FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

Jefferson-Pilot Corporation

(336) 691-3000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

Number of shares of common stock outstanding at March 31, 2005             135,938,302

JEFFERSON-PILOT CORPORATION

INDEX

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements

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JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME

See Notes to Consolidated Financial Statements

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JEFFERSON-PILOT CORPORATION
CONSOLIDATED UNAUDITED CONDENSED
STATEMENTS OF CASH FLOWS
(In Millions)

See Notes to Consolidated Financial Statements

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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 normal recurring adjustments 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, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. Certain prior year amounts have been reclassified to conform with the current year presentation.

The Company’s pretax earnings increased $49 in the first quarter of 2005 due to management actions and experience that affected the comparability with the previous quarter. Management reduced the rates for non-guaranteed cost of insurance bonuses (partial refunds) on certain older UL-type life insurance products. These bonuses are paid to certain policyholders at specified policy anniversaries for continuing coverage. Consequently, we recognized an accrual release, which increased cost of insurance charge revenue by $13, and a related unlocking of expected gross profits, which reduced amortization of value of business acquired by $17. Additionally, the Company experienced strong earnings emergence from favorable claim experience and reserve development in its group insurance business, primarily in the Canada Life block (see Note 9), reducing insurance and annuity benefits by $25 partially offset by $5 of additional amortization of deferred policy acquisition costs. Taken together, these items increased first quarter 2005 net income by $32.

Except as described otherwise herein, all significant accounting policies remain as we described in our Form 10-K for 2004.

2. Significant Accounting Policies

Stock Based Compensation

The Company accounts for stock incentive awards in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and accordingly, recognizes no compensation expense for stock option awards to employees or directors when the option price is not less than the market value of the stock at the date of award. The Company recognizes expense utilizing the fair value method in accordance with SFAS 123 for stock options granted to non-employees, specifically agents.

SFAS 123 requires the presentation of pro forma information as if the Company had accounted for its employee and director stock options under the fair value method of that Statement.

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The following is a reconciliation of reported net income and proforma information as if the Company had adopted SFAS 123 for its employee and director stock option awards:

3. 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 for 2004.

The following table summarizes certain financial information regarding the Company’s reportable segments:

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Default charges paid to the Corporate and Other segment for Individual, AIP and Benefit Partners were $6, $3, $1 and $6, $3, $0 for the three months ended March 31, 2005 and 2004.

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4. Income from Continuing Operations Per Share of Common Stock

The following table sets forth the computation of earnings per share and earnings per share assuming dilution:

5. Contingent Liabilities

A life insurance subsidiary is a defendant in a proposed class action suit. The suit alleges that a predecessor company, decades ago, unfairly discriminated in the sale of certain small face amount life insurance policies, and unreasonably priced these policies. Management believes that the life company’s practices have complied with state insurance laws and intends to vigorously defend the claims asserted.

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

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position or liquidity, although it could have a material adverse effect on the results of operations for a specified period.

6. New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (SFAS 123-R), which prescribes fair value expense recognition for stock options and is effective for interim and annual periods ending after June 15, 2005. In April 2005, the Securities and Exchange Commission announced the adoption of a new rule that delays our required effective date of SFAS 123-R to January 1, 2006.

As discussed above, the Company currently accounts for employee stock options using the intrinsic value method of APB 25, and related interpretations, and discloses the impact of the fair value method prescribed by SFAS 123 through footnote disclosure only. Under APB 25, the Company does not recognize any stock-based compensation expense for employee stock options because all options granted have an exercise price equal to the market value of the underlying stock on the date of grant. The Company plans to adopt the provisions of SFAS 123-R under the modified prospective method on January 1, 2006. Under this method, the fair value of all employee stock options vesting on or after the adoption date will be included in the determination of net income. The Company also plans to restate prior periods using the modified retrospective application described in SFAS 123-R. The fair value of stock options will be estimated using an appropriate fair value option-pricing model considering assumptions for dividend yield, expected volatility, risk-free interest rate, and expected life of the option. The fair value of the option grants will be amortized on a straight-line basis over the three-year vesting period of the awards. The adoption of SFAS 123-R will reduce our earnings per share similar to what is described in our proforma disclosures discussed earlier within Note 2. However, the implementation of more sophisticated modeling techniques may affect this impact.

