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 March 31, 2002 Commission file number 1-5955
Jefferson-Pilot Corporation
(Exact name of registrant as specified in its charter)
North Carolina 56-0896180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Greene Street, Greensboro, North Carolina 27401
(Address of principal executive offices) (Zip Code)
(336) 691-3000
(Registrant's telephone number, including area code)
Indicate whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
-- --
Number of shares of common stock outstanding at March 31, 2002 150,213,779
JEFFERSON-PILOT CORPORATION
INDEX
- Page No. -
Part I. Financial Information
Consolidated Unaudited Condensed Balance Sheets
- March 31, 2002 and December 31, 2001 3
Consolidated Unaudited Condensed Statements of Income
- Three Months ended March 31, 2002 and 2001 4
Consolidated Unaudited Condensed Statements of Cash Flows
- Three Months ended March 31, 2002 and 2001 5
Notes to Consolidated Unaudited Condensed Financial
Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information 28
Signatures 29
2
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
MARCH 31 DECEMBER 31
2002 2001
-------- -----------
(DOLLAR AMOUNTS IN
MILLIONS EXCEPT
SHARE INFORMATION)
ASSETS
Investments:
Debt securities available for sale, at fair value
(amortized cost $14,543 and $13,904) $14,566 $14,128
Debt securities held to maturity, at amortized cost
(fair value $3,243 and $3,378) 3,191 3,339
Equity securities available for sale, at fair value
(cost $29 and $29) 498 511
Mortgage loans on real estate 3,109 3,094
Policy loans 892 911
Real estate 133 132
Other investments 20 20
------- -------
Total investments 22,409 22,135
Cash and cash equivalents 60 139
Accrued investment income 290 281
Due from reinsurers 1,415 1,433
Deferred policy acquisition costs and value
of business acquired 2,170 2,070
Cost in excess of net assets acquired 312 312
Assets held in separate accounts 2,188 2,148
Other assets 483 478
------- -------
Total assets $29,327 $28,996
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $ 2,562 $ 2,565
Policyholder contract deposits 18,346 18,017
Dividend accumulations and other policyholder funds on deposit 250 250
Policy and contract claims 175 181
Other 509 486
------- -------
Total policy liabilities 21,842 21,499
Debt:
Commercial paper and revolving credit borrowings 227 297
Exchangeable Securities -- 150
Securities sold under repurchase agreements 565 292
Currently payable income taxes 97 24
Deferred income tax liabilities 215 291
Liabilities related to separate accounts 2,188 2,148
Accounts payable, accruals and other liabilities 507 604
------- -------
Total liabilities 25,641 25,305
------- -------
Commitments and contingent liabilities
Guaranteed preferred beneficial interest in
subordinated debentures ("Capital Securities") 300 300
Stockholders' Equity:
Common stock and paid in capital, par value $1.25 per share: authorized
350,000,000 shares; issued and outstanding 2002-150,213,779 shares;
2001-150,006,582 shares 194 188
Retained earnings 2,883 2,789
Accumulated other comprehensive income 309 414
------- -------
3,386 3,391
------- -------
Total liabilities and stockholders' equity $29,327 $28,996
======= =======
See Notes to Consolidated Unaudited Condensed Financial Statements.
3
JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
Three Months Ended
March 31
2002 2001
----- -----
(DOLLAR AMOUNTS IN
MILLIONS EXCEPT
SHARE INFORMATION)
REVENUE:
Premiums and other considerations $ 372 $ 349
Net investment income 404 370
Realized investment gains 34 57
Communications sales 48 50
Other 27 28
----- -----
Total revenue 885 854
----- -----
BENEFITS AND EXPENSES:
Insurance and annuity benefits 486 435
Insurance commissions, net of deferrals 31 31
General and administrative expenses, net of deferrals 53 62
Amortization of policy acquisition costs and value of business acquired 63 63
Communications operations 34 34
----- -----
Total benefits and expenses 667 625
----- -----
Income before income taxes 218 229
Income taxes 72 76
----- -----
Net income before dividends on Capital Securities and cumulative
effect of change in accounting principle 146 153
Dividends on Capital Securities (6) (6)
Cumulative effect of change in accounting for derivative instruments,
net of income taxes -- 1
----- -----
Net income available to common stockholders $ 140 $ 148
===== =====
Net income available to common stockholders, before dividends
on Capital Securities 146 154
Other comprehensive income (105) 94
----- -----
Comprehensive income $ 41 $ 248
===== =====
Average number of shares outstanding 150.1 153.5
===== =====
Net Income Per Share of Common Stock:
Net income available to common stockholders before realized
investment gains and cumulative effect of change in accounting
principle, net of income taxes $0.78 $0.72
Realized investment gains, net of income taxes 0.15 0.24
Cumulative effect of change in accounting for derivative
instruments, net of income taxes -- 0.01
----- -----
Net income available to common stockholders $0.93 $0.97
===== =====
Net income available to common stockholders before realized investment gains
and cumulative effect of change in accounting
principle, net of income taxes - assuming dilution $0.78 $0.71
Realized investment gains, net of income taxes 0.14 0.24
Cumulative effect of change in accounting for derivative
instruments, net of income taxes -- 0.01
----- -----
Net income available to common stockholders -
assuming dilution $0.92 $0.96
===== =====
Dividends declared per common share $0.303 $0.275
===== =====
See Notes to Consolidated Unaudited Condensed Financial Statements.
4
JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED
STATEMENTS OF CASH FLOWS
(IN MILLIONS)
THREE MONTHS ENDED
MARCH 31
2002 2001
----- -----
Net cash provided by operations $ 68 $ 188
----- -----
Cash Flows from Investing Activities:
Investments purchased, net (455) (247)
Other investing activities (4) (11)
----- -----
Net cash used in investing activities (459) (258)
----- -----
Cash Flows from Financing Activities:
Policyholder contract deposits, net 625 591
Policyholder contract withdrawals, net (325) (441)
Net short-term borrowings 54 90
Repurchase of common shares, net 3 (96)
Cash dividends paid (47) (44)
Other financing activities 2 1
----- -----
Net cash provided by financing activities 312 101
----- -----
Increase (Decrease) in cash and cash equivalents (79) 31
Cash and cash equivalents at beginning of period 139 26
----- -----
Cash and cash equivalents at end of period $ 60 $ 57
===== =====
Supplemental Cash Flow Information:
Income taxes paid $ 19 $ 28
===== =====
Interest paid $ 9 $ 15
===== =====
See Notes to Consolidated Unaudited Condensed Financial Statements.
5
JEFFERSON-PILOT CORPORATION
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in millions)
1. Basis of Presentation
The accompanying consolidated unaudited condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Operating results for the three month period ended March 31,
2002 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2002. Certain prior year amounts have been reclassified
to conform with the current year presentation.
