding, investigation, audit or claim now proposed or
pending against or with respect to the Company or any Subsidiary in respect of
any Tax.
(b) The Company and the Subsidiaries are not in violation of any
material applicable tax information reporting and tax withholding obligations
(or with notice or lapse of time, or both, would be in violation). Except as
disclosed on Schedule 8.02, the Company and the Subsidiaries have timely
withheld from, and paid over to the appropriate Taxing Authorities, and have
properly reported all salaries, wages, and other compensation. Each life
insurance and annuity product issued, sold or administered by, or on behalf of,
the Company and the Subsidiaries has been, and is, in compliance in all material
respects with Sections 72, 817, 7702 and/or 7702A of the Code.
<PG$PCN>
SECTION 8.03. Tax Covenants. (a) Buyer covenants that, other than in
the ordinary course of business, it will not cause or permit the Company, any
Subsidiary or any Affiliate of Buyer (i) to take any action on the Closing Date,
including but not limited to the distribution of any dividend or the
effectuation of any redemption that could give rise to any Tax liability of the
Seller Group or any loss of the Seller or the Seller Group under this Agreement
or (ii) without the prior written consent of the Seller, which shall not be
unreasonably withheld, to make or change any Tax election (other than the
Section 338 (h)(10) Election), amend any Return or take any Tax position on any
Return, take any action, omit to take any action or enter into any transaction
that results in any increased Tax liability or reduction of any Tax Asset of
Seller in respect of any Pre-Closing Tax Period. Buyer agrees that Seller is to
have no liability for any Tax resulting from any action, referred to in the
preceding sentence, of the Company, Buyer or any Affiliate of Buyer on the
Closing Date, and agrees to indemnify and hold harmless Seller and its
Affiliates against any such Tax. Each of Seller and Buyer agrees to give prompt
notice to the other party of the assertion of any claim, or the commencement of
any action or proceeding, in respect of which indemnity may be sought under this
Section 8.03(a). Buyer may participate in and assume the defense of any such
suit, action or proceeding at its own expense. If Buyer assumes such defense,
Seller shall have the right (but not the duty) to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by Buyer. Whether or not Seller chooses to defend or prosecute any
claim, the parties hereto shall cooperate in the defense or prosecution thereof.
(b) Buyer agrees to cause the Company and the Subsidiaries to elect,
where permitted by law, to carry forward any net operating loss, net capital
loss, charitable contribution or other item arising after the Closing Date that
would, absent such election, be carried back to a Pre-Closing Tax Period of the
Company or the Subsidiaries in which the Company or the Subsidiaries filed a
consolidated, combined or unitary Return with Seller or an Affiliate of Seller.
(c) The Buyer will cause the Company and any Subsidiary to timely file
any separate Returns required to be filed by the Company or any such Subsidiary
after the Closing Date.
(d) Buyer shall claim a compensation deduction with respect to the
exercise by employees and retired or former employees of the Company or any of
its Subsidiaries ("Employees") of options to purchase shares of common stock of
Seller which were granted to Employees pursuant to an employee benefit
arrangement maintained by Seller (a "Seller Stock Option"). Seller will notify
Buyer of the amount of such compensation deductions. Buyer covenants that it
will remit to Seller within fifteen days after the filing of its Federal Tax
Return for
<PG$PCN>
each taxable year the amount of any deduction multiplied by the maximum federal
corporate tax rate applicable to the tax year in which the deduction is claimed;
provided that if any such deduction is disallowed by any Taxing Authority,
Seller shall make appropriate adjustments to Buyer. Simultaneously with the
reporting of income in connection with the exercise of the Seller Stock Options,
Seller shall pay to Buyer an amount equal to the sum of (i) all Taxes required
to be withheld in respect of such income and (ii) the employer portion of all
FICA Taxes in respect of such income.
(e) All transfer, documentary, sales, use, stamp, registration and
other such Taxes and fees (including any penalties and interest) incurred in
connection with this Agreement (including any New York State Transfer Tax, New
York City Transfer Tax and any similar tax imposed in other states or
subdivisions) shall be borne and paid by Buyer, and Buyer will, at its own
expense, file all necessary Returns and other documentation with respect to all
such Taxes and fees, and, if required by applicable law, Seller will, and will
cause its Affiliates to, join in the execution of any such Returns and other
documentation.
(f) Seller shall, upon the request of Buyer, make a timely, effective
and irrevocable joint election under Section 338(g) and Section 338(h)(10) of
the Code and any comparable elections under state and local tax law (together,
the "Section 338(h)(10) Election") with respect to the Company and each
Subsidiary. Except as otherwise provided in this Section 8.03(f), Buyer, on the
one side, and Seller, on the other side, shall bear their respective
administrative, legal, accounting, and similar expenses resulting from the
making of the Section 338(h)(10) Election. Seller and Buyer agree to cooperate
fully with respect to the making of the Section 338(h)(10) Election. Such
cooperation shall include, but not be limited to, the following:
(i) the treatment of the transaction as an assumption reinsurance
transaction;
(ii) the determination of the fair market value of the assets of the
Company and each Subsidiary, and the calculation of the adjusted
gross-up basis, within the meaning of Treasury Regulation
Section 1.338(b)-1;
(iii) the allocation of the deemed purchase price among the acquired
assets in accordance with all applicable rules and regulations
under Section 338 of the Code; and
(iv) the preparation and timely filing of all Tax Returns, including
all forms or schedules necessary or appropriate to the Section
338(h)(10) Election.