On May 19, 2004, the FASB issued FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003”. In accordance with FSP 106-2, the Company remeasured its plan assets and Accumulated Postretirement Benefit Obligation (“APBO”) as of July 1, 2004 to account for the subsidy and other effects of the Act, which resulted in an immaterial reduction in postretirement benefit cost. The reduction in the APBO for the subsidy related to past service was insignificant.

In March 2004, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”(EITF 03-1). This issue establishes impairment models for determining whether to record impairment losses associated with investments in certain equity and debt securities. In September 2004, the FASB issued FSP EITF 03-1-1, “Effective Date of Paragraphs 10–20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments’”, which indefinitely deferred the effective date of the other-than-temporary impairment provisions of EITF 03-1 related to interest rates and sector spreads until such time as the FASB issues further implementation guidance. The Company continues to monitor developments concerning this guidance and is currently unable to estimate the potential effects of implementing the impairment provisions of EITF 03-1 on the Company’s consolidated financial position or results of operations.

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In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AcSEC) issued Statement of Position 03-1 “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (the SOP or SOP 03-1). The SOP addresses: (i) separate account presentation; (ii) accounting for an insurance company’s proportionate interest in separate accounts; (iii) transfers of assets from the general account to a separate account; (iv) valuation of certain insurance liabilities and policy features such as guaranteed minimum death benefits and annuitization benefits; and (v) accounting for sales inducements. The SOP was effective January 1, 2004 and was adopted through an adjustment for the cumulative effect of a change in accounting principle originally amounting to $13. In September 2004, AcSEC issued Technical Practice Aids (the TPAs) addressing certain provisions of the SOP. As a result of this additional guidance, we restated our cumulative effect adjustment as of January 1, 2004 to record an additional $4 of expense. The following table reflects our results for the first quarter of 2004 as originally reported and as adjusted by the addition to the cumulative effect adjustment recorded in the third quarter of 2004. Please refer to Note 2 of the Consolidated Financial Statements included within our Form 10-K for greater detail and discussion.

Our cumulative effect of $17 related primarily to the establishment of additional policy liabilities for secondary guarantees contained in our newer products and accounting for sales inducements resident in certain of our older policies.

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7. Retirement Benefit Plans

The following table illustrates the components of net periodic benefit cost for our pension plans:

The Company expects to make contributions of $14 to $18 during 2005 related to our nonqualified plans. Contributions of $12 were made during the three months ended March 31, 2005.

8. Comprehensive Income

The components of comprehensive income, net of related effects of DAC/VOBA and income taxes, are as follows:

9. Reinsurance Transaction

Effective March 1, 2004, the Company acquired via a reinsurance transaction substantially all of the in-force U.S. group life, disability and dental business of The Canada Life Assurance Company (Canada Life), an indirect subsidiary of Great-West Lifeco Inc.

Upon closing, Canada Life ceded, and the Company assumed, approximately $400 of policy liabilities. The Company also received assets, primarily comprised of cash, in support of those liabilities. The deferred policy acquisition costs of $35 recorded in the transaction are being amortized over 15 years, subject to dynamic persistency adjustments, representing the premium-paying period of the blocks of policies acquired. An intangible asset of $25, attributable to the value of the distribution system acquired in the transaction, was recorded in other assets within the consolidated balance sheets and is being amortized over 30 years, representing the period over which the Company expects to earn premiums from new sales stemming from the added distribution capacity. The revenues and benefits and expenses associated with these blocks are

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presented in the Company’s consolidated statements of income in a manner consistent with the Company’s accounting policies.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

JEFFERSON-PILOT CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the consolidated financial condition, changes in financial position and results of operations for the three months ended March 31, 2005, as compared to the same period of 2004, 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, 2004, and should be read in conjunction with the interim financial statements and notes contained herein. All dollar amounts are in millions except share and per share amounts.

Company Profile

Overview and Segment Revenues

We have five reportable segments: Individual Products, Annuity and Investment Products (AIP), Benefit Partners, Communications, and Corporate and Other. See our Form 10-K for an overview of the Company and our reportable segments and a discussion of key drivers and trends in our businesses, supplemented by the discussion herein.