2. Segment Reporting
The Company has five reportable segments that are defined based on the nature
of the products and services offered: Individual Products, Annuity and
Investment Products (AIP), Benefit Partners, Communications, and Corporate and
Other. The segments remain as we described in our Form 10-K.
The following table summarizes certain financial information regarding the
Company's reportable segments:
MARCH 31 DECEMBER 31
2002 2001
--------------------------
ASSETS
Individual Products $16,283 $16,115
AIP 8,904 8,740
Benefit Partners 824 791
Communications 197 202
Corporate & Other 3,119 3,148
--------------------------
Total assets $29,327 $28,996
==========================
6
THREE MONTHS ENDED
MARCH 31
2002 2001
------------------
REVENUES
Individual Products $447 $425
AIP 170 158
Benefit Partners 163 143
Communications 48 49
Corporate & Other 23 22
------------------
851 797
Realized investment gains, before tax 34 57
------------------
Total revenues before cumulative effect of change in
accounting principle $885 $854
==================
REPORTABLE SEGMENTS RESULTS AND RECONCILIATION TO
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
Individual Products $ 70 $ 70
AIP 21 19
Benefit Partners 13 10
Communications 7 7
Corporate & Other 7 4
------------------
Total reportable segment results, before cumulative
effect of change in accounting principle 118 110
Realized investment gains, net of tax 22 37
------------------
Net income available to common stockholders, before
cumulative effect of change in accounting principle 140 147
Cumulative effect of change in accounting for derivative
instruments, net of income taxes -- 1
------------------
Net income available to common stockholders $140 $148
==================
7
3. Income from Continuing Operations Per Share of Common Stock
On February 12, 2001, the Board authorized a 50% stock dividend distributed on
April 19, 2001 to shareholders of record as of March 19, 2001. All share and
per share amounts have been restated to give retroactive effect to the stock
split. The following table sets forth the computation of earnings per share
before cumulative effect of change in accounting principle and earnings per
share assuming dilution before cumulative effect of change in accounting
principle:
Three Months Ended
March 31
----------------------------------
2002 2001
------------ ------------
Numerator:
Net income before dividends on
Capital Securities and cumulative
effect of change in accounting
principle $ 146 $ 153
Dividends on Capital Securities and
preferred stock 6 6
------------ ------------
Numerator for earnings per share and
earnings per share - assuming
dilution - Net income available to
common stockholders, before
cumulative effect of change in
accounting principle $ 140 $ 147
============ ============
Denominator:
Denominator for earnings per share -
weighted-average shares
outstanding 150,099,358 153,529,963
Effect of dilutive securities:
Employee stock options 1,705,380 1,489,711
------------ ------------
Denominator for earnings per share
- assuming dilution - adjusted
weighted-average shares
outstanding 151,804,738 155,019,674
============ ============
Earnings per share, before cumulative
effect of change in accounting
principle $ 0.93 $ 0.96
============ ============
Earnings per share - assuming dilution,
before cumulative effect of change in
accounting principle $ 0.92 $ 0.95
============ ============
8
4. Contingent Liabilities
Jefferson-Pilot Life Insurance Company, a subsidiary of the Company, is a
defendant in two separate proposed class action suits. The plaintiffs'
fundamental claim in the first suit is that policy illustrations were
misleading to consumers. Management believes that the policy illustrations made
appropriate disclosures and were not misleading. The second suit alleges that a
predecessor company, Pilot Life, decades ago unfairly discriminated in the sale
of certain small face amount life insurance policies, and unreasonably priced
these policies. In both cases, the plaintiffs seek unspecified compensatory and
punitive damages, costs and equitable relief. While management is unable to
estimate the probability or range of any possible loss in either or both of
these cases, management believes that the subsidiary's practices have complied
with state insurance laws and intends to vigorously defend the claims asserted.
Accordingly, only the costs of defense have been recorded.
In the normal course of business, the Company and its subsidiaries are involved
in various lawsuits, including several proposed class action suits in addition
to those noted above. Because of the considerable uncertainties that exist, the
Company cannot predict the outcome of pending or future litigation. However,
management believes that the resolution of pending legal proceedings will not
have a material adverse effect on the Company's financial position or
liquidity, although it could have a material adverse effect on the results of
operations for a specific period.
5. Accounting Pronouncements
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and for Hedging Activities" and SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities"
(collectively referred to as SFAS 133). See our Form 10-K for information
regarding the cumulative effect of the accounting change in 2001.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 141 requires that all business combinations initiated
after June 30, 2001, be accounted for under the purchase method of accounting
and establishes specific criteria for the recognition of intangible assets
separately from goodwill. SFAS 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. In accordance
with the statements, the Company no longer amortizes goodwill or certain other
intangible assets (primarily Federal Communication Commission Licenses). For
the three months ending March 31, 2001, the Company recognized $3.1 of
amortization expense related to these assets. The Company is also required to
evaluate all existing goodwill and intangible assets with indefinite lives for
impairment at least annually at the reporting unit level. The Company did not
incur any impairment losses upon adoption of this accounting standard.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143) which is effective for fiscal years beginning after
June 15, 2002. The Statement requires legal obligations associated with the
retirement of long-lived assets to be recognized at their fair value at the
time that the obligations are incurred. The Company will adopt SFAS 143 on
January 1,
9
2003, and does not believe that the impact of adoption will have a significant
impact on the Company's financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144) which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", and APB Opinion No. 30,
"Reporting the Results of Operations" for a disposal of a segment of a
business. SFAS 144 is effective for fiscal years beginning after December 15,
2001. The Company will adopt the Statement as of January 1, 2002 and it does
not believe adoption of the Statement will have a significant impact on the
Company's financial position or results of operations.
10
JEFFERSON-PILOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the consolidated financial condition as of March 31, 2002,
changes in financial position and changes in results of operations for the
three months then ended as compared to the same period of 2001, of
Jefferson-Pilot Corporation and consolidated subsidiaries. The discussion
supplements Management's Discussion and Analysis in Form 10-K for the year
ended December 31, 2001, and it should be read in conjunction with the interim
financial statements and notes contained herein. All dollar amounts are in
millions except per share amounts.
COMPANY PROFILE
As detailed in our Form 10-K, we have five reportable segments: Individual
Products, Annuity and Investment Products (AIP), Benefit Partners,
Communications, and Corporate and Other.
In the first quarter 2002 our revenues, excluding realized gains and losses,
were derived 52.5% from Individual Products, 19.9% from AIP, 19.2% from Benefit
Partners, 5.6% from Communications, and 2.8% from Corporate and Other.