<PG$PCN>
No later than December 31, 1997, Buyer shall prepare and deliver to
Seller a schedule (the "Price Allocation Schedule") allocating the modified ADSP
(as such term is defined in Treasury Regulations Section 1.338(h)(10)-1) among
the assets of the Company and the Subsidiaries in accordance with the Treasury
regulations promulgated under Section 338(h)(10). Any objections by Seller to
the Price Allocation Schedule prepared by Buyer shall be raised within 60
business days after the receipt by Buyer of the Price Allocation Schedule. If
Buyer and Seller are unable to resolve any differences within 60 business days
thereafter, such dispute shall be resolved by the Accounting Referee, and, if
necessary, a revised Price Allocation Schedule consistent with the determination
made by the Accounting Referee shall be prepared by Buyer as soon as possible
thereafter. In all events, the Price Allocation Schedule shall be finally
prepared and agreed upon prior to August 15, 1998. Buyer and Seller shall each
pay one-half of the costs, fees and expenses of the Accounting Referee. The
Price Allocation Schedule shall be binding on the parties hereto, and Seller and
Buyer agree to act in accordance with such Schedule in the preparation, filing
and audit of any Tax return.
Buyer agrees to pay Seller for the "Section 338 Cost". The Section 338
Cost shall be equal to fifty percent of the excess, if any, of (a) the Tax
payable by Seller taking into account the Section 338(h)(10) Election and the
deemed liquidation of the Company and its Subsidiaries and giving effect to the
price allocation contained in the Price Allocation Schedule (including any Tax
payable as a consequence of the triggering of the policyholder surplus account
upon the deemed liquidation) over (b) the amount of Tax that would have been
payable if the Seller had reported the sale of the Shares for the Purchase Price
hereunder on the Closing Date, such Tax being computed in each case using the
maximum applicable statutory rate, provided, however, that the Section 338 Cost
shall in no event exceed $3,500,000.
Seller agrees to pay Buyer for the "Section 338 Benefit". The Section
338 Benefit shall be equal to fifty percent of the excess, if any, of (a) the
amount of Tax that would have been payable if the Seller had reported the sale
of the Shares for the Purchase Price hereunder on the Closing Date, such Tax
being computed in each case using the maximum applicable statutory rate, over
(b) the Tax payable by Seller taking into account the Section 338(h)(10)
Election and the deemed liquidation of the Company and its Subsidiaries and
giving effect to the price allocation contained in the Price Allocation Schedule
(including any Tax payable as a consequence of the triggering of the
policyholder surplus account upon the deemed liquidation) provided, however,
that the Section 338 Benefit shall in no event exceed $3,500,000.
<PG$PCN>
The amount of the Section 338 Cost or the Section 338 Benefit, as
applicable, shall be calculated in each case by Seller, and shall be determined
without regard to the Tax consequences of the payment required by this Section
8.03(f). Any objection by Buyer to the legal or factual basis for the
calculation by Seller of the Section 338 Cost or Section 338 Benefit, as
applicable, shall be settled by the Accounting Referee. Buyer and Seller shall
each pay one-half of the costs, fees and expenses of the Accounting Referee.
SECTION 8.04. Termination of Existing Tax Sharing Agreements. Any and
all existing Tax Sharing Agreements between the Company or any Subsidiary and
any member of the Seller Group shall be terminated as of the Closing Date. After
such date neither the Company, any Subsidiary, Seller nor any Affiliate of
Seller shall have any further rights or liabilities thereunder, and this
Agreement shall be the sole Tax sharing agreement relating to the Company or any
Subsidiary for all Pre-Closing Tax Periods.
SECTION 8.05. Tax Sharing. Immediately preceding the Closing, the
Company shall pay Seller, based on Seller's good faith estimate, an amount equal
to the Federal Taxes of the Company and the Subsidiaries with respect to all
Pre-Closing Tax Periods for which no Federal Tax Return has yet been filed,
exclusive of any Taxes resulting from the Section 338(h)(10) Election. Promptly
after the filing of Federal Tax Returns for the Pre-Closing Tax Periods, the
Company and Seller shall settle any difference between the provision for Federal
Taxes calculated in accordance with the Tax Sharing Agreement, exclusive of any
Federal Taxes resulting from the Section 338(h)(10) Election, and the payments
made pursuant to this Section 8.05.
SECTION 8.06. Cooperation on Tax Matters. (a) Seller will cause the
Company and each Subsidiary to retain all books, records or other information
that reflect, as of the last date on which such information is available (but
not prior to December 31, 1996), (i) the original tax cost, (ii) the adjusted
tax basis of all assets (including but not limited to all investment assets, all
depreciable real or personal property, and all amortizable and non-amortizable
intangible assets), and a schedule of all depreciation or amortization claimed
on such assets. Buyer and Seller agree to furnish or cause to be furnished to
each other, upon request, as promptly as practicable, such information
(including access to books and records) and assistance relating to the Company
as is reasonably necessary for the filing of any return, for the preparation for
any audit, and for the prosecution or defense of any claim, suit or proceeding
relating to any proposed adjustment. Buyer and Seller agree to retain or cause
to be retained all books and records pertinent to the Company and the
Subsidiaries until the applicable period for assessment under applicable law
(giving effect to any and all extensions or waivers) has expired, and to abide
by or cause the abidance with all record retention agreements entered into
<PG$PCN>
with any Taxing Authority. The Company agrees to give Seller reasonable notice
prior to transferring, discarding or destroying any such books and records
relating to Tax matters and, if Seller so requests, the Company shall allow
Seller to take possession of such books and records. Buyer and Seller shall
cooperate with each other in the conduct of any audit or other proceedings
involving the Company for any Tax purposes and each shall execute and deliver
such powers of attorney and other documents as are necessary to carry out the
intent of this subsection.
(b) Buyer and Seller further agree, upon request, to provide the other
party with all information that either party may be required to report pursuant
to Section 6043 of the Code and all Treasury Department Regulations promulgated
thereunder.
