FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998 Commission file number 1-5955
Jefferson-Pilot Corporation
(Exact name of registrant as specified in its charter)
North Carolina 56-0896180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Greene Street, Greensboro, North Carolina 27401
(Address of principal executive offices) (Zip Code)
(336) 691-3691
(Registrant's telephone number, including area code)
Indicate whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Number of shares of common stock outstanding at September 30, 1998 105,990,060
<PAGE>
JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
[S]
Part I. Financial Information
Consolidated Unaudited Condensed Balance Sheets
- September 30, 1998 and December 31, 1997 3
Consolidated Unaudited Condensed Statements of Income
- Three Months and Nine Months ended September 30, 1998 and 1997 4
Consolidated Unaudited Condensed Statements of Cash Flows
- Nine Months ended September 30, 1998 and 1997 5
Notes to Consolidated Unaudited Condensed Financial
Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information 26
Signatures 26
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<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
(In Millions)
<CAPTION>
September 30 December 31
1998 1997
------------ -----------
<S> <C> <C>
Debt securities available for sale, at fair value
(amortized cost $10,128 and $9,748) $10,786 $10,155
Debt securities held to maturity, at amortized cost
(fair value $3,812 and $3,892) 3,599 3,790
Equity securities available for sale, at fair value
(cost $79 and $88) 830 892
Equity securities trading portfolio, at fair value
(cost $1 and $1) - 1
Mortgage loans on real estate 1,862 1,716
Other investments 1,552 1,540
Cash and cash equivalents 31 9
------ ------
Total cash and investments 18,660 18,103
Accrued investment income 229 217
Due from reinsurers 1,389 1,526
Deferred policy acquisition costs and value
of business acquired 1,331 1,364
Cost in excess of net assets acquired 231 225
Assets held in separate accounts 1,463 1,282
Other assets 379 414
------- --------
Total assets $23,682 $ 23,131
======= ========
Policy liabilities $17,462 $ 17,497
Debt:
Commercial paper and revolving credit borrowings 184 285
Exchangeable Securities and other debt 297 331
Securities sold under repurchase agreements 289 95
Liabilities related to separate accounts 1,463 1,282
Tax liabilities 373 235
Accounts payable, accruals and other liabilities 286 321
------ ------
20,354 20,046
====== ======
Guaranteed preferred beneficial interest in
subordinated debentures ("Capital Securities") 300 300
------ ------
Mandatorily redeemable preferred stock 3 53
------ ------
Stockholders' Equity:
Common stock 132 93
Retained earnings 2,132 1,964
Accumulated other comprehensive income -
net unrealized gains on securities 761 675
------ ------
3,025 2,732
------ ------
Total liabilities and stockholders' equity $23,682 $23,131
======= =======
</TABLE>
See Notes to Consolidated Unaudited Condensed Financial Statements
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<PAGE>
<TABLE>
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
(In Millions Except Per Share Information)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Premiums and other considerations $ 255 $ 307 $ 809 $ 836
Net investment income 299 290 901 805
Realized investment gains 33 5 94 108
Communications sales 45 42 141 135
Other 17 13 52 21
----- ----- ----- -----
Total revenue 649 657 1,997 1,905
===== ===== ===== =====
Benefits and Expenses:
Insurance and annuity benefits 321 381 1,007 1,032
Insurance commissions 69 71 218 178
General, administrative and other expenses 50 50 165 145
Communications operations 28 28 88 88
----- ---- ----- -----
Total benefits and expenses 468 530 1,478 1,443
===== ==== ===== =====
Income before income taxes 181 127 519 462
Provision for income taxes 66 41 177 154
----- ---- ----- -----
Net income 115 86 342 308
Dividends on Capital Securities and
preferred stock 6 7 20 18
----- ---- ----- -----
Net income available to common
stockholders $ 109 $ 79 $ 322 $ 290
====== ===== ====== ======
Comprehensive income $ 122 $ 165 $ 409 $ 400
====== ===== ====== ======
Average number of shares outstanding 106.1 106.3 106.2 106.2
====== ===== ====== ======
Net Income Per Share of Common Stock:
Net income available to common
stockholders before realized investment
gains, net of income taxes $ 0.85 $ 0.71 $ 2.49 $ 2.07
Realized investment gains, net of income
taxes 0.18 0.04 0.54 0.66
------ ------ ------ ------
Net income available to common
stockholders $ 1.03 $ 0.75 $ 3.03 $ 2.73
====== ====== ====== ======
Net income available to common
stockholders - assuming dilution $ 1.02 $ 0.74 $ 3.01 $ 2.71
====== ====== ====== ======
Dividends declared per common share $0.295 $0.267 $ 0.86 $ 0.80
====== ====== ====== ======
See Notes to Consolidated Unaudited Condensed Financial Statements
</TABLE>
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<PAGE>
<TABLE>
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED
STATEMENTS OF CASH FLOWS
(In Millions)
<CAPTION>
Nine Months Ended
September 30
------------------
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operations $ 317 $ 373
---- ----
Cash Flows from Investing Activities:
Investments sold (purchased), net (259) (163)
Acquisition of subsidiaries, net of cash received - (758)
Other investing activities (13) 17
---- ----
Net cash used in investing activities (272) (904)
---- ----
Cash Flows from Financing Activities:
Issuance of Capital Securities - 300
Net short-term borrowings (repayments) 92 (111)
Issuance of Exchangeable Securities - 150
Cash dividends paid (112) (99)
Issuance (repurchase) of common shares, net (21) 4
Policyholder contract deposits, net 68 200
Redemption of preferred stock (50) -
---- ----
Net cash provided by financing activities (23) 444
---- ----
Increase in cash and cash equivalents 22 (87)
Cash and cash equivalents at beginning of period 9 105
---- ----
Cash and cash equivalents at end of period $ 31 $ 18
==== ====
Supplemental Cash Flow Information:
Income taxes paid $ 113 $ 95
==== ====
Interest paid $ 30 $ 25
==== ====
</TABLE>
See Notes to Consolidated Unaudited Condensed Financial Statements
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<PAGE>
JEFFERSON-PILOT CORPORATION
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in millions)
1. Basis of Presentation
The accompanying consolidated unaudited condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. All significant intercompany accounts
and transactions have been eliminated in consolidation. Operating results for
the nine month period ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. Acquisition of Life Subsidiaries from The Chubb Corporation
Effective April 30, 1997, for accounting and tax purposes, Jefferson-Pilot
Corporation (JP or the Company) acquired all the outstanding shares of Jefferson
Pilot Financial Insurance Company (JP Financial), formerly named Chubb Life
Insurance Company of America, from The Chubb Corporation (Seller). JP
Financial's operations, principally universal life, variable universal life and
term insurance, are conducted nationwide through JP Financial and its life
insurance subsidiaries, Jefferson Pilot LifeAmerica Insurance Company (formerly
named Chubb Colonial Life Insurance Company) and Chubb Sovereign Life Insurance
Company (which was merged into JP Financial on July 1, 1998). Hereinafter,
JP Financial and its subsidiaries are collectively referred to as "JP
Financial." Jefferson Pilot Securities Corporation (formerly named Chubb
Securities Corporation) is a full service NASD registered broker-dealer.