Our Premier Partnering strategy described in the Form 10-K continues to be the
primary focus in our internal initiatives to grow our life sales. In the first
quarter 2002, we had independent consultants perform a check-up of our progress
in implementing the goals of this strategy. The performance metrics tested
indicated that our lean manufacturing process, which focuses on improving
quality in our operations, had reduced turnaround time for new business
underwriting and processing and in getting new products to market. We also
learned through surveys of our sales force that over 75% of the respondents saw
significant improvement in the overall quality of our products and the Premier
Partnering program. Furthermore, we learned that we can benefit from further
improving our marketing focus through a functional orientation emphasizing case
support capabilities.
UPDATE ON CRITICAL ACCOUNTING POLICIES
Our Form 10-K described our four critical accounting policies that involve the
more significant judgments and estimates. They relate to:
- deferred acquisition costs (DAC) and value of business
acquired (VOBA);
- assumptions utilized in the test for goodwill impairment as
required by FAS 142;
- valuation methods for infrequently traded securities and
private placements; and
- accruals relating to legal and administrative proceedings.
We believe that these continued to be applied in a consistent manner during
this quarter.
11
RESULTS OF OPERATIONS
In the following discussion, "reportable segment results" and "total reportable
segment results" include all elements of net income available to common
stockholders except realized investment gains. Realized investment gains are
gains and losses on sales and writedowns of investments, net of related income
taxes. We include realized investment gains in the Corporate and Other segment.
We use reportable segment results in assessing the performance of our business
segments and believe that reportable segment results are relevant and useful
information. We may realize investment gains in our sole discretion from our
Available for Sale equity and bond portfolios. Reportable segment results as
described above may not be comparable to similarly titled measures reported by
other companies.
The following tables illustrate our results before and after including realized
investment gains:
Three Months Ended
March 31
------------------------
2002 2001
------------------------
Consolidated Summary of Income
------------------------------
Total reportable segment results $ 117.7 $ 112.0(a)
Realized investment gains (net of applicable income
taxes) 21.9 36.5
------------------------
Net income available to common stockholders $ 139.6 $ 148.5
========================
Consolidated Earnings Per Share
-------------------------------
Basic:
Total reportable segment results $ 0.78 $ 0.73(b)
Realized investment gains (net of applicable
income taxes) 0.15 0.24
------------------------
Net income available to common stockholders $ 0.93 $ 0.97
========================
Fully-diluted:
Total reportable segment results $ 0.78 $ 0.72
Realized investment gains (net of applicable
income taxes) 0.14 0.24
------------------------
Net income available to common stockholders $ 0.92 $ 0.96
========================
(a) Includes $1.5 in 2001 relating to the cumulative effect of change in
accounting for derivatives.
(b) Includes $0.01 per share of income in 2001 relating to cumulative
effect of change in accounting for derivatives.
Three Months Ended
March 31
--------------------------------
2002 2001
--------------------------------
Average number of shares outstanding 150,099,358 153,529,963
================================
Average number of shares outstanding - assuming
dilution 151,804,738 155,019,674
================================
Compared to first quarter 2001, net income available to common stockholders
declined 6.0% due to lower realized investment gains. Total reportable segment
results increased 5.1% due to increased
12
profitability in the AIP, Benefit Partners and Corporate and Other segments.
Individual Products results were essentially flat. Communications segment
results decreased 4.4% due to a weak sports advertising market. Net realized
investment gains declined 40.0% due to gains from sales of equities being
partially offset by bond losses and writedowns.
Earnings per share amounts for both total reportable segment results and net
income increased at greater percentages due to share repurchases in 2001, net
of stock plan issuances. The average number of diluted shares outstanding
decreased 2.1% from the first quarter 2001.
RESULTS BY BUSINESS SEGMENT
We assess profitability by business segment and measure other operating
statistics as detailed in the separate segment discussions that follow. Sales
are one of the statistics we use to track performance. Because of the nature of
our sales, which are primarily long-duration contracts in the Individual
Products and AIP segments, sales in a given quarter do not have a material
impact on operating results and therefore we do not consider sales volumes to
be material financial information. However, trends relating to new product
sales over a longer period of time may be an indicator of future growth and
profitability.
We determine reportable segments in a manner consistent with the way we
organize for purposes of making operating decisions and assessing performance.
We assign invested assets backing insurance liabilities to segments in relation
to policyholder funds and reserves. We assign net DAC and VOBA, reinsurance
receivables and communications assets to the respective segments where those
assets originate. We also assign invested assets to back capital allocated to
each segment in relation to our philosophy for managing business risks,
reflecting appropriate conservatism. We assign the remainder of invested and
other assets to the Corporate and Other segment.
Results by Reportable Segment
Three Months Ended
March 31
----------------------
2002 2001
----------------------
Individual Products $ 69.7 $ 69.5
AIP 21.4 20.7(a)
Benefit Partners 12.9 10.4
Communications 6.5 6.8
Corporate and Other 7.2 4.6
----------------------
Total reportable segment results 117.7 112.0
Net realized investment gains 21.9 36.5
----------------------
Net income available to common stockholders $139.6 $148.5
======================
(a) Includes $1.5 in 2001 relating to the cumulative effect of change in
accounting for derivatives.
13
Segment Assets
Three Months Ended
March 31
------------------------
2002 2001
------------------------
Individual Products $16,283 $15,201
AIP 8,904 7,860
Benefit Partners 824 729
Communications 197 206
Corporate and Other 3,119 3,598
------------------------
Total assets $29,327 $27,594
========================
INDIVIDUAL PRODUCTS
The Individual Products segment markets individual life insurance policies
through independent general agents, independent national account marketing
firms, agency building general agents, home service agents, broker/dealers,
banks and strategic alliances.
Individual Products include universal life (UL) and variable universal life
(VUL), together referred to as UL-type products, as well as traditional life
products. The operating cycle for life insurance products is long term in
nature; therefore, actuarial assumptions and the judgments utilized in those
assumptions are important to financial reporting for these products.
Traditional products require the policyholder to pay scheduled premiums over
the life of the coverage. We recognize traditional premium receipts as revenues
and profits are expected to emerge in relation thereto. UL-type product
premiums may vary over the life of the policy at the discretion of the
policyholder so we do not recognize them as revenues when received. Revenues
and reportable segment results on these products arise over time from
mortality, expense and surrender charges to policyholder fund balances (policy
charges). Additionally, we earn interest spreads on all UL-type and traditional
products. Policy benefits include interest credited to policyholder fund
balances and claim related costs. Reportable segment results for both
traditional and UL-type products also include earnings on required capital.