Our segments’ revenues as a percentage of total revenues, excluding realized gains and losses, were as follows:

Critical Accounting Policies and Estimates

Our Form 10-K described our accounting policies that are critical to the understanding of our results of operations and our financial position for which management uses significant judgments and estimates concerning future results or other developments including the likelihood, timing or amount of one or more future events. They relate to deferred acquisition costs (DAC), value of business acquired (VOBA), unearned revenue reserves, assumptions and judgments utilized in determining if declines in fair values of investments are other-than-temporary, valuation methods for infrequently traded securities and private placements, policy liabilities, pension plans, goodwill and accruals relating to legal and administrative proceedings.

These policies were applied in a consistent manner during the first quarter of 2005.

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Results of Operations

The following tables illustrate our results before and after the cumulative effect of change in accounting principle:

The increase in income before cumulative effect of change in accounting principle in the first quarter of 2005 reflected earnings growth in each of our segments, except for Corporate & Other, partially offset by lower realized gains. The Individual Products segment benefited from management actions to reduce non-guaranteed bonuses on certain older universal life products that resulted in a reserve release and an unlocking adjustment to DAC and VOBA, partially offset by higher mortality. AIP results were favorably impacted by lower interest credited resulting in higher investment spreads. Benefit Partners results for the quarter continue to be positively impacted from the business added via the Canada Life transaction, which was included for only one month in the 2004 quarter, and by improved loss ratios from favorable experience during the first quarter of 2005. Communications achieved earnings growth from higher advertising revenues in the sports operation that offset lower political advertising revenues, which are favorable in even-numbered years. Corporate & Other results were negatively impacted by higher short-term interest rates.

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Realized investment gains, net of taxes, were $3.5 for the first quarter of 2005 versus $14.7 during the same period in 2004.

Effective January 1, 2004, the Company adopted SOP 03-1, which relates to secondary guarantees and other benefit features. The implementation of this new standard created both a cumulative effect upon adoption as well as a reduction to ongoing net income. The cumulative effect now shown for the first quarter of 2004 reflects the revision recognized in the third quarter of 2004 to reflect additional implementation guidance issued in that quarter. Refer to Note 6 to the Consolidated Condensed Financial Statements.

Earnings per share growth was more favorable than the growth in absolute earnings due to share repurchases in the first quarter of 2005 and the first six months of 2004.

Results by Business Segment

Throughout this Form 10-Q, “reportable segment results” is defined as net income before realized investment gains and losses (and cumulative effect of change in accounting principle, if applicable). Reportable segment results is a non-GAAP measure. We believe reportable segment results provides relevant and useful information to investors, as it represents the basis on which we assess the performance of our business segments. We deem reportable segment results to be a meaningful measure for this purpose because, except for losses from other-than-temporary impairments, realized investment gains and losses occur primarily at our sole discretion. Note that reportable segment results as described above may not be comparable to similarly titled measures reported by other companies.

We assess profitability by business segment and measure other operating statistics as detailed in the separate segment discussions that follow. We determine reportable segments in a manner consistent with the way we make operating decisions and assess performance. Sales are one of the statistics we use to track performance. Our sales, which are primarily of long-duration contracts in the Individual Products and AIP segments, have little immediate impact on revenues for these two segments as described in the segment discussions below.

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The following table illustrates our results before and after realized investment gains and losses, and reconciles reportable segment results to net income, the most directly comparable GAAP financial measure:

Results by Reportable Segment

Segment Assets

We assign invested assets backing insurance liabilities to our 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, including all defaulted securities, to the Corporate and Other segment. Segment assets as of March 31 were as follows:

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Individual Products

The Individual Products segment markets individual life insurance policies primarily through independent general agents, independent national account marketing firms, and agency building general agents. We also sell products through home service agents, broker/dealers, banks and other strategic alliances.

Reportable segment results⁽¹⁾ for Individual Products were as follows:

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The following table summarizes key data for Individual Products that we believe are our important drivers and indicators of future profitability:

Sales from our Individual Markets, excluding Community Banks and bank-owned life insurance (BOLI), increased in the first quarter of 2005 compared to 2004 due to product, distribution and service initiatives.