The cost of the acquisition consisted of $775 cash paid by JP to Seller, plus
other acquisition costs. In addition, JP Financial paid a $100 special
dividend to Seller which was funded through liquidation of short-term
investments. The $775 was financed through the liquidation of invested assets,
various securities offerings and the issuance of commercial paper. The
acquisition was accounted for using the purchase method. As a result, JP
Financial's results of operations from May 1, 1997 forward are included in the
Company's financial statements. During the first quarter of 1998, the final
allocation of purchase price to JP Financial's tangible and identifiable
intangible assets and liabilities was completed, based on their respective
fair values with the difference, amounting to $163, allocated to cost in excess
of net assets acquired (i.e., goodwill). Goodwill arising from the acquisition
is being amortized over a period of 35 years.
The following pro-forma financial information has been prepared assuming that
the JP Financial acquisition had taken place at the beginning of 1997. The
pro-forma information includes adjustments for interest expense and foregone
investment income that would have resulted from financing the acquisition,
amortization of adjustments to fair value, amortization of value of business
acquired and cost in excess of net assets acquired, and related tax effects.
-6-
<PAGE>
The pro-forma financial information is not necessarily indicative of results of
operations that would have been reported had the transaction actually been
completed on the date assumed.
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997
------
<S> <C>
Revenue $1,910
======
Net income available to common stockholders
before realized investment gains, net of income taxes $ 231
Realized investment gains, net of income taxes 24
-----
Net income available to common stockholders $ 255
=====
Net Income Per Share of Common Stock:
Net income available to common stockholders
before realized investment gains, net of income taxes $2.17
Realized investment gains, net of income taxes 0.23
-----
Net income available to common stockholders $2.40
=====
</TABLE>
On a pro-forma basis, net income available to common stockholders before
realized investment gains, net of income taxes, increased from $219 to $231 for
the nine months ended September 30, 1997. On a pro-forma basis, realized
investment gains, net of income taxes, are significantly lower than actual for
the nine months ended September 30, 1997, because the pro-forma amounts
eliminate the effect of realized gains on invested assets sold during the first
quarter of 1997 to finance the JP Financial acquisition.
3. Contingent Liabilities
Jefferson-Pilot Life Insurance Company is a defendant in a proposed class
action suit alleging deceptive practices, fraudulent and negligent
misrepresentation and breach of contract in the sale of certain life insurance
policies using policy performance illustrations which used then current
interest or dividend rates and insurance charges and illustrated that some or
all of the future premiums might be paid from policy values rather than
directly by the insured. The claimant's actual policy values exceeded those
illustrated on a guaranteed basis, but were less than those illustrated on a
then current basis due primarily to the interest crediting rates having
declined along with the overall decline in interest rates in recent years.
Unspecified compensatory and punitive damages, costs and equitable relief are
sought. While management is unable to make a meaningful estimate of the amount
or range of loss that could result from an unfavorable outcome, management
believes that it has made appropriate disclosures to policyholders as a matter
of practice, and intends to vigorously defend its position.
In the normal course of business, the Company and its subsidiaries are parties
to various lawsuits. Because of the considerable uncertainties that exist,
the Company cannot predict the outcome of pending or future litigation.
However, management believes that the resolution of pending legal proceedings
will not have a material adverse effect on the Company's financial position or
liquidity, but could have a material adverse effect on the results of
operations for a specified period.
4. Accounting Pronouncements
As of January 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income", which sets standards for the reporting and display of comprehensive
income and its components in financial statements. Adoption had no impact on
the Company's net income or stockholders' equity. Comprehensive income consists
of net income plus other comprehensive income. Currently, the only element of
other comprehensive income applicable to the Company is changes in unrealized
gains and losses on securities classified as available for sale. Prior year
financial statements have been reclassified to conform to the requirements
of SFAS 130.
At the beginning of the third quarter, the Company adopted SOP 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use",
which requires capitalization of certain costs incurred in connection with
developing or obtaining internal use software. Prior to adoption, the Company
expensed such costs as incurred. Prior quarters have not been restated as the
quarterly and year to date amounts were immaterial to the financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". This pronouncement is effective for annual
periods beginning after December 15, 1997, and for interim periods beginning in
the following year. SFAS 131 requires disaggregated disclosures based on
internal segments used by a company in managing its business. Adoption will
not impact the Company's financial position or results of operation, but will
require additional footnote disclosures and may affect the presentation of
operating earnings by business segment.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and for Hedging Activities". This pronouncement is effective for annual periods
beginning after June 15, 1999. SFAS 133 requires all derivatives to be recorded
on the balance sheet and establishes accounting rules for hedging activities.
The effect of the hedge accounting rules is to offset changes in value or cash
flows of both the hedge and hedged item in earnings in the same period.
Changes in the fair value of derivatives that do not qualify for hedge
accounting are reported in earnings in the period of the change. Based on the
limited nature of the Company's use of derivatives and hedging activities,
adoption of this pronouncement is not expected to have a material impact on the
Company's financial position or results of operations.
5. Stock Split
On February 9, 1998, the Board authorized a three-for-two split of the Company's
common stock in the form of a 50% stock dividend distributed on April 13, 1998
to shareholders of record as of March 20, 1998. Prior share and per share
amounts have been restated to give retroactive effect to the stock split.
-8-
<PAGE>
6. Income Per Share of Common Stock
The following table sets forth the computation of earnings per share and
earnings per share assuming dilution:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net Income $115 $86 $342 $308
Dividends on Capital
Securities and
preferred stock 6 7 20 18
---- --- ---- ----
Numerator for earnings
per share and earnings
per share - assuming
dilution - Net income
available to common
stockholders $109 $79 $322 $290
==== === ==== ====
Denominator:
Denominator for earnings
per share - weighted-
average shares
outstanding 106,060,410 106,275,413 106,214,200 106,196,526
Effect of dilutive
securities:
Employee stock options 894,124 630,484 868,472 501,965
----------- ----------- ----------- -----------
Denominator for earnings per
share - assuming
dilution - adjusted
weighted-average shares
outstanding and assumed
conversions 106,954,534 106,905,897 107,082,672 106,698,491
=========== =========== =========== ===========
Earnings per share $1.03 $0.75 $3.03 $2.73
=========== =========== =========== ==========
Earnings per share -
assuming dilution $1.02 $0.74 $3.01 $2.71
=========== =========== =========== ==========
</TABLE>
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<PAGE>
JEFFERSON-PILOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of financial condition as
of September 30, 1998, changes in financial condition for the nine months then
ended, and results of operations for the three month and nine month periods
ended September 30, 1998 as compared to the same periods of 1997. This
discussion supplements Management's Discussion and Analysis in Form 10-K for
the year ended December 31, 1997, and it should be read in conjunction with
the interim financial statements and notes contained herein. All dollar amounts
are in millions except per share amounts. Prior share amounts have been
restated to give retroactive effect to the Company's three-for-two stock split,
which was effective in April 1998.
Company Profile
- ---------------
The Company (also referred to as JP) has two business segments:
Insurance and Communications. Within the Insurance segment, JP offers
Individual Life Insurance Products, Annuity and Investment Products, and Group
Insurance Products through the following subsidiaries: Jefferson-Pilot Life
Insurance Company (JP Life), Alexander Hamilton Life Insurance Company of
America (AH Life), First Alexander Hamilton Life Insurance Company (FAHL), and
Jefferson Pilot Financial Insurance Company (referred to as JP Financial and
formerly named Chubb Life Insurance Company of America), and its subsidiary
Jefferson Pilot LifeAmerica Insurance Company (referred to as JPLA and
formerly named Chubb Colonial Life Insurance Company), which were acquired in
the second quarter of 1997. Within the Communications business segment, JP
operates television and radio broadcasting stations and provides sports and
entertainment programming. These operations are conducted through Jefferson-
Pilot Communications Company (JPCC) and its subsidiaries.
Acquisition Summary
- -------------------
In May 1997, the Company acquired JP Financial. The discussion of this
acquisition contained in Note 2 on page 6 is incorporated herein by reference.
In January 1997, JPCC acquired the assets of KQKS-FM in Denver for $15 in cash.
RESULTS OF OPERATIONS
In the following discussion "operating income" means income from operations
before realized investment gains, but after dividends on Capital Securities
and mandatorily redeemable preferred stock, except where otherwise indicated.
Operating income increased 20.5% over the prior year's first nine months and
20.9% over the prior year's third quarter due to increased profitability in the
Insurance segment, especially from the JP Financial acquisition which had
operating results for nine months in the current year and five months in the
prior year. Group insurance results also improved for the quarter and year to
date. Excluding the earnings impact of the JP Financial acquisition and related
-10-
<PAGE>
financing costs, as well as Group Products earnings, operating income increased
9.5% over the first nine months of 1997 and 13.0% over the third quarter of
1997. Net income increased 11.3% for the nine months and 37.6% for the quarter,
despite a higher level of year to date realized investment gains in 1997. The
following tables illustrate JP's results and earnings per share before and
after the inclusion of realized investment gains.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consolidated Summary of Income
------------------------------
Operating income $ 90.5 $75.1 $265.0 $219.2
Realized investment gains, net 18.5 4.1 57.3 70.5
------ ----- ------ ------
Net income available to
common stockholders $109.0 $79.2 $322.3 $289.7
====== ===== ====== ======
Consolidated Earnings Per Share
-------------------------------
Operating income $ .85 $ .71 $2.49 $2.07
Realized investment gains, net .18 .04 .54 .66
----- ----- ----- -----
Net income available to
common stockholders $1.03 $0.75 $3.03 $2.73
===== ===== ===== =====
Net income available to
common stockholders - assuming dilution $1.02 $0.74 $3.01 $2.71
===== ===== ===== =====
</TABLE>
Operating income per share increased 20.3% over the first nine months of 1997
and 19.7% over the third quarter of 1997, due primarily to improved operating
results in the Insurance segment, including the impact of the JP Financial
acquisition. Net income per share increased 11.0% over the first nine months
of 1997 and 37.3% over the third quarter of 1997. Earnings per share - assuming
dilution increased 11.1% over the first nine months of 1997 and 37.8% over the
third quarter of 1997. Net realized gains decreased $13.2 from the first nine
months of 1997 and increased $14.4 over the third quarter of 1997. The higher
year to date realized gains in 1997 related to securities sales to fund the JP
Financial acquisition.
A more detailed discussion of operating results by segment and product class
follows.
Operating Earnings by Business Segment
- --------------------------------------
Operating income of the Insurance and Communications business segments includes
investment income but excludes net realized investment gains.
Earnings on investments of the parent company and passive investment
affiliates, dividends on preferred stock and Capital Securities, parent company
operating expenses, interest expense and consolidation entries are included in
the "Other" category. Substantially all corporate capital is allocated to the
business segments.
-11-
<PAGE>
The following table illustrates JP's results by segment and product class.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
----- ----- ------ ------
<S> <C> <C> <C> <C>
Insurance segment:
Individual Products $66.1 $60.2 $190.8 $154.3
Annuity and Investment Products 20.4 16.2 59.4 53.8
Group Products 6.8 1.9 18.1 12.1
------ ----- ------ ------
93.3 78.3 268.3 220.2
Communications segment 6.6 5.7 21.2 18.2
Other (9.4) (8.9) (24.5) (19.2)
------ ----- ------ -----
Operating income 90.5 75.1 265.0 219.2
Realized investment gains, net 18.5 4.1 57.3 70.5
Net income available to ------ ----- ------ -----
common stockholders $109.0 $79.2 $322.3 $289.7
====== ===== ====== ======
</TABLE>
Individual Products
- -------------------
The Individual Products distribution system offers a wide array of life and
health insurance products through a career agency force, independent agents
recruited through independent marketing organizations and a regional marketing
network, home service agents and financial institutions. Operating results
were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums, considerations,
and other income $193.5 $193.6 $ 575.0 $476.0
Net investment income 184.9 172.7 550.9 447.8
----- ----- ------- -----
Total revenues 378.4 366.3 1,125.9 923.8
Policy benefits 202.5 204.0 605.8 506.0
Expenses 72.5 69.8 225.8 181.1
----- ----- ------- -----
Total benefits and expenses 275.0 273.8 831.6 687.1
----- ----- ------- -----
Operating income before income taxes 103.4 92.5 294.3 236.7
Provision for income taxes 37.3 32.3 103.5 82.4
----- ----- ------- -----
Operating income $ 66.1 $ 60.2 $ 190.8 $154.3
===== ===== ======= =====
</TABLE>
Individual Products operating income increased $5.9 or 9.8% over the third
quarter of 1997 and $36.5 or 23.7% over the first nine months of 1997, due
largely to the JP Financial acquisition and subsequent integration cost savings.