Segment results were:
Three Months Ended
March 31
----------------------
2002 2001
----------------------
Traditional premiums and other considerations $ 47.2 $ 49.2
UL and investment product charges 168.2 159.4
Net investment income 229.9 214.6
Other income 1.8 2.0
----------------------
Total revenues 447.1 425.2
----------------------
Policy benefits 271.3 242.3
Expenses 68.6 76.2
----------------------
Total benefits and expenses 339.9 318.5
----------------------
Reportable segment results before income taxes 107.2 106.7
Provision for income taxes 37.5 37.2
----------------------
Reportable segment results $ 69.7 $ 69.5
======================
14
Individual Products reportable segment results were essentially flat over first
quarter 2001 due to higher mortality which offset the 5.2% growth
in revenues.
The following table summarizes key data for Individual Products which we
believe are our important drivers and indicators of future profitability:
Three Months Ended
March 31
------------------------------
2002 2001
------------------------------
Annualized life insurance premium sales:
Sales excluding large case BOLI $ 61.4 $ 36.2
Large case BOLI $ 0 $ 0.4
Individual traditional insurance premiums $ 44.2 $ 49.1
Average UL policyholder fund balances $ 9,558.9 $ 8,971.7
Average VUL separate account assets 1,331.9 1,276.0
------------------------------
$ 10,890.8 $ 10,247.7
==============================
Average face amount of insurance in force:
Total $160,061.0 $156,456.0
UL-type policies $118,577.0 $113,886.0
Average assets $ 16,219.0 $ 15,220.2
Annualized life insurance premium sales grew 35.5% in our core agency channels
over first quarter 2001, reflecting increased sales as a result of our Premier
Partnering initiative and the introduction of several new UL products. Total
sales, excluding large case BOLI, increased 69.6% over first quarter 2001.
Agency channels provided 63.2% of these sales. The remaining 36.8% was
primarily single premium products targeted to smaller banks and sold through
our target marketing channel; we do not expect these sales levels to be
sustainable for the rest of the year. For large case BOLI, our business
strategy is to respond to individual sales opportunities when the market
accommodates our required returns. Thus, BOLI sales will vary widely between
periods.
Revenues include traditional insurance premiums, policy charges and net
investment income. Individual traditional premiums decreased 10.0% from first
quarter 2001 due to the continuing decline in our traditional business in force
since whole life insurance is no longer as popular with consumers and we
reinsure most of our term insurance. UL and investment product charges
increased 5.5% over first quarter 2001 due to growth in average UL policyholder
fund balances of 6.5% over first quarter 2001. Average VUL separate account
assets increased 4.4% over first quarter 2001. Adjusting for the decrease in
fair market value, net of dividends, separate account balances would have
increased by approximately 12.0% in first quarter 2002.
Net investment income increased 7.1% over first quarter 2001, reflecting the
growth in average policyholder funds and changes in investment yields. The
average investment spread on UL-type products (calculated as the difference
between portfolio yields earned on invested assets less interest credited to
policyholder funds, assuming the same level of invested assets) increased 3
basis points to 1.99%. Interest spreads are affected by portfolio yields and
crediting rates, and also may vary over time due to our competitive strategies
and changes in product design.
15
Total policy benefits increased 12.0% over first quarter 2001 due to increases
in mortality and interest credited. The increase in interest credited is
consistent with the growth in business. We expect and plan for seasonal
mortality increases during the first quarter; however, the 11.7% increase over
first quarter 2001 exceeded our expectations. Information from the National
Vital Statistics Report confirms the recurring seasonality of first quarter
mortality rates and the unusually large up-turn in mortality across the country
in this quarter. We examined death claims associated with more recently issued
policies. This review did not suggest a deficiency in our current underwriting
practices. Policy benefits on UL-type products (annualized) increased to 7.7% of
average policyholder funds and separate accounts versus 7.3% in first quarter
2001. Policy benefits include interest credited to policyholder accounts on
UL-type products as well as death benefits in excess of fund balances.
Total expenses (including the net deferral and amortization of DAC and VOBA)
decreased 10.0% from first quarter 2001. The expense details are as follows:
Three Months Ended
March 31
----------------------
2002 2001
----------------------
Commissions $ 63.1 $ 53.6
General and administrative - acquisition related 19.3 19.1
General and administrative - maintenance related 11.1 13.3
Taxes, licenses and fees 14.7 11.2
----------------------
Total commissions and expenses incurred 108.2 97.2
Less commissions and expenses capitalized (75.2) (58.4)
Amortization of DAC and VOBA 35.6 37.4
----------------------
Total expenses $ 68.6 $ 76.2
======================
The decrease reflects (1) continued expense management, (2) increased
acquisition cost capitalization, as more issuance costs are deferred in line
with higher sales, thus reducing expenses not covered by pricing allowables at
lower sales levels, and (3) reduced DAC and VOBA amortization due to higher
mortality, which more than offset the increase in amortization that arises over
the first few years after UL-type products are sold. Amortization of DAC and
VOBA on UL-type products may decline when mortality increases, while our
longer-term assumptions remain consistent.
Average Individual Products assets grew 6.6% over first quarter 2001, primarily
due to sales of UL-type products and growth in existing policyholder funds and
separate accounts.
We discussed our financial and operating risks for this segment in the
Individual Products, Financial Position, Capital Resources and Liquidity, and
Market Risk Exposures sections of our Form 10-K.
ANNUITY AND INVESTMENT PRODUCTS
Annuity and Investment Products are marketed through most distribution channels
discussed in the Individual Products segment as well as though financial
institutions, investment professionals and annuity marketing organizations.
JPSC markets variable life insurance and variable annuities
16
written by our insurance subsidiaries and other carriers, and also sells other
securities and mutual funds.
Reportable segment results were:
Three Months Ended
March 31
------------------------
2002 2001
------------------------
Policy charges, premiums and other considerations $ 3.6 $ 4.4
Net investment income 140.6 130.4
Concession and other income 25.4 25.7
------------------------
Total revenues 169.6 160.5
------------------------
Policy benefits 100.4 90.9
Expenses 36.4 37.7
------------------------
Total benefits and expenses 136.8 128.6
------------------------
Reportable segment results before income taxes 32.8 31.9
Provision for income taxes 11.4 11.2
------------------------
Reportable segment results $ 21.4 $ 20.7(a)
========================
(a) Includes $1.5 in 2001 relating to the cumulative effect of change in
accounting for derivatives.
AIP reportable segment results increased 3.4% over first quarter 2001.