Approximately 50% and 53% of life insurance sales were attributable to products with secondary guarantee benefits for the first quarter of 2005 and 2004. These products were priced considering interest, mortality, withdrawal and termination (lapse) assumptions that are specific to the nature, marketing focus and funding pattern for each product. The lapse assumptions that we use for pricing are based on multi-scenario modeling techniques and are lower than the assumptions we use for non-guaranteed products, particularly when the secondary guarantee option is “in the money”. Since guaranteed UL policies are relatively new to the marketplace, credible experience has yet to emerge regarding policy and premium persistency; however, our assumptions represent our best estimate of future experience. See Capital Position for discussion of statutory-basis reserving methodologies for these types of products.

Interest margin on UL-type products decreased 2.4% during the first quarter of 2005. Lower investment yields more than offset growth in policyholder fund balances and the effect of lower crediting rates. As discussed further below, the lower investment yield was primarily due to the general interest rate environment and lower investment prepayments. We actively manage interest spreads on our fixed UL-type products in response to changes in investment yields by adjusting the rates credited to policyholder fund balances (up or down), subject to minimum rate guarantees, while considering product pricing targets, policyholder value, and competitive conditions. The average investment spread on fixed UL products declined 1 basis point to 1.83% for the quarter compared to the 2004 quarter. Our mortgage-backed securities portfolio is primarily a discount portfolio. We estimate that prepayments on mortgage-backed securities in excess of expected levels and prepayments of commercial mortgage loans increased effective investment yields by 7 basis points in the first quarter of 2004, but had no impact in 2005. Our ability to manage interest-crediting rates on fixed UL-type products is limited by minimum guaranteed rates provided in

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policyholder contracts. Therefore, continued low general market interest rates likely will impact future profitability, as the investment of cash flows at current interest rates reduces our average portfolio yield. For the first quarter of 2005 and 2004, our average crediting rates were approximately 40 and 55 basis points in excess of our average minimum guaranteed rates (spread to guarantee), including 56% and 55% of our average UL policyholder fund balances that were already at their minimum guaranteed rates. The spread to guarantee excludes crediting rate cuts we implemented on April 1, 2005, which will have the effect of reducing the average crediting rate across the entire UL-type block by 4 basis points in future quarters. Additionally, the spread to guarantee presented above was revised to include the effect of non-guaranteed interest bonuses that management has the discretion to reduce. A large portion of the remaining spread to guarantee relates to products that are currently being marketed, sales of which could be negatively impacted if we reduced crediting rates.

The increase in product charge revenue was due to continued growth and aging of our insurance blocks and the impact of a management action to reduce non-guaranteed cost of insurance bonuses (partial refunds) on certain older UL-type life products. Cost of insurance charges (COIs) grew 15.5% compared to the 2004 quarter largely due to a $12.7 accrual release associated with this reduction in certain non-guaranteed COI bonus rates. These bonuses are paid to certain policyholders at specified policy anniversaries for continuing coverage. This reduction in bonus rates will favorably impact quarterly COI charges prospectively by $1 after tax, through lower refunds of COIs, on a comparative basis. Excluding this impact, COIs grew 6.0% over the 2004 quarter from an increase in the average age of our insureds (this contributes to increased death benefits as well) and growth in face amount of UL-type policies. We defer expense charges received in excess of ultimate annual expense charges and amortize them into income relative to future estimated gross profits. Products issued in recent years are designed to generate a higher proportion of their revenues from expense charges. We adjusted our assumptions primarily for mortality on certain blocks of business and recognized an unlocking adjustment of $1.9 that reduced amortization of unearned expense charges. Excluding this impact, expense charges increased over the 2004 quarter due to changes in product mix. Surrenders of policies subject to a surrender charge decreased during the quarter resulting in lower surrender charge income compared to the 2004 quarter.