SECTION 8.07. Indemnification by Seller. (a) Seller hereby indemnifies
Buyer against and agrees to hold it harmless from any (i) Indemnifiable Tax of
the Company or any Subsidiary, and (ii) liabilities, costs, expenses (including,
without limitation, reasonable expenses of investigation and attorneys' fees and
expenses), arising out of or incident to the imposition, assessment or assertion
of any Indemnifiable Tax, including those incurred in the contest in good faith
in appropriate proceedings relating to the imposition, assessment or assertion
of any Indemnifiable Tax, in each case incurred or suffered by Buyer, any of its
Affiliates or, effective upon the Closing, the Company, or any Subsidiary (the
sum of (i) and (ii) being referred to as a "Loss"); provided, however, that
Seller shall have no liability for the payment of any loss attributable to or
resulting from any action described in Section 8.03(a) hereof; and provided,
further, that Seller shall have no obligation to make any payment to Buyer
pursuant to this Section 8.07 until the amount of all claims arising pursuant
hereto in the aggregate (minus any Temporary Difference attributable thereto
multiplied by the Applicable Tax Rate, each as defined in Section 8.07(b)
hereof) exceeds the Basket, in which case Buyer shall be entitled to indemnity
calculated in accordance with Section 8.07(b) for the full amount of all claims
in excess of the Basket.
(b) If Seller's indemnification obligation under Section 8.07(a)
arises in respect of an adjustment which makes allowable to Buyer, any of its
Affiliates, the Company or any Subsidiary, for any Post-Closing Tax Period, any
deduction, amortization, exclusion from income, credit or other allowance (a
"Temporary Difference") which would not, but for such adjustment, be allowable,
then any payment by Seller to Buyer under Section 8.07(a) shall be an amount
equal to (x) the amount otherwise due but for this subsection (b), minus (y) the
present value of the Temporary Difference (determined as if the Buyer and its
Affiliates have sufficient taxable income or other tax attributes to permit the
utilization of the Temporary Difference at the earliest time permissible under
applicable law) discounted at a rate of 10%, multiplied by the Applicable Tax
Rate plus (z) the
<PG$PCN>
present value of the Temporary Difference, if any, allowable to Seller as a
consequence of the adjustment giving rise to such payment, discounted at a rate
of 10%, multiplied by the Applicable Tax Rate.
(c) If as a result of an adjustment Seller makes a payment to any
Taxing Authority in respect of an Indemnifiable Tax of the Company with respect
to any Pre-Closing Tax Period, then Buyer shall promptly pay to Seller an amount
equal to such payment made by Seller, provided, however, that any such payment
by Buyer shall not exceed an amount equal to (x) the positive balance, if any,
in the Basket plus (y) the present value of the Temporary Difference, if any,
allowable to Buyer, any of its Affiliates or, effective upon the Closing, the
Company or any Subsidiary as a consequence of the adjustment giving rise to such
payment, discounted at a rate of 10%, multiplied by the Applicable Tax Rate
minus (z) the present value of the Temporary Difference, if any, allowable to
Seller as a consequence of the adjustment giving rise to such payment,
discounted at a rate of 10%, multiplied by the Applicable Tax Rate.
(d) The Basket shall be reduced by (i) the amount of any claim of
Buyer under Section 8.07(a) hereof that is not paid in whole or part by Seller
solely by reason of there being a positive balance in the Basket, minus any
Temporary Difference attributable thereto multiplied by the Applicable Tax Rate,
and (ii) the amount of any payment of Buyer to Seller under Section 8.07(c)
hereof, minus any Temporary Difference attributable thereto multiplied by the
Applicable Tax Rate.
(e) If any claim or demand for Indemnifiable Taxes is asserted in
writing against Buyer, any of its Affiliates or, effective upon the Closing, the
Company or any Subsidiary, Buyer shall notify Seller of such claim or demand
within 20 days of receipt thereof, or such earlier time that would allow Seller
to timely respond to such claim or demand, and shall give Seller such
information with respect thereto as Seller may reasonably request. Seller may
discharge, at any time, its indemnification obligation under this Section 8.07
by paying to Buyer the amount of the applicable Loss, calculated on the date of
such payment. Seller may, at its own expense, participate in and, upon notice to
Buyer, assume the defense of any such claim, suit, action, litigation or
proceeding (including any Tax audit). If Seller assumes such defense, Buyer
shall have the right (but not the duty) to participate in the defense thereof
and to employ counsel, at its own expense, separate from the counsel employed by
Seller. Whether or not Seller chooses to defend or prosecute any claim, all of
the parties hereto shall cooperate in the defense or prosecution thereof.
(f) Any payment by Seller pursuant to this Section 8.07 shall be made
not later than 30 days after receipt by Seller of written notice from Buyer
stating that any Loss has been paid by Buyer, any of its Affiliates or,
effective upon the
<PG$PCN>
Closing, the Company or any Subsidiary and the amount thereof and of the
indemnity payment requested.
(g) Seller shall not be liable under this Section 8.07 for (i) any
Indemnifiable Tax the payment of which was made without Seller's prior written
consent or (ii) any settlements effected without the consent of Seller, or
resulting from any claim, suit, action, litigation or proceeding in which Seller
was not permitted an opportunity to participate.
SECTION 8.08. Survival. Notwithstanding anything in this Agreement to
the contrary, the provisions of this Article 8 shall survive for the full period
of all statutes of limitations (giving effect to any waiver, mitigation or
extension thereof).
ARTICLE 9
EMPLOYEES AND EMPLOYEE BENEFITS
SECTION 9.01. Pension Plans. Seller and its Affiliates shall retain all
liabilities and obligations in respect of benefits accrued by Transferred
Employees under the Pension Plan and the Excess Pension Plan. Benefit accruals
in respect of Transferred Employees under the Pension Plan shall cease as of the
Closing Date and Transferred Employees participating therein shall be considered
to have terminated employment for purposes of such Plan. No Pension Plan assets
shall be transferred to Buyer or any of its Affiliates or to any plan of Buyer
or its Affiliates.