Excluding the $1.5 one time effect from first quarter 2001 results, AIP results
increased 11.5%. The following table summarizes key information for AIP:
Three Months Ended
March 31
-----------------------------
2002 2001
-----------------------------
Fixed annuity premium sales $ 186.4 $ 267.0
Variable annuity premium sales 5.1 10.3
-----------------------------
$ 191.5 $ 277.3
=============================
Investment product sales $ 743.9 $ 731.1
=============================
Average policyholder fund balances $ 7,532.4 $ 6,545.6
Average separate account policyholder fund balances 492.9 658.9
-----------------------------
$ 8,025.3 $ 7,204.5
=============================
Effective investment spreads for fixed annuities 1.84% 2.10%
Fixed annuity surrenders as a percentage of beginning fund
balances 9.2% 16.8%
Average assets $ 8,834.6 $ 7,821.8
We derive annuity revenues from investment income on segment assets, policy
charges, and concession income earned on investment product sales by JPSC. AIP
revenues increased 5.7% over first quarter 2001, due to growth in policyholder
fund balances, offset by lower surrender charge income (included in policy
charges) and lower JPSC concession income. Fixed annuity premium sales
decreased 30.2% from first quarter 2001, reflecting competition from providers
of fixed annuities. Our credited interest rates are closely tied to our ability
to acquire attractive assets at
17
acceptable yields based upon our investment criteria. During the first quarter,
such assets did not support competitive crediting rates in the marketplace.
JPSC's concession and other income decreased 1.2% from the first quarter 2001,
due to lower volumes of equity market purchase/sale transactions.
Fixed annuity surrenders as a percentage of beginning fund balances decreased
to 9.2% versus 16.8% in first quarter 2001. The lower lapse rates reflect the
combined effects of increased surrender charge protection on our in-force block
of business and internal conservation initiatives. The surrender rate in the
AIP segment is influenced by many factors such as: (1) the portion of the
business that has low or no remaining surrender charges; (2) competition from
annuity products including those which pay upfront interest rate bonuses or
higher market rates and (3) rising interest rates that may make returns
available on new annuities or investment products more attractive than our
older annuities. Fund balances with 5% or more surrender charges, including
payout annuities, increased to 43.9% from 40.6% in first quarter 2001.
Total AIP benefits and expenses increased 6.4% over first quarter 2001. Policy
benefits, which are mainly comprised of interest credited to policyholder
accounts, as a percentage of average policyholder fund balances were 1.3%
versus 1.4% in first quarter 2001. Total AIP expenses decreased 3.4% from the
first three months of 2001, due primarily to the lower commission expenses of
JPSC. Effective spreads on fixed annuities declined to 1.84% in first quarter
2002 from 2.10% in first quarter 2001, primarily due to sales over the past
year of our lower commission products which require less spread to achieve
pricing objectives. Of the 26 basis point spread compression from first quarter
2001, approximately 8 basis points represents economic spread contraction that
occurs in declining interest rate environments and affects earnings (by $1 this
quarter), while the remainder reflects lower commission products and does not
affect earnings.
JPSC earnings included in the segment results were $1.0 for first quarter 2002
and 2001.
See our Form 10-K for risks associated with this segment.
BENEFIT PARTNERS
The Benefit Partners segment offers group non-medical products such as term
life, disability and dental insurance to the employer marketplace. These
products are marketed primarily through a national distribution system of
regional group offices. These offices develop business through employee benefit
brokers, third party administrators and other employee benefit firms.
18
Reportable segment results were:
Three Months Ended
March 31
------------------------
2002 2001
------------------------
Premiums and other considerations $ 148.4 $ 129.3
Investment income, net of expenses 15.0 13.3
------------------------
Total revenues 163.4 142.6
------------------------
Policy benefits 109.2 95.7
Expenses 34.3 31.0
------------------------
Total benefits and expenses 143.5 126.7
------------------------
Reportable segment results before income taxes 19.9 15.9
Provision for income taxes 7.0 5.5
------------------------
Reportable segment results $ 12.9 $ 10.4
========================
Benefit Partners reportable segment results increased 24.0% over first quarter
2001, primarily due to the growth in this business. The following table
summarizes key information for Benefit Partners:
Three Months Ended
March 31
-----------------------
2002 2001
-----------------------
Life, Disability, and Dental:
Annualized sales $ 56.1 $ 46.5
Loss ratio 71.7% 73.0%
Total expenses, % of premium income 23.1% 24.1%
Average assets $807.1 $734.0
Premium income $148.6 $128.5
Benefit Partners revenues increased 14.6% over 2001. Annualized sales for the
core life, disability and dental lines of business grew 20.6% over first
quarter 2001. The revenue growth resulted from both sales growth and
satisfactory persistency in our non-medical business. These results reflect the
success of our technologically based approach to selling, underwriting and
administering group insurance products.
Policy benefits increased 14.1% over first quarter 2001, consistent with the
growth of business in force. Our life, disability and dental incurred loss
ratio declined to 71.7% versus 73.0% in first quarter 2001, reflecting
continued claims management efforts coupled with favorable morbidity and
mortality.
Our catastrophe reinsurance agreement that expired in April 2002 covered
extraordinary life claims arising from catastrophic events in the group life
line. Because this catastrophe reinsurance agreement could not be replaced
except with a much higher premium and deductible and with a terrorism
exclusion, we did not purchase catastrophic coverage and instead are relying on
case by case management to mitigate over time our concentration exposures. We
continue to monitor reinsurance market developments and to actively pursue
reasonable alternatives to traditional catastrophic reinsurance arrangements
which may further mitigate our concentration risks. See our Form 10-K for
additional risks beyond normal competition that may impact this segment.
19
Total expenses (including the net deferral and amortization of policy
acquisition costs) increased 10.6% over first quarter 2001 which represents a
smaller increase than the growth in premiums. As a percentage of premium
income, total expenses were 23.1% versus 24.1% for first quarter 2001.
COMMUNICATIONS
JPCC operates radio and television broadcast properties and produces syndicated
sports and entertainment programming. Reportable segment results were:
Three Months Ended
March 31
------------------------
2002 2001
------------------------
Communications revenues (net) $ 48.6 $ 50.6
Operating costs and expenses 33.7 33.8
------------------------
Broadcast cash flow 14.9 16.8
Depreciation and amortization 1.9 2.8
Corporate general and administrative expenses 1.3 1.3
Net interest expense 0.8 1.1
------------------------
Operating revenue before income taxes 10.9 11.6
Provision for income taxes 4.4 4.8
------------------------
Reportable segment results $ 6.5 $ 6.8
========================
Reportable segment results decreased 4.4% from first quarter 2001, primarily
due to lower basketball sales in the Sports operation. Combined revenues for
Radio and Television increased 2.8% over first quarter 2001.
Revenues from Sports operations decreased 26.5% from first quarter 2001,
reflecting the impact of weak demand for advertising due to the slowing
economic conditions. Sports advertising is typically sold with three to six
month lead times and economic activity was slowing during the prime fall Sports
selling season. See our Form 10-K for a description of our contractual
commitments related to Sports operations.