UL-type death benefits increased $8.7 over the prior year quarter. UL-type death benefits, net of reinsurance, per thousand dollars of average net face amount at risk (average face amount of insurance in force net of reinsurance and reduced by average policyholder fund balances) were $0.68, in the high end of the normal first quarter range, compared to $0.62 in the 2004 quarter. Aging of our blocks will continue to contribute to increasing levels of UL-type death benefits. While over the long term death benefits should emerge within actuarial expectations, the level of death benefits will fluctuate from period to period. Other UL-type insurance benefits increased $4.4 over the prior year quarter primarily due to growth in reserves related to secondary guarantees and other benefit features.

Consistent with the trend in recent years, traditional premiums and other considerations declined from the first quarter of 2004, reflecting customer preferences for UL-type products. Net investment income from our traditional blocks declined period over period due to a decline in investment yields, partly due to lower prepayments of mortgage-backed securities, and the decreasing size of the block.

Policy benefits on traditional business include death benefits, dividends, surrenders and changes in reserves, with the most significant being death benefits. Policy benefits as a percentage of premiums and other considerations were 119.9%, up slightly from 117.9% in the 2004 quarter.

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Total Individual expenses (including the net deferral and amortization of DAC and VOBA) were as follows:

Expenses, excluding amortization of DAC and VOBA, decreased in the first quarter of 2005 from the 2004 quarter due to lower general and administrative expenses and higher capitalization of commission expenses. Gross commissions increased from higher sales. Taxes, licenses and fees showed an increase due to a state income tax accrual release recognized in the 2004 quarter. The expense amounts we capitalize as DAC include first-year commissions and deferrable acquisition expenses. We recognized unlocking adjustments in the first quarter of 2005 for the effect of the COI bonus accrual release, which reduced amortization of DAC and VOBA for UL-type products by $16.5, and for adjusting our assumptions primarily for mortality on certain blocks of business, which increased amortization of DAC and VOBA for UL-type products by $0.5. During the first quarter of 2004, we adjusted our assumptions for interest spreads, mortality and lapsation on certain blocks of business resulting in a reduction in DAC amortization on UL-type products of $8.5. Excluding these impacts, growth in our insurance blocks for UL-type products was the primary contributor to the increase in the amortization of DAC and VOBA period over period.

The growth in average Individual Products assets in 2005 was primarily due to growth in UL policyholder fund balances, partially offset by declines in assets supporting our traditional block of business and market values of separate account assets.

Our financial and operating risks for this segment include failure to achieve pricing assumptions for interest margins, mortality, withdrawals and expenses; variances between actual and underlying assumptions of estimated gross profits, increased lapses when interest rates rise, particularly in fixed interest UL-type products subject to low or no surrender charges; increased lapses for $2 billion of UL policyholder fund balances sold to community banks that are serviced by two marketing organizations and are generally not subject to surrender charges; changes in taxation or other regulatory changes related to our products and competing offerings; changes in generally accepted or statutory accounting principles (such as the AXXX actuarial guideline discussed in Capital Resources); and the effects of unresolved litigation. We discuss these risks in more detail in the Critical Accounting Policies and Estimates, Capital Resources, Liquidity, and Market Risk Exposures sections of our Form 10-K.

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Annuity and Investment Products

Annuity and Investment Products (AIP) are marketed through most of the distribution channels discussed in Individual Products above as well as through financial institutions, investment professionals and annuity marketing organizations. JPSC markets primarily variable life insurance written by our insurance subsidiaries and other carriers, and also sells other securities and mutual funds.

Reportable segment results⁽¹⁾ for AIP were as follows:

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The following table summarizes key information for AIP that we believe to be important drivers and indicators of our future profitability.

Fixed annuity premium sales decreased in the first quarter of 2005 versus 2004 from the effects of a flattening interest rate yield curve and from competition from other products. Equity-indexed annuities (EIAs) comprised over three-fourths of our AIP sales during the first quarter of 2005. We continue to develop differentiated annuity products designed to create new distribution opportunities and strengthen existing marketing relationships.