SECTION 9.02. Individual Account Plans. (a) The Seller shall retain all
liabilities and obligations in respect to benefits accrued by Transferred
Employees under the Individual Account Plans and the Defined Contribution Excess
Plan. On the Closing Date, the Seller shall take such action as may be
necessary, if any, to permit each Transferred Employee to exercise his rights
under the Individual Account Plans to effect an immediate distribution of such
Transferred Employee's vested account balances under the Individual Account
Plans or to effect a tax-free rollover of the taxable portion of the account
balances into an eligible retirement plan (within the meaning of Section
401(a)(31) of the Code, a "Direct Rollover") maintained by the Buyer or a
Subsidiary of the Buyer (the "Buyer Plan") or to an individual retirement
account. The Seller and the Buyer shall work together in order to facilitate any
such distribution or rollover and to effect a Direct Rollover for those
participants who elect to roll over their account balances directly into the
Buyer Plan; provided that, except as provided in Section 9.02(c) below, nothing
contained herein shall obligate the Buyer Plan to accept a Direct Rollover in a
form other than cash.
<PG$PCN>
(b) On the Closing Date, or as soon as practicable thereafter, the
Buyer shall establish or designate the Buyer Plan in order to accommodate the
Direct Rollovers described above and shall take all action necessary, if any, to
qualify the Buyer Plan under the applicable provisions of the Code and shall
make any and all filings and submissions to the appropriate governmental
authorities required to be made by it in connection with any Direct Rollover.
(c) On the Closing Date, for each Transferred Employee who has an
outstanding loan under the Capital Accumulation Plan and who elects a Direct
Rollover to the Buyer Plan, the Direct Rollover shall include the note related
to such outstanding loan provided that Buyer with respect to the Buyer Plan and
Seller with respect to the Capital Accumulation Plan conclude that such Direct
Rollover complies with the applicable rules under Section 401 of the Code and
such note is enforceable under applicable law by the trustees of Buyer Plan. In
the event either Buyer or Seller is unable to so conclude, Buyer and Seller
agree to take such steps as may be necessary to amend the eligibility rules and
permit such Transferred Employee to secure a loan under the Buyer Plan (to the
extent of the loan permitted under the loan rules of the Buyer Plan) in order to
make a further rollover to the Buyer Plan of the amount of the distribution from
the Capital Accumulation Plan represented by such Transferred Employee's loan
balance under the Capital Accumulation Plan.
SECTION 9.03. Other Employee Plans and Benefit Arrangements.
(a) Buyer shall be liable for, and, where appropriate, shall cause the
Company to perform:
(i) all obligations to any Transferred Employee under Seller's
short-term disability and wage continuation programs;
(ii) all obligations to any Transferred Employee in respect of the
continuation of coverage rules under Section 601 through 608
of ERISA and Section 4980B of the Code;
(iii) all obligations relating to any Transferred Employee in
connection with applicable Worker's Compensation laws,
including any such obligations relating to events that occur
prior to the Closing Date;
(iv) all obligations relating to severance benefits with respect to
any Transferred Employee whose employment by the Company or a
Subsidiary terminates on or after the Closing Date with such
severance benefits for any Transferred Employee whose
employment terminates in the six month period beginning on the
Closing Date being at least equal to the
<PG$PCN>
benefit such Transferred Employee would have received
under the Company's severance policy in effect on the
Closing Date;
(v) all obligations relating to bonus and profit sharing to
which each Transferred Employee is entitled for the
period from January 1, 1997 through the Closing Date
and vacation and personal holidays (including personal
time off (PTO) days) to which each Transferred Employee
is entitled as of the Closing Date; and
(vi) subject to Buyer's annual discretionary review, a
payroll deduction function to continue and facilitate
the purchase of insurance and the payment of premiums
for such coverages for personal insurance products made
available through Affiliates of the Seller to employees
of the Company and its Subsidiaries as described in
Benefit Arrangement Item 22 on Schedule 3.17.
(b) Seller shall retain all obligations and liabilities under the
Employee Plans and Benefit Arrangements in respect of any employee or former
employee or any independent contractor (including any beneficiary or dependent
thereof) who is not a Transferred Employee (other than Items 23 and 24 on
Schedule 3.17, which shall be the liability of the Company).
(c) With respect to Transferred Employees, Seller shall have no
obligation or liability relating to or arising under the Employee Plans or
Benefit Arrangements except as otherwise provided in Sections 9.01 or 9.02 and
except for any liability arising under the Employee Plans or Benefit
Arrangements which are attributable to events occurring on or prior to the
Closing Date, which Seller hereby assumes, provided, however, that with respect
to any Transferred Employee who, on the Closing Date, is absent by reason of
short-term disability or wage continuation, Buyer shall assume and be liable for
any payment attributable to the period beginning on the Closing Date.
SECTION 9.04. Plans Following the Closing. Buyer will, or will cause
the Company to, give Transferred Employees full credit for purposes of
eligibility and vesting under any plans or arrangements maintained by Buyer or
the Company for such Transferred Employees' service recognized for such purposes
under the Employee Plans and Benefit Arrangements. Buyer shall cause all health
and welfare plans in which Transferred Employees become participants on or after
the Closing Date to waive any and all pre-existing condition exclusions and
waiting period requirements to the extent necessary to provide a Transferred
Employee with the same status as such Transferred Employee had under the
Employee Plans as of the date of this Agreement, and to recognize, to the extent
such participation commences other than at the beginning of a plan year,
expenses previously
<PG$PCN>
incurred for purpose of applicable deductible and co-payment rules to the extent
such expenses would have been recognized under the applicable Seller plan as in
effect immediately prior to the Closing Date.