Broadcast cash flow declined 11.3% from first quarter 2001 due to the decline
in Sports.
Total expenses, excluding interest expense, decreased $1.0 or 2.6% from first
quarter 2001, but since revenues were down, these expenses as a percent of
communication revenues were 75.9% versus 74.9% in first quarter 2001. We
reviewed JPCC's current intangible assets and found no cause to record
impairment losses. FCC license and goodwill amortization expense was $0.8 in
first quarter 2001.
CORPORATE AND OTHER
The Corporate and Other segment includes the excess capital of the insurance
subsidiaries, other corporate investments including impaired securities, benefit
plan net assets, goodwill related to insurance acquisitions, and corporate debt.
The reportable segment results primarily contain the earnings on the invested
excess capital, interest expense related to the corporate debt, and operating
expenses that are corporate in nature (i.e. advertising, charitable and civic
contributions, etc.). All net capital gains and losses, which include
impairments of securities, are reported in this segment.
20
The following table summarizes results for this segment:
Three Months Ended
March 31
---------------------
2002 2001
---------------------
Earnings on investments $21.0 $24.3
Interest expense on debt and Exchangeable Securities 2.4 8.5
Operating expenses 4.9 7.2
Provision for income tax expense (benefit) 0.4 (2.1)
---------------------
Total expenses 7.7 13.6
---------------------
Reportable segment results before dividends on Capital
Securities and mandatorily redeemable preferred stock 13.3 10.7
Dividends on Capital Securities and mandatorily
redeemable preferred stock (6.1) (6.1)
---------------------
Reportable segment results 7.2 4.6
Realized investment gains, net 21.9 36.5
---------------------
Reportable segment results, including realized gains $29.1 $41.1
=====================
Reportable segment results excluding realized gains increased 56.5% over first
quarter 2001.
The decrease in investment earnings in first quarter 2002 is due to a decrease
in invested assets, resulting from stock buybacks during 2001 and debt
repayments, and to reduced assets arising from bond credit losses that are
reflected in this segment. Earnings on investments in this segment can
fluctuate based upon opportunistic repurchases of common stock, the amount of
excess capital generated by the operating segments and lost investment income
on impaired securities.
Interest expense on debt and Exchangeable Securities decreased $6.1 from first
quarter 2001 primarily due to lower average interest rates, including the
replacement of the MEDS securities with short term borrowings in January 2002
and overall lower amounts outstanding. Operating expenses vary with the level
of corporate activities and strategies. Goodwill amortization of $2.4,
excluding JPCC, was included in operating expenses for the first quarter of
2001. We did not record any goodwill impairment during the 2002 quarter. The
provision for income tax expense includes the tax benefit of preferred
dividends on Capital Securities, which we record gross of related tax effects.
Income taxes increased $2.5 over first quarter 2001 which had reflected
implementation of strategies that reduced federal income taxes on investment
earnings and the resolution of certain tax issues for which we had previously
established reserves.
Realized investment gains and losses for first quarter 2002 include a net after
tax $8.7 loss on our bond portfolio, including both writedowns and actual sales
in the normal course of business, which were offset by gains in equities,
resulting in a net gain of $21.9. The portfolio loss was driven primarily by
recent economic events.
21
The following table summarizes assets assigned to this segment.
March 31
----------------------
2002 2001
----------------------
Parent company, passive investment companies and
Corporate line assets of insurance subsidiaries $1,080 $1,359
Unrealized gain on fixed interest investments 15 163
Co-insurance receivables on acquired blocks 1,076 1,143
Employee benefit plan assets 368 363
Goodwill arising from insurance acquisitions 270 277
Other 310 293
----------------------
Total $3,119 $3,598
======================
Total assets for the Corporate and Other segment decreased 13.3% from first
quarter 2001 due primarily to writedowns of impaired securities, stock buybacks
in 2001 and the reduction of co-insurance receivables as this closed block
slowly diminishes. Unrealized gains and losses on all Available for Sale fixed
income securities are assigned to this segment, and decreased $148 from first
quarter 2001 as interest rates increased.
FINANCIAL POSITION
Our primary resources are investments related to our Individual Products, AIP
and Benefit Partners segments, properties and other assets utilized in all
segments and investments backing corporate capital. This section identifies
several items on our balance sheet that are important to understanding our
financial position. The Investments section reviews our investment portfolio
and key strategies.
Total assets increased $331 from year end 2001 due to growth in income and net
policyholder contract deposits, despite a decrease in the valuation of
Available for Sale securities.
The Individual Products, AIP and Benefit Partners segments defer the costs of
acquiring new business, including first year commissions, first year bonus
interest, certain costs of underwriting and issuing policies plus agency office
expenses (referred to as DAC). We capitalize actual acquisition costs only up
to the amounts we use in the specific product pricing models, and we expense
any excess acquisition costs above the pricing allowable. When we acquire new
business through an acquisition, we allocate a portion of the purchase price to
a separately identifiable intangible asset, referred to as VOBA. We initially
establish VOBA as the actuarially determined present value of future gross
profits of each business acquired.
We amortize DAC and VOBA on traditional products in proportion to premium
revenue recognized. We amortize DAC and VOBA on UL-type products relative to
the future estimated gross profits (EGP) from those products. The EGP for
UL-type products include the following components: (1) estimates of fees
charged to policyholders to cover mortality, surrenders and maintenance costs;
(2) estimated mortality in excess of fund balances accumulated; (3) expected
interest rate spreads between income earned and amounts credited to
policyholder accounts; and (4) estimated cost of policy administration
(maintenance). EGP is also reduced by our estimate of future losses due to
defaults in fixed interest investments. DAC and VOBA related to UL-type
products are sensitive to a change in our assumptions regarding EGP components,
and any change in such an assumption will immediately impact the current DAC
and VOBA balances with the
22
change reflected through the income statement. At March 31, 2002, the DAC and
VOBA related to Individual UL-type products amounted to 72.7% of the $2,170 on
the balance sheet compared to 71.6% at December 31, 2001.
We provided a sensitivity analysis of changes in significant assumptions to DAC
and VOBA in our 2001 10-K. In the first quarter, nothing came to our attention
that would have caused us to change any of the three assumptions: estimated
mortality, estimated interest spread and estimated future policy lapses. While
we experienced adverse mortality in the first quarter, we believe this was a
random fluctuation and we would not change our assumptions utilized in the
amortization models unless these exceptionally high rates continue over time.
The actual interest spreads and policy lapses are in line with our assumptions.
We also adjust the carrying value of DAC and VOBA to reflect changes in the
unrealized gains and losses in Available for Sale securities since this impacts
EGP.