Profitability of EIAs is influenced by the management of derivatives to hedge the index performance of the policies. These contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500 Index®. Policyholders may elect to rebalance index options at renewal dates, either annually or biannually. At each renewal date, we have the opportunity to re-price the equity-indexed component by establishing participation rates, subject to minimum guarantees. We purchase options that are highly correlated to the portfolio allocation decisions of our policyholders, such that we are economically hedged with respect to equity returns for the current reset period. The mark-to-market of the options we hold impacts investment income and interest credited in approximately equal and offsetting amounts. For the first quarter of 2005 this adjustment decreased both net investment income and interest credited by $8.9 compared to an increase of $0.6 for the prior period, with no net impact on reportable segment results. However, SFAS 133 requires that we calculate the fair values of index options we will purchase in the future to hedge policyholder index allocations applicable to future reset periods. These fair values represent an estimate of the cost of the options we will purchase in the future, discounted back to the date of the balance sheet, using current market indicators of volatility and interest rates. Changes in the fair values of these liabilities result in volatility that is reported in interest credited. Interest credited was decreased by $6.2 and $0.2 in the first quarter of 2005 and 2004. The notional amounts of policyholder fund balances allocated to the index options were $1,151 at March 31, 2005 and $476 at March 31, 2004.

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Excluding the impact of the options market value adjustment described above, net investment income increased at a lower rate than the growth in average policyholder fund balances due to a decline in investment yields. Lower investment yields resulted from a decline in our base earned rate caused by declining interest rates, partially offset by an increase in excess investment income items. The effect of these excess investment income items in the AIP segment increased effective yields by 18 and 10 basis points in the first quarter of 2005 and 2004.

We actively manage spreads on fixed annuity products in response to changes in our investment portfolio yields by adjusting the interest rates we credit on annuity policyholder fund balances while considering our competitive strategies. Our newer product designs in AIP require lower spreads to achieve targeted returns and require lower levels of capital to support new sales. These factors, combined with the current interest rate environment, will likely result in earnings that lag behind growth in average fund balances for a period of time. Effective investment spreads on fixed annuities increased in the first quarter of 2005 compared to 2004 because the decline in investment yields was mitigated by a reduction in crediting rates (including the effect of MYG lapses discussed below), the effect of SFAS 133 and excess investment income items.

Our ability to manage interest crediting rates on fixed annuity products is limited by continued low general market interest rates, as the investment of cash flows at current interest rates reduces our average portfolio yield, and crediting rate actions are limited by minimum guaranteed rates provided in policyholder contracts. We have approximately $4.3 billion of average fixed annuity policyholder fund balances with crediting rates that are reset on an annual basis, for which our average crediting rates in the first quarter of 2005 were approximately 11 basis points in excess of average minimum guaranteed rates, including 55% that were already at their minimum guaranteed rates. Approximately $3.1 billion of fixed annuity policyholder fund balances have multi-year guaranteed rates (MYG), approximately $700 of which have begun to reset in 2005 with an additional $2.4 billion resetting in 2006 and thereafter. As multi-year guarantees expire, policyholders have the opportunity to renew their annuities at rates in effect at that time. Our ability to retain these annuities will be subject to then-current competitive conditions. The average spread to the minimum underlying guarantee on these products is approximately 250 basis points. In the first quarter of 2005, $106 of fixed annuity policyholder fund balances reset, of which approximately $74 lapsed where the holder did not select another product that we offer. These lapses reduced policyholder fund balances and increased DAC amortization but also increased investment spreads. Surrenders are affected by factors such as crediting rates on MYG annuities compared to current crediting rates at reset dates and the absence of surrender charges at reset dates.

Fixed annuity surrenders as a percentage of beginning fund balances increased in the first quarter of 2005 reflecting, in part, the surrender of annuities with expiring MYGs. The increase in fixed annuity surrenders, other than resetting MYG annuities, favorably impacted surrender charge revenues. The surrender rate in the AIP segment is influenced by many other 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 up-front 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. In addition to surrender charge protection against early surrender, we have added a market value adjustment (MVA) to many of our new annuity products. The MVA provides some degree of protection from disintermediation in a rising interest rate environment. Fixed annuity fund balances subject to surrender charges of at least 5% or an MVA were 47% at March 31, 2005 and 2004, as strong sales of EIAs offset the decline in the existing inforce that is subject to these surrender charges or an MVA.