Total premiums and receipts for policyholder accounts for life products
increased $12.1 or 3.9% over the third quarter of 1997 to $324.8, and $212.8
or 27.3% over the first nine months of 1997 to $991.0. The increase is
primarily attributable to sales of variable universal life products, especially
through JP Financial's regional marketing distribution channel, for which 1998
results include nine months of operations. Other distribution channels noted
-12-
<PAGE>
increases as well due to the cross selling of variable, interest-sensitive and
term insurance products for the various life insurance subsidiaries of the
Corporation.
Net investment income increased $12.2 or 7.1% over the third quarter of 1997 and
$103.1 or 23.0% over the first nine months of 1997, consistent with increases
in policyholder fund balances and the acquisition of JP Financial. Average
policyholder fund balances on interest sensitive products of $6,976.5 for the
first nine months of 1998 represent a 28.6% increase over the $5,423.4 of
average fund balances for the same period in 1997.
Policy benefits, excluding JP Financial, decreased $3.9 or 2.9% for the third
quarter, but increased $2.0 or 0.5% over the prior year's first nine months.
Increases in fund balances, excluding JP Financial, resulted in interest
credited to policyholder funds increasing $1.0 or 1.5% for the third quarter
and $10.1 or 5.3% for the first nine months of 1998. Death benefits, excluding
JP Financial, increased $0.2 for the third quarter and $4.8 or 4.1% to year to
date, reflecting unfavorable mortality experience for 1998.
Excluding JP Financial, 1998 total expenses increased slightly from the first
nine months of 1997 due to decreases in net deferrals of policy acquisition
costs in certain blocks of business in 1998 for which no new sales were made.
Offsetting this expense increase were declines in both commissions and general
and administrative expenses. Commissions declined due to changes in product
sales towards lower commission products. General and administrative expenses
continued to decline due to cost control measures.
Annuity and Investment Products
- -------------------------------
Annuity and Investment Products (also referred to as AIP) offers its products
through financial institutions, independent agents, career agents, investment
professionals and broker-dealers. Operating results were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums and other considerations $ 3.8 $ 10.2 $ 13.6 $ 26.1
Net investment income 108.3 112.3 330.2 329.4
Other income 15.8 13.1 48.2 21.8
----- ----- ----- -----
Total revenues 127.9 135.6 392.0 377.3
Policy benefits 73.8 86.5 226.6 243.6
Expenses 22.8 23.5 74.0 50.4
----- ----- ----- -----
Total benefits and expenses 96.6 110.0 300.6 294.0
----- ----- ----- -----
Operating income before income taxes 31.3 25.6 91.4 83.3
Provision for income taxes 10.9 9.4 32.0 29.5
----- ---- ----- -----
Operating income $ 20.4 $ 16.2 $ 59.4 $ 53.8
===== ===== ===== =====
</TABLE>
Operating income increased $4.2 or 25.9% over the third quarter of 1997 and $5.6
or 10.4% over the first nine months of the prior year. Average total assets
under management (net of reinsurance) of $6,115.4 for the first nine months of
1998 represented an increase of 4.1% from the first nine months of 1997,
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<PAGE>
primarily as a result of the JP Financial acquisition. Average fixed annuity
assets under management (net of reinsurance) of $5,730.3 for the first nine
months of 1998 represented an increase of 1.1% from the first nine months of
1997 while the third quarter average of $5,652.3 represented a decrease of 3.4%.
Fixed annuity receipts of $92.0 for the third quarter were down from $146.3
in 1997, while receipts for the first nine months of 1998 were $285.0 compared
to $474.7 for the same period in 1997. The decline occurred as fixed rate
products were less attractive than commercial bank certificates of deposit and
as potential customers chose variable annuities on the strength of United States
equity markets. Fixed annuity benefits and surrenders as a percentage of
beginning fund balances, on an annualized basis, were 16.2% and 15.5% for 1998
and 1997 on a year to date basis. For the third quarter of 1998, this same
percentage was 15.3%. Annuity surrenders may increase as the percentage of the
business that can be withdrawn by policyholders without incurring a surrender
charge increases.
Effective spreads represent the yield on the investment portfolio less interest
credited to policy-holders, adjusted for net deferral of bonus interest. The
effective spread for the year ended December 31, 1997 was 2.13%. The effective
spread for the third quarter of 1998 was 2.08%, unchanged from the second
quarter of 1998. The nine month 1998 spread was 2.09%.
The growth in other income is attributable to broker-dealer subsidiaries
acquired with JP Financial. Net investment income decreased $4.0 or 3.6% for
the quarter and increased $0.8 or 0.2% for the nine months, following trends
in the average fixed annuity assets under management.
Policy benefits decreased $12.7 or 14.7% for the quarter and $17.0 or 7.0% for
the first nine months. These declines as well as the declines in premiums are
primarily attributable to a reclassification of certain single premium annuity
products as interest-sensitive rather than as traditional products. During the
first nine months of 1997, $11 of revenue associated with such products was
included in premiums and other considerations. The growth in total year to date
expenses is attributable to broker-dealer operations acquired with JP Financial.
General and administrative expenses, excluding JP Financial, decreased $0.2 for
the quarter and increased $1.3 or 9.8% year to date from the same periods of
1997. Expenses in 1997 were lower in the first six months because of lower
assignments of general corporate expenses.
-14-
<PAGE>
Group Products
- --------------
Group Products provides a wide range of group insurance products for employers
and their employees primarily in the Southeast and Southwest. It offers life,
disability income and dental plans as well as conventionally-insured and
alternatively-funded medical plans. Operating results were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Group life premiums and other
considerations $13.4 $ 15.7 $ 45.4 $ 53.5
Group accident & health premiums and
other considerations 45.4 87.1 179.1 280.2
Investment income, net of expenses 9.9 10.8 31.3 33.4
---- ----- ----- -----
Total revenues 68.7 113.6 255.8 367.1
Policy benefits 44.7 90.1 174.5 282.6
Expenses 13.6 20.6 53.8 66.2
---- ----- ----- -----
Total benefits and expenses 58.3 110.7 228.3 348.8
---- ----- ----- -----
Operating income before income taxes 10.4 2.9 27.5 18.3
Provision for income taxes 3.6 1.0 9.4 6.2
---- ----- ----- -----
Operating income $ 6.8 $ 1.9 $ 18.1 $ 12.1
==== ===== ===== =====
</TABLE>
Group operating income increased $4.9 or 258% in the third quarter of 1998
compared to 1997 primarily as a result of medical rate increases and expense
reductions under the Company's strategy to improve the economics of this block
of business. On a year to date basis, operating income increased $6.0 or 49.6%.
As a percentage of total revenues, operating income was 7.1% for the first nine
months of 1998 in comparison to 3.3% for the same period in 1997. For the
first nine months of 1998, Group has contributed 6.8% of total Company operating
income versus 5.5% in 1997. Group contributed 12.8% and 19.3% of the Company's
total revenues for the first nine months of 1998 and 1997.
Group continues to implement the strategic initiatives adopted in the fourth
quarter of 1997, with an increased emphasis on marketing life and disability
products, renewal medical rate increases and increased emphasis on profitable
Group health underwriting. As a result, Group experienced its highest
quarterly earnings in the last two years.
Premiums declined during the first nine months due to the decision to withdraw
from the small group medical market and as a result of anticipated medical
policy lapses, caused primarily by renewal rate increases. Group accident and
health premiums and other considerations of $45.4 were down 47.9% for the third
quarter and declined 36.1% on a year to date basis. Disability premiums, which
are included in accident and health premiums, decreased 8.9% to $6.6 in the
third quarter of 1998 and decreased 5.6% to $21.7 in the first nine months of
1998, primarily due to cancellation by a large client. Excluding this client,
disability premiums decreased 2.5% year to date. Life premiums and other
considerations decreased 14.6% from the third quarter of 1997 and decreased
15.1% for the first nine months, primarily due to reinsurance ceded effective
January 1, 1998 and markets exited during 1998.
-15-
<PAGE>
Policy benefits as a percentage of premiums and other considerations decreased
in the third quarter of 1998 to 76.0% from 87.6%, and to 77.7% from 84.7% for
the nine months. The conventional medical loss ratio for the first nine months
of 1998 showed a marked improvement over that of a year ago due primarily to
higher premium rates.
Communications
- --------------
JPCC operates television and radio broadcast properties and produces syndicated
sports and entertainment programming. Operating results were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Communications sales and other
income $45.4 $42.7 $141.5 $135.2
Net investment income,
net of expenses 0.1 0.7 0.3 1.0
Financing costs (1.6) (1.6) (4.8) (5.0)
----- ----- ------ ------
Total revenues 43.9 41.8 137.0 131.2
Operating costs 28.0 28.1 88.2 88.4
Depreciation and amortization 2.9 2.8 8.8 8.7
General expenses 1.1 1.3 3.8 3.4
----- ---- ----- -----
Total expenses 32.0 32.2 100.8 100.5
----- ---- ----- -----
Operating income before income taxes 11.9 9.6 36.2 30.7
Provision for income taxes 5.3 3.9 15.0 12.5
----- ----- ------ ------
Operating income $ 6.6 $ 5.7 $ 21.2 $ 18.2
===== ===== ====== ======
</TABLE>
Operating income from the Communications segment increased $3.0 or 16.5%
compared to the first nine months of 1997. Third quarter operating income
increased $0.9 or 15.8% compared to the third quarter of 1997.
The Company's radio broadcasting properties continued to benefit from the
generally favorable advertising environment and the strong local economies in
which they operate. Combined revenues for Radio and Television grew 7.1% and
9.8% over the third quarter and first nine months of 1997, respectively. Radio
experienced strong revenue growth in all quarters of 1998, resulting from
programming changes made in 1997 and increased demand for local advertising.
Two of the television stations are CBS affiliates and benefited from robust
winter Olympic-related advertising during the first quarter. However,
Television revenues declined for the third quarter as national agency
sales continue to be sluggish, consistent with a nationwide trend.
Third quarter revenues in the Sports division decreased $0.2 or 6.9% from the
1997 quarter, and year-to-date revenues declined $4.9 or 22%. The third quarter
decline due to a reduction in the number of ACC games, while the year-to-date
decline is primarily a result of first quarter factors, including a
non-recurring sporting event held in the first quarter of 1997 and a decrease
in collegiate-related basketball sales in 1998.
-16-
<PAGE>
Broadcast cashflow grew by 18.4% and 13.5% for the third quarter and nine months
ended September 30, respectively, as the strong growth of the broadcast
properties, particularly Radio, was partially offset by Sports' decline from
the strong prior year results.
Total expenses decreased 0.6% and 0.3% for the third quarter and nine months
ended September 30, respectively, as the Company limited discretionary spending
in an effort to partially offset the decline in Sports. On a year to date
basis, expenses as a percent of communications sales and other income decreased
from 74.3% for 1997 to 71.2% for 1998, reflecting the shift from Sports
programming towards the higher margin Radio and Television broadcast activities.
Other
- -----
Activities of the parent company and passive investment affiliates, financing
expenses on Corporate debt and debt securities including Capital Securities
and mandatorily redeemable preferred stock, and federal and state income
taxes not otherwise allocated to business segments are reported in the "Other"
category. The following table summarizes the operating results:
<TABLE>
<CAPTI0N>
Three Months Ended Nine Months Ended
September 30 September 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings on investments $ 5.9 $ 4.5 $ 18.0 $ 16.8
Interest expense on debt and
Exchangeable Securities (8.1) (9.5) (25.4) (17.9)
Operating expenses (6.5) (3.8) (16.7) (13.5)
Federal and state income tax benefits 5.5 6.9 19.1 14.0
----- ----- ------ ------
(3.2) (1.9) (5.0) (0.6)
Dividends on Capital Securities and
mandatorily redeemable preferred stock (6.2) (7.0) (19.5) (18.6)
----- ----- ------ ------
Operating income $(9.4) $(8.9) $(24.5) $(19.2)
===== ===== ====== ======
</TABLE>
Interest expense increased due to the issuance of the Mandatorily Exchangeable
Debt Securities (MEDS) during the second quarter of 1997. Operating expenses
represent costs incurred to fund corporate activities and will fluctuate based
on the level of those activities. Operating expenses for the third quarter of
1998 included a $2.4 pre-tax charge related to the carrying value of surplus
furniture and equipment. Dividends were down for the quarter due to the
redemption of $50 of preferred stock, but were up for the nine months reflecting
the issuance of Capital Securities in the first quarter of 1997. Federal and
state income tax benefits include the tax benefits of preferred dividends on
Capital Securities, which are recorded gross of related tax effects.
CONSOLIDATED FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
JP's resources consist primarily of investments related to its Insurance
segment, properties and other assets used in its Insurance and
Communications segments and investments backing corporate capital. The
Investments section reviews the Company's investment portfolio and key
strategies.
-17-
<PAGE>
Total assets increased $551 during the first nine months of 1998. This growth
resulted from cash provided by operating activities, increases in Separate
Account assets and increases in the market values of available for sale
investments, a slight increase in policyholder contract deposits (which was
adversely impacted by a $140 decline related to business that is 100% coinsured
to a third party), offset in part by redemption of $50 of preferred stock and
payment of dividends.
The Insurance segment defers the costs of acquiring new business, including
commissions, certain costs of underwriting and issuing policies, first year
bonus interest and agency office expenses. Deferred acquisition costs were
$802 at September 30, 1998, up 8.1% from December 31, 1997.
Value of business acquired (VOBA) represents the actuarially-determined present
value of future gross profits of each business acquired. VOBA was $529 at
September 30, 1998, a decrease of 15.0% since year end. The decrease is
attributable to net amortization partially offset by purchase accounting
adjustments to net realizable values of purchased assets.
Cost in excess of net assets acquired (goodwill) was $231 at September 30, 1998
and $225 at December 31, 1997. The increase was attributable to the final
allocation of the purchase price of JP Financial. Goodwill as a percentage of
stockholders' equity was 7.6% at September 30, 1998 and 8.2% at December 31,
1997.
JP had reinsurance receivables of $1,082 and $1,250 at September 30, 1998 and
December 31, 1997 and policy loans of $832 and $834 as of each date, which
relate to businesses of AH Life that are 100% coinsured to Household, in
connection with the acquisition of AH Life from Household in 1995. Household
has provided payment, performance and capital maintenance guarantees with
respect to the balances receivable. JP also had a recoverable of $97 at
September 30, 1998 from a single reinsurer related to a block of business of
JP Financial that is 50% reinsured. JP and the reinsurer are joint and equal
owners of $193 in securities which support the block.
Capital Resources
- -----------------
Stockholders' Equity
JP's capital adequacy is illustrated by the following table:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
---- ----
<S> <C> <C>
Total assets $23,682 $23,131
Total stockholders' equity 3,025 2,732
Ratio of stockholders' equity to assets 12.8% 11.8%
</TABLE>
The Company's ratio of capital to assets increased as a result of earnings
retained and unrealized gains on available for sale securities.
JP considers existing capital resources to be more than adequate to support
the current level of its business activities. The business plan places
-18-
<PAGE>
priority on redirecting certain capital resources invested in bonds and stocks
into its core businesses, such as the JP Financial acquisition, which would be
expected to produce higher returns over time. Such available invested resources
declined substantially with the JP Financial acquisition.
The Insurance segment is subject to regulatory constraints. The Company's
insurance subsidiaries have statutory surplus and risk based capital levels
well above required levels. This has enabled JP Life, AH Life and JP Financial
to attain very strong claims paying ratings. Standard & Poor's has recently
reaffirmed "AAA" claims paying ratings for JP Life and AH Life and has upgraded
JP Financial and JPLA from "AA" to "AAA."
Debt and Exchangeable Securities
The ACES and MEDS are carried at fair value, which fluctuates based on the
market value of BankAmerica common stock. Changes in the carrying value of
these securities (which amounted to year to date decreases of $22 for ACES and
$11 for MEDS) are recorded to accumulated other comprehensive income - net
unrealized gains on securities in stockholders' equity, net of deferred income
taxes.
Mandatorily Redeemable Preferred Stock
Of the $53 of mandatorily redeemable preferred stock outstanding at December
31, 1997, $50 was redeemed upon request of the holder in April 1998.
While the Company has made no commitments for additional financing, additional
securities may be issued to finance acquisitions or for other corporate
purposes.
Liquidity
Liquidity requirements are met primarily by positive cash flows from the
operations of insurance subsidiaries and other consolidated subsidiaries.
Overall sources of liquidity are sufficient to satisfy operating requirements.
Primary sources of cash from the Insurance segment are premiums, other insurance
considerations, receipts for policyholder accounts, investment sales and
maturities and investment income. Primary uses of cash include purchase of
investments, payment of insurance benefits, operating expenses, withdrawals
from policyholder accounts, costs related to acquiring new business, and income
taxes. Primary sources of cash from the Communications 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.
Cash provided by operations was $317 and $373 for the first nine months of 1998
and 1997 as a result of a shift in policy receipts from traditional products
(which are reflected in operating cash flows) to interest sensitive products
(which are reflected in financing cash flows).
Net cash used in investing activities was $(272) and $(904) for the first nine
months of 1998 and 1997. The variance in the amounts reflects the acquisition
price of JP Financial, partially offset by sales of investments made to
partially fund the acquisition.
-19-
<PAGE>
Net cash provided by financing activities was $(23) and $444 for the first nine
months of 1998 and 1997. Proceeds from the issuance of securities of $450
related to funding of the JP Financial acquisition drove the 1997 totals, while
1998 reflects the redemption of $50 of preferred stock and repurchases of
Company common stock. The Company made net short-term borrowings of $92 in
1998 versus net repayments of $(111) in 1997. The increased borrowings in 1998
related primarily to securities sold under repurchase agreements, partially
due to expansion of the repurchase program (which is an asset/liability
management tool) to JP Financial. Cash inflows from changes in policyholder
contract deposits were $68 and $200 for the first nine months of 1998 and 1997.
The decrease is a result of higher withdrawals of policyholder funds and
slightly lower sales in a period of declining interest rates.
In order to meet the parent company's dividend payments, debt servicing
obligations and other expenses, internal dividends are received from the
subsidiary companies. Total internal cash dividends paid to the parent company
from its subsidiaries during the first nine months were $162 in 1998 and $382
in 1997. JP Life and AH Life were the primary sources of these dividends in
1998. The level of dividends in 1997 was driven by funding of the JP Financial
acquisition. The Company's life insurance subsidiaries are subject to laws in
the states of domicile that limit the amount of dividends that can be paid with
out the prior approval of the respective State's Insurance Commissioner. A
majority of the remaining dividends planned from life subsidiaries for 1998
will require regulatory approval. The Company has no reason to believe that
such approval will be withheld.
Fixed income and equity securities held by the parent company and non-regulated
subsidiaries were $470 and $564 at September 30, 1998 and December 31, 1997.
These securities, less the $294 (at September 30, 1998) of BankAmerica common
stock which supports the Exchangeable Securities, are considered to be sources
of liquidity to support the Company's strategies.
Total cash and cash equivalents, trading securities, and debt and equity
securities available for sale at September 30, 1998 were $11,647.
Investments
JP's strategy for managing the insurance investment portfolio is to dependably
meet pricing assumptions while achieving the highest possible after-tax returns
over the long term. Cash flows are invested primarily in fixed income
securities. The nature and quality of the various types of investments held by
insurance subsidiaries must comply with state regulatory requirements. The
Company has a formal investment policy that governs overall quality and
diversification.
-20-
<PAGE>
JP held the following carrying amounts of investments:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
--------------- ----------------
<S> <C> <C> <C> <C>
Publicly-issued bonds $11,380 61.0% $11,088 61.3%
Privately-placed bonds 2,984 16.0 2,832 15.6
Commercial mortgage loans 1,862 10.0 1,716 9.5
Common stock 830 4.4 893 4.9
Policy loans 1,432 7.6 1,422 7.9
Preferred stock 23 0.1 25 0.1
Real estate 87 0.5 75 0.4
Other investments 31 0.2 43 0.2
Cash and cash equivalents 31 0.2 9 0.1
------ ------ ------ ------
Total $18,660 100.0% $18,103 100.0%
====== ====== ====== ======
</TABLE>
The strategy of identifying market sectors and niches that provide investment
opportunities to meet the portfolios' growth, quality and yield requirements
is expected to continue to result in increasing percentages of private
placements and commercial mortgage loans.
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 "A+", excluding mortgage loans.
Carrying amounts of investments categorized as "higher risk" assets were:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ -------------
<S> <C> <C> <C> <C>
Bonds near or in default $ 6 -% $ 2 - %
Bonds below investment grade 709 3.8 766 4.2
Mortgage loans 60 days
delinquent or in foreclosure 2 - 7 0.1
Mortgage loans restructured 11 0.1 13 0.1
Foreclosed properties 3 - 4 -
------ ---- ------ -----
Sub-total, higher risk assets 731 3.9 792 4.4
All other investments 17,929 96.1 17,311 95.6
------ ----- ------ -----
Total cash and investments $18,660 100.0% $18,103 100.0%
====== ====== ====== ======
</TABLE>
The level of below investment grade bonds, which has decreased slightly during
1998, is within the guidelines authorized by the Finance Committee.
The Company's use of derivative financial instruments has been limited, using
them to manage well-defined interest rate risks. Interest rate swaps with a
notional value of $218 and $200 were open as of September 30, 1998 and December
31, 1997. Termination of these arrangements under then current interest rates
would result in a potential gain of $17. The periodic cash settlements under
these arrangements are reflected as an adjustment to investment income.
-21-
<PAGE>
Collateralized Mortgage Obligations (CMO's), which are included in debt
securities available for sale, were:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
---- ----
<S> <C> <C>
Federal agency issued CMO's $2,616 $2,398
Corporate private-labeled CMO's 1,413 1,485
----- -----
Total $4,029 $3,883
===== =====
</TABLE>
The Company's investment strategy with respect to CMO's focuses on actively-
traded, less volatile issues that produce relatively stable cash flows. The
majority of CMO holdings are sequential tranches of federal agency issuers.
The CMO portfolio has been constructed with underlying mortgage collateral
characteristics and structure in order to lower cash flow volatility over a
range of interest rate levels.
Year 2000 Issue
Like most if not all companies, the Company faces certain risks associated with
the coming of the year 2000. The Year 2000 issue relates to the way computer
systems and programs define calendar dates. By using only two digit dates, they
could fail or make miscalculations due to the inability to distinguish between
dates in the 1900's and in the 2000's. Also, many systems and equipment that
are not typically thought of as "computer-related" (referred to as "non-IT")
contain imbedded hardware or software that must handle dates and may not
properly perform with dates after 1999.
The Company began work on the Year 2000 compliance issue in 1995. The scope of
the project includes: ensuring the compliance of all applications, operating
systems and hardware on mainframe, PC and LAN platforms; addressing issues
related to non-IT embedded software and equipment; and addressing the compliance
of key vendors and service providers to the Company (business partners).
The project has four phases: assessment of systems and equipment affected by
the Year 2000 issue; definition of strategies to address affected systems and
equipment; remediation of affected systems and equipment; and certification that
each is Year 2000 compliant. To certify that all IT systems (internally
developed or purchased) are Year 2000 compliant, each system is tested using
a standard testing methodology which includes regression testing, millennium
testing, millennium leap year testing and cross over year testing.
Certification testing is performed on each system as soon as remediation is
completed.
The target for completion of all phases and categories is September 30, 1999.
The Company has completed the assessment and strategy phases for mainframe
applications, operating systems and hardware. The Company's new business and
policyholder administration systems and the general ledger are on the
mainframe. Currently, approximately 45% of all mainframe systems are
compliant. This means they have been tested to confirm that their performance
will not be affected by dates extending after 1999. With respect to
significant policyholder systems, the Company is on schedule to complete all
phases by the end of 1998, with the exception of one system, for a closed block
of old non-variable life and health policies, which should be completed in the
first quarter 1999. For other mainframe systems the project is on schedule.
-22-
<PAGE>
For PC and LAN systems, the Company has begun the assessment phase and intends
to complete remediation and certification during the third quarter of 1999.
For the majority of the Company's non-IT related systems and equipment, the
Company has been advised by vendors that the systems and equipment are currently
Year 2000 compliant. Written documentation regarding compliance is being
obtained. For those material to operations, testing will be conducted where
feasible. Completion for non-IT systems and equipment is scheduled for
September 1999.
The most significant category of key business partners is financial
institutions. Their critical functions include safeguarding and managing
investment portfolios, processing of the Company's operating bank accounts,
and sales/distribution. Other partner categories include insurance agents
and marketing organizations, suppliers of communication services, utilities,
materials and supplies. The Company has conducted surveys of all its software
and hardware vendors, and testing is underway. For business partners with whom
the Company engages in electronic transfer of information, sample testing will
be conducted. The Company has begun to compile a list of other key business
partners. Based on the importance of each relationship, the Company then will
define a strategy to determine compliance.
The Company has not had an independent review of its Year 2000 risks or
estimates. However, experts have been engaged to assist in developing
estimates and to complete remediation work on specific portions of the
project.
Since inception of the project, the Company has incurred external costs of $5.5
and internal costs of $5. Current estimates, based on actual experience to
date, project a total expense for the project of $26, with remaining external
costs of $6.5 and internal costs of $9. Costs are included in various budgets
and expensed as incurred. Current year costs are expected to be $7. There has
not been a material adverse impact on the Company's operations as a result of
IT projects being deferred due to resource constraints caused by the Year 2000
project.
The Company has investments in publicly and privately placed securities and
loans. The Company may be exposed to credit risk to the extent that related
borrowers are materially adversely impacted by the Year 2000 issue. Portfolio
diversification reduces the overall risk.
Although the Company expects its critical policyholder systems, with one
exception, to be compliant by year end 1998, there is no guarantee that these
results will be achieved. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work (not yet
encountered), failure to identify all susceptible systems, non-compliance by
third parties whose systems and operations impact the Company, and other similar
uncertainties.
Specifically, from Year 2000 problems, the Company could experience an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets and operating cash accounts,
accurately maintain policyholder information, accurately maintain accounting
records, issue new policies and/or perform adequate customer service. In JPCC,
from Year 2000 problems, broadcasting could experience an inability to
broadcast commercial spots and invoice for them, or to receive TV network
programming.
While the Company believes the occurrence of such a situation is unlikely, a
possible worst case scenario might include one or more of the Company's
-23-
<PAGE>
significant policyholder systems or broadcasting inventory management systems
being non-compliant. Such an event could result in a material disruption to
the Company's or JPCC's operations. Should the worst case scenario occur
(except in JPCC), it could, depending on its duration, have a material impact
on the Company's results of operations and liquidity and ultimately on its
financial position.
With respect to contingency plans for critical policyholder systems, the
Company has long recognized that there is no viable alternative if these systems
are non-compliant. Thus, the Company targeted completion of critical
policyholder systems by year end 1998, allowing for unanticipated delays.
Certification of these systems as compliant remains on schedule with one minor
exception noted earlier. For other IT and non-IT systems and equipment and key
business partners, the Company intends to assess their compliance and consider
alternatives, where necessary. The Company will continue to reassess the need
for formal contingency plans, based on progress of Year 2000 efforts by the
Company and third parties.
MARKET RISK EXPOSURES
With respect to the Company's exposure to market risks, see management's
comments in the 1997 Form 10-K. During 1998, 10 year U.S. Treasury rates
have declined approximately 130 basis points, primarily occuring during the
third quarter. The Company has maintained its spreads through the declining
interest rate environment. However, under a scenario of continued and
prolonged interest rate declines, minimum crediting rate guarantees may impede
the Company's ability to achieve its current spreads.
EXTERNAL TRENDS AND FORWARD LOOKING INFORMATION
With respect to economic trends, inflation and interest rate risks,
environmental liabilities and the regulatory and legal environment, see
management's comments in the 1997 Form 10-K.
With respect to accounting pronouncements, see Note 4 on page 8, which is
incorporated herein by reference.
Forward-looking information
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. Certain information contained here 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 "Year 2000 Issue", "Market Risk Exposures", "External Trends and
Forward Looking Information" and other risks detailed from time to time in the
Company's SEC filings; to the risks that JP might fail to successfully complete
synergistic strategies for cost reductions and for growth in sales of products
-24-
<PAGE>
of JP Financial and other insurance subsidiaries through all existing and
acquired distribution channels; to business interruption risks if the Company
does not timely complete its Year 2000 compliance project; 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.
-25-
<PAGE>
PART II. OTHER INFORMATION
JEFFERSON-PILOT CORPORATION
Item 1. Legal Proceedings
The registrant is involved in various claims and lawsuits incidental to and in
the ordinary course of its business. In the opinion of management, the
ultimate liability will not have a material effect on the financial condition
or liquidity of the Company, but could have a material adverse effect on the
results of operations for a specified period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports of Form 8-K
No reports on Form 8-K were filed during the third quarter of 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERSON-PILOT CORPORATION
By (Signature) /s/Dennis R. Glass
(Name and Title) Dennis R. Glass, Executive Vice President,
Chief Financial
Officer and Treasurer
Date November 12, 1998
By (Signature) /s/Reggie D. Adamson
(Name and Title) Reggie D. Adamson, Senior Vice President - Finance
(Principal Accounting Officer)
Date November 12, 1998
-26-
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 10,786
<DEBT-CARRYING-VALUE> 3,599
<DEBT-MARKET-VALUE> 3,812
<EQUITIES> 830
<MORTGAGE> 1,862
<REAL-ESTATE> 87
<TOTAL-INVEST> 18,629
<CASH> 31
<RECOVER-REINSURE> 1,389
<DEFERRED-ACQUISITION> 1,331
<TOTAL-ASSETS> 23,682
<POLICY-LOSSES> 17,026
<UNEARNED-PREMIUMS> 49
<POLICY-OTHER> 177
<POLICY-HOLDER-FUNDS> 209
<NOTES-PAYABLE> 770
303
0
<COMMON> 132
<OTHER-SE> 2,893
<TOTAL-LIABILITY-AND-EQUITY> 23,682
809
<INVESTMENT-INCOME> 901
<INVESTMENT-GAINS> 94
<OTHER-INCOME> 193
<BENEFITS> 1,007
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
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</TABLE>