At March 31, 2002 and December 31, 2001, we had reinsurance receivables of $915
and $914 and policy loans of $138 and $153 which are related to the businesses
of JP Financial that are coinsured with Household International (HI)
affiliates. HI has provided payment, performance and capital maintenance
guarantees with respect to the balances receivable. We regularly evaluate the
financial condition of our reinsurers and monitor concentrations of credit risk
related to reinsurance activities. We have not suffered any significant credit
losses from reinsurance activities in the last three years.
CAPITAL RESOURCES
Stockholders' Equity
The following table shows our capital adequacy:
March 31 December 31
2002 2001
----------------------------
Total assets less separate accounts $27,139 $26,848
Total stockholders' equity 3,386 3,391
Ratio of stockholders' equity to assets less
separate accounts 12.5% 12.6%
The ratio of equity to assets less separate accounts has remained relatively
constant. Unrealized gains on Available for Sale securities, which are included
as a component of stockholders' equity, decreased $105 from December 31, 2001.
We have share repurchase authorization for 5 million shares of common stock,
and we intend to continue to make opportunistic repurchases although we made
none in the first quarter 2002.
We consider existing capital resources to be more than adequate to support the
current level of our business activities. Our business plan places priority on
redirecting certain capital resources invested in bonds and stocks into our
core businesses, which should produce higher returns over time.
The Individual Products, AIP and Benefit Partners segments are subject to
regulatory constraints. Our insurance subsidiaries have statutory surplus and
risk based capital levels well above required levels. These capital levels
together with the rating agencies' assessments of our business strategies have
enabled our major life insurance affiliates to retain the highest available
ratings by A.M. Best,
23
Standard & Poor's and Fitch as detailed in our Form 10-K. A very significant
drop in these ratings, while not anticipated, could potentially impact future
sales and/or accelerate surrenders on our business in force.
Short-Term Borrowings and Debt
We have bank credit agreements for unsecured revolving credit, under which we
have the option to borrow at various interest rates. In May 2002, we replaced
an expiring $375 bank credit agreement with new unsecured revolving credit
agreements currently aggregating $400, half available for five years and half
available for 364 days. The credit agreements principally support our issuance
of commercial paper. As of March 31, 2002, outstanding commercial paper had
various maturities, with none in excess of 90 days, although maturities can be
up to 270 days. If we cannot remarket commercial paper at maturity, we have
sufficient liquidity, consisting of the bank credit agreements, liquid assets,
such as equity securities, and other resources to retire these obligations. The
weighted-average interest rates for commercial paper borrowings outstanding of
$227 and $297 at March 31, 2002 and December 31, 2001 were 2.75% and 3.72%. The
maximum amount outstanding during the first quarter 2002 was $330.
Our commercial paper has retained the highest ratings by both Standard & Poor's
and Fitch as detailed in our Form 10-K. A significant drop in these ratings,
while not anticipated, could cause us to pay higher rates in commercial paper
borrowings or lose access to the commercial paper markets.
Our insurance subsidiaries have sold U. S. Treasury obligations and
collateralized mortgages under repurchase agreements involving various
counterparties, accounted for as financing arrangements. Proceeds are used to
purchase securities with longer durations as an asset/liability management
strategy. We also may use repurchase agreements from time to time in lieu of
commercial paper borrowings. At March 31, 2002 and December 31, 2001, repurchase
agreements, including accrued interest, were $565 and $292. The securities
involved had a fair value and amortized cost of $583 and $570 at March 31, 2002
versus $306 and $289 at the end of 2001. The maximum principal amounts
outstanding were $562 and $457 during first quarter 2002 and 2001.
At March 31, 2002 and December 31, 2001, net advances from subsidiaries were
$440 and $417, all of which are eliminated in consolidation.
LIQUIDITY
We meet liquidity requirements primarily by positive cash flows from the
operations of subsidiaries. We have sufficient overall sources of liquidity to
satisfy operating requirements. Primary sources of cash from our insurance
operations are premiums, other insurance considerations, receipts for
policyholder accounts, investment sales and maturities and investment income.
Primary uses of cash for our insurance operations include purchases of
investments, payment of insurance benefits, operating expenses, withdrawals
from policyholder accounts, costs related to acquiring new business, dividends
and income taxes. Primary sources of cash from the Communications operations
are revenues from advertising, and primary uses include payments for
commissions, compensation (and compensation-related costs), sports rights,
interest, income taxes and purchases of fixed assets.
Cash provided by operations in first quarter 2002 and 2001 was $68 and $188.
24
Net cash used in investing activities was $459 and $258 for first quarter 2002
and 2001.
Net cash provided by financing activities was $312 and $101 for first quarter
2002 and 2001. Cash inflows from policyholder contract deposits net of
withdrawals were $300 and $150 for first quarter 2002 and 2001.
In order to meet the parent company's dividend payments, debt servicing
obligations and other expenses, we received internal dividends from
subsidiaries. Total cash dividends paid by subsidiaries during the first
quarter were $94 versus $80 in 2001. Our life insurance subsidiaries are
subject to laws in the states of domicile that limit the amount of dividends
that can be paid without the prior approval of the respective State's Insurance
Commissioner. The limits are based in part on the prior year's statutory
income, and approvals are based in part on statutory RBC, both of which are
negatively impacted by bond losses and writedowns. We have no reason to believe
that such approval will be withheld, if required.
Cash and cash equivalents were $60 and $139 at March 31, 2002 and December 31,
2001. Additionally, fixed income and equity securities held by the parent
company and non-regulated subsidiaries were $509 and $542 at these dates. These
securities are considered to be sources of liquidity to support our strategies.
Total debt and equity securities Available for Sale at March 31, 2002 and
December 31, 2001 were $15,064 and $14,639.
INVESTMENTS
Our strategy for managing the insurance investment portfolio is to consistently
meet pricing assumptions while achieving the highest possible after-tax yields
over the long term. We invest cash flows primarily in fixed income securities.
The nature and quality of investments held by insurance subsidiaries must
comply with state regulatory requirements. We have established a formal
investment policy that we use to achieve overall quality and diversification
objectives.
We held the following carrying amounts of investments:
March 31, 2002 December 31, 2001
---------------------------------------------
Publicly-issued bonds $13,780 61.3% $13,312 59.8%
Privately-placed bonds 3,952 17.6 4,125 18.5
Mortgage loans on real property 3,109 13.8 3,094 13.9
Common stock 496 2.2 509 2.3
Policy loans 892 4.0 911 4.1
Preferred stock 27 0.1 32 0.1
Real estate 133 0.6 132 0.6
Other 20 0.1 20 0.1
Cash and equivalents 60 0.3 139 0.6
---------------------------------------------
Total $22,469 100.0% $22,274 100.0%
=============================================
Our internal guidelines require an average quality fixed income portfolio
(excluding mortgage loans) of "A" or higher. Currently, the average quality is
"A1". Our guidelines also limit the amount of lower quality investments and
require diversification by issuer and asset type. We
25
monitor "higher risk" investments in order to determine if the securities have
experienced an other than temporary decline in value. We adjust securities that
experience other than temporary declines in value to fair values through a
charge to earnings. We recognized gross impairment losses before taxes of $13.4
and none in the first quarter 2002 and 2001.
We state mortgage loans on real property net of an allowance for credit losses.
We determine this allowance for specific impaired loans by calculating the fair
value of each loan, utilizing estimated future cash flows of the impaired loan,
discounted at the loan's effective interest rate. We also set aside an
additional allowance based on aggregate loans with similar risk characteristics
utilizing historical statistics. At March 31, 2002 and December 31, 2001, our
allowances for mortgage loan credit losses were $29.2 and $28.6.
Carrying amounts of investments categorized as "higher risk" assets were:
March 31, 2002 December 31, 2001
---------------------------------------------
Bonds near or in default $ 74 0.3% $ 60 0.3%
Bonds below investment grade 979 4.4 1,005 4.5
Mortgage loans 60 days delinquent or in
foreclosure 4 -- -- --
Mortgage loans restructured 8 -- 9 --
Foreclosed properties -- -- -- --
---------------------------------------------
Subtotal, "higher risk assets" 1,065 4.7 1,074 4.8
All other investments 21,404 95.3 21,200 95.2
---------------------------------------------
Total cash and investments $22,469 100.0% $22,274 100.0%
=============================================
A weak economy or a more pronounced downturn, or events which affect one or
more companies, industries, or countries, could lead to further credit related
portfolio losses in "higher risk" and other investments.
Our guidelines permit use of derivative financial instruments such as futures
contracts and interest rate swaps in conjunction with specific direct
investments. Our actual use of derivatives has been limited to managing
well-defined interest rate risks. Interest rate swaps with a current notional
value of $131 and $132 were open as of March 31, 2002 and December 31, 2001.
Mortgage backed securities (including Collateralized Mortgage Obligations) at
March 31,2002 and December 31, 2001, which are included in debt securities
Available for Sale, were as follows:
March 31 December 31
--------------------------
2002 2001
--------------------------
Federal agency issued mortgage backed securities $3,277 $3,254
Corporate private-labeled mortgage backed securities 2,268 2,330
--------------------------
Total $5,545 $5,584
==========================
Our investment strategy with respect to mortgage backed securities (MBS)
focuses on actively traded, less volatile issues that produce relatively stable
cash flows. The majority of MBS holdings are sequential and planned
amortization class tranches of federal agency issuers. The MBS 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.
26
MARKET RISK EXPOSURES
We believe that the amounts shown in Form 10-K with respect to our exposure to
market risks, and relating to the incremental income (loss) deriving primarily
from differences in the yield curve, continue to be representative. The 10-year
U.S. Treasury rates have risen slightly this year. The unsteady equity markets
in 2002 indicate that the potential decrease of 20% remains viable in the short
term.
EXTERNAL TRENDS AND FORWARD LOOKING INFORMATION
With respect to external trends, inflation and interest rate risks,
environmental liabilities and the regulatory and legal environment, see
management's comments in the 2001 Form 10-K.
Forward Looking Information
You should note that this document and our other SEC filings reflect
information that we believe was accurate as of the date the respective
materials were made publicly available. Thus they do not reflect later
developments.
As a matter of policy, we do not normally make projections or forecasts of
future events or our performance. When we do, we rely on a safe harbor provided
by the Private Securities Litigation Reform Act of 1995 for statements that are
not historical facts, called forward looking statements. These may include
statements relating to our future actions, sales and product development
efforts, expenses, the outcome of contingencies such as legal proceedings, or
financial performance.
Certain information in our SEC filings and in any other written or oral
statements made by us or on our behalf, involves forward looking statements. We
have used appropriate care in developing this information, but any forward
looking statements may turn out to be wrong. They can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties that could
significantly affect our actual results. These risks and uncertainties include
among others, the risk that we might fail to successfully complete our strategy
for substantially increasing life insurance sales; general economic conditions
(including the uncertainty as to the depth and duration of the current economic
slowdown and the rate at which the economy recovers), the impact on the economy
from any further terrorist activities, and interest rate changes and
fluctuations, all of which can impact our sales, investment portfolios, and
earnings; competitive factors, including pricing pressures, technological
developments, new product offerings and the emergence of new competitors;
changes in federal and state taxes (including estate taxes); changes in the
regulation of the financial services industry; or changes in other laws and
regulations and their impact.
We undertake no obligation to publicly correct or update any forward looking
statements, whether as a result of new information, future developments or
otherwise. You are advised, however, to consult any further disclosures we make
on related subjects in our press releases and filings with the SEC. In
particular, you should read the discussion in the section entitled "External
Trends and Forward Looking Information," and other sections it may reference,
in our most recent 10-K report as it may be updated in our subsequent 10-Q and
8-K reports. This discussion covers certain risks, uncertainties and possibly
inaccurate assumptions that could cause our actual results to differ materially
from expected and historical results. Other factors besides those listed there
could also adversely affect our performance.
27
PART II. OTHER INFORMATION
JEFFERSON-PILOT CORPORATION
Item 1. Legal Proceedings
The registrant is involved in various claims and lawsuits incidental to and in
the ordinary course of its business. In the opinion of management, the ultimate
liability will not have a material effect on the financial condition or
liquidity of the Company, but could have a material adverse effect on the
results of operations for a specified period.
Item 4. Submission of Matters to a Vote of Security Holders
Election of Directors at the May 6, 2002 annual meeting of shareholders:
Class I Term Votes For Withheld
------- ---- --------- --------
Elizabeth Valk Long 3 years 124,561,492 2,032,271
William Porter Payne 3 years 121,379,381 5,214,382
David A. Stonecipher 3 years 125,422,354 1,171,409
Class III Term Votes For Withheld
--------- ---- --------- --------
Kenneth C. Mlekush 2 years 125,415,902 1,177,861
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
There were none filed during the first quarter of 2002.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERSON-PILOT CORPORATION
By (Signature) /s/Theresa M. Stone
(Name and Title) Theresa M. Stone, Executive Vice President,
Chief Financial Officer and Treasurer
Date May 14, 2002
By (Signature) /s/Reggie D. Adamson
(Name and Title) Reggie D. Adamson, Senior Vice President - Finance
(Principal Accounting Officer)
Date May 14, 2002
29