SECTION 9.05. Third Party Beneficiaries. No provision of this Article 9
shall create any third party beneficiary rights in any employee or former
employee of the Company or any Subsidiary (including any beneficiary or
dependent thereof) in respect of continued employment or resumed employment, and
no provision of this Article 9 shall create any rights in any such persons in
respect of any benefits that may be provided, directly or indirectly, under any
employee benefit plan or arrangement. Except as otherwise provided in this
Article 9, Buyer makes no representations, warranties or covenants with respect
to any compensation or benefits to be offered or provided to Transferred
Employees or former employees of the Company or any Subsidiary after the Closing
Date.
ARTICLE 10
CONDITIONS TO CLOSING
SECTION 10.01. Conditions to Obligations of Buyer and Seller. The
obligations of Buyer and Seller to consummate the Closing are subject to the
satisfaction of the following conditions:
(i) Any applicable waiting period under the HSR Act relating to the
transactions contemplated hereby shall have expired or been
terminated.
(ii) No provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the
consummation of the Closing. There shall not be pending or
threatened any claim, suit, action or proceeding by any
governmental agency before any court or governmental agency,
seeking to prohibit or restrain the transactions contemplated by
this Agreement or seeking material damages in connection
therewith.
(iii) This Agreement and the consummation of the transactions
contemplated hereby shall have been approved by the Insurance
Departments of the Required Jurisdictions and the jurisdictions
set forth on Schedule 4.03 or shall not have been disapproved by
such Departments and the period of time during which such
Departments and jurisdictions may, under applicable law,
disapprove this Agreement and the consummation of
<PG$PCN>
such transactions shall have lapsed, and the parties shall have
received reasonably satisfactory evidence of such approvals or
non-disapprovals.
SECTION 10.02. Conditions to Obligation of Buyer. The obligation of
Buyer to consummate the Closing is subject to the satisfaction of the following
further conditions:
(i) (A) Seller shall have performed in all material respects all of
its obligations hereunder required to be performed by it on or
prior to the Closing Date and (B) the representations and
warranties of Seller contained in this Agreement and in any
certificate or other writing delivered by Seller pursuant hereto
shall be true in all material respects at and as of the Closing
Date, as if made at and as of such date, except for those
representations and warranties made as of a specified date, and
(C) Buyer shall have received a certificate signed by an
executive officer of Seller to the foregoing effect.
(ii) Buyer shall have received an opinion of Robert Rusis, Esq.,
General Counsel of Seller, and an opinion of Davis Polk &
Wardwell, counsel to Seller, dated the Closing Date in the forms
attached as Exhibits I and III hereto. In rendering such
opinions, such counsel may rely: (x) upon certificates of public
officers, (y) as to matters governed by the laws of jurisdictions
other than New York and the corporate laws of Delaware or the
federal laws of the United States of America, upon the opinions
of Shanley & Fisher, P.C. (as to the laws of New Jersey),
Frederick Condon, General Counsel to the Company (as to the laws
of New Hampshire), and any other counsel reasonably satisfactory
to Buyer and (z) as to matters of fact, upon certificates of
officers of Seller, the Company or any Subsidiary, copies of
which opinions and certificates shall be contemporaneously
delivered to Buyer.
(iii) The Company shall have obtained the consents required under Item
1 of Schedule 3.04 or new Investment Contracts, substantially in
the form of CIAC's existing Investment Contracts, with each
Investment Company to which CIAC currently provides investment
advisory or management services.
(iv) Buyer shall have received all documents it may reasonably request
relating to the existence of Seller, the Company and Subsidiary
and the authority of Seller for this Agreement, all in form and
substance reasonably satisfactory to Buyer.
<PG$PCN>
SECTION 10.03. Conditions to Obligation of Seller. The obligation of
Seller to consummate the Closing is subject to the satisfaction of the following
further conditions:
(i) (A) Buyer shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or
prior to the Closing Date and (B) the representations and
warranties of Buyer contained in this Agreement and in any
certificate or other writing delivered by Buyer pursuant hereto
shall be true at and as of the Closing Date, as if made at and as
of such date, except for those representations and warranties
made as of an earlier date, and (C) Seller shall have received a
certificate signed by an executive officer of Buyer to the
foregoing effect.
(ii) Seller shall have received an opinion of King & Spalding, counsel
to Buyer, dated the Closing Date in the form attached as Exhibit
IV hereto. In rendering such opinion, such counsel may rely upon
certificates of public officers, as to matters governed by the
laws of jurisdictions other than New York or the federal laws of
the United States of America, upon opinions of counsel reasonably
satisfactory to Seller and, as to matters of fact, upon
certificates of officers of Buyer, copies of which opinions and
certificates shall be contemporaneously delivered to Seller.
(iii) Seller shall have received all documents it may reasonably
request relating to the existence of Buyer and the authority of
Buyer for this Agreement, all in form and substance reasonably
satisfactory to Seller.
ARTICLE 11
SURVIVAL; INDEMNIFICATION
SECTION 11.01. Survival. The representations and warranties of the
parties hereto contained in this Agreement or in any certificate or other
writing delivered pursuant hereto or in connection herewith shall survive the
Closing until 18 months after the Closing Date; provided that (i) the
representations and warranties contained in Sections 3.02, 3.05, 3.06 and
3.07(b) and the covenants and agreements contained in Sections 5.10, 5.11, 6.02,
7.02, 7.04 and 13.03 and Article 11 shall survive indefinitely, (ii) the
covenants and agreements set forth in Sections 5.05, 5.06, 5.09, 6.03, 7.05,
7.06, 7.08 and 7.09 shall survive for the respective periods set forth therein
and (iii) the covenants, agreements, representations and warranties contained in
Articles 8 and 9 shall survive until
<PG$PCN>
expiration of the statute of limitations applicable to the matters covered
thereby (giving effect to any waiver, mitigation or extension thereof), if
later. No covenant, agreement, representation or warranty contained in this
Agreement shall survive after the time at which it would otherwise terminate
pursuant to the preceding sentence unless written notice of the inaccuracy or
breach thereof shall have been given to the party against whom such indemnity
may be sought prior to such time.
SECTION 11.02. Indemnification. (a) Seller hereby indemnifies Buyer
and, effective at the Closing, without duplication, the Company or any
Subsidiary and their officers, directors, employees, agents, successors and
assigns (the "Claim Indemnified Parties") against and agrees to hold them
harmless from any and all damage, loss, liability and expense (including without
limitation reasonable expenses of investigation and reasonable attorneys' fees
and expenses in connection with any claim, action, suit or proceeding)
("Damages") relating to or arising out of:
(i) any inaccuracy in or breach of any representation or warranty
made by Seller pursuant to this Agreement (other than pursuant to
Section 3.19 or Article 8); provided that (x) Seller shall not be
liable under this Section 11.02(a)(i) unless the aggregate amount
of Damages with respect to all matters referred to in this
Section 11.02(a)(i) exceeds $12,000,000 and then only to the
amount of such excess, provided that this limitation shall not
apply to the breach of any representation or warranty contained
in Sections 3.02, 3.05, 3.06 and 3.07(b), and (y) Seller's
maximum liability under this Section 11.02(a)(i) shall not exceed
an amount equal to the Purchase Price;
(ii) Seller's breach of or failure to perform any of its covenants or
agreements contained in or made pursuant to this Agreement (other
than Article 8);
(iii) [
CONFIDENTIAL TREATMENT REQUESTED
]
<PG$PCN>
[
CONFIDENTIAL TREATMENT REQUESTED
]
(iv) any obligation or liability of the Company or any Subsidiary that
is payable after December 31, 1996 under any acquisition,
disposition or joint venture agreement involving a significant
amount of assets owned or previously owned by the Company or any
Subsidiary, to the extent such obligation or liability is not
fully reflected in the Statutory Financial Statements of the
Company and the Insurance Subsidiaries as of and for the year
ended December 31, 1996; and
(v) any cause of action, claim, suit or proceeding relating to or
arising out of the Company's or any Subsidiary's violation of, or
liability under, any Environmental Laws which arises out of facts
or circumstances occurring prior to the Closing Date; provided
that (x) Seller shall not be liable under this Section
11.02(a)(v) unless the aggregate amount of Damages with respect
to all matters referred to in this Section 11.02(a)(v) exceeds
$250,000 and then only to the amount of such excess, and (y)
Seller's maximum liability under this Section 11.02(a)(v) shall
not exceed $3,000,000.
(b) Buyer hereby indemnifies Seller and its officers, directors,
employees, agents, successors and assigns against and agrees to hold them
harmless from any and all Damages relating to or arising out of (i) any
inaccuracy or breach of any representation or warranty made by Buyer pursuant to
this Agreement (other than pursuant to Article 8); provided that Buyer shall not
be liable under this Section
<PG$PCN>
11.02(b) unless the aggregate amount of Damages with respect to all matters
referred to in this Section 11.02(b) exceeds an amount equal to $12,000,000 and
then only to the extent of such excess, (ii) Buyer's breach of or failure to
perform any of its covenants and agreements pursuant to this Agreement (other
than Article 8) and (iii) any Damages resulting from the use, after the Closing
Date, of any policy forms and materials or marketing materials containing the
Chubb Trademarks or the "Chubb" name or the use of the Chubb Trademarks.
SECTION 11.03. Procedures; Exclusivity. (a) The party seeking
indemnification under Section 11.02 (the "Indemnified Party") agrees to give
prompt written notice to the party against whom indemnity is sought (the
"Indemnifying Party") of the assertion of any claim, or the commencement of any
suit, action or proceeding in respect of which indemnity may be sought under
such Section. The Indemnifying Party may, and at its election shall, participate
in and control the defense of any such suit, action or proceeding at its own
expense. Except as otherwise provided in this Article 11, the Indemnifying Party
shall not be liable under Section 11.02 for any settlement effected without its
consent of any claim, litigation or proceeding in respect of which indemnity may
be sought hereunder.
(b) The Indemnified Party shall have the right to employ separate
counsel in any action or claim and to participate in the defense thereof at the
expense of the Indemnifying Party (i) if the retention of such counsel has been
specifically authorized by the Indemnifying Party, or (ii) if the counsel is
retained because the Indemnifying Party does not notify the Indemnified Party
within twenty (20) days after receipt of a claim notice that it elects to
undertake the defense thereof. The Indemnified Person shall have the right to
employ counsel at the Indemnified Party's own expense and participate in such
action or claim, including settlement or trial.
(c) Except as otherwise provided in Section 11.05, the Indemnifying
Party shall obtain the prior written approval of the Indemnified Party before
entering into any settlement, adjustment, or compromise of such claim or ceasing
to defend against such claim that provides for any relief (i) other than the
payment of monetary damages by the Indemnifying Party or (ii) which might
adversely affect the Indemnified Party or its business or operations, and the
determination of whether and under what conditions such approval may be given
shall be in the sole discretion of the Indemnified Party.
(d) If the Indemnifying Party does not assume control over the defense
of such claim as provided in Section 11.03(a) within 30 days of receipt of
notice thereof, the Indemnified Party shall have the right to defend the claim
in such
<PG$PCN>
manner as it may deem appropriate at the cost and expense of the Indemnifying
Party, including the right to settle, adjust or compromise such claim.
(e) Except as otherwise specifically set forth in this Agreement,
Buyer and its Affiliates (including, effective at the Closing without
duplication, the Company or any Subsidiary) hereby waive all rights for
contribution or other rights of recovery with respect to Damages arising under
or relating to Environmental Laws that Buyer or any of the Affiliates may have
by statute or otherwise against Seller or any of its Affiliates.
(f) After the Closing, Section 11.02 will provide the exclusive remedy
for any breach of representation or warranty (other than those contained in
Article 8) or other claim arising under this Agreement.
SECTION 11.04. [
CONFIDENTIAL TREATMENT REQUESTED
]
<PG$PCN>
[
CONFIDENTIAL TREATMENT REQUESTED
]
SECTION 11.05. Procedures for Certain Litigation. (a) For the purposes
of this Section 11.05, "Claims" shall mean [CONFIDENTIAL TREATMENT REQUESTED]
and any cause of action, claim, suit or proceeding described in Sections
11.02(a)(iii)(B)-(D).
(b) The Claim Indemnified Parties shall take no action with respect to
any Claim without Seller's express written consent. Seller shall control the
defense of the Claims at its own expense and with counsel of its choosing;
provided that Seller shall keep the Buyer apprised of all material developments
relating to the conduct of the litigation relating to the Claims.
(c) Seller shall have the right to consent to a settlement of, or the
entry of any judgment arising from any Claim, without the consent of the Buyer;
provided, that Seller (i) shall pay or cause to be paid all amounts arising out
of such settlement or judgment concurrently with the effectiveness thereof; (ii)
shall not encumber any assets of the Claim Indemnified Parties or agree to any
condition or restriction that would apply to the Claim Indemnified Parties or to
the conduct of their respective businesses; and (iii) shall obtain an
unconditional release of the Claim Indemnified Parties, as applicable, from such
Claim. Seller shall not be liable under this Section 11.05 for any settlement of
a Claim effected without its consent.
<PG$PCN>
(d) The Claim Indemnified Parties and their Affiliates shall cooperate
fully with Seller and its counsel in the investigation, trial and defense of any
Claim (including the filing by the Company of any cross-claim, counter-claim or
other proceeding deemed reasonably appropriate by Seller) and any appeal arising
therefrom. Such cooperation shall include, but shall not be limited to, the
Claim Indemnified Parties' giving prompt written notice to Seller of any notice,
request, pleading or similar matter it shall receive relating to any Claim,
making available, without charge, to Seller and its counsel such of the books,
records, documents and other data of the Company and its Subsidiaries, and such
employees and representatives of the Company and its Subsidiaries as Seller, in
its sole discretion, shall deem necessary. The Claim Indemnified Parties hereby
agree to retain all such books, records, documents and other data until the
final resolution of the Claims.
(e) If Seller and Buyer are unable to agree with respect to any matter
arising under this Section 11.05, Seller and Buyer, shall, within five days
after notice of disagreement given by either party, present their differences in
writing (each party simultaneously providing to the other a copy of all
documents submitted) to the Judicial Arbitration and Mediation Service, New
York, New York (the "Referee"), who shall promptly review and resolve the
disputed matter. The decision of the Referee shall be final and binding unless
both the Seller and the Buyer agree otherwise. Seller and Buyer shall equally
share all costs and fees of the Referee. It is the express understanding of the
parties hereto that a failure of cooperation could be materially prejudicial to
the interests of the Seller and that the procedure described in this paragraph
(e) shall resolve any dispute in as timely a manner as possible, such that any
such dispute has no affect on the underlying Claim. It is the further
understanding of the parties hereto that the decision of the Referee with
respect to any matter may be specifically enforced through injunctive and other
equitable relief.
SECTION 11.06. Limitation of Indemnification. Notwithstanding the
foregoing provisions of this Article 11, an Indemnifying Party's obligation to
indemnify an Indemnified Party shall be subject to the following limitations:
(i) No indemnification shall be required to be made by Buyer or
Seller with respect to any claim for indemnity which when
aggregated with any similar claims is less than $1,000.
(ii) The Damages required to be paid by the Indemnifying Party
pursuant to this Article 11 shall be reduced to the extent of any
amounts actually received by the Indemnified Party after the
Closing Date pursuant to the terms of any insurance policies
covering such Damages.
<PG$PCN>
(iii) Each of the parties agrees that to the extent the other party
indemnifies it from any claim for Damages, the Indemnified Party
shall assign its rights to such claim to the Indemnifying Party
to the extent of any amounts actually received by the Indemnified
Party from the Indemnifying Party.
ARTICLE 12
TERMINATION
SECTION 12.01. Grounds for Termination. This Agreement may be
terminated at any time prior to the Closing:
(i) by mutual written agreement of Seller and Buyer;
(ii) by either Seller or Buyer if the Closing shall not have been
consummated on or before September 30, 1997;
(iii) by either Seller or Buyer if there shall be any law or regulation
that makes consummation of the transactions contemplated hereby
illegal or otherwise prohibited or if consummation of the
transactions contemplated hereby would violate any nonappealable
final order, decree or judgment of any court or governmental body
having competent jurisdiction;
(iv) by Seller if events occur which render impossible compliance with
one or more conditions set forth in Section 10.01 and Section
10.03 hereof and such conditions are not waived by Seller;
provided that such events did result from any action or omission
by Seller, the Company or the Subsidiaries which were within the
control of such entity and which such entity was not expressly
permitted to take or omit by the terms of this Agreement; or
(v) by Buyer if events occur which render impossible compliance with
one or more conditions set forth in Section 10.01 and 10.02
hereof, and such conditions are not waived by Buyer; provided
that such events did not result from any action or omission by
Buyer which was within its control and which Buyer was not
expressly permitted to take or omit by the terms of this
Agreement;
The party desiring to terminate this Agreement shall give notice of
such termination to the other party.
<PG$PCN>
SECTION 12.02. Effect of Termination. If this Agreement is terminated
as permitted by Section 12.01, termination shall be without liability of either
party (or any stockholder, director, officer, employee, agent, consultant or
representative of such party) to the other party to this Agreement; provided
that if such termination shall result from the willful failure of either party
to fulfill a condition to the performance of the obligations of the other party
or to perform a covenant of this Agreement or from a willful breach by either
party to this Agreement, such party shall be fully liable for any and all
Damages incurred or suffered by the other party as a result of such failure or
breach. The provisions of Sections 6.01, 6.02 and 13.03 shall survive any
termination hereof pursuant to Section 12.01.
ARTICLE 13
MISCELLANEOUS
SECTION 13.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including facsimile transmission)
and shall be given,
if to Buyer, to:
Jefferson-Pilot Corporation
100 N. Greene Street
Greensboro, NC 27401
Attention: General Counsel
Fax: 910-691-3639
with a copy to:
King & Spalding
120 West 45th Street
New York, NY 10036
Attention: E. William Bates, II
Fax: 212-556-2222
<PG$PCN>
if to Seller, to:
The Chubb Corporation
15 Mountain View Road
Warren, New Jersey 07061-1625
Attention: General Counsel
Fax: (908) 903-3607
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Dennis S. Hersch, Esq.
Fax: (212) 450-4800
All such notices, requests and other communications shall be deemed received on
the date of receipt by the recipient thereof if received prior to 5 p.m. in the
place of receipt and such day is a business day in the place of receipt.
Otherwise, any such notice, request or communication shall be deemed not to have
been received until the next succeeding business day in the place of receipt.
SECTION 13.02. Amendments and Waivers. (a) Any provision of this
Agreement may be amended or waived prior to the Closing Date if, but only if,
such amendment or waiver is in writing and is signed, in the case of an
amendment, by each party to this Agreement, or in the case of a waiver, by the
party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 13.03. Expenses. All costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such cost and expense and neither the Company nor any
Subsidiary shall be responsible for or pay any such cost or expense.
SECTION 13.04. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns. No party shall assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the prior
written consent of each other party hereto. Notwithstanding the foregoing,
<PG$PCN>
Buyer may assign all or any portion of its rights, interest or obligations
hereunder to any Affiliate of Buyer without the prior written consent of Seller,
provided that such assignment shall not release Buyer from or in any manner
limit Buyer's obligations hereunder.
SECTION 13.05. Governing Law. This Agreement shall be governed by
and construed in accordance with the law of the State of New York, without
regard to the conflicts of law rules of such state.
SECTION 13.06. Jurisdiction. Except as otherwise expressly provided in
this Agreement, any suit, action or proceeding seeking to enforce any provision
of, or based on any matter arising out of or in connection with, this Agreement
or the transactions contemplated hereby may be brought in the United States
District Court for the Southern District of New York or any other New York State
court sitting in New York City, and each of the parties hereby consents to the
jurisdiction of such courts (and of the appropriate appellate courts therefrom)
in any such suit, action or proceeding and irrevocably waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such suit, action or proceeding in any such court or
that any such suit, action or proceeding which is brought in any such court has
been brought in an inconvenient form. Process in any such suit, action or
proceeding may be served on any party anywhere in the world, whether within or
without the jurisdiction of any such court. Without limiting the foregoing, each
party agrees that service of process on such party as provided in Section 13.01
shall be deemed effective service of process on such party.
SECTION 13.07. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 13.08. Counterparts; Third Party Beneficiaries. This Agreement
may be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. No provision of this Agreement is intended to confer upon any Person
other than the parties hereto any rights or remedies hereunder.
SECTION 13.09. Entire Agreement. This Agreement and the Confidentiality
Agreement between Buyer and Seller dated October 16, 1996 constitute the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter of this
<PG$PCN>
Agreement. No representation, inducement, promise, understanding, condition or
warranty not set forth herein has been made or relied upon by either party
hereto. Neither this Agreement nor any provision hereof is intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder.
<PG$PCN>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
JEFFERSON-PILOT CORPORATION
By: /s/ David A. Stonecipher
--------------------------------------
Title: President and Chief Executive Officer
THE CHUBB CORPORATION
By: /s/ Dean R. O'Hare
-------------------------------------
Title: Chairman and Chief Executive Officer
<PG$PCN>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 6,673
<DEBT-CARRYING-VALUE> 3,877
<DEBT-MARKET-VALUE> 3,903
<EQUITIES> 929
<MORTGAGE> 1,323
<REAL-ESTATE> 75
<TOTAL-INVEST> 14,143
<CASH> 105
<RECOVER-REINSURE> 1,260
<DEFERRED-ACQUISITION> 934
<TOTAL-ASSETS> 17,562
<POLICY-LOSSES> 13,308
<UNEARNED-PREMIUMS> 40
<POLICY-OTHER> 71
<POLICY-HOLDER-FUNDS> 200
<NOTES-PAYABLE> 614
53
0
<COMMON> 88
<OTHER-SE> 2,209
<TOTAL-LIABILITY-AND-EQUITY> 17,562
994
<INVESTMENT-INCOME> 893
<INVESTMENT-GAINS> 47
<OTHER-INCOME> 191
<BENEFITS> 1,211
<UNDERWRITING-AMORTIZATION> 89
<UNDERWRITING-OTHER> (141)
<INCOME-PRETAX> 443
<INCOME-TAX> 149
<INCOME-CONTINUING> 294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 291
<EPS-PRIMARY> 4.09
<EPS-DILUTED> 4.09
<RESERVE-OPEN> 259
<PROVISION-CURRENT> 401
<PROVISION-PRIOR> (63)
<PAYMENTS-CURRENT> 246
<PAYMENTS-PRIOR> 91
<RESERVE-CLOSE> 260
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