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Total AIP expenses (including the net deferral and amortization of DAC and VOBA) were as follows:

Commissions and capitalized expenses decreased from lower sales compared to the first quarter of 2004. General and administrative acquisition expenses increased despite the sales decline due to an increase in distribution expenses. In the first quarter of 2005, we updated our assumptions for lapsation of MYG annuities through an unlocking adjustment that increased amortization of DAC and VOBA by $4.4. Additionally, amortization of DAC and VOBA increased in the first quarter of 2005 from true-ups of $3.4, resulting from the favorable change in the fair value of EIA option liabilities and excess investment income. In the first quarter of 2005, broker/dealer expenses increased at a slightly higher rate than revenues due to higher effective commission rates and higher taxes, licenses and fees versus the first quarter of last year.

Risks in the annuity business are spread compression; increased lapses from maturity of MYG annuities which could result in increased DAC amortization; increased lapses when interest rates rise, particularly in the portion of business subject to low or no surrender charges or MVA; execution risk on EIA hedges; the possible effects of litigation; changes in taxation of our products or products they might compete with; and competition from variable annuities or other financial services in an evolving market for investment products. We discuss these risks in more detail in the Capital Resources and Liquidity sections and in the Market Risk Exposures section of our Form 10-K.

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Benefit Partners

The Benefit Partners segment markets products 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.

Reportable segment results (1) for Benefit Partners were as follows:

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The following table summarizes key information for Benefit Partners that we believe to be important drivers and indicators of our future profitability.

Total revenues and reportable segment results for Benefit Partners increased substantially in the first quarter over the 2004 quarter. The increase reflects a full quarter’s results from the Canada Life business (“the Canada Life block”) in 2005 versus one month in 2004. The 2005 quarter also reflected strong earnings emergence from favorable claim experience and reserve development of approximately $16 after tax that may not repeat, partially offset by $3 after tax of elevated DAC amortization that is discussed later. See Note 9 for further discussion of the Canada Life transaction.

Excluding the Canada Life block, premiums and other considerations increased 16.5% over the 2004 quarter due to strong growth in the life and disability business. Annualized sales increased 30.8% during the first quarter of 2005, due to strong growth in the number of our field representatives,

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in part due to representatives added from acquiring the Canada Life block, and from good sales execution.

Policy benefits increased only 4.4% in the first quarter of 2005 compared to the prior period due to a significantly improved combined loss ratio of 62.3%, driven by favorable life and long-term disability results. In our life business, we experienced favorable waiver claims incidence and favorable waiver claim terminations. In long-term disability, we experienced favorable claims incidence and favorable claims terminations. In each product line, effective claims management contributed to the favorable claims termination experience. In addition to these impacts, emerging experience and the related claim reserve development were very favorable for the quarter. Together, these factors significantly decreased our loss ratios. We believe the loss ratios experienced during calendar 2004 (low-to-mid 70s) to be more representative of longer-term expectations.

Expenses were as follows:

Total expense growth for the first quarter of 2005 reflects the overall growth in the business and a full quarter impact of Canada Life as compared to the prior quarter. DAC amortization for the 2005 quarter reflects $5.3 of accelerated amortization related to a dynamic adjustment for persistency on the Canada Life block. Although we had anticipated a certain amount of “shock lapse” to occur on the Canada Life business as it is renewed with the Company, the actual lapsation during the quarter was higher than forecasted. Absent this item, the increase in the expense ratio for the 2005 quarter relative to the 2004 quarter was driven by a slightly higher average commission ratio during the 2005 quarter, and higher unit expenses for taxes, licenses and fees, without the benefit of favorable state taxes in the 2004 quarter.

Risks beyond normal competition that may impact this segment include the potential for increased loss ratios in our disability business as it continues to grow; lower investment spreads on investments backing longer-tail liabilities that could require us to lower our discount rate; increased morbidity risk due to a weak economy that may increase disability claim costs (an industry-wide phenomenon); continued medical cost inflation that can put pressure on non-medical benefit premium rates because employers may focus more on the employer’s cost of non-medical programs; mortality risks including concentration risks from acts of terrorism not priced for or reinsured; and regulatory or litigation risks such as might result from matters the Office of the New York Attorney General and others have investigated, although we have not received any subpoenas. A

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discontinuation of our Exec-U-Care® program would have a significant impact on segment revenues, but only a minimal effect on reportable segment results. We discuss these risks in more detail in the Benefit Partners section of our Form 10-K.

Communications

JPCC operates radio and television broadcast properties and produces syndicated sports programming. Reportable segment results⁽¹⁾ for Communications were as follows:

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Communications revenues increased 4.1% over the first quarter of 2004 due to growth in radio and sports. Combined revenues for radio and television increased 1.7% over the first quarter of 2004 due to improved revenue shares in several markets, combined with modest growth in our markets. Advertising revenues from Sports operations increased $1.6 or 14.2% over the first quarter of 2004 due to increased demand for our basketball products. Typically, political advertising favorably impacts television revenues in even numbered years and as a result, television revenues declined 1.1% compared to the first quarter of 2004. Excluding the impact of political advertising, television revenues increased 1.1%.

Broadcast cash flow, a non-GAAP measure that is commonly used in the broadcast industry, is calculated as communications revenues less operating costs and expenses before depreciation and amortization. Broadcast cash flow increased by 5.5% over the first quarter of 2004 due to increases in revenues combined with effective operating expense control in all the businesses.

Cost of sales represents direct and variable costs, consisting primarily of sales commissions, rights fees, and sports production costs. Operating expenses represent other costs to operate broadcast properties, including salaries, marketing, research, purchased programming and station overhead costs. Total expenses, excluding interest expense, increased 3.5% over the first quarter of 2004. As a percent of communication revenues, these expenses were 68.8% and 69.2% for the first quarter of 2005 and 2004.

Radio and television stations require a license, subject to periodic renewal, from the FCC to operate. While management considers the likelihood of a failure to renew remote, any station that fails to

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receive renewal would be forced to cease operations. We currently have two television stations that are operating under expired licenses pending renewal, as allowed by the FCC. The FCC is delaying all commercial broadcast license renewals in these states until all complaints against any commercial broadcast station in that state are resolved. We are unaware of any complaints involving JP stations.

Because our broadcasting businesses rely on advertising revenues, they are sensitive to cyclical changes in both the general economy and in the economic strength of local markets. Furthermore, our stations derived 24.8% of their advertising revenues from the automotive industry in the first quarter of 2005 and 25.5% in the first quarter of 2004. If automobile advertising is severely curtailed, it could have a negative impact on broadcasting revenues. In the 2005 quarter, 7.8% of television revenues came from a network agreement with our CBS-affiliated stations that expires in 2011. The trend in the industry is away from the networks compensating affiliates for carrying their programming and there is a possibility those revenues will be eliminated when the contract is renewed. Many different businesses compete for available advertising sales in our markets, including newspapers, magazines, billboards and other radio and television broadcasters. Technological media changes, such as satellite radio and the internet, and consolidation in the broadcast and advertising industries, may increase competition for audiences and advertisers.

Corporate and Other

The Corporate and Other segment includes the excess capital of the insurance subsidiaries, other corporate investments including defaulted 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 (such as advertising and charitable and civic contributions). All net realized capital gains and losses, which include other-than-temporary impairments of securities, are reported in this segment.

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Reportable segment results⁽¹⁾ for Corporate and Other were as follows:

Earnings on investments and other income increased $2.2 in the first quarter of 2005, including an increase in default charges received from the operating segments (see Note 3), real estate income, income recovery on defaulted bonds and growth in invested assets. Partially offsetting this increase is $3.6 from a Bank of America merger class action suit that settled in the first quarter of 2004. Default charges are received from the operating segments for this segment’s assumption of all credit-related losses on the invested assets of those segments. We discuss these charges in more detail in the Corporate and Other section of our Form 10-K. 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 bonds defaulted or sold at a loss.

Interest expense on debt increased by $3.0 in the first quarter of 2005 versus 2004 due primarily to an increase in short-term interest rates. See Note 8 of the Consolidated Financial Statements in our Form 10-K for details of our debt structure and interest costs. Operating expenses vary from period to period based upon the level of corporate activities and strategies.

Realized investment gains and losses were as follows: