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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FORFor the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NUMBERSECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9254
UNUM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)Corporation
(Exact name of registrant as specified in its charter)
----------------
DELAWAREDelaware
01-0405657
(STATE OR OTHER JURISDICTION OF(State or other jurisdiction of (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.Employer Identification No.)
incorporation or organization)
04122
2211 CONGRESS STREET, PORTLAND, MAINE 04122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)Congress Street, Portland, Maine (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:Registrant's telephone number, including area code: (207) 770-2211
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------------------- -------------------------------------------Title of each class Name of each exchange on which registered
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Common stock, $0.10 par value New York Stock Exchange
Pacific Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Pacific Exchange
8.8% Junior Subordinated Deferrable Interest New York Stock Exchange
Debentures, Series A, Due 2025
6.75% Notes, due 2028 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONESecurities registered pursuant to Section 12(g) of the Act: None
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 _X_[X] No ___[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ][X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 10, 1995,February 19, 1999, was approximately $3,044,100,000.$6,721,800,000.
As of March 10, 1995, 72,536,338February 19, 1999, 138,905,041 shares of the registrant's common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information from the Registrant's proxy statement dated March 28, 1995, is
incorporated by reference into Part III.
Exhibit Index appears on page 83.
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Amendment No. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report on Form 10-K for
the year ended December 31, 1998:
Additional disclosures in the Disability Insurance segment section to discuss
the claim operations integration activities and additional financial
information in the chart preceding each segment discussion have been provided
in Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Also, additional disclosures relating to the following "Notes to Consolidated
Financial Statements" in Item 8 "Financial Statements and Supplementary Data"
have been provided:
o special item designation in Note 1 "Summary of Significant Accounting
Policies,"
o the claim operations integration activities and the description of the
discount rate used to calculate reserves in Note 4 "Reserves" and
o the proposed merger with Provident Companies Inc. in Note 17 "Proposed Merger
with Provident and Pro Forma Combined Condensed Financial Statements
(Unaudited)."
In addition, the registrant hereby amends Item 12 "Security Ownership of
Certain Beneficial Owners and Management," to include a holder of more than
five percent of UNUM Corporation common stock as of December 31, 1998, that was
inadvertently excluded.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date June 1, 1999 /s/ ROBERT E. BROATCH
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Robert E. Broatch
Senior Vice President and
Chief Financial Officer
TABLE OF CONTENTS
PART I
ITEM PAGEItem Page
- ---- ----
PART I
1. Business......................................................................................................Business ................................................................................. 1
A. Description of Business...................................................................................Business ............................................................... 1
B. Employee Benefits Segment.................................................................................Disability Insurance Segment .......................................................... 2
C. Related Businesses Segment................................................................................Special Risk Insurance Segment ........................................................ 4
D. Colonial Companies Segment................................................................................Products Segment ............................................................. 5
E. Individual Disability Segment.............................................................................Retirement Products Segment ........................................................... 5
F. Retirement Security Segment...............................................................................Investments ........................................................................... 5
G. Other Operations Segment..................................................................................
H. Investments...............................................................................................
I. Risk Management and Reinsurance...........................................................................Reinsurance ....................................................... 5
H. Reserves .............................................................................. 6
I. Employees ............................................................................. 6
J. Reserves..................................................................................................Competition ........................................................................... 6
K. Employees.................................................................................................Regulation ............................................................................ 6
L. Competition...............................................................................................
M. Regulation................................................................................................
N. Participation Fund Account................................................................................Account ............................................................ 7
2. Properties....................................................................................................Properties ............................................................................... 7
3. Legal Proceedings.............................................................................................Proceedings ........................................................................ 7
4. Submission of Matters to a Vote of Security Holders...........................................................Holders ...................................... 7
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters.....................................Matters ................ 8
6. Selected Financial Data.......................................................................................Data .................................................................. 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................Operations .... 10
7A. Quantitative and Qualitative Information about Market Risk ............................... 27
8. Financial Statements and Supplementary Data...................................................................Data .............................................. 28
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................Disclosure ..... 65
PART III
10. Directors and Executive Officers of the Registrant............................................................Registrant ....................................... 65
A. Directors of the Registrant...............................................................................Registrant ........................................................... 65
B. Executive Officers of the Registrant......................................................................Registrant .................................................. 66
11. Executive Compensation........................................................................................and Director Compensation ...................................................... 67
12. Security Ownership of Certain Beneficial Owners and Management................................................Management ........................... 72
13. Certain Relationships and Related Transactions................................................................Transactions ........................................... 73
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................................
Signatures....................................................................................................
Report of Independent Accountants.............................................................................
Report of Independent Auditors................................................................................8-K .......................... 74
Signatures ............................................................................... 75
Index to Financial Statement Schedules........................................................................
Index to Exhibits.............................................................................................Exhibits ........................................................................ 83
UNUM Corporation and Subsidiaries
PART I
ITEMItem 1. BUSINESS
A. DESCRIPTION OF BUSINESSDescription of Business
UNUM Corporation is a Delaware corporationinsurance holding company organized in
1985 as an insurance
holding company. UNUM Corporation and1985. Operations of its subsidiaries, ("UNUM") are the leading
provider of group long term disability insurance ("group LTD") in the United
States and the United Kingdom. UNUM is also a major provider of employee
benefits, individual disability insurance and special risk reinsurance. UNUM
also markets long term care and retirement income products. The operations of
the following subsidiariesdescribed below, account for
substantially all of UNUM'sUNUM Corporation and subsidiaries' ("UNUM") consolidated
assets and revenues. UNUM Corporation is based in Portland, Maine, and through
its affiliates has operations in North America, the United Kingdom, and the Pacific
Rim.Rim and Latin America. UNUM conducts its operationsis:
o the leading provider of group long term disability insurance ("group
LTD") in the United States and the United Kingdom;
o the leading provider of group short term disability insurance ("group
STD") in the United States; and
o a major provider of group life, individual disability ("ID"), long term
care ("LTC") insurance, special risk reinsurance operations and
payroll-deducted voluntary employee benefit products.
UNUM conducts operations in North America through a number of
wholly-owned subsidiaries:subsidiaries
including:
o UNUM Life Insurance Company of America ("UNUM America"), a Maine life
insurance company licensed in 49 states, the District of Columbia and
Canada, the
leading provider of group disability insurance in the nation, and a provider of
employee benefits, long term care and retirement products;Canada;
o First UNUM Life Insurance Company ("First UNUM"), a New York life
insurance company;
Commercial
Life Insurance Company, a Wisconsin life insurance company and a leader in
special risk insurance and professional association insurance marketing;
Duncanson & Holt, Inc., a New York corporation and a leading accident and health
reinsurance underwriting manager;o Colonial Companies, Inc. ("Colonial Companies"), a Delaware holding
company; and UNUM Holding Company, a Delaware corporation.company whose wholly-owned subsidiary, Colonial Life & Accident Insurance
Company a wholly-owned subsidiary of Colonial Companies,
Inc.("Colonial"), is a South Carolina life insurance company licensed
in 49 states and the leader in payroll-deducted voluntary employee benefits offered to
employees at their worksites. Through UNUM Holding Company, UNUM Corporation
also owns UNUM Sales Corporation, a licensed broker-dealer incorporated in
Delaware, and Claims Service International,District of Columbia;
o Duncanson & Holt, Inc. ("D&H"), a Delaware corporation,New York corporation; and
o Options and Choices, Inc. ("OCI"), based in Wyoming and acquired in 1997,
which provides claims administration services.
UNUM Corporation also holds all of the outstanding capital stock of UNUM
European Holding Company, which is incorporated in the United Kingdom.delivers integrated information and analysis to help organizations
manage their health and disability program costs.
UNUM's United Kingdom operations are conducted byby:
o UNUM Limited, which is the United
Kingdom's leader in group disability insurance and a wholly-owned subsidiary of UNUM European Holding Company,
which is wholly-owned by UNUM Corporation; and
o Duncanson & Holt Europe Ltd., a wholly-owned subsidiary of Duncanson & Holt, Inc.D&H.
UNUM's JapanesePacific Rim operations are conducted through a wholly-owned subsidiary,led by:
o UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), a
wholly-owned Japanese non-life insurance company which was established in 1994.
UNUM's Latin America operations are led by:
o Boston Compania Argentina de Seguros SA ("Boston Seguros"), a general
lines property/casualty, life and workers' compensation insurance
company, purchased in 1997 and based in Argentina.
On December 3, 1992,November 22, 1998, UNUM entered into an agreement with Provident
Companies Inc. ("Provident"), pursuant to which UNUM and Colonial Companies, Inc.Provident will merge
under the name UNUMProvident Corporation ("Colonial"UNUMProvident"). Under the merger
agreement ("the merger"), signed
a definitive merger agreement. On March 26, 1993, Colonial Class Aeach outstanding share of Provident common stock shareholders voted to approve the merger. Under the agreement, UNUM exchanged
0.731 shareswill
be reclassified and converted into 0.73 of itsa share of UNUMProvident common
stock forand each outstanding share of Colonial Class A and BUNUM common stock outstanding on March 26, 1993. UNUM issued approximately 11.4 million
shares of common stock from treasury in connection with the merger. In addition,
outstanding options to acquire shares of Colonial Class B common stock werewill be converted into
options to acquire sharesone share of UNUMUNUMProvident common stock. The merger waswill be accounted for as a
pooling of interests.
The transaction is expected to be completed by midyear 1999, and is
subject to clearance or approval by certain federal and state regulators,
approval by shareholders of both companies, and customary closing conditions.
Shareholders who collectively have beneficial ownership representing
approximately 26% of Provident's common stock have agreed to vote in favor of
the merger. As a result of the merger, approximately 58% of UNUMProvident will
be owned by current UNUM reports its operations principallyshareholders immediately prior to the merger and 42%
of UNUMProvident by current Provident shareholders immediately prior to the
merger.
1
In October 1996, UNUM America and First UNUM closed the sale of their
group tax-sheltered annuity ("TSA") businesses to two insurance subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
contracts were initially reinsured on an indemnity basis. Upon consent of the
TSA contractholders and participants, the contracts are considered reinsured on
an assumption basis, legally releasing UNUM America and First UNUM from future
contractual obligation. As of December 31, 1998, consents for assumption
reinsurance have been received relating to substantially all assets under
management.
B. Disability Insurance Segment
The Disability Insurance segment, which in six business segments: Employee
Benefits, Related Businesses, Colonial Companies, Individual1998 accounted for 57% and 59%
of UNUM's revenues and income before income taxes, respectively, includes
disability products offered in North America, the United Kingdom and Japan.
UNUM America and First UNUM market their group insurance and individual
insurance products, included in the Disability Retirement SecurityInsurance and Other Operations. Corporate includes transactions which
are generally non-insurance related, expenses incurredSpecial Risk
Insurance segments, through a network of 40 offices in connectionthe United States and
Canada utilizing brokers. As of December 31, 1998, these branch offices were
organized into five regions and were staffed with UNUM's
long-term strategic investment in Japan,approximately 1,140
management, sales, service and interest expense on corporate
borrowings.administrative personnel.
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Product Description Customer Focus Other Information
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UNUM America and First UNUM
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Group LTD Coverage for loss of earned Employer groups consisting of Group LTD is UNUM's principal
income due to injury or sickness, executive, administrative, product. Since 1976, UNUM
effective after a waiting period, to management personnel; America and First UNUM
specified maximums as a professionals such as educators, combined have been the leading
percentage of income and length consultants, health care providers, provider of group LTD, based on
of time. accountants and engineers. inforce cases and premium,
according to Employee Benefit
Plan Review.
Sold primarily on a basis
permitting periodic repricing to
address the underlying claims
experience and the interest rate
environment.
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Group STD Coverage for loss of earned Employer groups consisting of UNUM America and First UNUM
income due to injury or sickness, executive, administrative, combined are the leading provider
effective immediately for management personnel; of group STD based on premium
accidents, and after one week for professionals such as educators, and inforce lives according to
sickness, for up to 26 weeks, to consultants, health care providers, Employee Benefit Plan Review
specified maximums as a accountants and engineers. for 1997.
percentage of income.
Sold primarily on a basis
permitting periodic repricing to
address the underlying claims
experience and the interest rate
environment.
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LTC Pays a benefit upon the loss of Group LTC is offered to employer Marketed on a guaranteed
two or more Activities of Daily groups of 15 or more participants. renewable basis. All policies cover
Living (e.g. bathing, dressing, Groups can offer coverage to costs related to licensed nursing
feeding) and the insured's retirees and employees, and their home care; optional coverage is
requirement of standby assistance spouses, parents and grandparents. available for professional and/or
or cognitive impairment; pays on informal home care and inflation
an indemnity basis, regardless of Individual LTC is offered on a protection.
expenses incurred, up to a lifetime single customer basis and to
maximum. smaller employer groups.
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2
UNUM Corporation and Subsidiaries
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Product Description Customer Focus Other Information
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UNUM America and First UNUM
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Lifelong Coverage for loss of earned Professionals, corporate UNUM America and First UNUM
Disability income due to injury or sickness. executives, business owners, and combined are a major provider of
Protection administrative support personnel. individual disability income
("LDP") policies measured by inforce
premium for the United States and
Canada, according to the Life
Insurance Marketing Research
Association's 1997 Individual
Health Issues and Inforce Survey.
Issued on a guaranteed renewable
basis, with the right to reprice
inforce policies subject to
regulatory approval.
Provides benefits and transitional
support for moderate disabilities,
with richer benefits for severe
disabilities. Common options
include additional coverage for
catastrophic injury or illness and
an option to convert to an LTC
policy at retirement age.
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Association Coverage for loss of earned Members of professional UNUM America is a leading
disability income due to injury or sickness. associations. provider of disability insurance in
the association marketplace.
UNUM introduced new
conditionally renewable products
in 1997.
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LTD reinsurance Reinsurance of other insurance Insurance companies participating Managed by Duncanson & Holt
companies' LTD insurance risks. in reinsurance facilities. Services, Inc., a leading manager
of group LTD reinsurance in the
United States and a wholly-owned
subsidiary of D&H.
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Non-cancellable No longer actively marketed by UNUM America or First UNUM in the Refer to Item 8 Note 6
ID products United States. "Reinsurance" for a detailed
discussion of reinsurance coverage
of the active life reserves of
UNUM America's existing United
States non-cancellable ID block of
business by Centre Life
Reinsurance Limited.
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UNUM Limited
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Group LTD Similar to United States product. The leading provider of group
LTD insurance in the United
Kingdom, based on premium
Executive, administrative and revenue, per ERC Frankona
management personnel and other Reassurance Ltd's annual group
professionals. risk survey for 1997.
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Individual Similar to United States product, Marketed through a network of
disability subject to local welfare independent financial advisors and
regulations. selected United Kingdom
insurance companies.
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UNUM Japan
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Group and Similar to United States products. Executive, administrative and Marketed through contracted
individual LTD management personnel and other independent agents and brokers.
professionals.
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Credit LTD Protection for mortgage/home Salaried workers. Marketed through banks and
lease payments in the event of credit unions.
disability.
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3
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Product Description Customer Focus Other Information
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LTD reinsurance Assumption of certain insurance Insurance companies participating Primarily quota share coinsurance
risk through long term disability in reinsurance facilities. with the direct insurer subject to
reinsurance operations for policies compliance with UNUM Japan's
in Japan and Hong Kong. risk management standards for
pricing, underwriting and claims
management.
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Refer to Item 7 under the caption "Disability Insurance Segment" and Item
8 (Note 16)Note 16 "Segment Information" for more information.
B. EMPLOYEE BENEFITS SEGMENTC. Special Risk Insurance Segment
The Employee BenefitsSpecial Risk Insurance segment which in 19941998 accounted for 47.3%28% and 31% of
UNUM's revenues and 129.8% of its income before income taxes, markets a range ofrespectively. The Special Risk
Insurance segment's group
disability, group life and other specialty insurance products to employers.
Group LTD is the Employee Benefits segment's principal product. UNUM targets
sales of group LTD to executive, administrative and management personnel and
other professionals. Since 1976, UNUM has been the nation's leading provider of
group LTD according to EMPLOYEE BENEFIT PLAN REVIEW, a recognized industry
publication.
Group LTD provides employees with insurance coverage for loss of income in
the event of inability to work due to sickness or injury. Most of these policies
begin providing benefits following 90 or 180 day waiting periods and continue
providing benefits until the employee reaches age 65-70. Group LTD benefits are
paid monthly and generally are limited to
two-thirds of the employee's earned income up to a specified maximum benefit.
Premiums for group LTD insurance are based upon the expected mortality,
morbidity and persistency of the insured group as well as assumptions concerning
operating expenses and future interest rates.
UNUM's group life insurance product provides term insurance for employees.
It is marketed primarily to executive, administrative and management personnel.
As reported by EMPLOYEE BENEFIT PLAN REVIEW FOR 1993, the most recent available
data, UNUM was the third largest writer of group life insurance, based on number
of contracts inforce.
Group short term disability insurance ("Group STD") provides employees with
insurance coverage for loss of income in the event of inability to work due to
sickness or injury. Most of these policies begin providing benefits immediately
for accidents or following a one week waiting period for sickness and continue
providing benefits for up to 26 weeks. Group STD benefits are paid weekly and
generally are limited to 60% of the employee's earned income up to a specified
maximum benefit. As reported by EMPLOYEE BENEFIT PLAN REVIEW, UNUM was one of
the top five providers of STD for 1993, based on premium and number of lives
inforce.
UNUM markets other employee benefits products including accidental death and
dismemberment, and dental insurance. UNUM's flexible benefits product provides
employees with the opportunity to allocate benefit dollars among the various
combinations of employee benefits products.
Employee Benefits' group insurance is sold primarily on a basis
that permits
annual repricing. This enablespermitting periodic repricing, enabling UNUM to adjust the pricing of its
products to more closely matchaddress the underlying claimclaims experience and interest rate
environment.
UNUM markets
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Product Description Customer Focus Other Information
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UNUM America and First UNUM
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Group life Term life insurance; universal Broad range of employees. UNUM America and First UNUM
products life insurance; accidental combined were the fourth largest
death and dismemberment riders. writer of group life insurance in
the United States for 1997 based
on number of inforce contracts
per Employee Benefit Plan
Review. Marketed through
independent brokers and specialty
agents; also offered through the
association group channel.
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Group special risk Travel and voluntary accident To employees on an employer or Marketed through a network of
insurance. employee-paid basis. independent brokers and specialty
agents.
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Duncanson & Holt
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Reinsurance Provides reinsurance facility Insurance companies participating Special risk reinsurance operations
business management services which may in reinsurance facilities. include UNUM America's
include marketing, underwriting, participation in reinsurance
administration, claims payment facilities managed by D&H and
and actuarial services. direct reinsurance arrangements
primarily for accident and health,
long term care and other special
risk business. As a member
company in special risk
reinsurance facilities managed by
D&H, UNUM America assumes a
share of the insurance risk of
those facilities.
A leading accident and health
reinsurance underwriting manager
which has offices throughout the
United States and in London,
Toronto, Bermuda and Singapore.
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D&H and its Employee Benefits' insurance products through a networksubsidiaries, with the exception of
33 offices in the United States and Canada, which distribute these products as
well as the products offered by the Retirement Security segment, through
brokers. As of December 31, 1994, these branch offices were organized into four
regions and were staffed with approximately 590 management, sales, service and
administrative personnel.
Refer to Item 7 and Item 8 (Note 16) under the caption "Employee Benefits
Segment" for more information.
C. RELATED BUSINESSES SEGMENT
The Related Businesses segment in 1994 accounted for 15.6% of UNUM's
revenues and 30.4% of its income before income taxes. The Related Businesses
segment includes UNUM Limited in the United Kingdom, Commercial Life Insurance
Company ("Commercial Life"), and reinsurance operations including Duncanson & Holt
Inc.
On July 2, 1990, UNUM acquired all of the outstanding shares of National
Employers' Life Assurance Company LimitedUnderwriters Ltd. ("NEL"). On August 1, 1990, UNUM
acquired certain remaining policyholder interests of a NEL subsidiary, N.E.L.
Permanent Health Insurances Limited (now known as UNUM Limited). In the third
quarter of 1990, UNUM announced plans to restructure the operations of its
United Kingdom acquisition by continuing to develop the permanent health
insurance (long term disability) business through UNUM Limited and by divesting
the life, pension and mortgage businesses of NEL. On January 6, 1992, the NEL
businesses were sold.
UNUM Limited is the leading provider of group long term disability insurance
in the United Kingdom. UNUM Limited targets group long term disability sales to
management personnel, other professionals and technical and skilled artisans.
These products are marketed through a network of independent brokers. UNUM
Limited's long term disability products provide employees with insurance
coverage for loss of income in the event of inability to work due to sickness or
injury. UNUM Limited also markets individual disability insurance to
self-employed individuals and those not covered under group policies through
brokers and agents.
In May 1994, UNUM Limited assumed the management of the group risk portfolio
of Windsor Life Assurance Company Limited ("Windsor Life"), which included group
long term disability and group life products. Windsor Life was the third largest
group long term disability provider in the United Kingdom in 1993, as reported
by Employers Re. International.
Commercial Life is a leading provider of group special risk accident
products, including group travel and voluntary accident insurance. Commercial
Life also provides group universal life, group term life, and long term
disability, along with payroll deduction programs for employees through a
network of independent brokers and specialty agents. Commercial Life is a leader
in the association group marketplace, offering disability income, business
overhead expense, accidental death and dismemberment, hospital indemnity and
term life insurance to members of professional associations.
On July 30, 1992, UNUM purchased Duncanson & Holt, Inc. ("D&H"DHU"), a leading
accidentwholly-owned subsidiary of Duncanson and health reinsurance underwriting manager. As a reinsurance manager,
Holt
Europe Ltd. ("D&H provides pool management as well as marketing, underwriting, administration,
claims payment and actuarial services for client companies, but doesEurope"), do not bear any insurance risk. DHU participates in
various Lloyd's of London ("Lloyd's") syndicates as a corporate name bearing
insurance risk. D&H has offices throughout the United StatesEurope owns three Lloyd's Managing Agents which manage
syndicates that underwrite primarily personal accident and in London,
Toronto, and Singapore.other classes of
business at Lloyd's.
Refer to Item 7 under the caption "Special Risk Insurance Segment" and
Item 8 (Note 16) under the caption "Related Businesses
Segment"Note 16 "Segment Information" for more information.
4
D. COLONIAL COMPANIES SEGMENTColonial Products Segment
The Colonial CompaniesProducts segment, which includes Colonial and its affiliates,
in 19941998 accounted for 13.1%14% and 21% of UNUM's revenues and 31.6% of its income before income
taxes.taxes, respectively. Colonial Companies'
principal subsidiary, Colonial Life & Accident Insurance Company ("Colonial
Life"), markets a broad line of payroll-deducted,
voluntary benefits to
employeesemployee benefit products.
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Product Description Customer Focus Other Information
- ---------------------------------------------------------------------------------------------------------------------------
Accident and Benefit payments for disability Colonial products are marketed
sickness policies income, death, dismemberment or primarily through a 3,500 member
major injury. Designed to career sales force and 7,700
supplement Social Security, brokers, and through collaborative
workers' compensation and other sales with UNUM America. All
insurance plans. products are purchased solely with
employee funds.
Employees at their worksites. Policies are issued on a
guaranteed renewable basis. This
right to change premiums is, or
may be, subject to various state
insurance department rules,
regulations and approvals.
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Life insurance Universal life; whole life.
- ------------------------------------------------------
Cancer policies Designed to provide payments for
hospitalization and scheduled
medical benefits.
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Colonial Life focuses on personal accident and
sickness, life and cancer insurance plans.
Colonial Life's accident policies generally provide benefit payments for
disability income, death, dismemberment or major injury. Accident policies are
designed to supplement other benefits available through Social Security,
workers' compensation, and other insurance plans. Colonial Life offers a wide
range of life insurance products, with universal life and whole life accounting
for most of the life insurance sold. Colonial Life's cancer policies are
designed to provide payments for hospitalization and scheduled medical benefits,
with the amounts of such payments established by the policies. All of Colonial
Life's insurance policies are issued on a nonparticipating basis.
More than 95% of Colonial Life's premiums for 1994 were derived from
policies marketed to employees at their worksites, with premiums in most cases
to be collected through payroll deduction. Such policies are issued on a
"guaranteed renewable for life" basis, which means that Colonial Life cannot
refuse to renew any policy, but it does reserve the right on a
product-by-product basis to increase premiums for inforce policies. This right
to change premiums is or may be subject to various state insurance department
rules, regulations and approvals.
Since 1985, Colonial Life has marketedmarkets its accident and health products as qualified fringe
benefits that can be purchased with pretax employee dollars as part of a
flexible benefits program pursuant to Section 125 of the Internal Revenue Code.
In 1994, premiums from sales to employees participating in such programs
accountedCode,
accounting for approximately 48%47% of its total premiums. A flexiblepremiums in 1998. Flexible
benefits program
assistsprograms assist employers in managing their benefitsbenefit and compensation
packages and providesprovide policyholders with the ability to choose the benefits that best
meet their needs. Although Congress mightcould change the tax laws to limit or eliminate fringe
benefits available on a pretax basis, and such a change could limit or
eliminate Colonial Life'seliminating Colonial's ability to
continue marketing its products in this way,way. However, Colonial Life believes its
products provide value to its policyholders, value, which will remain even if the tax
advantages offered by flexible benefit programs are eliminated.
Colonial Life markets its products nationwide primarily through a
5,300-member independent contractor sales force. Approximately 1,150 home office
employees provide corporate administration, sales support, internal services and
systems, claims processing, policyholder services, and employer services.
Colonial Companies' subsidiary, BenefitAmerica, Inc. ("BenefitAmerica"),
offers employers administrative services for their employee benefit programs.
The services offered by BenefitAmerica include claims adjudication and payment
for reimbursement plans, which are offered under an employer's flexible benefits
plan pursuant to Section 125 of the Internal Revenue Code, as well as other
administrative services to those plans. The services offered by BenefitAmerica
complement the services and products offered to employers by Colonial Life.
Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial Companies
Segment" for more information.
E. INDIVIDUAL DISABILITY SEGMENT
The Individual Disability segment accounted for 12.2% of UNUM's revenues and
(94.8)% of its income before income taxes in 1994. This segment's products
provide coverage for loss of income for professionals, corporate executives,
business owners and administrative support personnel in the event of disability.
As reported in the Life Insurance Marketing Research Association's 1993
INDIVIDUAL HEALTH ISSUES AND INFORCE SURVEY for the United States, the most
recent available data, UNUM was the fourth largest provider of individual
disability income policies measured by premium inforce.
UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to state
regulatory approval, UNUM expects to introduce the new disability products to
most states during the second quarter of 1995.
Until the new products are introduced, UNUM will continue to sell individual
disability products on a non-cancellable basis, with a fixed premium for the
duration of the policy. The basic individual disability policy provides the
insured with a portion of the earned income which is lost as a result of
sickness or injury. Monthly benefits available range from 30% to 70% of the
insured's earned income up to a specified maximum benefit. Various options are
available that permit tailoring of an insurance policy to the specific client's
needs. The most common options include the length of period before benefits are
paid, the length of the benefit period, partial disability payments, and
cost-of-living adjustments, college benefits and retirement benefits. UNUM also
markets buy/sell and key person coverage and policies that provide reimbursement
for business overhead expenses incurred during a period of disability.
Individual Disability insurance premium rates are based on expected mortality,
morbidity and persistency as well as assumptions concerning policy related
expenses, inflation and investment income.
UNUM currently distributes this segment's products in the United States and
Canada through a branch office system of Individual Disability sales
consultants, who distribute these products as well as products offered by the
Retirement Security Segment, through brokers and agents. UNUM has a network of
36 Individual Disability offices in the United States that are staffed with
approximately 105 management, sales, service and administrative employees.
Another 11 sales offices, staffed by approximately 39 employees, are located
throughout Canada.
Refer to Item 7 and Item 8 (Note 16) under the caption "Individual
Disability Segment" for more information.
F. RETIREMENT SECURITY SEGMENT
The Retirement Security segment accounted for 8.0% of UNUM's revenues and
12.9% of its income before income taxes in 1994. This segment markets and
services tax-sheltered annuities ("TSA"), long term care insurance and lifestyle
security protection ("LSP") products.
TSA products (Section 403(b) plans under the Internal Revenue Code) are
marketed to non-profit hospitals and organizations. These contracts offer a
fixed fund which provides for annual renewable guarantees of principal and
interest. In addition, some TSA contracts offer variable annuity investment
alternatives. These investment alternatives are mutual funds offered as
subaccounts in a UNUM separate account. The mutual funds, managed by nationally
recognized investment managers, include a variety of choices such as growth,
balanced and stock index funds. UNUM also offers recordkeeping and reporting
services to TSA contractholders.
LSP products are marketed to employers to supplement their employees'
retirement planning needs. It provides plan participants with insurance coverage
for retirement savings in the event of the inability to continue retirement
contributions due to death or disability.
UNUM markets its TSA and LSP products through a network of 13 offices in the
United States, which distribute these products as well as the products offered
by the Employee Benefits segment, primarily through brokers.
UNUM markets long term care insurance to employer groups, continuing care
retirement communities and individuals. The group product is offered on an
employer or employee paid basis, and employer groups may offer coverage to
retirees, spouses, parents and grandparents, in addition to the employee. UNUM
distributes long term care products in the United States through brokers and
agents from the branch office system as described in the Employee Benefits and
Individual Disability Segments.
Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement Security
Segment" for more information.
G. OTHER OPERATIONS SEGMENT
The Other Operations segment accounted for 3.6% of UNUM's revenues and 4.3%
of its income before income taxes in 1994. This segment includes individual life
insurance business of UNUM America, group medical insurance, guaranteed
investment contracts ("GICs"), deposit administration accounts ("DAs"), and
401(k) plans, all of which are no longer actively marketed by UNUM.
In the fourth quarter of 1991, UNUM announced plans to withdraw from the
401(k) market by the end of 1992. UNUM has transferred 401(k) service
responsibilities to its formerly wholly-owned subsidiary, Preferred Benefits
Corporation, which was sold in the second quarter of 1992.
UNUM discontinued active marketing of GICs and DAs primarily due to the lack
of demand and the level of investment risk. UNUM discontinued new sales of
universal life and other individual life policies as of January 1, 1988. UNUM
began exiting the group medical product line in 1987 with the discontinuance of
new sales on the traditional group medical product. In 1990, management
announced its intention to exit the group medical product entirely. Beginning
with
the February 1991 renewals, policyholders had the option of transferring their
group medical product to another insurer. UNUM services commitments to inforce
policyholders, which include conversions of group life and group medical
insurance.
Refer to Item 7 and Item 8 (Note 16) under the caption "Other Operations
Segment" for more information.
H. INVESTMENTS
Refer to Item 7 under the caption "Investments""Colonial Products Segment" and Item 8
Note 16 "Segment Information" for more information.
Additional information aboutE. Retirement Products Segment
The Retirement Products segment in 1998 accounted for 1% and less than 1%
of UNUM's mortgage loan portfolio is provided below:
Overall,revenues and income before income taxes, respectively. This segment
includes products no longer actively marketed by UNUM including: TSAs,
guaranteed investment contracts, deposit administration accounts, 401(k) plans,
individual life and group medical insurance. On October 1, 1996, UNUM America
and First UNUM closed the sale of their respective TSA businesses to Lincoln,
as discussed in Item 1 A "Description of Business."
Refer to Item 7 under the caption "Retirement Products Segment" and Item 8
Note 16 "Segment Information" for more information.
F. Investments
UNUM management believes that its mortgage loan portfolio is well diversified
geographically and among property types. The mortgage loan portfolio
percentages by geographic region and property type at December 31, 1994,year end 1998, with less than 20% in any
one region; 33% was in industrial properties, 28% in office buildings, 22% in
retail properties, and 1993, were as follows:
GEOGRAPHIC REGION
1994 1993
----------- -----------
New England............................. 10.6% 10.5%
Mid-Atlantic............................ 17.4 16.6
Southeast............................... 15.0 16.4
Southwest............................... 8.4 7.7
Pacific................................. 15.1 16.2
North Central........................... 16.0 15.1
Farm Belt............................... 9.5 9.9
Oil Patch............................... 8.0 7.6
----- -----
Total............................... 100.0% 100.0%
----- -----
----- -----
PROPERTY TYPE
1994 1993
----------- -----------
Office Building......................... 26.2% 28.1%
Retail.................................. 30.9 29.5
Industrial.............................. 19.5 19.1
Residential............................. 7.2 6.4
Medical................................. 6.5 6.5
Nursing Home............................ 2.7 3.6
Hotel/Motel............................. 5.8 5.5
Other................................... 1.2 1.3
----- -----
Total............................... 100.0% 100.0%
----- -----
----- -----
17% in other property types. Mortgage loans delinquentthat were 60
days or more delinquent on a contract delinquency basis, by
geographic regionimpaired loans and property typerestructured
loans were as followsimmaterial at December 31, 1994,1998.
Refer to Item 7 under the caption "Investments" and 1993 (Dollars in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 15.7 $ 15.7
Mid-Atlantic................................. 3.5 4.6
Southwest.................................... -- 2.7
Pacific...................................... 0.9 3.1
North Central................................ 2.2 --
--------- ---------
Total.................................... $ 22.3 $ 26.1
--------- ---------
--------- ---------
PROPERTY TYPE
1994 1993
--------- ---------
Office Building.............................. $ 22.3 $ 23.4
Retail....................................... -- 2.7
--------- ---------
Total.................................... $ 22.3 $ 26.1
--------- ---------
--------- ---------
Restructured mortgage loans by geographic regionItem 8 Note 2
"Investments" for more information.
G. Risk Management and property type were as
follows at December 31, 1994, and 1993 (Dollars in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 3.3 $ 3.4
Mid-Atlantic................................. 4.4 2.2
Southeast.................................... 9.5 12.2
Pacific...................................... 10.8 5.6
North Central................................ 14.5 13.9
Farm Belt.................................... 8.8 8.8
Oil Patch.................................... 14.4 16.3
Other........................................ 7.9 3.5
--------- ---------
Total.................................... $ 73.6 $ 65.9
--------- ---------
--------- ---------
PROPERTY TYPE
1994 1993
--------- ---------
Office Building.............................. $ 32.2 $ 31.5
Retail....................................... 12.8 8.5
Industrial................................... 8.6 7.6
Residential.................................. 7.1 6.2
Hotel/Motel.................................. 2.4 --
Other........................................ 10.5 12.1
--------- ---------
Total.................................... $ 73.6 $ 65.9
--------- ---------
--------- ---------
Potential problem mortgage loans are defined by UNUM as current and
performing loans with which management has some concerns about the ability of
the borrower to comply with present loan terms and whose book value exceeds the
market value of the underlying collateral. Potential problem loans by geographic
region and property type were as follows at December 31, 1994, and 1993 (Dollars
in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 3.4 $ 6.2
Mid-Atlantic................................. 9.3 31.3
Southeast.................................... 6.3 3.1
Southwest.................................... 1.5 2.2
Oil Patch.................................... 4.9 3.5
Pacific...................................... 4.1 17.4
North Central................................ 0.8 22.1
Farm Belt.................................... 5.9 6.9
--------- ---------
Total.................................... $ 36.2 $ 92.7
--------- ---------
--------- ---------
PROPERTY TYPE
1994 1993
--------- ---------
Office Building.............................. $ 17.2 $ 25.9
Industrial................................... -- 25.5
Retail....................................... 0.7 20.7
Residential.................................. 2.2 --
Hotel/Motel.................................. 11.5 18.3
Medical...................................... 4.6 2.3
--------- ---------
Total.................................... $ 36.2 $ 92.7
--------- ---------
--------- ---------
I. RISK MANAGEMENT AND REINSURANCEReinsurance
Risk management, which includesincluding product design, pricing, underwriting,
reserving and benefits management, involves a determination of the type and
amount of risk that an insurer is willing to accept, administration and evaluation
of business inforce and controldetermination of claims. UNUM hasclaim liability. UNUM's underwriters,
organized within business
segments whoby product and sales region, evaluate policy applications based on the basis of
information provided by the applicant and other sources. Underwriting
5
UNUM Corporation and Subsidiaries
rules and procedures are established to produce mortality and morbidity results
consistent with assumptions used in pricing the product, while also providing
for competitive risk selection.
Consistent with industry practice, UNUM reinsures with other unaffiliated
companies portions of the insurance policiesrisk it has underwritten. Reinsurance
allows UNUM to sell policies with greaterhigher benefits than the entire risk that UNUM is
willing to assume. UNUM remains contingently liable to the insured for the payment
of policy benefits if the reinsurers cannot meet their obligations under the
reinsurance agreements. In the Employee Benefits segment, UNUM has underwritersdoes not generally reinsure risk on a product-specific basis
for each major
product line. Quotes for prospective customers are based on UNUM's experience
with the profitability and persistency of the respective employer's risk
category. The maximum group LTD, and group STD monthly benefit varies, but the
usual maximum monthly amount available is $35,000 and $2,500, respectively.or association group disability. For group lifeother insurance
products, UNUM retains up to $750,000 per individual life
and reinsures the balance with other insurance carriers.
Colonial Life has reinsurance on its cancer insurance products that provides
coverage for claim payments in excess of $50,000 in any one year, per claimant,
up to a lifetime maximum of $1 million per claimant.
The financial and medical underwriting areas of UNUM Limited handle the
underwriting of group and individual disability policies and group life
policies. The maximum yearly benefit for group LTD is 326,000 pounds
sterling. UNUM Limited retains 75,000 pounds sterling of this risk and
reinsures the balance. The maximum yearly initial benefit for individual
disability insurance is 125,000 pounds sterling andbenefits over various amounts, over 40,000 pounds
sterling per annum are reinsured. On group life business, UNUM Limited retains
60% of the risk up to a maximum of 150,000 pounds sterling per individual life.
Commercial Life reinsures the risk on its accidental death and dismemberment
contracts that exceed $400,000 on any one life. Commercial Life also reinsures
the risk on individual, group, and franchise life contracts that exceed $250,000
on any one life.
UNUM requires medical examinations, financial data, and other information to
make a decisiondepending on the acceptabilitytype
of the individual risk and to appropriately
classify an applicant for individual disability insurance products. On new sales
of the existing non-cancellable product, UNUM retains up to $8,000 plus 25% of
amounts in excess of $8,000 basic monthly indemnity per life for personal
disability coverages, $20,000 plus 25% of amounts in excess of $20,000 per life
for business overhead expenses coverages and $500,000 per life for buy/sell
coverages. UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to regulatory
approval, UNUM expects to introduce new disability products to most states
during the second quarter of 1995.
UNUM (except for Colonial Life) reinsures the risk of individual life
insurance contracts that exceed $425,000 on any one life. Colonial Life limits
its risk for death and dismemberment benefits to $100,000 per life.
coverage. In addition to product-specific reinsurance arrangements, UNUM's
insurance companies are covered by reinsurance for certain catastrophic losses.
UNUM periodically monitors the financial condition, and in some cases
holds substantial collateral as security in the form of funds, securities
and/or letters of credit to mitigate credit risk from its reinsurers. At
December 31, 1998, approximately 85% of the reinsurance arrangements above,receivable balance was
due from five reinsurers. These reinsurers had a rating of A or better (Strong)
from Standard & Poor's--a recognized insurance rating agency. Additionally,
UNUM (exceptholds collateral in the form of securities comprising 53% of the balance.
During 1996, UNUM America entered into an agreement for Colonial
Life, UNUM Limited and Commercial Life) is covered by catastrophe reinsurance
which provides additional protection against aggregate losses in excesscoverage of $1
million up to a maximumthe active life reserves of $100 million. This protection is activated whenever
one event causes the disability and/or death of five or more people covered
under UNUM's life or disability contracts. Colonial Life is covered by
catastrophe reinsurance for accidental deaths totaling more than $300,000 from a
single disaster, up to a limit of $5 million. UNUM Limited's group disability
business is partially covered by catastrophe reinsurance of 3 million
pounds sterling for losses from one event involving more than twenty-five
lives. Commercial Life is covered by catastrophe reinsurance, which provides
additional protection against aggregate losses in excess of $1 million up to a
maximum of $54 million for losses involving three or more covered lives.
Also, UNUM purchased excess-of-loss reinsurance totaling $60 million over
three years through a Lloyd's of London syndicate for theits existing United States
non-cancellable individual disability businessblock of UNUM America and First UNUM.
Reinsurancebusiness. This agreement does
not reinsure any claims incurred prior to January 1, 1996. For more information
on this reinsurance agreement refer to Item 8 Note 6 "Reinsurance."
Total reinsurance premiums assumed and ceded for the year ended December
31, 1994,1998, were $170.7$320.8 million and $112.5$414.3 million, respectively. No currentCurrent or
planned reinsurance activity is not expected to have a significant impact on
theUNUM's ability of
UNUM to underwrite additional insurance.
J. RESERVESH. Reserves
The unpaid claims reserves reported in the consolidated financial
statements ofare liabilities for unpaid losses, with respect to insured events
which have occurred, including events not yet reported to UNUM,
Corporation and subsidiaries have been computed in accordance
with generally accepted accounting principles ("GAAP") for stock life insurance companies.. These reserve balances
generally differ from those specified by the laws of the
various states and those carried in the statutory financial statements.statements, which are
subject to minimum reserves established by state laws. The differences between
GAAP and statutory reserves arise from the use of different morbidity,
mortality, morbidity, interest, expense and lapse assumptions.
Pursuant to insurance laws of the states of Maine, New York, South Carolina,
and Wisconsin, the United Kingdom and of Japan, UNUM's insurance subsidiaries
(UNUM America, First UNUM, Colonial Life, Commercial Life, UNUM Limited and UNUM
Japan, respectively) set up statutory reserves, carried as liabilities, to meet
obligations on their various policies. These statutory reserves are amounts
which, together with premiums to be received and interest on such reserves at
assumed rates, are calculated to be sufficient to meet theFuture policy and contract
obligations of UNUM's insurance subsidiaries. Pursuant to insurance laws of
Canada, UNUM America has established regulatory reserves to meet the obligations
of policies written in its Canadian branch.
Statutory, GAAP and regulatorybenefits reserves are based uponon UNUM's insurance
subsidiaries' experience as adjusted to provide for possible adverse
deviations. These estimates are periodically reviewed and compared towith actual
experience. The assumptions aremay be revised when it is determined that future
expected experience differs from the assumed estimates.
K. EMPLOYEESI. Employees
At December 31, 1994,1998, UNUM had approximately 7,2008,200 full-time employees.
UNUM
does not have collective bargaining agreements with employees.
L. COMPETITIONSome employees in Argentina, comprising less than 1% of UNUM's total workforce,
are members of a union.
J. Competition
The principal competitive factors affecting all of UNUM's business are
reputation, financial strength, quality of service, risk management expertise,
distribution, product design and price. There is competition among insurance
companies for the types of group and individual and group insurance and retirement products sold by
UNUM. At the end of 1994,1998, there were approximately 1,900more than 1,600 legal reserve life
insurance companies in the United States and Canada, andmore than 240 life
assurance offices in the United Kingdom, whichapproximately 106 life and non-life
insurance companies in Japan, and more than 250 insurance companies in
Argentina. These companies may offer insurance products similar to those
marketed by UNUM.
UNUM also competesK. Regulation
In common with banks, investment advisors, mutual funds and other
financial entities to provide products and services. All areas of group
insurance are highly competitive because of the large number of insurance companies, and other entities offering these products.
M. REGULATION UNUM's insurance subsidiaries
are subject to regulation and supervision in the jurisdictions in which they do
business.business, primarily for the protection of policyholders. Although the extent of
such regulation varies, U.S. state, Canadian, United Kingdom and Japanese insurance laws generally establish supervisory agencies
such as state insurance
departments, the Office of the Superintendent of Financial Institutions
("OSFI"), The Department of Trade and Industry ("DTI") and the Ministry of
Finance ("MOF"), respectively, with broad administrative powers. These powers relate chiefly to theincluding: granting and revocation of the licenses
to transact business, andbusiness; establishing reserve requirements andrequirements; setting the form,
content and contentfrequency of required financial statements. Such powers also includestatements; the licensing of
agents
in the U.S. andagents; the approval of policy
forms6
forms; prescribing the type and amount of investments permitted; and, in
general, the U.S. and Japan.conduct of all insurance activities. UNUM's insurance operations
and subsidiaries must meet the standards and tests for its investments
promulgated by insurance laws and regulations of Maine, New York,
South Carolina, Wisconsin, Canada, the United Kingdom and Japan, as applicable.
UNUM's United States domiciled insurance subsidiaries are required to file
quarterly and annual statements with the various insurance departments in state jurisdictions in which
they do business. These statements comply with the rules
of the National Association ofare domiciled. Insurance Commissioners ("NAIC"). UNUM's
insurance subsidiaries are examined periodically by examiners of the states of
Maine, New York, South Carolina and Wisconsin and of other states (on an
"association"
or "zone" basis) in which they are licensed to do business. UNUM's insurance
branch operation in Canada is periodically examined by Canadian insurance
regulatory authorities and is required to file annual reports that comply with
the insurance laws of Canada and with the rules of the OSFI of the Canadian
Federal government and each of the provinces. UNUM's United Kingdom subsidiary
is required to file financial statements annually with the DTI, in accordance
with United Kingdom law and regulation. UNUM Japan is required to file periodic
financial statements with the MOF, in accordance with Japanese laws and
regulations.
UNUM's insurance subsidiaries operate under insurance laws which
require that they establish and carry, as liabilities, actuarialstatutory reserves to meet
their
obligations on their disability, life, disability, accident and health policies and
annuities. These reserves are verified periodically by various regulators.
UNUM's reinsurance underwriting manager, Duncanson & Holt, Inc., ("D&H") is
a licensed reinsurance intermediary in New York. It is subject to regulation in
New Yorkdomestic insurance subsidiaries are examined periodically by examiners
from their states of domicile and by other states where it doesin which they are licensed to
conduct business.
Duncanson & Holt Underwriters,
Ltd., a subsidiary of D&H, is a corporate member of Lloyds of London and is
subject to all rules applicable to such members.
UNUM Sales Corporation, a registered broker-dealer, is regulated by the
National Association of Securities Dealers, Inc. and the Securities and Exchange
Commission. It is the principal underwriter for variable annuity contracts
offered by UNUM America and First UNUM.
The laws of the State of MaineCertain states require periodic registration and reporting by insurance
companies domiciled within its jurisdiction, whichin them that control or are controlled by other
corporations or persons. This constitutes, by definition, a
holding company system. UNUM America is domiciled in Maine and is subject to
these laws. New York, which is the domiciliary state of First UNUM; South
Carolina, which is the domiciliary state of Colonial Life; and Wisconsin, which
is the domiciliary state of Commercial Life, have similar laws. Accordingly, the
UNUMUNUM's domestic insurance subsidiaries are registered
as members of the UNUM holding company system in the states of Maine, New York,
South Carolina and Wisconsin.Delaware. The statutes of these states require periodic
disclosure concerning the ultimate controlling person and intercorporate
transactions within the holding company system, some of which require prior
approval.
Effective December 31, 1991, UNUM America merged with two of UNUM
Corporation's wholly-owned MaineThe risk-based capital ("RBC") standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, establish an
RBC ratio comparing adjusted surplus to required surplus for United States
domiciled insurance companies. If the RBC ratio falls within certain ranges,
regulatory action may be taken ranging from increased information requirements
to mandatory control by the domiciliary insurance department. The RBC ratios
for UNUM's insurance subsidiaries, UNUM Life
Insurance Company ("UNUM Life") and UNUM Pension and Insurance Company ("UPIC"),
with UNUM America remaining as the surviving corporation. In connection with the
merger of UNUM Life and UPIC into UNUM America, UNUM Life ceased to maintain its
licensing status in the State of New York effective December 31, 1991, with all
future New York business being transacted by First UNUM. As a condition of New
York regulatory approval, UNUM America agreed to maintain a security deposit in
the State of New York equal to 102% of outstanding statutory liabilities to New
York policyholders, insureds and claimants of UNUM Life. The security deposit
consists of certain cash and invested assets. An initial deposit was made in
February 1992 andmeasured at December 31, 1994,1998, were
significantly above the required deposit was $819.2 million.
UNUM America has the ability to withdraw assets from this account and to
substitute other assets at its discretion. The balance of the security deposit
will be reviewed and adjusted at least annually based upon the outstanding
liabilities described above.
N. PARTICIPATION FUND ACCOUNTranges that would require regulatory action.
L. Participation Fund Account
Participating policies issued prior to November 14, 1986, by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to its demutualization will remain participating
as long as they remain in force. A Participation Fund Account ("PFA") has beenwas
established for the sole benefit of all of Union Mutual's individual participating life
and annuity policies and contracts. At December 31, 1994,1998, the PFA had
$347.0approximately $371 million in assets, which are held by UNUM America. UNUM has
agreed to pay certain expenses associated with the PFA and at December 31, 1994,
the reserve for the present value of such expenses was $15.9 million.America, Union Mutual's
successor.
PFA assets, investment earnings, and income from operations are not
available to UNUM America or UNUM during the operation or upon the termination of the
PFA. In the unlikely event that the assets of the PFA are not adequate to provide
for policyholder benefits (exclusive of dividends, which are not guaranteed),
UNUM America would be required to provide for any shortfall, and such amounts
if
any, would reduce earnings of UNUM America and UNUM. All operating data of the individual participating life and annuity
contractsPFA
has been excluded from the Consolidated Statements of Income and all other
operating data included in this report unless otherwise noted. The assets and
liabilities associated with the participating business are included in UNUM's
Consolidated Balance Sheets.
ITEMItem 2. PROPERTIES
UNUM owns home office property consisting of fiveseven office buildings and
fourthree service buildings located throughout the Portland, Maine area. UNUM also
owns an
office buildingbuildings in the United Kingdom, South Carolina and Argentina,
which isserve as the home officeoffices of UNUM
Limited. The home office ofLimited, the Colonial Companies is located in Columbia, South
Carolina, and
is also owned by UNUM.Boston Seguros, respectively. In addition, UNUM leases office space, on periods
principally from five to ten years, office and warehouse space for use by its home office, affiliates and
sales forces.
ITEMItem 3. LEGAL PROCEEDINGS
In the normal course of its business operations, UNUM is involved in
litigation from timeRefer to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1994. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effectItem 8 Note 15 "Litigation" for information on the consolidated financial
position or the consolidated operating results of UNUM.
ITEMlegal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders, through solicitation of
proxies or otherwise, during the fourth quarter 1994.of 1998.
7
UNUM Corporation and Subsidiaries
PART II
ITEMItem 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal markets in which UNUM'sUNUM Corporation common stock is traded are
the New York Stock Exchange and the Pacific Stock Exchange. UNUM's ticker symbol is
"UNM." As of December 31, 1994,1998, there were 25,28021,756 shareholders of record of
common stock. Information concerning restrictions on the ability of UNUM's
subsidiariesaffiliates to transfer funds to UNUM in the form of cash dividends is described
in Item 8 (Note 14).Note 11 "Dividend Restrictions."
The market price (as quoted by the New York Stock Exchange) and cash
dividends paid, per share of UNUM's common stock, by calendar quarter for the
past two years were as follows:
1994 1993
------------------------------------------ ------------------------------------------1998 1997
--------------------------------------------------- ---------------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
--------------------------------------------------------------------------------------------------------------------------------
High.................................... $ 46.875 $ 50.000 $ 56.750 $ 58.000 $ 54.750 $ 60.125 $ 57.750 $ 58.375
Low..................................... $ 35.125 $ 43.000 $ 44.500 $ 48.000 $ 47.750 $ 53.250 $ 51.000 $ 49.250
Close................................... $ 37.750 $ 46.000 $ 44.750 $ 52.750 $ 52.500 $ 54.500 $ 54.000 $ 56.500High .................. $60.063 $59.375 $59.625 $55.563 $54.438 $48.250 $46.500 $39.813
Low ................... $42.000 $44.000 $51.500 $48.000 $45.125 $40.688 $33.625 $35.313
Close ................. $58.375 $49.688 $55.500 $55.188 $54.375 $45.625 $42.250 $36.500
Dividend Paid........................... $ 0.24 $ 0.24 $ 0.24 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $0.16 1/2Paid ......... $0.1475 $0.1475 $0.1475 $0.1425 $0.1425 $0.1425 $0.1425 $0.1375
8
ITEMUNUM Corporation and Subsidiaries
Item 6. SELECTED FINANCIAL DATA
The following should be read in conjunction with UNUM's Consolidated
Financial Statements and related notes reported in Item 8.
UNUM CORPORATION AND SUBSIDIARIESCorporation and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------------------------------------------------------------------------------------
1998 1997
(Dollars in millions, except per common share data) --------------- ---------------
INCOME STATEMENT DATAIncome Statement Data
Revenues:
Premiums and fees and other income (expense):
Employee Benefits $1,451.4 $1,362.6 $1,116.2 $1,000.0income: (b)
Disability Insurance Segment ....................... $ 909.82,167.5 $ 769.3 $ 723.3 $ 670.5
Related Businesses 477.5 402.5 354.4 324.2 269.2 192.91,882.6
Special Risk Insurance Segment ..................... 1,208.4 947.2
Colonial Products Segment .......................... 556.5 530.8
Retirement Products Segment ........................ 26.6 130.3
Corporate .......................................... -- --
Colonial Companies 441.3 407.4 371.9 325.4 281.1 241.0 216.6 192.1
Individual Disability 357.5 322.5 292.9 253.4 169.4 147.2 134.7 126.1
Retirement Security 62.5 36.3 32.3 28.0 21.7 22.7 17.1 9.1
Other Operations 16.9 25.9 29.3 41.9 74.4 108.1 162.9 229.3
Corporate 0.8 -- 0.8 -- (0.1) 0.2 0.1
0.9
-------------------------------------------------------------------------------------------------------------------------------------------- ----------
Total premiums and fees and other income 2,807.9 2,557.2 2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0
--------------------------------------------------------------------------------------------------------------------------------............ 3,959.0 3,491.0
------------ ----------
Net investment income (expense):income: (a)
Employee Benefits 263.5 234.7 234.4 196.1 176.5 160.8 151.3 133.7
Related Businesses 89.6 85.5 91.6 95.3 63.5 38.3 -- --Disability Insurance Segment ....................... 491.4 468.0
Special Risk Insurance Segment ..................... 80.6 71.5
Colonial Companies 32.6 41.4 35.4 38.5 25.2 26.7 22.3 19.0
Individual Disability 84.6 82.5 75.0 67.5 67.3 64.1Products Segment .......................... 67.7 57.6
Retirement Products Segment ........................ 38.6 54.4
46.2
Retirement Security 226.9 235.5 228.8 227.8 209.6 196.8 172.4 157.6
Other Operations 114.4 154.0 181.6 184.9 218.0 227.8 240.7 260.6
Corporate 4.2 6.2 3.9 1.5 (9.0) 6.0 20.3 19.1
--------------------------------------------------------------------------------------------------------------------------------.......................................... 4.1 5.9
------------ ----------
Total net investment income 815.8 839.8 850.7 811.6 751.1 720.5 661.4 636.2
--------------------------------------------------------------------------------------------------------------------------------......................... 682.4 657.4
------------ ----------
Total revenues 3,623.7 3,397.0 3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2
--------------------------------------------------------------------------------------------------------------------------------...................................... 4,641.4 4,148.4
------------ ----------
Benefits and expenses: Employee Benefits 1,457.1 1,358.2 1,128.1 1,002.2 915.6 779.7 743.5 703.7
Related Businesses 506.8 430.7 392.6 358.4 298.3 213.4 -- --(b)
Disability Insurance Segment ....................... 2,352.4 2,037.9
Special Risk Insurance Segment ..................... 1,127.7 917.4
Colonial Companies 411.2 378.4 346.8 306.4 259.6 225.5 201.1 178.6
Individual Disability 630.3 336.0 323.3 284.2 210.8 195.0 192.3 169.8Products Segment .......................... 517.2 489.6
Retirement Security 263.7 250.7 254.4 257.9 230.9 212.9 176.2 151.1
Other Operations 122.8 159.1 194.4 243.3 271.9 326.5 404.5 533.7Products Segment ........................ 64.6 108.5
Corporate 33.2 23.6 10.4 12.5 10.8 12.4 9.5 15.8
--------------------------------------------------------------------------------------------------------------------------------.......................................... 62.1 58.6
------------ ----------
Total benefits and expenses 3,425.1 2,936.7 2,650.0 2,464.9 2,197.9 1,965.4 1,727.1 1,752.7
--------------------------------------------------------------------------------------------------------------------------------
......................... 4,124.0 3,612.0
------------ ----------
Income (loss) before income taxes: (b)
Disability Insurance Segment ....................... 306.5 312.7
Special Risk Insurance Segment ..................... 161.3 101.3
Colonial Products Segment .......................... 107.0 98.8
Retirement Products Segment ........................ 0.6 76.2
Corporate .......................................... (58.0) (52.6)
------------ ----------
Total income before income taxes .................... 517.4 536.4
------------ ----------
Income taxes ........................................ 154.0 166.1
------------ ----------
Net income .......................................... $ 363.4 $ 370.3
============ ==========
Per common share:
Net income--basic .................................. $ 2.63 $ 2.65
Net income--diluted ................................ $ 2.57 $ 2.59
Dividends paid ..................................... $ 0.5850 $ 0.5650
============= ===========
Balance Sheet Data
Assets .............................................. $ 15,182.9 $ 13,440.1
Long-term debt ...................................... $ 598.3 $ 509.2
Stockholders' equity ................................ $ 2,737.7 $ 2,434.8
Shares outstanding .................................. 138.7 138.3
Weighted-average shares outstanding during the year:
Basic .............................................. 138.3 139.9
Diluted ............................................ 141.4 142.9
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)-----------------------------------------------
1996 1995 1994
1993 1992 1991 1990 1989 1988 1987
--------------------------------------------------------------------------------------------------------------------------------(Dollars in millions, except per common share data) --------------- --------------- ---------------
Income Statement Data
Revenues:
Premiums and fees and other income: (b)
Disability Insurance Segment ....................... $ 1,917.7 $ 1,879.9 $ 1,716.2
Special Risk Insurance Segment ..................... 783.3 702.3 607.1
Colonial Products Segment .......................... 498.2 475.1 441.3
Retirement Products Segment ........................ 65.8 34.1 31.4
Corporate .......................................... -- 0.1 0.8
------------ ---------- ----------
Total premiums and fees and other income ............ 3,265.0 3,091.5 2,796.8
------------ ---------- ----------
Net investment income: (a)
Disability Insurance Segment ....................... 468.5 592.9 400.3
Special Risk Insurance Segment ..................... 57.6 48.4 40.7
Colonial Products Segment .......................... 47.3 52.2 32.6
Retirement Products Segment ........................ 217.2 323.7 338.0
Corporate .......................................... 16.1 14.2 4.2
------------ ---------- ----------
Total net investment income ......................... 806.7 1,031.4 815.8
------------ ---------- ----------
Total revenues ...................................... 4,071.7 4,122.9 3,612.6
------------ ---------- ----------
Benefits and expenses: (b)
Disability Insurance Segment ....................... 2,170.9 2,255.8 2,060.3
Special Risk Insurance Segment ..................... 761.7 690.4 581.9
Colonial Products Segment .......................... 453.1 439.6 411.2
Retirement Products Segment ........................ 281.6 312.3 327.4
Corporate .......................................... 62.8 42.9 33.2
------------ ---------- ----------
Total benefits and expenses ......................... 3,730.1 3,741.0 3,414.0
------------ ---------- ----------
Income (loss) before income taxes and
cumulative effects of accounting changes:
Employee Benefits 257.8 239.1 222.5 193.9 170.7 150.4 131.1 100.5
Related Businessestaxes: (b)
Disability Insurance Segment ....................... 215.3 217.0 56.2
Special Risk Insurance Segment ..................... 79.2 60.3 57.3 53.4 61.1 34.4 17.8 -- --65.9
Colonial CompaniesProducts Segment .......................... 92.4 87.7 62.7
70.4 60.5 57.5 46.7 42.2 37.8 32.5
Individual Disability (188.2) 69.0 44.6 36.7 25.9 16.3 (3.2) 2.5
Retirement Security 25.7 21.1 6.7 (2.1) 0.4 6.6 13.3 15.6
Other Operations 8.5 20.8 16.5 (16.5) 20.5 9.4 (0.9) (43.8)Products Segment ........................ 1.4 45.5 42.0
Corporate .......................................... (46.7) (28.6) (28.2)
(17.4) (5.7) (11.0) (19.9) (6.2) 10.9 4.2
-------------------------------------------------------------------------------------------------------------------------------------------- ------------ ------------
Total income before income taxes and
cumulative effects of accounting changes.................... 341.6 381.9 198.6
460.3 398.5 319.6 278.7 236.5 189.0 111.5
-------------------------------------------------------------------------------------------------------------------------------------------- ------------ ------------
Income taxes (credit)........................................ 103.6 100.8 43.9
148.3 107.3 74.3 60.9 51.1 30.1 (4.7)
--------------------------------------------------------------------------------------------------------------------------------
Cumulative effects of accounting changes -- (12.1)(b) -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------------------- ------------ ------------
Net income .......................................... $ 238.0 $ 281.1 $ 154.7
$ 299.9 $ 291.2 $ 245.3 $ 217.8 $ 185.4 $ 158.9 $ 116.2
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------============ ============ ============
Per common share:
Net income $2.09 $3.81(b) $3.71 $3.15 $2.73 $2.03 $1.57 $1.06income--basic .................................. $ 1.63 $ 1.93 $ 1.04
Net income--diluted ................................ $ 1.61 $ 1.92 $ 1.04
Dividends paid $0.92 $0.76-1/2 $0.62-1/2 $0.49 $0.37-1/2 $0.28-1/2 $0.23 $0.20
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
(a) Includes investment income and net realized investment gains.
(b) Effective January 1, 1993, UNUM adopted Financial Accounting Standard No.
106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," which decreased net income by $32.1 million, or $0.40 per share,
and Financial Accounting Standard No. 109, "Accounting for Income Taxes,"
which increased net income by $20.0 million, or $0.25 per share.
UNUM CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
December 31,
------------
(DOLLARS AND SHARES IN MILLIONS) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA..................................... $ 0.5450 $ 0.5175 $ 0.4600
============= ============= =============
Balance Sheet Data
Assets $13,127.2 $12,437.3 $11,959.8 $11,310.9 $10,063.4 $9,045.7 $8,592.3 $7,783.0 $7,333.8 $6,019.0.............................................. $ 15,580.4 $ 14,787.8 $ 13,127.2
Long-term debt ...................................... $ 409.2 $ 457.3 $ 182.1
$ 128.6 $ 77.2 $ 51.5 $ 77.2 $ 1.5 $ 1.5 $ 1.7 $ 1.4 --
Stockholders' equity ................................ $ 2,263.1 $ 2,302.9 $ 1,915.4
$ 2,102.7 $ 2,010.9 $ 1,755.5 $ 1,490.1 $1,445.0 $1,512.3 $1,463.8 $1,471.1 $ 770.0(a)
Shares outstanding 72.4 76.0 79.1 78.2 77.4 82.0 96.8 104.2 111.4 NA(a)
Weighted average.................................. 143.6 146.0 144.8
Weighted-average shares outstanding during the year 74.2 78.8 78.5 77.8 79.9 91.4 101.3 109.1 NA(a) NA(a)
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
(a) In November 1986, UNUM converted to a stock company from a mutual company.year:
Basic .............................................. 145.9 145.4 148.3
Diluted ............................................ 148.0 146.6 149.5
- --------
(a) Includes investment income and net realized investment gains (losses).
(b) Refer to the discussion of special items in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations," as these
items may affect the comparability of the information presented in certain
segments.
9
ITEMItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This management'sManagement's discussion and analysis reviews the consolidated financial
condition of UNUM at December 31, 1994,1998, and 1997, the consolidated results of
operations for the past three years and, where appropriate, factors that may
affect future financial performanceperformance.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 ("the Act") provides
a "safe harbor" for forward-looking statements which are identified as such and
discussed. Management's
Discussionare accompanied by the identification of important factors which could cause a
material difference from the forward-looking statements. UNUM claims the
protection afforded by the safe harbor in the Act. Certain information
contained in this discussion, or in any other written or oral statements made
by UNUM, is or may be considered as forward-looking; for example, disclosures
regarding "Quantitative and AnalysisQualitative Information About Market Risk," the
"Year 2000 Date Conversion" and reserves discussed in the Disability Insurance
segment contain such information. Forward-looking statements are those not
based on historical information, but rather, relate to future operations,
strategies, financial results or other developments, and contain terms such as
"may," "expects," "should," "believes," "anticipates," "intends," "estimates,"
"projects," "goals," "objectives" or similar expressions. Although UNUM has
used appropriate care in developing forward-looking statements, such statements
are based upon estimates and assumptions that are subject to significant risks,
business, economic and competitive uncertainties, and other factors, many of
Financial Conditionwhich are beyond UNUM's control or, with respect to future business decisions,
are subject to change.
Certain risks and Resultsuncertainties are inherent in UNUM's business.
Therefore, UNUM cautions the reader that revenues and income could differ
materially from those expected to occur depending on factors which may be
global or national in scope, related to the insurance industry generally, or
applicable to UNUM specifically. Such factors are general economic conditions
including changes in interest rates and the performance of Operationsfinancial markets,
changes in domestic and foreign laws, regulations and taxes, competition,
industry consolidation, competitor demutualization, credit risks and other
factors. Insurance reserve liabilities can fluctuate as a result of changes in
numerous factors, and such fluctuations can have material positive or negative
effects on earnings. These factors include, but are not limited to, interest
rates, incidence rates and recovery rates. Incidence and recovery rates may be
influenced by many factors, including but not limited to, the emergence of new
diseases, new trends and developments in medical treatments, general economic
and societal conditions of the markets where UNUM has operations, and the
effectiveness of risk management programs. UNUM disclaims any obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future developments or otherwise.
PROPOSED MERGER WITH PROVIDENT
On November 22, 1998, UNUM entered into an agreement with Provident
Companies Inc. ("Provident"), pursuant to which UNUM and Provident will merge
under the name UNUMProvident Corporation ("UNUMProvident"). Under the merger
agreement, each outstanding share of Provident common stock will be
reclassified and converted into 0.73 of a share of UNUMProvident common stock
and each outstanding share of UNUM common stock will be converted into one
share of UNUMProvident common stock. The merger will be accounted for as a
pooling of interests.
Certain information contained in this discussion about the merger, or in
any other written or oral statements made by UNUM, regarding the impact of the
merger on future operations, is considered as forward-looking, and should be
read as such (see previous section on "Forward-Looking Information"). In
connection with the proposed merger, UNUM is evaluating its processes and
assumptions used to calculate the discount rate for claim reserves of certain
disability businesses so that they may be more consistent with those used by
Provident. Upon completion of the merger, UNUM will reduce the rates used to
discount unpaid claims reserves for group long term disability, individual
disability and the disability businesses of UNUM Limited. The preliminary
estimates of discount rate reductions will result in an estimated increase to
UNUM's unpaid claims reserves upon consummation of the merger of approximately
$230 million on a pretax basis. Additionally, it is expected that upon
completion of the merger the combined entity, UNUMProvident, will record an
expense for merger related costs of approximately $210 million on a pretax
basis. These costs include amounts for severance and related costs, early
retirement, exit costs for duplicate facilities and asset impairments, and
merger related costs such as investment banker, legal and accountant fees. The
estimated merger related expenses represent management's best estimates based
on available information at this time. Actual charges may differ from these
estimated amounts when these items are finalized.
10
UNUM Corporation and Subsidiaries
CONSOLIDATED OVERVIEW
(Dollars and shares in millions,
except per common share data) 1998 % Change 1997 % Change 1996
- ------------------------------------------------- ------------- ----------- ------------- ----------- -------------
Income Data
Revenues
Premiums ....................................... $ 3,841.7 17.7% $ 3,263.7 3.6% $ 3,151.5
Investment income .............................. 661.4 nm 661.0 (17.7) 803.3
Net realized investment gains (losses) ......... 21.0 nm (3.6) nm 3.4
Fees and other income .......................... 117.3 (48.4) 227.3 nm 113.5
--------- ----- ---------- ----- ---------
Total revenues ................................ 4,641.4 11.9 4,148.4 1.9 4,071.7
Benefits and expenses ........................... 4,124.0 14.2 3,612.0 (3.2) 3,730.1
--------- ----- ---------- ----- ---------
Income before income taxes ...................... 517.4 (3.5) 536.4 57.0 341.6
Income taxes .................................... 154.0 (7.3) 166.1 60.3 103.6
--------- ----- ---------- ----- ---------
Net income .................................... $ 363.4 (1.9)% $ 370.3 55.6% $ 238.0
========= ===== ========== ===== =========
Net income per common share:
Diluted ........................................ $ 2.57 (0.8)% $ 2.59 60.9% $ 1.61
Basic .......................................... $ 2.63 (0.8)% $ 2.65 62.6% $ 1.63
========== ===== ========== ===== ==========
Summary of income (loss) before
income taxes
Disability Insurance Segment ................... $ 306.5 (2.0)% $ 312.7 45.2% $ 215.3
Special Risk Insurance Segment ................. 161.3 59.2 101.3 27.9 79.2
Colonial Products Segment ...................... 107.0 8.3 98.8 6.9 92.4
Retirement Products Segment .................... 0.6 (99.2) 76.2 nm 1.4
Corporate ...................................... (58.0) 10.3 (52.6) 12.6 (46.7)
---------- ----- ---------- ----- ----------
Total income before income taxes .............. $ 517.4 (3.5)% $ 536.4 57.0% $ 341.6
========== ===== ========== ===== ==========
- --------
nm = not meaningful or in excess of 100%
(Dollars and shares in millions) 1998 1997 1996
- ------------------------------------------------------ -------------- -------------- --------------
Balance Sheet Data
Assets ............................................... $15,182.9 $13,440.1 $15,580.4
Notes Payable ........................................ $ 881.8 $ 635.8 $ 526.9
Stockholders' equity ................................. $ 2,737.7 $ 2,434.8 $ 2,263.1
Shares outstanding ................................... 138.7 138.3 143.6
Weighted-average shares outstanding--diluted ......... 141.4 142.9 148.0
Weighted-average shares outstanding--basic ........... 138.3 139.9 145.9
During 1998, to better reflect the business of Duncanson & Holt
Underwriters Ltd., as reported in the Special Risk Insurance segment, the
results have been reflected on separate lines in UNUM's consolidated statements
of income and balance sheets. Previously, the operating results and financial
position were reported as a net amount in fees and other income and other
assets, respectively. The 1997 and 1996 amounts have been reclassified for
comparative purposes.
Effective tax rates, which reflect income tax expense as a percentage of
income before income taxes, were 29.8%, 31.0% and 30.3% for 1998, 1997 and
1996, respectively. Reported income tax expense was below the federal statutory
tax rate of 35% primarily due to tax savings from investments in tax-exempt
bonds and mortgages. The change in the effective tax rate over the three year
period was primarily due to changes in tax-exempt income as a percentage of
income before income taxes.
11
UNUM Corporation and Subsidiaries
A comparison of net income is impacted by the inclusion of realized
investment gains (losses), and special items, that occurred in 1998, 1997 and
1996. Operating income in 1998, 1997 and 1996, which is presented on an after
tax basis and excludes realized investment gains (losses) and the special items
discussed below, was as follows:
(Dollars in millions,
except per common share amounts) 1998 % Change 1997 % Change 1996
- ---------------------------------- ----------- ---------- ----------- ---------- -----------
Operating income ................. $388.2 13.6% $341.7 13.3% $301.7
Operating income per common share:
Diluted ......................... $ 2.75 15.1% $ 2.39 17.2% $ 2.04
Basic ........................... $ 2.81 15.2% $ 2.44 17.9% $ 2.07
This management's discussion and analysis focuses on results on a pretax
operating income basis, which is defined as income (loss) before income taxes
exclusive of realized investment gains (losses) and special items. Realized
investment gains (losses) are excluded from this discussion as management
believes the volatility in gains and losses associated with the selling of
invested assets in the financial markets is not representative of ongoing
operations. Special items are excluded from this discussion as management
considers them as being not representative of our ongoing operations and
believes a discussion of the results on a pretax operating income basis provides
a better understanding of the results of ongoing operations. While management
believes that pretax operating income provides relevant and useful information,
it does not replace income before income taxes and net income calculated in
accordance with generally accepted accounting principles as a measure of UNUM's
profitability. Therefore, this discussion should be read in conjunction with the
Consolidated Financial Statements, Notes to Consolidated Financial Statements
and Selected Consolidated Financial Data.
CONSOLIDATED OVERVIEWData included elsewhere in the Form 10-K (as
amended). The following table summarizes pretax operating income (loss) for the
four business segments and Corporate for the years ended December 31, 1998, 1997
and 1996, and is followed by a discussion of the special items for those periods
and a reconciliation of income (loss) before income taxes to pretax operating
income (loss).
(Dollars and shares in millions, except per share amounts, and
percentage increase (decrease) over prior year) 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------millions) 1998 % Change 1997 % Change 1996
- ----------------------------------------- ----------- ---------- ----------- ---------- -----------
REVENUES
Premiums $2,732.4 10.4% $2,474.1 15.5% $2,142.4
InvestmentSummary of pretax operating income 770.2 (2.6) 790.4 (2.3) 809.2
Net realized investment gains 45.6 (7.7) 49.4 19.0 41.5
Fees and other(loss)
Disability Insurance Segment ........... $348.3 10.3% $315.8 13.4% $278.4
Special Risk Insurance Segment ......... 159.4 27.7 124.8 38.4 90.2
Colonial Products Segment .............. 105.1 6.4 98.8 6.6 92.7
Retirement Products Segment ............ 1.0 (78.7) 4.7 (65.4) 13.6
Corporate .............................. (58.0) 12.0 (51.8) 38.1 (37.5)
------ ----- ------ ----- ------
Total pretax operating income 75.5 (9.1) 83.1 50.0 55.4
---------------------------------------------------------------------------------------------------------------------------
Total revenues 3,623.7 6.7 3,397.0 11.4 3,048.5
BENEFITS AND EXPENSE 3,425.1 16.6 2,936.7 10.8 2,650.0
---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECTS OF ACCOUNTING CHANGES 198.6 (56.9) 460.3 15.5 398.5
INCOME TAXES 43.9 (70.4) 148.3 38.2 107.3
---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effects of
accounting changes 154.7 (50.4) 312.0 7.1 291.2
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- nm 20.0 nm --
Postretirement benefits other than pensions, net of tax -- nm (32.1) nm --
---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 154.7 (48.4)% $ 299.9 3.0% $ 291.2
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before cumulative effects of accounting changes $ 2.09 $ 3.96 $ 3.71
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 0.25 --
Postretirement benefits other than pensions, net of tax -- (0.40) --
---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2.09 $ 3.81 $ 3.71
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF INCOME (LOSS) BEFORE INCOME TAXES
Employee Benefits Segment $ 257.8 7.8% $ 239.1 7.5% $ 222.5
Related Businesses Segment 60.3 5.2 57.3 7.3 53.4
Colonial Companies Segment 62.7 (10.9) 70.4 16.4 60.5
Individual Disability Segment (188.2) nm 69.0 54.7 44.6
Retirement Security Segment 25.7 21.8 21.1 nm 6.7
Other Operations Segment 8.5 (59.1) 20.8 26.1 16.5
Corporate (28.2) 62.1 (17.4) nm (5.7)
---------------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 198.6 (56.9)% $ 460.3 15.5% $ 398.5
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
1994 1993 1992
BALANCE SHEET DATA
Assets $13,127.2 $12,437.3 $11,959.8
Long-term debt $ 182.1 $ 128.6 $ 77.2
Stockholders' equity $ 1,915.4 $ 2,102.7 $ 2,010.9
Shares outstanding 72.4 76.0 79.1
Weighted average shares outstanding
during the year 74.2 78.8 78.5
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------......... $555.8 12.9% $492.3 12.6% $437.4
====== ===== ====== ===== ======
CONSOLIDATED OVERVIEW
During 1994,
UNUM reported decreasedincreased pretax operating income before income taxes, which was
primarily attributable to unfavorable claims experience in two of UNUM's largest
product lines, individual disability as reported in the Individual Disability
segment, and group long term disability, as reported in the Employee Benefits
segment.
As further described in the Individual Disability segment, throughout 1994
UNUM's individual disability business in the United States experienced a higher
incidence of new claims and a disproportionate number of larger claims that
management has attributed to certain geographical and occupational segments,
particularly physicians. As a result, in 1994 UNUM increased reserves for
existing claims by $83.3 million and established a reserve for future estimated
losses of $109.1 million. These increased reserves reflect management's current
expectations for morbidity trends for the existing individual disability
business, as reported in the Individual Disability segment. This reserve
strengthening resulted in an increase to benefits to policyholders in the
Consolidated Statement of Income of $192.4 million and a decrease to net income
of $125.1 million, or $1.69 per share, for the year ended
December 31, 1994. It
is not possible1998, as compared with the same period in 1997. The increase was
primarily attributable to predict whether morbidity trends will be consistentimprovements in pretax operating income for the
Special Risk Insurance and Disability Insurance segments, primarily resulting
from solid premium growth in each segment. See the segment discussions that
follow for a more detailed analysis of operating results.
For the year ended December 31, 1997, as compared with UNUM's current assumptions.
During 1994, UNUM's North American group long term disabilitythe same period in
1996, UNUM reported increased pretax operating income, driven by improved
results as
reported in the Employee Benefits segment, were adversely affected through a
combination of increased incidence of new claimsDisability Insurance and an increased number of
large claims. Management continues to address these unfavorable claim trends by
increasing prices on selected new and inforce business, implementing more
stringent underwriting guidelines, and strengthening risk management programs.
Management believes these actions will strengthen UNUM's ability to dealSpecial Risk Insurance segments,
resulting primarily from strong premium growth in both segments during 1997.
Special Item in 1998
Disability Claims Reserve Increase
In connection with these disability claims trendsentering into the future, andmerger agreement with Provident in
fourth quarter 1998, UNUM anticipates that the levelas a result of future
earnings of the group long term disability productintegrating its claim
operations with Provident, there will be a functiontemporary increase in claim costs.
UNUM expects that fewer claims will be resolved or closed during the period
when the two companies are planning and implementing the integration of their
claims organizations. The average length of duration for claims will increase,
resulting in more benefit payments being paid for a relatively short time until
the effectivenessconsolidation of these continuing actionsoperations is complete. During the fourth quarter of 1998,
UNUM increased its unpaid claims reserve by $59.4 million related to the
expected increase in disability claim duration on existing claims. For
additional disclosures related to this reserve increase see Item 8 Note 4
"Reserves" and the time required for these
actions to take effect.
During 1994, several of UNUM's businesses were contending with various proposals
to reform the health care delivery systemdiscussion in the
12
Disability Insurance segment. This reserve increase was reflected as a $49.0
million increase in benefits to policyholders and a $10.4 million reduction in
fee income in the Disability Insurance segment. The reduction in fee income
represents increased reserves for the United States. While proposed
federal health care legislation was not enacted in 1994, structural reformStates non-cancellable individual
disability business that is reinsured with Centre Life Reinsurance Limited
("Centre Re"). See Item 8 Note 6 under way, which UNUM believes has andthe caption "Reinsurance" for further
information on the reinsurance transaction. Management will continue to
alterevaluate the medical
profession, as well as the social and economic environmentimpacts of the health care
industry. Management believesmerger on disability claims experience and the
uncertainties as to howassumptions around expected disability claims duration that were used in the
health care
industry will emerge from such structural reform, as well as changes in and
consolidationdetermination of the health care delivery system, contributed to a higher
incidence of new and larger claims for physicians.
The interest rate environment changed dramatically during 1994, as long-term
interest rates rose from a more than twenty-year low experiencedreserve increase.
Special Items in 1993, along
with increases in the prime lending rates and short-term rates. However,
average investment yields on new fixed maturity purchases for the past two years
remain below the existing average portfolio yield, which has decreased the
average rate used to discount disability claim reserve liabilities and decreased
levels of investment income in 1994 and 1993, despite continued growth in
invested assets. Management anticipates that the average investment portfolio
yield will further decline, since UNUM invests its cash flows in high quality
assets that currently have yields below the existing average portfolio yields.
Economic indicators at the end of 1994 and in early 1995 were predicting modest
growth in 1995 for UNUM's major markets: the United States, Canada and the
United Kingdom. In February 1995, the Federal Reserve Board tightened credit
policy, due to continued concerns about inflation, by raising the federal funds
rate to 6%, the highest level in four years. This represents an increase of
three full percentage points since the Federal Reserve Board started raising
rates in February 1994. Also in 1994, the central banks in Canada and the
United Kingdom increased interest rates. During 1994, long-term yields
increased; however, since long-term yields are based on market dynamics,
management cannot predict the impact of a higher short-term rate on future long-
term yields.
The increase in income before income taxes in 1993 was primarily due to expense
management, favorable claims experience in the Individual Disability segment and
unusually favorable interest spread margins on tax sheltered annuities in the
Retirement Security segment. Expenses of $9.6 million, or $0.12 per share,
incurred in connection with the merger of UNUM and Colonial Companies, Inc.,
included in Corporate, and unfavorable group life claims experience in the
Employee Benefits segment partially offset these results.
ACCOUNTING CHANGES
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after January
1, 1994. Upon the adoption of FAS 115, UNUM increased unrealized gains on
available for sale securities included in stockholders' equity on January 1,
1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the
unrealized holding gains on fixed maturities classified as available for sale
which were previously carried at amortized cost. In accordance with FAS 115,
prior year consolidated financial statements have not been restated to reflect
the change in accounting principle. The adoption of FAS 115 did not affect 1994
net income.
Included in 1993 net income were the cumulative and incremental effects of the
adoption of FAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions," and FAS No. 109, "Accounting for Income Taxes."
Effective January 1, 1993, UNUM adopted FAS 106, which changed the method for
recognition of the cost of postretirement benefits other than pensions from a
cash basis to an accrual basis over the years in which employees render the
related services. UNUM elected to recognize the FAS 106 liability at January 1,
1993, of $48.8 million as a cumulative effect of an accounting change which
decreased net income by $32.1 million, or $0.40 per share, in 1993. The
incremental effect of FAS 106 for 1993 was increased operating expenses of
approximately $6.0 million from 1992.
Also effective January 1, 1993, UNUM adopted FAS 109, which changed the method
for calculating and reporting deferred income taxes in the financial statements
from the deferred method to the liability method. The cumulative effect of this
accounting change amounted to a $20.0 million increase, or $0.25 per share, in
1993 net income.
UNUM also adopted FAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," effective January 1, 1993, which
resulted in an increase in other assets of $80.0 million and a corresponding
increase in future policy benefits and unpaid claims and claim expenses, but did
not affect 1993 net income.
INCOME TAXES
Effective tax rates, which reflect income tax expense as a percentage of pretax
income, were 22.1%, 32.2% and 26.9% for 1994, 1993 and 1992, respectively. The
significant reduction in the effective tax rate for 1994 resulted primarily from
reduced pretax earnings. Reported income tax expense was below the federal
statutory tax rate of 35% for 1994 and 1993, and 34% for 1992, primarily due to
tax savings from investments in tax-exempt securities. Although investments in
tax-exempt securities result in increased consolidated net income, these
investments reduce UNUM's business segments' income before income taxes.
In 1993, UNUM's growth in pretax income outpaced the growth of income from tax-
exempt securities, which resulted in an increased effective tax rate. On August
10, 1993, legislation was enacted to increase the federal corporate income tax
rate of 34% to 35%, retroactive to January 1, 1993. The change in tax rates
resulted in a $7.8 million, or $0.10 per share, charge related to the adjustment
of deferred tax liabilities. Excluding the adjustment to deferred income tax
expense of $7.8 million for the enacted tax rate change, the 1993 effective tax
rate would have been 30.5%.
EMPLOYEE BENEFITS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums
Group LTD $ 966.1 3.5% $ 933.4 20.4% $ 775.2
Group life insurance 312.3 14.8 272.0 28.2 212.2
Other employee benefits 162.2 10.0 147.4 22.2 120.6
--------------------------------------------------------------------------------------------------------------------------
Total premiums 1,440.6 6.5 1,352.8 22.1 1,108.0
Investment income 229.2 8.2 211.9 5.4 201.0
Net realized investment gains 34.3 50.4 22.8 (31.7) 33.4
Fees and other income 10.8 10.2 9.8 19.5 8.2
--------------------------------------------------------------------------------------------------------------------------
Total revenues 1,714.9 7.4 1,597.3 18.3 1,350.6
BENEFITS AND EXPENSES
Benefits to policyholders 1,117.0 9.7 1,018.3 26.0 808.0
Operating expenses 290.9 2.2 284.6 9.7 259.5
Commissions 108.0 10.3 97.9 10.7 88.4
Increase in deferred policy
acquisition costs (58.8) 38.0 (42.6) 53.2 (27.8)
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,457.1 7.3 1,358.2 20.4 1,128.1
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 257.8 7.8% $ 239.1 7.5% $ 222.5
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized new premiums)
Group LTD $ 218.0 $ 196.2 $ 160.0
Group life insurance $ 91.2 $ 89.4 $ 77.6
Other employee benefits $ 63.6 $ 52.9 $ 46.7
Persistency (premiums)
Group LTD 84.0% 88.7% 90.3%
Group life insurance 84.8% 89.2% 89.2%
Benefit ratio (% of premiums) 77.5% 75.3% 72.9%
Operating expense ratio (% of premiums) 20.2% 21.0% 23.4%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
EMPLOYEE BENEFITS SEGMENT
The Employee Benefits segment includes group long term disability ("group LTD"),
group life and other employee benefits products including short term disability,
accidental death and dismemberment and dental insurance, which are sold by1997
TSA Deferred Gain Recognition
UNUM Life Insurance Company of America ("UNUM America") and First UNUM
Life Insurance Company ("First UNUM") closed the sale of their respective
tax-sheltered annuity ("TSA") businesses to The Lincoln National Life Insurance
Company and Lincoln Life & Annuity Company of New York, both subsidiaries of
Lincoln National Corporation, on October 1, 1996. The sale resulted in a
deferred pretax gain, of which $72.6 million was recognized in income during
1997, as fees and other income in the Retirement Products segment.
Reorganization Costs
During fourth quarter 1997, UNUM recognized $6.5 million of operating
expenses related to a management and field office reorganization within its
North American reinsurance operations, reducing income before income taxes in
the Special Risk Insurance segment. Included in the $6.5 million of costs was a
$6.0 million restructuring charge and $0.5 million of direct costs, primarily
relocation expenses. The restructuring charge of $6.0 million was comprised of
$4.0 million of lease exit costs, $1.4 million of severance related costs and
$0.6 million of abandoned assets.
Reinsurance Pool Results
During fourth quarter 1997, certain reinsurance pools managed by UNUM's
wholly-owned subsidiary, Duncanson & Holt Inc. ("D&H"), received new claim
information from ceding insurance enterprises about certain older pool years
and completed an analysis of recent claims experience deterioration. As a
result of these factors, certain pools have strengthened claim reserves. The
impact to UNUM in fourth quarter 1997 from these pool claim reserve increases
was an $11.7 million reduction in fee income and a $6.7 million increase in
benefits to policyholders in the Special Risk Insurance segment, reducing
income before income taxes by $18.4 million. The $11.7 million reduction in fee
income reflects lower profit commission levels in certain older pool years
after the pool claim reserve strengthening. The $6.7 million increase in
benefits to policyholders represents the amount of additional claim reserves
UNUM recognized as a result of its participation in the pools that strengthened
claim reserves.
Special Items in 1996
Individual Disability Reinsurance Fees
During the fourth quarter of 1996, UNUM executed a definitive reinsurance
agreement between UNUM America and Centre Re, a Bermuda-based reinsurance
specialist, for reinsurance coverage of the active life reserves of UNUM
America's existing United States non-cancellable individual disability block of
business. As a result, UNUM recognized a pretax charge of $49.7 million,
reflected as operating expenses in the Disability Insurance segment, which
represents the present value of the anticipated minimum amount of fees to be
paid to Centre Re under the agreement. For additional information regarding the
reinsurance agreement see Item 8 Note 6 under the caption "Reinsurance."
Intangible Asset Write-offs and Future Loss Reserves
In connection with the merger of Commercial Life Insurance Company
("Commercial Life") into UNUM America, the sale of UNUM America's TSA business,
as well as UNUM's continued efforts to strengthen its focus on its core
products, the company initiated a review of certain products, which resulted in
the recognition of pretax charges totaling $39.4 million during third quarter
1996. The charges included the write-off of certain intangible assets and the
establishment of a reserve for the present value of expected future losses on
certain discontinued products.
13
For the year ended December 31, 1996, these charges reduced income before
income taxes by $13.1 million in the Disability Insurance segment, reflected as
$0.5 million of benefits to policyholders, $0.9 million of operating expenses,
and $11.7 million as a change in deferred policy acquisition costs; $11.3
million in the Special Risk Insurance segment, reflected as $6.9 million of
benefits to policyholders and $4.4 million of operating expenses; and $15.0
million in the Retirement Products segment, reflected as benefits to
policyholders.
Commercial Life Merger and Integration Costs
During the third quarter of 1996, actions related to the merger of
Commercial Life into UNUM America resulted in a $10.1 million increase in
operating expenses for Corporate. The $10.1 million charge consisted of $2.9
million of direct costs incurred and the recording of a $7.2 million
restructuring charge to recognize $2.8 million of severance costs and $4.4
million of lease exit costs, primarily related to the merger.
Reconciliation of Income (Loss) Before Income Taxes to Pretax Operating Income
(Loss)
The following table reconciles income (loss) before income taxes to pretax
operating income (loss) for the four business segments and Corporate for the
years ended December 31, 1998, 1997 and 1996:
Disability Special Risk Colonial Retirement Consolidated
(Dollars in millions) Insurance Insurance Products Products Corporate UNUM
- ------------------------------------------ ------------ -------------- ---------- ------------ ----------- -------------
Year Ended December 31, 1998:
Income (loss) before income taxes ........ $306.5 $161.3 $107.0 $ 0.6 $(58.0) $517.4
Exclude realized investment (gains)
losses .................................. (17.6) (1.9) (1.9) 0.4 -- (21.0)
------ ------ ------ ----- ------ ------
288.9 159.4 105.1 1.0 (58.0) 496.4
Special item:
Disability claims reserve increase ...... 59.4 -- -- -- -- 59.4
------ ------ ------ ----- ------ ------
Pretax operating income (loss) ........... $348.3 $159.4 $105.1 $ 1.0 $(58.0) $555.8
====== ====== ====== ===== ====== ======
Year Ended December 31, 1997:
Income (loss) before income taxes ........ $312.7 $101.3 $ 98.8 $76.2 $(52.6) $536.4
Exclude realized investment (gains)
losses .................................. 3.1 (1.4) -- 1.1 0.8 3.6
------ ------ ------ ----- ------ ------
315.8 99.9 98.8 77.3 (51.8) 540.0
Special items:
TSA deferred gain recognition ........... -- -- -- (72.6) -- (72.6)
Reorganization costs .................... -- 6.5 -- -- -- 6.5
Reinsurance pool results ................ -- 18.4 -- -- -- 18.4
------ ------ ------ ----- ------ ------
Pretax operating income (loss) ........... $315.8 $124.8 $ 98.8 $ 4.7 $(51.8) $492.3
====== ====== ====== ===== ====== ======
Year Ended December 31, 1996:
Income (loss) before income taxes ........ $215.3 $ 79.2 $ 92.4 $ 1.4 $(46.7) $341.6
Exclude realized investment (gains)
losses .................................. 0.3 (0.3) 0.3 (2.8) (0.9) (3.4)
------ ------ ------ ----- ------ ------
215.6 78.9 92.7 (1.4) (47.6) 338.2
Special items:
ID reinsurance fees ..................... 49.7 -- -- -- -- 49.7
Write-offs and future loss reserves ..... 13.1 11.3 -- 15.0 -- 39.4
Merger and integration costs ............ -- -- -- -- 10.1 10.1
------ ------ ------ ----- ------ ------
Pretax operating income (loss) ........... $278.4 $ 90.2 $ 92.7 $13.6 $(37.5) $437.4
====== ====== ====== ===== ====== ======
14
Pretax Operating Income (Loss) by Segment
The following sections discuss the results of the four business segments
and Corporate for the years ended December 31, 1998, 1997 and 1996. These
discussions are based on pretax operating income (loss), which excludes
realized investment gains (losses) and the special items previously described.
The summary financial information provided prior to each segment discussion has
been adjusted to exclude the impact of special items from all income statement
line items, consistent with the discussion of results on a pretax operating
income basis.
DISABILITY INSURANCE SEGMENT
(Dollars in millions) 1998 % Change 1997 % Change 1996
- ----------------------------------------- ------------- ------------ ------------- ----------- --------------
Revenues
Premiums
Group LTD .............................. $ 1,385.1 13.6% $ 1,219.1 11.4% $ 1,094.6
Group STD .............................. 274.4 33.7 205.3 29.9 158.1
UNUM Limited ........................... 166.8 13.5 147.0 10.8 132.7
Individual Products .................... 131.0 34.6 97.3 17.8 82.6
Other Disability Insurance ............. 168.6 14.1 147.8 (65.0) 421.9
--------- ------ --------- ----- ----------
Total premiums ......................... 2,125.9 17.0 1,816.5 (3.9) 1,889.9
Investment income ....................... 473.8 0.6 471.1 0.5 468.8
Fees and other income ................... 52.0 (21.3) 66.1 nm 27.8
--------- ------ --------- ----- ----------
Total operating revenues ............... 2,651.7 12.7 2,353.7 (1.4) 2,386.5
Benefits and expenses
Benefits to policyholders ............... 1,745.7 16.1 1,503.9 (0.7) 1,514.4
Operating expenses ...................... 486.7 7.7 452.0 (1.8) 460.4
Commissions ............................. 196.8 17.2 167.9 (8.8) 184.2
Increase in deferred policy acquisition
costs .................................. (125.8) 46.4 (85.9) 68.8 (50.9)
---------- ------ ---------- ----- -----------
Total benefits and expenses ............ 2,303.4 13.0 2,037.9 (3.3) 2,108.1
---------- ------ ---------- ----- -----------
Pretax operating income (a) ............. 348.3 10.3 315.8 13.4 278.4
---------- ------ ---------- ----- -----------
Special items (b) ....................... (59.4) -- (62.8)
Realized gains (losses) ................. 17.6 (3.1) (0.3)
---------- ---------- -----------
Income before income taxes (c) .......... $ 306.5 (2.0)% $ 312.7 45.2% $ 215.3
========== ====== ========== ===== ===========
Supplemental information (d):
Sales (annualized new premiums) .........
Group LTD .............................. $ 325.2 $ 294.4 $ 218.7
Group STD .............................. $ 130.1 $ 94.8 $ 74.0
UNUM Limited ........................... $ 30.6 $ 20.0 $ 14.3
Long Term Care ......................... $ 43.0 $ 24.5 $ 17.4
Lifelong Disability Protection ......... $ 17.0 $ 10.6 $ 5.5
Persistency (premiums) ..................
Group LTD .............................. 89.4% 87.7% 83.6%
Group STD .............................. 89.6% 86.7% 84.5%
UNUM Limited ........................... 91.2% 91.3% 85.6%
Benefit ratio (% of premiums) ........... 82.1% 82.8% 80.1%
Operating expense ratio (% of
premiums) .............................. 22.9% 24.9% 24.4%
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income see page 12 of the
Consolidated Overview.
(b) A discussion of special items begins on page 12 of the Consolidated
Overview. For a discussion of the 1998 special item see the caption
Disability Claims Reserve Increase and for a discussion of the 1996
special items see the captions Individual Disability Reinsurance Fees and
Intangible Asset Write-offs and Future Loss Reserves.
(c) The Disability Insurance segment discussion of results is on a pretax
operating income basis. Management believes pretax operating income is a
better representation of our ongoing operations. While management
15
UNUM Corporation and Subsidiaries
believes pretax operating income provides relevant and useful information,
it does not replace income before income taxes and net income calculated in
accordance with generally accepted accounting principles as a measure of
UNUM's profitability. Therefore, this discussion should be read in
conjunction with UNUM's Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Selected Consolidated Financial Data
included elsewhere in the Form 10-K (as amended).
Increased(d) Information relating to sales and selectedpersistency is presented as an indicator
of premium growth in the segment. Persistency data also indicates
experience in maintaining customers over time. Benefit ratios and
operating expense ratios show the relative relationships among data to
earned premiums in the segment's income statement.
The Disability Insurance segment includes disability products offered
through: UNUM America and First UNUM in North America; UNUM Limited in the
United Kingdom; and UNUM Japan Accident Insurance Company Limited ("UNUM
Japan"). The products included in this segment are group long term disability
("group LTD"), group short term disability ("group STD"), long term care,
individual disability and disability reinsurance operations.
Overview
A new product grouping, Individual Products, shown in the previous table,
was reported in the Disability Insurance segment effective June 30, 1998, and
prior year amounts have been reclassified for comparative purposes. Those
products reported as Individual Products include long term care, guaranteed
renewable individual disability (Lifelong Disability Protection) and certain
other individual disability products. The traditional, fixed price, increasesnon-
cancellable individual disability ("non-cancellable ID") business is now
reported in the Other Disability Insurance line. Additionally, effective
January 1, 1997, the individual components of the operating results for the
reinsured non-cancellable ID business are not reflected on newseparate lines in
UNUM's statements of income; instead, components of the operating results are
combined and inforce cases
contributedreflected as a net amount in fees and other income.
The Disability Insurance segment's pretax operating income increased in
1998, as compared with 1997, primarily as a result of strong premium growth and
favorable expense growth for the segment. Unfavorable claims experience in the
major product lines and reduced fees and other income for the segment partially
offset these favorable factors.
The following discussion of 1997 results, as compared with 1996 results,
includes the underlying trends of both the reinsured and non-reinsured portions
of the non-cancellable ID business in order for the analysis of operating
results to be comparable. Refer to Item 8 Note 6 under the caption
"Reinsurance" for further information. The increase in the Disability Insurance
segment's pretax operating earnings in 1997, as compared with 1996, was
primarily attributable to improved premium growth, increased investment income
and favorable operating expense ratios across most lines of business. These
favorable factors were partially offset by higher benefit ratios in certain
disability businesses.
After adjusting for the effect of claim block acquisitions, the Disability
Insurance segment reported premium growth of 6.5%15.5% in 1998 compared with prior
year's growth of 9.4%, which was also adjusted for $255.4 million of premium
ceded during 1997 under the Employee Benefits segmentnon-cancellable ID reinsurance agreement. The
improvement in 1994. Rate increases to address unfavorable experience on selected segments of
the inforce business contributed to the declinepremium growth was driven by strong sales results and
persistency improvements, primarily in both the group LTD and group life premium persistencySTD.
One-time premiums, which are generated by claim block acquisitions, are
summarized in the table below. Management intends to pursue additional claim
block acquisitions in the future.
Year Ended December 31,
------------------------------------
(Dollars in millions) 1998 1997 1996
- ------------------------------------------- ---------- ---------- ----------
Group LTD ................................. $23.7 $18.9 $10.0
UNUM Limited .............................. 0.3 2.6 8.4
Long Term Care ............................ -- 0.5 --
Disability Reinsurance Operations ......... 31.0 2.1 --
----- ----- -----
Total .................................... $55.0 $24.1 $18.4
===== ===== =====
During 1998, market interest rates fell to historically low levels.
Management expects the reserve discount rate for certain disability lines will
likewise decline as current cash flows are invested in 1994. In general, case terminationsassets at current
yields,
16
which are below the composite yield of existing assets purchased in prior
years, resulting from rate increases have occurred in less profitable segments of these
businesses.higher claim liabilities. Management expects to price new
business and reprice existing business, at contract renewal dates, to mitigate
the effect on new claim liabilities from this decline in interest rates.
However, given the competitive market conditions for UNUM's disability products
in the United States and the United Kingdom, it is uncertain whether pricing
actions can mitigate the entire effect of interest rate declines. Additionally,
in connection with the proposed merger with Provident, UNUM is evaluating its
processes and assumptions used to calculate the discount rate for claim
reserves for group LTD, individual disability and the disability businesses of
UNUM Limited (see "Proposed Merger with Provident" for further information).
The proposed merger of UNUM and Provident is expected to have a near term
adverse impact on the productivity of UNUM's claims management function
resulting in some delay in claim resolutions during 1999 and additional claim
payments to policyholders. Claim personnel will be distracted from normal claim
management activities as a result of planning and implementing the integration
of the two companies' claims organizations. As a result of the claim operations
integration activities, UNUM recorded a $59.4 million increase in the reserve
for group and individual disability claims incurred as of December 31, 1998.
See Item 8 Note 4 "Reserves" for a detailed discussion. In addition, management
expects the claims operations integration efforts to have some benefits,
primarily related to claims incurred in future periods, as well as the
potential for improved customer satisfaction and lower ultimate claim costs as
best practices in return to work and claims management are implemented. As
benefits related to the integration become known, reserve assumptions will be
revised, if appropriate. Insurance policies that are impacted by the temporary
change in claim resolution rates will not perform as anticipated when priced.
However, since the cause of the additional claim cost is of a temporary nature,
it is not anticipated to have an effect on future policy pricing. The $59.4
million reserve increase is not considered material from a capital adequacy
position.
Group Long Term Disability
During 1998, group LTD experienced increased pretax operating income that
was driven primarily by strong premium growth of 13.6% and an improved
operating expense ratio. Premium growth in 1998 resulted from the impact of
solid sales growth and stronger persistency, which is a reflection of
continuing customer service actions.
Group LTD was unfavorably affected by a higher benefit ratio in 1998,
largely the result of increased levels of claims incidence, an increase in the
average size of claims and a longer duration of claims as compared with 1997.
As discussed in the section titled Forward-Looking Information, certain risks
and uncertainties are inherent in UNUM's business. Components of claims
experience, including but not limited to, incidence levels and claims duration,
may continue for some period of time at or above the higher levels experienced
in 1998. Therefore, management continues to monitor claims experience in group
LTD and responds to changes by periodically adjusting prices, refining
underwriting guidelines, changing product features and strengthening risk
management policies and procedures. In addition, management will continue to
seek inforce case rate increases,
as appropriate, givenevaluate the impacts of the merger on disability claims experience and the
assumptions around expected disability claims duration that were used in the
determination of the fourth quarter 1998 claims reserve increase.
Group Short Term Disability
Pretax operating income for group STD increased in 1998, as compared with
1997. Key drivers of the increase were premium growth from record sales and
improved persistency, and a favorable operating expense ratio. The strong sales
levels reflect UNUM's continuing efforts to improve profitability. However,
suchcross-sell group STD products with
other UNUM group products, as well as increasing large case sales. An
unfavorable change in the benefit ratio, primarily from increased claims
incidence levels and larger size cases, partially offset these favorable
factors.
UNUM Limited
UNUM Limited's pretax operating income declined for the year ended
December 31, 1998, as compared with 1997. The decline was primarily due to an
increased benefit ratio generally resulting from a longer duration of claims
and increased levels of claims incidence and average size of claims. Favorable
expense growth partially offset this decline.
In general, UNUM Limited's earnings expressed in U.S. dollars are affected
by fluctuations in the exchange rates used in the translation of earnings from
British pounds sterling. The weighted-average exchange rate actions may increase case terminationswas approximately
$1.66, $1.64 and decrease persistency rates$1.56 for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, the spot rate was approximately $1.66.
17
UNUM Corporation and Subsidiaries
Individual Products
During 1998, the long term care ("LTC") and Lifelong Disability Protection
("LDP") blocks of business, while still relatively small, continued to
contribute favorably to pretax operating income. LTC and LDP experienced
significant premium growth in 1998, as compared with 1997, reflecting the
strong sales momentum for these businesses.
In 1994Other Disability Insurance
The non-cancellable ID business contributed favorably to the segment's
pretax operating earnings for 1998, largely driven by a lower benefit ratio, as
compared with 1997, during which the non-cancellable ID block incurred higher
levels of claims incidence. Partially offsetting these positive results was a
decline in the operating results of the reinsured block of non-cancellable ID
business reported in fees and 1993,other income. This decline was primarily due to
unfavorable claims experience generally resulting from an increase in the
average size of claims and a higher level of claims incidence in the reinsured
block. See Item 8 Note 6 under the caption "Reinsurance" for a discussion of
the reinsurance transaction.
SPECIAL RISK INSURANCE SEGMENT
(Dollars in millions) 1998 % Change 1997 % Change 1996
- ------------------------------------------- ------------ ---------- ------------ ---------- ------------
Revenues
Premiums
Group Life ............................... $ 645.9 22.3% $ 528.1 20.1% $ 439.6
Other Special Risk Products .............. 513.2 32.5 387.4 25.5 308.6
-------- ----- -------- ---- --------
Total premiums .......................... 1,159.1 26.6 915.5 22.4 748.2
Investment income ......................... 78.7 12.3 70.1 22.3 57.3
Fees and other income ..................... 49.3 13.6 43.4 23.6 35.1
-------- ----- -------- ---- --------
Total revenues .......................... 1,287.1 25.1 1,029.0 22.4 840.6
Benefits and expenses
Benefits to policyholders ................. 803.3 26.1 637.2 23.2 517.1
Operating expenses ........................ 226.8 17.5 193.1 3.4 186.8
Commissions ............................... 176.1 38.1 127.5 42.1 89.7
Increase in deferred policy acquisition
costs .................................... (78.5) 46.5 (53.6) 24.1 (43.2)
--------- ----- --------- ---- ---------
Total benefits and expenses ............. 1,127.7 24.7 904.2 20.5 750.4
--------- ----- --------- ---- ---------
Pretax operating income (a) ............... 159.4 27.7 124.8 38.4 90.2
--------- ----- --------- ---- ---------
Special items (b) ......................... -- (24.9) (11.3)
Realized gains ............................ 1.9 1.4 0.3
--------- --------- ---------
Income before income taxes (c) ............ $ 161.3 59.2% $ 101.3 27.9% $ 79.2
========= ===== ========= ==== =========
Supplemental information (d):
Group life sales (annualized new
premiums) ................................ $ 208.7 $ 175.8 $ 150.0
Group life persistency (premiums) ......... 86.4% 86.5% 85.6%
Benefit ratio (% of premiums) ............. 69.3% 69.6% 69.1%
Operating expense ratio (% of
premiums) ................................ 19.6% 21.1% 25.0%
- --------
(a) For the definition of pretax operating income see page 12 of the
Consolidated Overview.
(b) A discussion of special items begins on page 12 of the Consolidated
Overview. For a discussion of the 1997 special items see the captions
Reorganization Costs and Reinsurance Pool Results and for a discussion of
the 1996 special items see the caption Intangible Asset Write-offs and
Future Loss Reserves.
(c) The Special Risk Insurance segment discussion of results is on a pretax
operating income basis. Management believes pretax operating income is a
better representation of our ongoing operations. While management
18
believes pretax operating income provides relevant and useful information,
it does not replace income before income taxes and net income calculated in
accordance with generally accepted accounting principles as a measure of
UNUM's profitability. Therefore, this discussion should be read in
conjunction with UNUM's Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Selected Consolidated Financial Data
included elsewhere in the Form 10-K (as amended).
(d) Information relating to sales and persistency is presented as an indicator
of premium growth in the segment. Persistency data also indicates
experience in maintaining customers over time. Benefit ratios and
operating expense ratios show the relative relationships among data to
earned premiums in the segment's income statement.
The Special Risk Insurance segment includes group LTDlife, accidental death
and dismemberment, travel and voluntary accident insurance, special risk
reinsurance operations, and other special risk insurance products.
Pretax operating income for the Special Risk Insurance segment increased
for the year ended December 31, 1998, as compared with 1997, primarily driven
by strong premium growth and a lower operating expense ratio across the
segment. Additionally, increased fees and other income, largely from
reinsurance underwriting management operations, and increased investment income
positively affected pretax operating income for this period. Higher benefit
ratios in certain product lines partially offset these increases. UNUM's
participation in Lloyd's of London syndicates experienced a higher benefit
ratio, especially in the fourth quarter, as new information was activereceived about
the profitability of open syndicate years. The profitability of the Lloyd's of
London market and the syndicates in acquiring
closedwhich UNUM participates may continue to
deteriorate and impact future pretax operating income. UNUM is conducting a
strategic review of its reinsurance businesses, including the Lloyd's of London
syndicates, to determine the appropriateness of their fit within the context of
the UNUMProvident merged entity. The review could result in the sale of some or
all of the reinsurance businesses. Due to the nature of the risks underwritten
and the relative size of the blocks of businesses, several of the products in
the Special Risk Insurance segment can exhibit claims whichvariability.
Solid sales results and stable persistency continued during the year and
were the primary drivers of group life premium growth of 22.3% in 1998. Claim
block acquisitions generated one-time premiums totaling $8.6for group life of $0.2 million
and $58.3$3.6 million, respectively.respectively, for 1997 and 1996, and for reinsurance
operations of $5.1 million and $16.3 million, respectively, for 1998 and 1996.
Management intends to pursue additional claim block acquisitions in the future.
The 22.1%segment's operating expense ratio improved in 1998, primarily driven
by continued expense management combined with the strong premium growth in 1993 reflected record sales in all ofgrowth. In
1998, the Employee
Benefits segment's product lines. Premium growth also reflected selected price
increases, acquisitions of closed blocks of claims, and slight growth of the
employment and salary levels for group LTD's existing customer base. Renewal
rate actions for group LTD had a minimal impact on the premium persistency rate
for 1993.
During 1994, the group LTD business experienced a higher incidence of new claims
and an increased number of large claims, which were the primary causes of the
increased benefit ratio for the Employee Benefits segment from 1993. Management
has identified a number of geographical and occupational segments of the group
LTD business which are experiencing higher than expected claims. Management
continues to pursue these segments of the business for underwriting and pricing
actions, and is addressing increased incidence rates, lower recovery rates, and
the more subjective nature of the types of disability claims by implementing
new, and enhancing existing, risk management programs.
Group LTD earnings in 1994 were also adversely affected by a decrease in the
discount rate used to determine reserves, from 9.34% at December 31, 1993, to
9.18% at December 31, 1994, which resulted in an increase to claim reserves.
The discount rate is a composite yield of assets specifically matched with the
group LTD reserves. Management expects the discount rate will further decline,
since current cash flows are invested in high quality assets at current yields,
which are below the composite yields of the existing assets purchased in prior
years. UNUM has increased prices on both existing and new business in order to
mitigate the impact of the interest rate environment.
Reserves for unpaid claims are estimates based on UNUM's historical experience
and other actuarial assumptions, which consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to interest rates, and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. Reserve estimates and assumptions
are periodically reviewed and updated with any resulting adjustments to reserves
reflected in current operating results. Given the complexity of the reserving
process, the ultimate liability may be more or less than such estimates
indicate.
During 1994, management implemented and strengthened various risk management
programs to address the unfavorable claims trends experienced in group LTD. In
addition to the selected price increases on new and inforce business, more
stringent underwriting practices, and reducing benefit options for certain
segments of the business, management has established special units to address
specific aspects of disability claims, including complex and fraudulent claims.
Additionally, management has implemented new group LTD contract provisions which
provide risk management features and claimant rehabilitation incentives. Also,
management continually reviews the benefits management process to identify and
strengthen risk management policies and procedures.
Management believes these underwriting, pricing and risk management actions will
strengthen UNUM's ability to deal with these disability claims trends into the
future, and that the level of future earnings of the group LTD product will be a
function of the effectiveness of these continuing actions and the time required
for these actions to take effect.
The group life business reported favorable claims experience in 1994.
Management continues to address higher than expected claims in certain portions
of the business by imposing more stringent underwriting requirements and
increasing prices. Management believes these actions improved overall claims
experience for group life products in 1994.
The ratio of operating expenses to premiums was 20.2%, 21.0%, and 23.4% in 1994,
1993 and 1992, respectively. The decreases in 1994 and 1993 were attributable
to continued efforts to manage expense growth and increased premium from claim
block purchases in 1993, which do not have proportionally higher expenses.
Deferred policy acquisition costs increased in 1994 and 1993 due primarily to
deferrals of higher marketing costs associated with increased sales and renewal
activity.
In summary, the improvement in income before income taxes for the Employee
Benefits segment in 1994 wasdeclined slightly, primarily due to favorable
claims experience in the
group life and short term disability businesses, a lower operating expense
ratio, and increased realized investment gains, which were partiallymost lines of business offset by unfavorable claims experience in
the group LTD business. Strongcertain reinsurance pools.
The increase in pretax operating income for 1997, as compared with 1996,
was primarily due to strong premium growth
and a lower operating expense ratio, which were partially offset by unfavorable
claims experience in the group life business, lower
expense ratio across most lines, increased investment income and lower realized investment
gains, resultedadditional
fees and other income predominately from reinsurance underwriting management
operations. These favorable factors were partially offset by higher benefit
ratios in increased income before income taxes for 1993 as compared
with 1992.certain lines of business.
19
RELATED BUSINESSESUNUM Corporation and Subsidiaries
COLONIAL PRODUCTS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------millions) 1998 % Change 1997 % Change 1996
- ------------------------------------ ------------ ---------- ------------ ---------- ------------
REVENUESRevenues
Premiums $ 434.0 22.8% $ 353.4 4.9% $ 336.8........................... $552.7 5.2% $525.4 6.4% $493.7
Investment income 88.8 8.2 82.1 (6.2) 87.5
Net realized investment gains 0.8 (76.5) 3.4 (17.1) 4.1.................. 65.8 14.2 57.6 21.0 47.6
Fees and other income 43.5 (11.4) 49.1 nm 17.6
--------------------------------------------------------------------------------------------------------------------------.............. 3.8 (29.6) 5.4 20.0 4.5
------ ----- ------ ---- ------
Total operating revenues 567.1 16.2 488.0 9.4 446.0
BENEFITS AND EXPENSES......... 622.3 5.8 588.4 7.8 545.8
Benefits and expenses
Benefits to policyholders 333.2 24.0.......... 268.7 2.3 262.73.5 259.7 8.5 239.3
Interest credited .................. 16.6 37.2 12.1 61.3 7.5
Operating expenses 127.3 3.6 122.9 30.1 94.5................. 139.4 7.1 130.2 6.2 122.6
Commissions 53.1 13.5 46.8 9.1 42.9........................ 123.3 7.1 115.1 6.8 107.8
Increase in deferred policy acquisition
costs (6.9) (12.7) (7.9) 3.9 (7.6)
Interest expense 0.1 (50.0) 0.2 nm 0.1
--------------------------------------------------------------------------------------------------------------------------................................. $(30.8) 12.0% $(27.5) 14.1% $(24.1)
------- ---- ------- ---- -------
Total benefits and expenses 506.8 17.7 430.7 9.7 392.6
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES.......... 517.2 5.6 489.6 8.1 453.1
------- ---- ------- ---- -------
Pretax operating income (a) ............ 105.1 6.4 98.8 6.6 92.7
Realized gains (losses) ................ 1.9 -- (0.3)
------- ------- -------
Income before income taxes (b) ......... $107.0 8.3% $ 60.3 5.2%98.8 6.9% $ 57.3 7.3% $ 53.4
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------92.4
======= ==== ======= ==== =======
Supplemental information (c):
Sales (annualized first month's
premiums) ............................. $203.9 $224.7 $213.6
Benefit ratio (% of premiums) 76.8% 76.0% 78.0%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
RELATED BUSINESSES SEGMENT
The Related Businesses segment includes: UNUM Limited, the United Kingdom's
leader in group disability insurance; Commercial Life Insurance Company
("Commercial"), a leader in special risk insurance and professional association
insurance marketing; and Reinsurance Operations, which includes Duncanson &
Holt, Inc. ("D&H"), a leading accident and health reinsurance underwriting
manager, and other special risk reinsurance operations.
UNUM LIMITED
The depressed economic environment that affected the United Kingdom in 1992 and
1993 experienced a modest recovery in 1994, which positively affected UNUM
Limited's ability to sell long term disability insurance. UNUM Limited
experienced strong premium growth in 1994 as sales increased and persistency
rates improved. Also in 1994, claim block acquisitions generated one-time
premium of $25.8 million. A reallocation of capital from UNUM Limited in 1992,
and a decreasing interest rate environment, resulted in decreased investment
income for the Related Businesses segment in 1993.
UNUM Limited experienced favorable claims levels for most of 1994, which
improved the benefit ratio from 1993. However, in late 1994, UNUM Limited
incurred unfavorable claims experience, which management is evaluating to
determine the need for pricing actions, changes in underwriting standards or
risk management programs. If the unfavorable claims experience that developed
in late 1994 were to continue, UNUM Limited's earnings could be negatively
affected. Due to the nature of the risks insured and the relative size of the
U.K. block of business, UNUM Limited's operating results can exhibit claims
variability. Investment in administrative procedures and systems was the
primary reason for increased operating expenses in 1993.
On April 1, 1995, the United Kingdom's new Social Security (Incapacity for Work)
Act of 1994 will be effective, and will shift a greater financial responsibility
for disability benefits from the U.K. government to the private sector.
Management believes this legislation will increase awareness of the need for
disability insurance and expand the U.K. insurance market for long term
disability products, which could favorably affect UNUM Limited's sales.
However, it is unclear when the effects of this legislation will be evidenced.
During 1994, the U.S. dollar weakened slightly against the British pound
sterling, increasing UNUM Limited's earnings as reported in U.S. dollars. This
reversed the trend in 1993 and 1992 when the U.S. dollar strengthened against
the British pound sterling, decreasing earnings as reported in U.S. dollars.
The weighted average exchange rate was approximately $1.53, $1.51 and $1.78 for
the years ended December 31, 1994, 1993 and 1992. At December 31, 1994, the
spot rate had increased to $1.56.
COMMERCIAL
Increased sales across all lines of Commercial's businesses in 1994 benefited
premium growth, which was partially offset by higher than expected case
terminations. The 1994 benefit ratio was driven by favorable experience in the
special risk product line, offset by unfavorable claims experience in the
association group disability business within certain occupational groups and
geographical areas. Management is implementing rate increases and stronger
underwriting policies to mitigate this unfavorable claims experience. The
decrease in the benefit ratio in 1993 was primarily due to more favorable claims
experience in the association group disability business. Due to the nature of
the risks underwritten and relative size of the block of business, Commercial's
special risk products can exhibit claims variability.
REINSURANCE OPERATIONS
In 1994, Reinsurance Operations had unfavorable claims experience in certain
reinsurance pools and decreased fee income for D&H due to increased competition
and contract terminations. Fee income and operating expenses increased in the
Related Businesses segment in 1993 due to the full year inclusion of D&H, which
was acquired in third quarter 1992.
SUMMARY
Income before income taxes increased in 1994 for the Related Businesses segment,
primarily due to strong premium growth and favorable claims experience at UNUM
Limited, partially offset by unfavorable claims experience in Commercial's
association group disability business and in certain reinsurance pools. The
principal reason for the increase in income before income taxes for the Related
Businesses segment in 1993 was the inclusion of D&H results for a full year,
which was partially offset by less favorable earnings for UNUM Limited due to a
lower weighted average exchange rate.
COLONIAL COMPANIES SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 439.1 8.7% $ 403.9 10.8% $ 364.6
Investment income 30.9 3.7 29.8 (0.3) 29.9
Net realized investment gains 1.7 (85.3) 11.6 nm 5.5
Fees and other income 2.2 (37.1) 3.5 (52.1) 7.3
--------------------------------------------------------------------------------------------------------------------------
Total revenues 473.9 5.6 448.8 10.2 407.3
BENEFITS AND EXPENSES
Benefits to policyholders 221.1 6.6 207.5 10.4 187.9
Interest credited 5.0 19.0 4.2 16.7 3.6
Operating expenses 107.1 13.7 94.2 1.0 93.3
Commissions 96.7 4.3 92.7 8.0 85.8
Increase in deferred policy acquisition costs (18.7) (7.9) (20.3) (15.1) (23.9)
Interest expense -- (100.0) 0.1 -- 0.1
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 411.2 8.7 378.4 9.1 346.8
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 62.7 (10.9)% $ 70.4 16.4% $ 60.5
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized first month's premiums) $ 183.1 $ 171.4 $ 179.7
Benefit ratio (% of premiums) 50.4% 51.4% 51.5%.......... 48.6% 49.4% 48.5%
Operating expense ratio (% of
premiums) 24.4% 23.3% 25.6%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------............................. 25.2% 24.8% 24.8%
nm = not meaningful or in excess- --------
(a) For the definition of 100%
COLONIAL COMPANIES SEGMENTpretax operating income see page 12 of the
Consolidated Overview.
(b) The Colonial CompaniesProducts segment discussion of results is on a pretax
operating income basis. Management believes pretax operating income is a
better representation of our ongoing operations. While management believes
pretax operating income provides relevant and useful information, it does
not replace income before income taxes and net income calculated in
accordance with generally accepted accounting principles as a measure of
UNUM's profitability. Therefore, this discussion should be read in
conjunction with UNUM's Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Selected Consolidated Financial Data
included elsewhere in the Form 10-K (as amended).
(c) Information relating to sales is presented as an indicator of premium growth
in the segment. Benefit ratios and operating expense ratios show the
relative relationships among data to earned premiums in the segment's income
statement.
The Colonial Products segment includes Colonial Life & Accident Insurance
Company ("Colonial") and affiliates, which offeraffiliates. Colonial offers payroll-deducted,
voluntary employee benefitsbenefit products, including accident and sickness,
disability, cancer and life insurance. These products are offered to employees
at their worksites. Theworksites and are marketed by Colonial Companies segment
("Colonial") markets accident and sickness, cancer, and life insurance products primarily through independent
sales representatives.
In 1994,Pretax operating income for the Colonial experiencedProducts segment increased for
the year ended December 31, 1998, as compared with 1997. The increase was
primarily attributable to additional investment income and a reduced benefit
ratio in the accident, sickness and disability product line, partially offset
by an increase in sales, which was attributed to
increased productivity from the sales organizationinterest credited and the offering of a number
of new products. In 1993, Colonial experienced a slight decrease in sales,
which management attributed to uncertainty in the marketplace as to the types of
coverage that would be included in health care reform proposals. Management
does not feel that 1994 sales were as negatively affected by health care reform
fears, as the focus shifted away from legislative health care restructuring
toward private market restructuring. Additionally, management views health care
reform as an opportunity for UNUM by allowing Colonial to leverage its expertise
in worksite marketing, since the workplace is considered to be a primary means
of access to insurance benefits in the developing healthcare environment. While
premium growth slowed in 1994, enhanced customer conservation programs have
partially offset the weaker sales levels in 1993 and 1992 by improving
persistency.
Realized investment gains for 1993 include approximately $8.5 million of gains
associated with Colonial's sales of higher yielding but callable investments to
realign its investment portfolio with UNUM's investment philosophy. Fees and
other income for 1992 reflect $4.0 million received from the settlement of a
lawsuit against a competitor.
Colonial's benefit ratio improved to 50.4% in 1994 from 51.4% in 1993. The
lower 1994 benefit ratio was driven by favorable claims experience and improved
incidence rates in most product lines, particularly in the cancer
product line. Management expects the benefit ratio toThe increase in investment income and interest credited, is
largely due to the futureassumption of worksite-marketed universal life insurance
under reinsurance agreements Colonial entered into in 1998 and 1997. During
1998, management continued to implement organizational changes to focus on
specific distribution channels to market Colonial products.
Colonial's pretax operating income increased in 1997, as Colonial
continuescompared with
1996, primarily due to shift its product mix toward products with higher benefit ratios,
loweradditional investment income, premium growth and reduced
operating expense ratios and better persistency.
During 1994, the expense ratio increased becauseacross most lines of higher than expected costs
associated with a sales organization realignment and litigation expenses, which
were partially offset by continued expense control efforts. The decline in
1993's expense ratio reflected management's efforts to control expenditures and
improve operational efficiencies.
Income before income taxes decreased in 1994 primarily because of reduced
realized investment gains and increased expenses, partially offset by favorable
claims experience. For 1993, Colonial's income before income taxes increased
primarily through continued expense control and a higher level of realized
investment gains attributed to the investment portfolio realignment.business.
20
INDIVIDUAL DISABILITYRETIREMENT PRODUCTS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------millions) 1998 1997 1996
- ----------------------------------------- --------- --------- ----------
REVENUES
PremiumsPretax operating income (a) ............. $ 346.8 11.2%1.0 $ 312.0 10.6%4.7 $ 282.2
Investment13.6
Special items (b) ....................... -- 72.6 (15.0)
Realized gains (losses) ................. (0.4) (1.1) 2.8
------ ------ -------
Income before income 77.0 3.2 74.6 5.5 70.7
Net realized investment gains 7.6 (3.8) 7.9 83.7 4.3
Fees and other income 10.7 1.9 10.5 (1.9) 10.7
--------------------------------------------------------------------------------------------------------------------------
Total revenues 442.1 9.2 405.0 10.1 367.9
BENEFITS AND EXPENSES
Benefits to policyholders 487.2 nm 212.0 3.7 204.4
Operating expenses 122.3 18.2 103.5 3.5 100.0
Commissions 82.5 9.1 75.6 6.0 71.3
Increase in deferred policy acquisition costs (61.7) 12.0 (55.1) 5.2 (52.4)
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 630.3 87.6 336.0 3.9 323.3
--------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXEStaxes (c) .......... $ (188.2) nm%0.6 $ 69.0 54.7%76.2 $ 44.6
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized new premiums) $ 65.8 $ 63.2 $ 60.1
Persistency (premiums) 92.4% 92.1% 91.7%
Benefit ratio (% of premiums) 140.5% 67.9% 72.4%
Operating expense ratio (% of premiums) 35.3% 33.2% 35.4%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------1.4
====== ====== =======
nm = not meaningful or in excess- --------
(a) For the definition of 100%
INDIVIDUAL DISABILITY SEGMENT
The Individual Disability segment includes disabilitypretax operating income products sold in
the United States and Canada through UNUM America and First UNUM, as well as
private label agreements through these companies.
The loss before income taxes of $(188.2) million for the Individual Disability
segment for 1994 is primarily due to the $192.4 million reserve strengthening
recorded in the third quarter of 1994 and a $12.3 million restructuring charge
incurred in the fourth quarter as a resultsee page 12 of the
decision to stop selling non-
cancellable disability income policies in the United States. During 1994, the
Individual Disability segment experienced a higher incidenceConsolidated Overview.
(b) A discussion of new claims and a
disproportionate number of large claims that management has attributed to
certain geographic and occupational segmentsspecial items begins on page 12 of the business, particularly
physicians.Consolidated
Overview. For a discussion of the 1997 special item see the caption TSA
Deferred Gain Recognition and for a discussion of 1996 special item see
the caption Intangible Asset Write-offs and Future Loss Reserves.
(c) The Retirement Products segment discussion of results is on a pretax
operating income basis. Management believes that changes inpretax operating income is a
better representation of our ongoing operations. While management believes
pretax operating income provides relevant and consolidation of the health
care delivery system in the United States and the increased prevalence of
emerging and often subjective types of disabilities have contributed to
increased benefit costs.
During the third quarter of 1994, management concluded that the deterioration of
claims experience wasuseful information, it does
not a temporary fluctuation in certain segments of the
business, but was indicative of expected claim trends for the future. Unlike
the group long term disability product, management has limited ability to manage
the claims risk associated with non-cancellable individual disability business,
since UNUM is contractually unable to reprice or cancel inforce policies that
have become unprofitable because of changes in claims experience that were
unforeseen when the policy was sold. The combination of these factors prompted
UNUM to assess the adequacy of future premiums to provide for future benefits
and expenses and the assumptions used in the existing claim reserves for the
Individual Disability segment. As a result, in third quarter 1994, UNUM
increased reserves for existing claims by $83.3 million and established a
reserve for estimated future losses of $109.1 million. These increased reserves
reflect management's current expectations for morbidity trends and record the
estimated future losses for the existing individual disability business, as
reported in the Individual Disability segment.
It is not possible to predict whether future morbidity trends will be consistent
with UNUM's current assumptions. During the fourth quarter of 1994, excess-of-
loss reinsurance totaling $60 million over three years was purchased through a
Lloyd's of London syndicate to cover UNUM's exposure to claims exceeding levels
assumed in the strengthened reserves. Management continues to evaluate its
financial options for this business, including reinsurance opportunities.
UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to state
regulatory approval, UNUM expects to introduce the new disability products to
most states during the second quarter of 1995. In connection with these product
changes, management expects to incur costs during 1995 to develop and market the
new individual disability products.
UNUM has further tightened underwriting rules and practices, and made other
product design limitations for the interim sales of the existing product. As a
result of the tightened underwriting of the existing product and the time needed
to develop the new products, management expects that sales of the Individual
Disability segment will decrease significantly in 1995 from levels in 1994.
UNUM is in continuing discussions with its private label partners as it develops
the new disability products to determine the future course of its private label
agreements. Private label agreements allow other insurance companies to market
UNUM's individual disability product under their own names.
In the fourth quarter of 1994, UNUM recorded a pretax charge of $12.3 million
related to the restructuring of the individual disability business and resulting
consolidation of home office operations in UNUM America, which was comprised of
$7.1 million for severance costs for 150 field and 150 home office employees and
$5.2 million for exit costs of certain leased facilities and equipment, expiring
through 1998. The severance costs are expected to be paid by the end of 1995.
The increase inreplace income before income taxes forand net income calculated in
accordance with generally accepted accounting principles as a measure of
UNUM's profitability. Therefore, this discussion should be read in
conjunction with the Individual Disability segmentConsolidated Financial Statements, Notes to
Consolidated Financial Statements and Selected Consolidated Financial Data
included elsewhere in 1993 from 1992 was primarily due to more favorable claims experience and
continued expense management.
RETIREMENT SECURITY SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 56.0 75.0% $ 32.0 17.6% $ 27.2
Investment income 225.4 (3.6) 233.8 0.3 233.0
Net realized investment gains (losses) 1.5 (11.8) 1.7 nm (4.2)
Fees and other income 6.5 51.2 4.3 (15.7) 5.1
-----------------------------------------------------------------------------------------------------------------------------
Total revenues 289.4 6.5 271.8 4.1 261.1
BENEFITS AND EXPENSES
Benefits to policyholders 53.7 69.4 31.7 -- 31.7
Interest credited 158.4 (3.9) 164.9 (8.4) 180.0
Operating expenses 47.1 (11.5) 53.2 43.4 37.1
Commissions 14.5 15.1 12.6 41.6 8.9
Increase in deferred policy acquisition costs (10.0) (14.5) (11.7) nm (3.3)
-----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 263.7 5.2 250.7 (1.5) 254.4
-----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 25.7 21.8% $ 21.1 nm% $ 6.7
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Invested assets under management, at end of period $3,065.0 $3,033.0 $2,929.9
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
RETIREMENT SECURITY SEGMENTthe Form 10-K (as amended).
The Retirement SecurityProducts segment includes tax sheltered annuities ("TSAs"), long
term care insurance, and beginning in 1993, lifestyle security protection
products all of which areno longer actively
marketed by UNUM America and First UNUM.
During 1994 and 1993, UNUM offered the holders of certain types of TSA contracts
the opportunity to modify such contracts. The proposed contract amendments
provide for UNUM to increase the minimum guaranteed credited rates in return for
contractholders relinquishing the right to make lump-sum withdrawals without an
associated fee. As expected, certain contractholders elected to withdraw their
funds rather than convert to the modified contract provisions, which affected
the overall growth of invested assets under management. Management expects
these types of withdrawals to continue, which may affect future growth of
invested assets under management for TSAs.
During 1994, UNUM implemented an investment strategy to increase investments in
tax-exempt securities which has reduced income before income taxes for the
segment. Although investments in tax-exempt securities resulted in increased
consolidated net income, this investment strategy reduced the Retirement
Security segment's income before income taxes by approximately $6.7 million in
1994. In addition, the low interest rate environment during the past two years
has reduced the investment yields on TSA assets. As a result of these factors,
investment income decreased by $8.4 million and increased by only $0.8 million,
during 1994 and 1993, respectively.
As interest rates declined in 1993, the rate and level of interest credited to
TSA contractholders declined as well. Despite a rising interest rate
environment in 1994, the level of interest credited to TSA contractholders
continued to decline. As a result, the TSA business experienced unusually
favorable interest spread margins in 1994 and 1993. In 1994, 1993 and 1992, the
amount of interest credited to funds on deposit amounted to 70.3%, 70.5%, and
77.3% of investment income, respectively. Management does not expect interest
spread margins experienced byincluding: TSAs, in 1994 and 1993 to continue at the same
level, which may reduce future earnings for the Retirement Security segment.
Management believes the failure of the last Congress to pass health care reform
legislation positively affected long term care insurance products, which
experienced premium and sales growth during 1994 after lower than expected
growth in 1993 due to the announcement of President Clinton's health care reform
proposal that included long term care coverage. During 1994, block acquisitions
generated one-time net premiums for long term care insurance products of $15.0
million. Management may pursue additional block acquisitions in the future.
Long term care insurance products experienced an increased incidence of new
claims during 1994, which management has addressed by implementing new
underwriting guidelines.
Income before income taxes increased in 1994 reflecting continued premium growth
and expense reductions in the long term care insurance products partially offset
by unfavorable claims experience. Additionally, during 1994 UNUM continued its
investment in the development of long term care and lifestyle security
protection products, and in a TSA business initiative which management expects
will improve customer acquisition and service functions as well as reduce future
operating expenses. Unusually favorable interest spread margins on tax
sheltered annuities were the primary reason for increased income before income
taxes in 1993.
OTHER OPERATIONS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
REVENUES $131.3 (27.0)% $179.9 (14.7)% $210.9
BENEFITS AND EXPENSES
Benefits to policyholders 35.9 (4.3) 37.5 (1.1) 37.9
Interest credited 79.3 (29.1) 111.9 (22.7) 144.8
Operating expenses 5.7 (5.0) 6.0 (11.8) 6.8
Commissions 1.1 (8.3) 1.2 (25.0) 1.6
Decrease in deferred policy acquisition costs 0.8 (68.0) 2.5 (24.2) 3.3
----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 122.8 (22.8) 159.1 (18.2) 194.4
----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 8.5 (59.1)% $ 20.8 26.1% $ 16.5
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
OTHER OPERATIONS SEGMENT
The Other Operations segment includes individual life insurance business of UNUM
Life Insurance Company of America, group medical insurance, guaranteed investment contracts ("GICs"),
deposit administration accounts ("DAs"), and
401(k) plans, allindividual life and
group medical insurance. For the years ended December 31, 1998, and 1997, the
segment reported decreased pretax operating income as compared with the
respective prior year. The decline in operating income in both periods was
primarily the result of which are no longer actively marketedthe sale of UNUM's TSA business in October 1996, as
discussed in Item 8 Note 5 "Sale of Tax-Sheltered Annuity Business." For 1997,
the decrease in TSA results was partially offset by UNUM.
The reduced invested asset base under management for GICs, DAs and 401(k) plans
resulted in lower revenues from investment income and reduced amounts of
interest credited. Management expects continued decreasesfavorable volatility in the
amountsrun-off of investment income and interest credited as the related GIC, DA and 401(k)
contracts mature or terminate. Managementcertain other discontinued products. UNUM expects future earnings in the Other
Operations segmentthese blocks of
business to continue to decline in size over several years and experience
earnings volatility, reflecting thetheir run-off nature of these closed
blocks of businesses.
During 1992, UNUM released the remaining restructuring reserve for the costs of
withdrawal from the 401(k) business since actual costs were less than expected,
resulting in increased pretax income of $5.3 million. The gain associated with
the release of this restructuring reserve reduced operating expenses in the 1992
Consolidated Statement of Income.
nature.
CORPORATE
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------(Dollars in millions) 1998 1997 1996
- ----------------------------------------- ----------- ----------- -----------
Pretax operating loss (a) ............... $ (58.0) $ (51.8) $ (37.5)
Special item (b) ........................ -- -- (10.1)
Realized gains (losses) ................. -- (0.8) 0.9
------- ------- -------
Loss before income taxes $(28.2) $(17.4) $(5.7)
------------------------------------------------------------------------------
------------------------------------------------------------------------------(c) ............ $ (58.0) $ (52.6) $ (46.7)
======= ======= =======
- --------
(a) For the definition of pretax operating income see page 12 of the
Consolidated Overview.
(b) A discussion of special items begins on page 12 of the Consolidated
Overview. For a discussion of the 1996 special item see the caption
Commercial Life Merger and Integration Costs.
(c) The Corporate discussion of results is on a pretax operating income basis.
Management believes pretax operating income is a better representation of
our ongoing operations. While management believes pretax operating income
provides relevant and useful information, it does not replace income
before income taxes and net income calculated in accordance with generally
accepted accounting principles as a measure of UNUM's profitability.
Therefore, this discussion should be read in conjunction with UNUM's
Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Selected Consolidated Financial Data included elsewhere in
the Form 10-K (as amended).
Corporate includes transactions that are generally non-insurance related,
expenses incurredrelated.
For the year ended December 31, 1998, as compared with the same period in conjunction with UNUM's long-term strategic investment1997,
the increased pretax operating loss in Japan andCorporate was due to higher interest
expense on corporate borrowings.and decreased investment income, partially offset by lower operating
expenses. The increased pretax operating loss before
income taxes in 1994 in Corporatefor 1997, compared with 1996, was
primarily due to increased interest
expense and increased costs related to thedecreased investment in Japan. The increased
loss before income, taxes in 1993 was primarily due to the expenses incurred in
connection with the March 26, 1993, merger ofprincipally
21
UNUM Corporation and Colonial
Companies, Inc., decreased interest incomeSubsidiaries
from the Company's increased use of capital to repurchase shares of its common
stock, and increasedhigher operating expenses.
INVESTMENTS
Overview
UNUM's investment in Japan.
UNUM JAPAN
On June 20, 1994, the Japanese Ministry of Finance granted UNUM a provisional
operating license which allowed UNUMobjective is to establish a non-life insurance company,
UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), to market
disability and other accident products in Japan. UNUM Japan has subsequently
received an official license and began selling group long term disability
products in the fourth quarter of 1994, with the first policies effective
January 1, 1995.
UNUM Japan formed a cooperative relationship with Japan's leading short term
disability insurer, Yasuda Fire & Marine Insurance Co., Ltd. to develop the new
long term disability products and introduce them in Japan. The two companies
continue to work together on market and product development and will also market
their own separate long term disability products. UNUM expects to continue
incurring costs to develop UNUM Japan's distribution network, advertising andoptimize total asset return within
appropriate risk management programs.
INVESTMENTS
UNUM has a fairly conservative investment philosophy, with a portfolio that is
concentrated in investment grade bonds. UNUM evaluates total expected return
after consideration of all associated expenses and losses, within criteria established for each product line. UNUM seeks to meet
this objective through its asset/liability management process and active asset
management of the portfolios. Asset/liability management requires a balance
between investment risk and business risk and is a key element for managing
certain market risks (see Item 7A "Quantitative and Qualitative Information
about Market Risk" for further discussion). Product line investment strategies
are developed to complement business risks by meeting the liquidity and
solvency requirements of each product. UNUM purchases assets whosewith maturities,
expected cash flows and prepayment conditions that are consistent with these
strategies.
The
natureIn connection with the merger as described in the "Proposed Merger with
Provident" section, UNUM is in the process of evaluating its investment
strategy and qualityoverall asset allocation by investment type in anticipation of the types of investments comply with policies established
by management, which are more stringent overall than the statutes and
regulations imposed by the jurisdictions in which UNUM's insurance subsidiaries
are licensed.a
combined entity.
UNUM's investments are reported in the consolidated financial statements
at net realizable value or net of anyapplicable allowances for probable losses.
Allowances for real estate held for sale and mortgages are established based on
a review of specific assets as well as theon an overall portfolio basis,
considering the
carrying value of the underlying assets.assets and collateral. If a decline in
marketfair value is considered to be other than temporary or if a long-lived asset is
deemed permanently impaired, the investment is reduced to estimated net
realizable value and the reduction is recorded as a realized investment loss.
UNUM discontinues the accrual of investment income on invested assets when it
is determined that collectability is doubtful. Management monitors the risk
associated with the invested asset portfolio and regularly reviews and adjusts
the allowance for probable losses.
AtUNUM's invested assets were $9,837.7 million and $8,958.9 million at
December 31, 1994, the1998, and 1997, respectively. The composition of UNUM's $10,433.8 million of invested
assets at December 31, 1998, was 75.4%80.3% fixed maturities, 11.7%13.2% mortgage loans,
6.0% equity securities,
1.8%2.6% real estate and 5.1%3.9% other invested assets.
Gross realized investment gains were $117.0$29.1 million, $85.2$24.4 million and
$94.4$40.2 million, and gross realized investment losses were $71.4$8.1 million, $35.8$28.0
million and $52.9$36.8 million for the years ended December 31, 1994, 19931998, 1997 and 1992,1996,
respectively.
FIXED MATURITIES:
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after January
1, 1994, which are classified and accounted for as follows:
-Fixed Maturities
Fixed maturities that UNUM has the positive intent and ability to hold to
maturity are classified as "held to maturity" and are reported at amortized
cost, less an allowance for probable losses. The majority of UNUM's
insurance reserve liabilities are generally long-term in nature and not
subject to withdrawal. Since UNUM purchases assets whose maturities,
expected cash flows, and prepayment conditions complement business risks
by meeting the liquidity and solvency requirements of each product, the
majority of UNUM's fixed maturities have been classified as "held to
maturity" to match the longer term nature of UNUM's products.
- Fixed maturities and equity securities classified as "available for sale"
are reported at fair value. Related unrealized holding gainsvalue were $7,896.9 million and losses,
net of deferred taxes, are reported in a separate component of
stockholders' equity. Fair values of fixed maturities are generally
obtained from external quoted market sources, and if not externally quoted,
are determined by UNUM primarily by using discounted cash flow models.
Upon the adoption of FAS 115, UNUM increased unrealized gains on available for
sale securities included in stockholders' equity on January 1, 1994, by $41.8
million (net of deferred taxes of $22.5 million) to reflect the unrealized
holding gains on fixed maturities classified as available for sale which were
previously carried at amortized cost. In accordance with FAS 115, prior year
consolidated financial statements have not been restated to reflect the change
in accounting principle. UNUM reclassified certain fixed maturities from held
to maturity to available for sale on January 1, 1994, in connection with the
adoption of FAS 115. The increasing interest rate environment during 1994
resulted in depressed fair values for available for sale fixed maturities, which
has decreased the initial $41.8 million increase in stockholders' equity to an
unrealized loss of $42.8$7,310.9 million
at December 31, 1994.1998, and 1997, respectively. Management believes UNUM's fixed
maturity portfolio is well diversified by company and industry sector. The
fixed maturity portfolio is primarily comprised of taxable corporate bonds.
At December 31, 1994,1998, and 1993,1997, the fixed maturity portfolio included
$193.8$89.1 million and $263.3$83.7 million, respectively, of below investment grade bonds
(below "Baa""BAA"), which
represented 2.5% and 3.5% of the fixed maturity portfolio, respectively. recorded at fair value. These bonds had an associated market valuesamortized
cost of $193.4$86.2 million and $279.1$80.2 million, respectively. Virtually all of the nonconvertible, below investment grade bonds
were purchased at investment grade, but were subsequently downgraded. UNUM's
investment policy is to invest primarily in fixed maturities of investment grade
quality. Selected purchases of convertible subordinated debentures, which UNUM
considers to be part of its investment strategy for equity securities, have
contributed to the amount of below investment grade bonds. Fixed maturity ratings
are obtained from external rating agencies and if not externally rated,or are rateddetermined internally by UNUM
internally using similar methods.methods if external ratings are not available. Below investment
grade bonds are inherently more risky than investment grade bonds since the
risk of default by the issuer, by definition and as exhibited by bond rating,
is higher. Management does not expect any risks or uncertainties associated
with below investment grade bonds to have a significant affecteffect on UNUM's
consolidated financial position or results of operations. The percentage ofThere were no fixed
maturities delinquent 60 days or more compared to total fixed maturities was 0.25% at December 31, 1994,1998, and 0.24% at
December 31, 1993.
During fourth quarter 1994, UNUM sold fixed maturities of five issuers
classified as held to maturity with an amortized cost of $49.8 million due to
evidence of significant unexpected deterioration of the issuers'
creditworthiness. These sales resulted in a net realized loss of $3.0 million.
MORTGAGES:1997.
Mortgages
At December 31, 1994,1998, and 1993,1997, UNUM's mortgage loans were $1,216.3$1,303.4
million and $1,432.2$1,131.0 million, respectively. The mortgage loan portfolio, as a percentage of
total invested assets, has decreased to 11.7% as of December 31, 1994, from
14.1% as of December 31, 1993. It is anticipated that mortgages as a percentage
of total invested assets will decline further, but at a slower rate, as new
mortgage investments and refinances in selected markets will partially offset
prepayments and scheduled maturities. Management establishes allowances for
mortgage loans based upon a review of individual loans and the overall loan
portfolio, considering the value of the underlying collateral. UNUM uses a comprehensive
rating system to evaluate the investment and credit risk of each mortgage loan
and to targetidentify specific properties for inspection and reevaluation. Overall, managementManagement
establishes allowances for mortgage loans based on a review of individual loans
and the overall loan portfolio, considering the value of the underlying
collateral.
22
Management believes that its mortgage loan portfolio is well diversified
geographically and among property types. UNUM's incidence of new problem
mortgage loans declinedand foreclosure activity has continued to remain very low in
1994 as1998, reflecting improvements in overall economic activity improved
modestly, and many of theimproving real
estate markets in whichthe geographic areas where UNUM has mortgage loans
stabilized. Foreclosure activity and new reserve additions remainedloans.
Management expects a modest in
1994; however, management continues to expect additionallevel of delinquencies and problem loans in the
future. Management believesThere were no delinquent mortgage loans at December 31, 1998, and at
December 31, 1997, the amount was 0.7% of the portfolio.
At December 31, 1998, and 1997, impaired loans totaled $20.7 million and
$43.4 million, respectively. Included in the $20.7 million of impaired loans at
December 31, 1998, were $9.0 million of loans which had a related allowance providedfor
probable losses of $2.4 million, and $11.7 million of loans which had no
related allowance for probable losses. Interest lost on impaired loans in 1998,
1997 and 1996 was not material.
Realized investment losses related to impaired mortgage loans amounted to
$2.3 million, $3.3 million and $1.0 million for 1998, 1997 and 1996,
respectively. Impaired mortgage loans as of December 31, 1994, is adequate1998, are not expected
to cover probable losses.have a significant impact on UNUM's results of operations, liquidity or
capital resources.
Restructured mortgage loans are defined by UNUM as loansthose whose terms have been modified to
interest rates less than market at the time of restructure and are currently
expected to perform pursuant to such modified terms. UNUM modifies loans to
protect its investment and only when it is anticipated that the borrower will
be able to meet the modified terms. As of December 31, 1994,1998, restructured
mortgage loans totaled $73.6$14.5 million, as compared with $65.9$39.3 million at
December 31, 1993.1997. Interest lost on restructured loans was not material in
1994, 19931998, 1997 or 1992.
Problem loans are defined as mortgage loans that were delinquent 60 days or more
on a contract delinquency basis. Mortgage loans in the amount of $22.3 million
and $26.1 million, both representing 1.8% of the mortgage loan portfolio, were
delinquent 60 days or more on a contract delinquency basis, and were accounted
for on a nonaccrual basis at1996.
Real Estate
At December 31, 1994, and 1993, respectively.
Interest lost on problem loans was not material in 1994, 1993 or 1992.
Potential problem loans are defined by UNUM as current and performing loans with
which management has some concerns about the ability of the borrower to comply
with present loan terms and whose book value exceeds the market value of the
underlying collateral. Loans in this category1998, investment real estate amounted to $36.2$250.6 million,
compared with $231.5 million at December 31, 1994, versus $92.7 million at December 31, 1993. Active asset
management contributed to the decline in this category during 1994.
Realized investment losses related to restructured and problem mortgage loans in
1994 amounted to $8.5 million, compared with $4.8 million and $26.5 million for
1993 and 1992, respectively. Problem and potential problem mortgage loans as of
December 31, 1994, are not expected to have a significant impact on UNUM's
results of operations, liquidity, or capital resources.
REAL ESTATE:
At December 31, 1994, investment1997. Investment real estate and real estate held for sale
amounted to $190.8 million and $31.0 million, respectively. This compares with
$193.5 million of investment real estate and $24.7 million of real estate held
for sale at December 31, 1993. UNUM has limited the growth of its real estate
exposure, as a percentage of invested assets, through an active sales program.
UNUM sold $25.4 million and $40.5 million of real estate at 103% and 105% of
carrying value during 1994 and 1993, respectively.
Real estate which meets certain investment criteria and is intended to be held
long-term is
carried at cost less accumulated depreciation. Real estate that
has been acquired through
foreclosure is valued at fair value at the date of foreclosure. Realforeclosure and may be
classified as investment real estate held for saleif it meets UNUM's investment criteria. If
investment real estate is included in other assets in the
Consolidated Balance Sheets and is valued net of an allowance which reducesdetermined to be permanently impaired, the carrying
valueamount of the asset is reduced to the lower of fair value less estimated costs to sell, or cost.value. Occasionally, investment real
estate is reclassified and revalued as real estate held for sale when it no
longer meets UNUM's investment criteria. Additions to
allowances for probable losses related to real estate held for sale resulted in
realized investment losses of $0.8 million, $18.8 million and $7.2 million for
the years ended December 31, 1994, 1993 and 1992, respectively.
Given the current real estate environment, additional foreclosures are
anticipated, but at a reduced level from the early 1990s. Current and
anticipated realReal estate acquired through
foreclosure is not expected to have a significant affecteffect on UNUM's results of
operations, liquidity or capital resources.
At December 31, 1998, and 1997, real estate held for sale amounted to
$15.6 million and $23.3 million, respectively. Real estate held for sale is
included in other assets in the Consolidated Balance Sheets and is valued net
of a valuation allowance that reduces the carrying value to the lower of fair
value less estimated costs to sell or cost. This valuation allowance is
periodically adjusted based on subsequent changes in UNUM's estimate of fair
value less costs to sell.
LIQUIDITY AND CAPITAL RESOURCES
UNUM's businesses produce positive cash flows which are invested primarily
in intermediate term, fixed maturity investments intended to reflect the nature of
anticipated cash obligations of insurance benefit payments and insurance
contract maturities and to optimize investment returns at appropriate risk
levels. To meet unexpectedUnexpected cash requirements and liquidity needs UNUM maintains
part of itscan be met through
UNUM's investment portfolio inof fixed maturities classified as available for
sale, equity securities, cash and short-term investments.
From time to time, dividend payments, which may be subject to approval by
insurance regulatory authorities, are made from UNUM's affiliates and insurance
subsidiaries to UNUM
Corporation. These dividends, along with other funds, are used to service the
needs of UNUM Corporation including: debt service, common stock dividends,
corporate development, stock repurchase and administrative costscosts. Net statutory
operating income, which excludes realized investment gains and corporate
development. Income determined using statutory accountinglosses net of
tax, is one of the major determinants of an insurance company's dividend capacity to
its parent in the
following fiscal year.parent. Statutory accounting rules and practices, which differ in certain
respects from generally accepted accounting principles, are mandated by
regulators in an insurance company's state of domicile. In 1994,addition to the
level of net statutory operating income, UNUM's determination of amounts to be
dividended by affiliates to UNUM America's disability businesses were adversely affectedCorporation depends on other factors such as
risk-based capital ratios, funding growth objectives at an affiliate level and
maintaining appropriate capital adequacy ratios as defined by unfavorable claims experience as discussedcertain rating
agencies (see "Ratings" section).
The states of domicile for UNUM's subsidiaries generally limit dividend
payments to the greater of the prior year's net statutory operating income or
10% of the prior year's statutory surplus. The amount available under
23
UNUM Corporation and Subsidiaries
current law for payment of dividends during 1999 to UNUM Corporation from all
U.S. domiciled insurance subsidiaries without state insurance regulatory
approval is approximately $150 million. UNUM Corporation also has the ability to
draw a dividend from its United Kingdom-based affiliate, UNUM Limited. Such
dividends are limited in amount, based on insurance company legislation in the
Employee Benefits and
Individual Disability segments. As described in the Individual Disability
segment, UNUM America strengthened reserves for existing claims related to the
traditional non-cancellable individual disability products. AsUnited Kingdom which requires a result, UNUM
America recognized a statutory after-tax charge of $69.6 million in third
quarter 1994. These factors caused the 1994 statutory income of UNUM America to
be significantly reduced to $39.2 million, as compared with $165.2 million in
1993.
As a result of this reduction in UNUM America's statutory earnings, theminimum solvency margin. The amount available
under current law for payment of dividends to UNUM Corporation from all U.S.UNUM Limited
during 1999 is approximately $20 million. It is not uncommon for an insurance
entity to request regulatory approval for dividends in excess of amounts
available without such approval.
The risk-based capital ("RBC") standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, establish an
RBC ratio comparing adjusted surplus to required surplus for each of UNUM's
United States domiciled insurance subsidiaries. If the RBC ratio falls within
certain ranges, regulatory action may be taken ranging from increased
information requirements to mandatory control by the domiciliary insurance
department. The RBC ratios for UNUM's insurance subsidiaries, during 1995, without state insurancemeasured at
December 31, 1998, were significantly above the ranges that would require
regulatory approval, decreased to approximately $81.3 million, as compared with
$176.8 million for 1994. UNUM Corporationaction.
Cash flow requirements are also has the ability to drawsupported by a
dividend of approximately $30 million from its United Kingdom based affiliate,
UNUM Limited, subject to certain U.S. tax consequences.
Effective December 13, 1994, management expanded UNUM Corporation's lines of
credit with a new committed revolving credit
facility totaling $500 million, expiring onwhich expires October 1, 1999, which replaced previously existing facilities
totaling $300 million. UNUM Corporation's2001. UNUM's
commercial paper program is supported by the revolving credit facility and is
available for general liquidity needs, capital expansion, acquisitions and
stock repurchase. The committed revolving credit facility contains certain
covenants which,that, among other provisions, require maintenance of certain levels
of stockholders' equity and limits on leveldebt levels.
On December 15, 1998, UNUM Corporation issued $250 million of debt.
In September 1993, UNUM announced the filing ofsenior
notes, which mature in 2028, under an omnibus shelf registration
statement with the
Securities and Exchange Commission, which became effective on
October 8, 1993, relatingAugust 2, 1996. UNUM
used the proceeds to $450repay short-term debt and for general corporate purposes.
The shelf registration relates to $500 million of securities (including debt
securities, preferred stock, common stock and other securities). On October 8,
1993,August 15,
1996, UNUM filed a prospectus supplement to establishestablished a $250 million medium-term note ("MTN") program under
the shelf registration.
On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3
million) through a private placement with an investor in the United Kingdom (see
Item 8 Note 8 "Notes Payable"). The medium-term note programborrowing has an expected term of ten years.
Upon issuance of the [British pound]100 million borrowing, UNUM entered into
currency and interest rate swap agreements that converted the principal amount
to U.S. dollars and the unsold portioninterest obligation on the debt from a pound sterling
based fixed rate to a U.S. dollar fixed rate. The borrowing is callable by
either party over the life of the shelf registration carry ratings of "A1" (Medium Quality)agreement, under certain circumstances. UNUM
anticipates the debt will be called in 1999. Therefore, UNUM is currently
evaluating various financing alternatives and "(P)A1" (Medium Quality), respectively, from Moody's Investors Service,intends to substitute a debt
instrument to match the maturity and "A+" (Strong) from Standard & Poor's Corporation. The unsold portionterms of the shelf registration relating to subordinated debt and preferred stock carries
ratings of "(P)A2" (Medium Quality) and "(P)"a1"" (Upper-Medium Quality),
respectively, from Moody's Investors Service.interest rate swap agreement.
At December 31, 1994,1998, UNUM had short-term and long-term debt totaling
$246.6$283.5 million and $182.1$598.3 million, respectively. At December 31, 1994,1998,
approximately $280$414 million was available for additional financing under the
existing revolving credit facility and approximately $390$200 million of investment grade debt
instruments was available for issuance under the shelf registration. On
February 28, 1995,In the
normal course of business, UNUM borrowed $100enters into letters of credit, primarily to
satisfy capital requirements related to certain subsidiary transactions. UNUM
had outstanding letters of credit of $149.7 million under the revolving credit
facility, which was infused into UNUM America in exchange for surplus
debentures. Repayment of principal and interest on the surplus debentures is
subject to state insurance regulatory approval. Contingent upon market
conditions$84.6 million at
December 31, 1998, and corporate needs, management may refinance short-term notes
payable with longer term securities.
In September 1993, UNUM announced the resumption of a program to repurchase its
common stock pursuant to an existing Board of Directors' resolution. On
February 11, 1994,1997, respectively.
Effective November 23, 1998, UNUM's Board of Directors voted to expand UNUM's
authorization to repurchase an additional 5.0 million shares, bringingrescinded the
total
number of shares authorized for repurchase to 44.0 million shares. Since the
resumption of thecompany's stock repurchase program as a result of the pending merger agreement
with Provident. During 1998, 1997 and 1996, UNUM has acquired 7.6approximately 1.3
million, 7.1 million and 3.8 million shares, through December 31, 1994,respectively, of its common stock
in the open market at an aggregate cost of $375.8$65.0 million, that was primarily funded through additional borrowings. This share
repurchase contributed to the decrease in the number of shares outstanding at
December 31, 1994, to 72.4 million, from 76.0 million at December 31, 1993.
Prior to the resumption of this repurchase program, UNUM had not acquired any
shares in the open market since 1990. At December 31, 1994, approximately 2.7
million outstanding shares remained authorized for repurchase.
During 1994 and 1993, withdrawals of contracts reported in the Other Operations
segment, including contract terminations, payments to participants and transfers
to other carriers, were approximately $130$285.2 million and
$309$119.1 million, respectively. Withdrawals during 1994 and 1993 were at levels expected by
management and reflect the run-off nature of these closed blocks of businesses.
UNUM manages liquidity objectives by including certain conditions in pension
contracts which prohibit or restrict availability of funds.
UNUM was committed at December 31, 1994,1998, to purchase fixed maturities and other invested assets in
the amount of $37.5$45.7 million. Independent of the cash flows of UNUM Corporation,
management anticipates that the operating cash flows of the subsidiaries of
UNUM Corporation will be sufficient to meet benefit obligations, planned
investment commitments and operational needs of those companies.
RATINGS
Standard & Poor's Corporation ("Standard & Poor's"), Moody's Investors
Service ("Moody's") and A.M. Best Company ("A.M. Best") are among the third
parties that provide UNUM independent assessments of its overall financial
position. Ratings from these agencies for financial strength are available for
the individual United States
24
domiciled insurance company subsidiaries. Financial strength ratings are based
primarily on U.S. statutory financial information for the individual U.S.
domiciled insurance companies. Debt ratings for UNUM Corporation are based
primarily on consolidated financial information prepared using generally
accepted accounting principles. Both financial strength ratings and debt ratings
incorporate qualitative analyses of UNUM companies done by rating agencies on an
ongoing basis.
As a result of UNUM's announced plan to merge with Provident, on November
23, 1998, the aforementioned credit agencies put UNUM's credit ratings under
review. The table below reflects the debt ratings for UNUM Corporation and the
financial strength ratings for UNUM's United States domiciled insurance company
subsidiaries at February 26, 1999:
Standard
& Poor's Moody's A.M. Best
--------------------------- ------------------------------------- --------------------------
UNUM Corporation Ratings:
Senior Notes due A+ A1
December, 2028 (Strong) (Upper Medium Grade)
CreditWatch with negative On review for possible
implications downgrade
Senior Debt A+ A1
(MTN program) (Strong) (Upper Medium Grade)
CreditWatch with negative On review for possible
implications downgrade
Subordinated Debt A- A2
(Monthly Income (Strong) (Upper Medium Grade)
Debt Securities) CreditWatch with negative On review for possible
implications downgrade
Commercial Paper A-1 P-1
(Strong) (Superior Ability)
Rating affirmed, 11/23/98 Rating confirmed, 11/23/98
United States Subsidiaries' Ratings:
UNUM America AA Aa2 A++
(Very Strong) (Excellent) (Superior)
CreditWatch with negative On review for possible Under review with
implications downgrade developing implications
First UNUM AA Aa2 A+
(Very Strong) (Excellent) (Superior)
CreditWatch with negative On review for possible Under review with
implications downgrade developing implications
Colonial AA Aa3 A+
(Very Strong) (Excellent) (Superior)
CreditWatch with negative On review for possible Under review with
implications upgrade developing implications
At February 26, 1999, the unsold portion of the shelf registration related
to preferred stock carried a rating of "a1/a2" (Upper-Medium Quality) from
Moody's.
DERIVATIVES
Refer to Item 8 Note 14 "Derivative Financial Instruments" for
information.
LITIGATION
Refer to Item 8 Note 15 "Litigation" for information.
EFFECT OF INFLATION
Inflation is one of the factors that has increased the need for insurance. Many
policyholders who once had adequate insurance programs at lower coverage levels
have increased their disability insurance coverage to provide the same relative
financial benefits and protection.
Changing interest rates, which are traditionally linked to changes in
inflation, affect UNUM's level of discounted reserves. While rising interest
rates are beneficial when the company is investing current cash flows, they can
also reduce the fair value of existing fixed rate long-term investments. In
addition, lower interest rates
25
UNUM Corporation and Subsidiaries
can lead to early payoffs and refinancing of some of UNUM's fixed rate
investments. Management generally invests in fixed rate instruments that are
structured to limit the exposure to such reinvestment risk.
YEAR 2000 DATE CONVERSION
The following discussion regarding the Year 2000 Date Conversion contains
forward-looking statements, and should be read in conjunction with the
Forward-Looking Information disclosure made at the beginning of the
Management's Discussion and Analysis.
The year 2000 date conversion relates to whether computer systems will
properly recognize date-sensitive information when the year changes to 2000.
This inability to recognize the year 2000 may cause systems to process critical
financial and operational information incorrectly. This, in turn, could cause
disruptions of normal business operations, including the inability to process
claims, bill and collect premium, and manage investment activities. UNUM has a
corporate-wide program underway to address the year 2000 date conversion
relating to its internal computer systems and critical dependencies of its
business including suppliers, business partners, customers, facilities and
telecommunications.
UNUM has determined that it is required to modify or replace significant
portions of its software so its computer systems will properly function using
dates beyond December 31, 1999. Management is utilizing both internal and
external resources to reprogram, or replace, and test the software for year
2000 compliance. UNUM's program for the year 2000 is organized into a number of
phases for rectifying its internal computer systems, including assessment, code
remediation, testing, and deployment.
As of December 31, 1998, UNUM has completed the assessment phase for all
its critical systems and for more than 90% of its non-critical systems. Coding
remediation of UNUM's critical systems is virtually complete with approximately
95% of those remediated completing the testing phase. Greater than 85% of the
non-critical systems have been remediated and tested. Deployment is underway
for most critical systems and the majority of non-critical systems. Management
has substantially completed all phases for its critical and non-critical
systems as of December 31, 1998, and expects to complete all phases by the end
of 1999.
In addition, UNUM continues to assess critical external dependencies,
including suppliers, business partners and customers, and non-systems aspects
of the business such as facilities and telecommunication. As part of this due
diligence program, UNUM has sent year 2000 compliance questionnaires to its
critical third party suppliers, is reviewing responses received, performing
cross-checks against other publicly available information and conducting due
diligence meetings. UNUM is performing site visits to certain third party
businesses, determining the frequency and timing of follow-up site visits, and
planning to test specific systems for compliance. To date, no significant
issues from critical external dependencies have been identified; however, there
can be no guarantee that the computer systems of these third parties will be
year 2000 compliant. UNUM is developing contingency plans to alleviate the
potential business impact of third parties not being year 2000 compliant.
Management expects all of these plans to be finalized and ready for
implementation in third quarter 1999.
UNUM estimates that total internal (opportunity costs) and external
(out-of-pocket) costs for addressing the year 2000 date conversion will range
from $70 million to $80 million, which are expensed as incurred. As of December
31, 1998, UNUM has incurred approximately $59 million in connection with its
year 2000 program. The costs of the project and the date on which UNUM plans to
complete year 2000 modifications are based on management's best estimates,
derived using numerous assumptions about future events. However, there can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those plans.
Failure by UNUM to make the required modifications to existing systems and
conversions to new systems in a timely manner, or failure by third parties to
successfully address year 2000 issues could have a material adverse effect on
UNUM's results of operations, liquidity or capital resources; however, the
potential impact and related costs, if any, are not known at this time. While
management does not anticipate a material adverse effect, UNUM is developing
contingency plans that would allow UNUM to devote its financial and personnel
resources to correct the problem as soon as possible if UNUM's systems were to
be non-compliant. With regard to non-compliance resulting from third party
failure, contingency plans are being developed, as previously discussed, to
attempt to mitigate the extent of this potential impact.
26
ACCOUNTING PRONOUNCEMENTS ADOPTED
Refer to Item 8 Note 1 under the caption "Accounting Pronouncements
Adopted" for information.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Item 8 Note 1 under the caption "New Accounting Pronouncements"
for information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Market-Sensitive Instruments and Risk Management
The following discussion about UNUM's risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements (see "Forward-Looking Information" in Item 7). UNUM's financial
instruments are exposed to market risk, which is the risk of market volatility
and potential disruptions in the market that may result in certain financial
instruments becoming less valuable. UNUM's primary market risk is interest rate
risk, which is the sensitivity of earnings, cash flows and the fair value of
financial instruments to changes in the level of interest rates. In accordance
with the Securities and Exchange Commission's Financial Reporting Release No.
48, the following quantitative analysis provides the estimated loss in fair
value of certain market sensitive financial assets and liabilities held at
December 31, 1998, and 1997, given a hypothetical 10-percent adverse change in
interest rates and related qualitative information on how UNUM manages interest
rate risk. All of UNUM's financial instruments are held for purposes other than
trading.
Interest-Rate Risk
UNUM's asset/liability duration management activities represent a key
element for managing interest rate risk to the overall business. The objective
of asset/liability duration management is to support the achievement of
business strategies while minimizing levels of investment risk, which includes
interest rate risk. As part of the Company's asset/liability duration
management strategy, detailed actuarial models of the cash flows associated
with each type of insurance liability are generated under various interest rate
scenarios allowing the calculation of an estimated duration for each insurance
product line. This duration measure can then be used to compare the price
sensitivities of the insurance liabilities versus the price sensitivities of
the financial assets held to provide the required liability cash flows. When
the durations of assets and liabilities are equal, interest rate exposure is
effectively neutralized on an economic basis as the change in value of
financial assets should be largely offset by the change in the value of the
liabilities.
The model used in the following analysis included UNUM's fixed maturities,
mortgage loans and deposit assets held at December 31, 1998, and 1997, and
incorporated assumptions regarding the impact of changing interest rates on
expected cash flows for certain financial assets with prepayment features, such
as callable bonds, mortgage-backed securities and mortgage loans. The model
used also assumed an immediate change in interest rates without any management
of the investment portfolio in reaction to such change. The hypothetical
reduction in the fair value of UNUM's financial assets included in the model
resulting from a hypothetical 10-percent adverse change in interest rates
prevalent at December 31, 1998, and 1997, was estimated to be $290 million and
$323 million, respectively. In consideration of UNUM's ongoing strategy of
asset/liability duration alignment, this hypothetical reduction in fair value
would be largely offset by the corresponding decrease in the fair value of
insurance reserves.
UNUM has established policies and procedures governing its issuance of
debt. UNUM manages its debt composition and related interest rate risk by
considering such factors as the debt to equity ratio, fixed rate to variable
rate debt ratio, future debt requirements, interest rate environment and market
conditions. The sensitivity analysis of notes payable considered the impact of
an immediate hypothetical interest rate change as of December 31, 1998, and
1997, and the effects of the interest rate swap agreement described in Item 8
Note 14 "Derivative Financial Instruments." Based upon the interest rate
exposure relating to UNUM's notes payable at December 31, 1998, and 1997, a
hypothetical 10-percent adverse change in interest rates in the near term would
not materially affect the fair value of UNUM's notes payable.
Additionally, UNUM periodically uses options, futures and interest rate
swaps, which are common derivative financial instruments, to hedge interest
rate risk associated with anticipated purchases and sales of investments and
debt issuance (see Item 8 Note 14 "Derivative Financial Instruments" for
further information on derivatives).
27
UNUM Corporation and Subsidiaries
Foreign Currency Exchange Risk
UNUM generally conducts its international businesses through foreign
operating entities that maintain assets and liabilities in local currencies,
substantially limiting foreign currency exchange rate risk to net assets
denominated in foreign currencies. The unrealized foreign currency translation
gains and losses are reported in other comprehensive income in stockholders'
equity. After assessing UNUM's foreign currency exchange risk at December 31,
1998, and 1997, a hypothetical 10-percent adverse change in exchange rates in
the near term would not materially affect UNUM's consolidated stockholders'
equity at December 31, 1998, and 1997. Foreign exchange exposure was calculated
by translating the local reporting currency into U.S. dollars using foreign
currency exchange rates at December 31, 1998, and 1997, and applying a
hypothetical 10-percent adverse change in foreign exchange rates to the
translated amount.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX Page
----- -----
Report of Independent Accountants ........................................................ 29
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 .. 30
Consolidated Balance Sheets as of December 31, 1998, and 1997 ........................... 31
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998,
1997
and 1996 .............................................................................. 32
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 33
1996
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998,
1997
and 1996 .............................................................................. 35
Notes to Consolidated Financial Statements ............................................... 36
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
UNUM Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 on page 28 present fairly, in all material respects, the
financial position of UNUM Corporation and its subsidiaries at December 31,
1998, and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules listed in the index appearing under Item 14(a) on
page 74 present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are
the responsibility of UNUM's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Maine
February 2, 1999
29
UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
---------------------------------------------
(Dollars in millions, except per common share data) 1998 1997 1996
- ------------------------------------------------------- ------------- ------------- -------------
Revenues
Premiums .............................................. $ 3,841.7 $ 3,263.7 $ 3,151.5
Investment income ..................................... 661.4 661.0 803.3
Net realized investment gains (losses) ................ 21.0 (3.6) 3.4
Fees and other income ................................. 117.3 227.3 113.5
--------- ---------- ---------
Total revenues ...................................... 4,641.4 4,148.4 4,071.7
Benefits and expenses
Benefits to policyholders ............................. 2,886.2 2,438.8 2,342.2
Interest credited ..................................... 46.4 83.5 200.6
Salaries and related expenses ......................... 479.3 433.4 424.0
Other operating expenses .............................. 401.1 370.3 445.0
Commissions ........................................... 496.2 410.5 386.9
Increase in deferred policy acquisition costs ......... (235.1) (166.9) (109.3)
Interest expense ...................................... 49.9 42.4 40.7
---------- ---------- ----------
Total benefits and expenses ......................... 4,124.0 3,612.0 3,730.1
---------- ---------- ----------
Income before income taxes ............................ 517.4 536.4 341.6
Income taxes
Current ............................................... 27.9 68.3 122.3
Deferred .............................................. 126.1 97.8 (18.7)
---------- ---------- ----------
Total income taxes .................................. 154.0 166.1 103.6
---------- ---------- ----------
Net income ............................................ $ 363.4 $ 370.3 $ 238.0
========== ========== ==========
Net income per common share:
Basic ................................................ $ 2.63 $ 2.65 $ 1.63
Diluted .............................................. $ 2.57 $ 2.59 $ 1.61
See notes to consolidated financial statements.
30
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
(Dollars in millions) 1998 1997
- -------------------------------------------------------------- ------------- --------------
ASSETS
Investments
Fixed maturities available for sale--at fair value
(amortized cost: 1998--$7,350.0; 1997--$6,893.0) ........... $ 7,896.9 $ 7,310.9
Equity securities available for sale--at fair value
(cost:1998--$21.3; 1997--$21.1)............................. 31.0 30.7
Mortgage loans .............................................. 1,303.4 1,131.0
Real estate, net ............................................ 250.6 231.5
Policy loans ................................................ 137.6 128.5
Other long-term investments ................................. 2.0 1.8
Short-term investments ...................................... 216.2 124.5
---------- -----------
Total investments ......................................... 9,837.7 8,958.9
Cash ......................................................... 80.5 56.8
Accrued investment income .................................... 167.4 160.3
Premiums due ................................................. 518.1 390.9
Deferred policy acquisition costs ............................ 1,266.0 1,031.7
Property and equipment, net .................................. 237.9 196.2
Reinsurance receivables ...................................... 1,770.0 1,441.2
Deposit assets ............................................... 729.7 688.3
Other assets ................................................. 540.3 486.2
Separate account assets ...................................... 35.3 29.6
---------- -----------
Total assets .............................................. $ 15,182.9 $ 13,440.1
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits ...................................... $ 2,360.2 $ 2,108.4
Unpaid claims and claim expenses ............................ 6,841.2 5,944.4
Other policyholder funds .................................... 875.4 1,004.9
Income taxes
Current .................................................... 47.3 20.7
Deferred ................................................... 625.8 496.2
Notes payable ............................................... 881.8 635.8
Other liabilities ........................................... 778.2 765.3
Separate account liabilities ................................ 35.3 29.6
---------- -----------
Total liabilities ......................................... 12,445.2 11,005.3
Stockholders' equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
240,000,000 shares, issued 199,975,916 shares .............. 20.0 20.0
Additional paid-in capital .................................. 1,151.2 1,123.0
Retained earnings ........................................... 2,444.9 2,162.5
Accumulated other comprehensive income:
Unrealized gains, net ...................................... 248.4 211.4
Unrealized foreign currency translation adjustment ......... (19.4) (16.0)
---------- -----------
Total accumulated other comprehensive income .............. 229.0 195.4
---------- -----------
3,845.1 3,500.9
Less:
Treasury stock, at cost (1998--61,266,501 shares;
1997--61,703,924 shares) .................................. 1,085.9 1,050.3
Restricted stock deferred compensation ...................... 21.5 15.8
---------- -----------
Total stockholders' equity .................................. 2,737.7 2,434.8
---------- -----------
Total liabilities and stockholders' equity ................ $ 15,182.9 $ 13,440.1
========== ===========
See notes to consolidated financial statements.
31
UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
Common Accumulated
Stock Additional Other
(Dollars in millions, $0.10 Par Paid-in Comprehensive
except per common share data) Value Capital Income
- ------------------------------------- ----------- ------------ ---------------
Balance at January 1, 1996 .......... $ 10.0 $ 1,088.2 $ 190.0
1996 Transactions:
Net income .........................
Other comprehensive income ......... (108.9)
Dividends to stockholders
($0.545 per common share)..........
Treasury stock acquired ............
Employee stock option and
other transactions ................ 15.2
------- ---------- --------
Balance at December 31, 1996 ........ 10.0 1,103.4 81.1
1997 Transactions:
Net income .........................
Other comprehensive income ......... 114.3
Two-for-one common stock split ..... 10.0 (10.0)
Dividends to stockholders
($0.565 per common share)..........
Treasury stock acquired ............
Employee stock option and
other transactions ................ 29.6
------- ---------- --------
Balance at December 31, 1997 ........ 20.0 1,123.0 195.4
1998 Transactions:
Net income .........................
Other comprehensive income ......... 33.6
Dividends to stockholders ..........
($0.585 per common share)
Treasury stock acquired ............
Employee stock option and
other transactions ................ 28.2
------- ---------- --------
Balance at December 31, 1998 ........ $ 20.0 $ 1,151.2 $ 229.0
======= ========== ========
Restricted
Stock
(Dollars in millions, Retained Treasury Deferred
except per common share data) Earnings Stock Compensation Total
- ------------------------------------- ------------- -------------- -------------- -------------
Balance at January 1, 1996 .......... $ 1,713.2 $ (691.6) $ (6.9) $ 2,302.9
1996 Transactions:
Net income ......................... 238.0 238.0
Other comprehensive income ......... (108.9)
Dividends to stockholders
($0.545 per common share).......... (79.8) (79.8)
Treasury stock acquired ............ (119.1) (119.1)
Employee stock option and
other transactions ................ 18.5 (3.7) 30.0
---------- ---------- -------- ----------
Balance at December 31, 1996 ........ 1,871.4 (792.2) (10.6) 2,263.1
1997 Transactions:
Net income ......................... 370.3 370.3
Other comprehensive income ......... 114.3
Two-for-one common stock split ..... --
Dividends to stockholders
($0.565 per common share).......... (79.2) (79.2)
Treasury stock acquired ............ (285.2) (285.2)
Employee stock option and
other transactions ................ 27.1 (5.2) 51.5
---------- ---------- -------- ----------
Balance at December 31, 1997 ........ 2,162.5 (1,050.3) (15.8) 2,434.8
1998 Transactions:
Net income ......................... 363.4 363.4
Other comprehensive income ......... 33.6
Dividends to stockholders ..........
($0.585 per common share) (81.0) (81.0)
Treasury stock acquired ............ (65.0) (65.0)
Employee stock option and
other transactions ................ 29.4 (5.7) 51.9
---------- ---------- -------- ----------
Balance at December 31, 1998 ........ $ 2,444.9 $ (1,085.9) $ (21.5) $ 2,737.7
========== ========== ======== ==========
See notes to consolidated financial statements.
32
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------
(Dollars in millions) 1998 1997 1996
- ------------------------------------------------------------------- ------------- ------------- -------------
Operating activities:
Net income ........................................................ $ 363.4 $ 370.3 $ 238.0
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in future policy benefits and unpaid claims and
claim expenses .................................................. 980.1 726.6 743.0
Increase in reinsurance receivables .............................. (327.8) (277.5) (721.2)
Increase in premiums due ......................................... (127.1) (94.8) (72.6)
Increase in income tax liability ................................. 140.5 52.8 20.4
(Increase) decrease in deferred policy acquisition costs ......... (234.2) (163.3) 274.3
(Increase) decrease in deposit assets ............................ 12.3 (55.9) (432.1)
Deferral (recognition) of gain on sale of tax-sheltered
annuities ....................................................... (3.3) (72.6) 80.8
Charge for individual disability reinsurance fees ................ -- -- 49.7
Other ............................................................ 6.8 6.4 112.4
---------- ---------- ----------
Net cash provided by operating activities ...................... 810.7 492.0 292.7
---------- ---------- ----------
Investing activities:
Maturities of fixed maturities available for sale ................. 405.4 457.7 775.2
Sales of fixed maturities available for sale ...................... 715.0 652.1 2,514.4
Sales and maturities of other investments ......................... 144.5 234.9 269.5
Purchases of fixed maturities available for sale .................. (1,557.0) (1,360.6) (1,890.9)
Purchases of other investments .................................... (374.4) (216.3) (263.0)
Net (increase) decrease in short-term investments ................. (91.7) 10.7 (1,063.9)
Net additions to property and equipment ........................... (41.1) (26.1) (54.3)
---------- ---------- ----------
Net cash provided by (used in) investing activities ............... (799.3) (247.6) 287.0
---------- ---------- ----------
Financing activities:
Deposits and interest credited to investment contracts ............ 100.7 285.1 597.1
Maturities and withdrawals from investment contracts .............. (217.2) (327.2) (903.8)
Dividends to stockholders ......................................... (81.0) (79.2) (79.8)
Treasury stock acquired ........................................... (65.0) (285.2) (119.1)
Proceeds from notes payable ....................................... 278.1 168.3 --
Repayment of notes payable ........................................ (68.1) (48.5) (15.0)
Net increase (decrease) in short-term debt ........................ 36.0 (10.6) (42.3)
Other ............................................................. 27.3 32.8 18.9
---------- ---------- ----------
Net cash provided by (used in) financing activities ............ 10.8 (264.5) (544.0)
---------- ---------- ----------
Effect of exchange rate changes on cash ........................... 1.5 (1.0) (0.3)
---------- ---------- ----------
Net increase (decrease) in cash ................................... 23.7 (21.1) 35.4
Cash at beginning of year ......................................... 56.8 77.9 42.5
---------- ---------- ----------
Cash at end of year ............................................... $ 80.5 $ 56.8 $ 77.9
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes ..................................................... $ 31.4 $ 76.1 $ 76.4
Interest ......................................................... $ 50.9 $ 43.3 $ 40.8
See notes to consolidated financial statements.
33
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of noncash operating and investing activities:
For the year ended December 31, 1997, in connection with contractholder
and participant consents for assumption reinsurance related to the
tax-sheltered annuity business UNUM sold in 1996, UNUM reduced its deposit
assets by $2,317.8 million, policy loan assets by $104.8 million, other
policyholder fund liabilities by $2,486.5 million and separate account assets
and liabilities by $526.5 million. Also, during 1996, fixed maturities
available for sale of $588.6 million and short-term investments of $1,825.9
million were transferred to the buyer on October 1, 1996. Upon transfer, there
was a corresponding increase in UNUM's deposit assets.
See notes to consolidated financial statements.
34
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
----------------------------------------
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------------------------- ----------- ----------- ------------
Net income ..................................................... $ 363.4 $ 370.3 $ 238.0
Other comprehensive income:
Unrealized holding gains (losses) arising
during the period, net ....................................... 47.4 131.2 (135.5)
Reclassification adjustment for realized (gains) losses
included in net income, net .................................. (10.4) (2.1) 4.7
-------- -------- ---------
Changes in unrealized gains (losses), net .................... 37.0 129.1 (130.8)
Foreign currency translation adjustments ...................... (3.4) (14.8) 21.9
-------- -------- ---------
Total other comprehensive income ............................. 33.6 114.3 (108.9)
-------- -------- ---------
Comprehensive income ........................................... $ 397.0 $ 484.6 $ 129.1
======== ======== =========
Supplemental disclosures of comprehensive income information:
Tax (expense) benefit related to unrealized holding (gains)
losses ........................................................ $ (20.8) $ (65.5) $ 41.8
Tax (expense) benefit related to reclassification adjustment for
realized (gains) losses ....................................... $ (5.6) $ (1.1) $ 2.5
========= ========= =========
See notes to consolidated financial statements.
35
UNUM Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of UNUM Corporation and
subsidiaries ("UNUM") have been prepared on the basis of generally accepted
accounting principles ("GAAP"). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of UNUM
Corporation and subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
Reclassification
To better reflect the business of Duncanson & Holt Underwriters Ltd., as
reported in the Special Risk Insurance segment, the results have been reflected
on separate lines in UNUM's statements of income, balance sheets and statements
of cash flows. Previously the operating results, financial position and cash
flows were reported as net amounts in fees and other income and other assets.
Prior year amounts have been reclassified for comparative purposes. Certain
other 1997 and 1996 amounts have been reclassified in 1998 for comparative
purposes.
Investments
Investments are reported as follows:
o Fixed maturities available for sale (certain bonds and redeemable
preferred stocks)--at fair value.
o Equity securities available for sale (common stocks and non-redeemable
preferred stocks)--at fair value.
o Mortgage loans--at amortized cost less an allowance for probable losses.
o Real estate--at cost less accumulated depreciation.
o Policy loans--at unpaid principal balance.
o Other long-term investments--at cost plus UNUM's equity in undistributed
net earnings since acquisition.
o Short-term investments--are considered available for sale and are carried
at cost which approximates fair value.
Fixed maturities and equity securities are classified as available for
sale as they may be sold in response to changes in interest rates, resultant
prepayment risk, liquidity and capital needs or other similar economic factors.
Unrealized gains and losses related to securities classified as available for
sale are excluded from net income and reported in a separate component of
stockholders' equity, net of applicable deferred taxes and related adjustments
to unpaid claims and claim expenses. The unrealized gains and losses are
determined based on estimated market values at the balance sheet date and are
not necessarily the amounts which would be realized upon sale of the securities
or representative of future market values. Changing interest rates affect the
level of unrealized gains and losses related to securities classified as
available for sale. While rising interest rates are beneficial when investing
current cash flows, they can also reduce the fair value of existing fixed rate
long-term investments. In addition, lower interest rates can lead to early
payoffs and refinancing of some of UNUM's fixed rate investments. Management
generally invests in fixed rate instruments that are structured to limit the
exposure to such reinvestment risk.
RATINGS
A.M. Best Company ("Best's"), Moody's Investors Service ("Moody's") and Standard
& Poor's Corporation ("S&P") are among the third parties that provide UNUM
independent assessments of its overall financial position. Ratings from these
agencies for financial strength and claims-paying ability are available for the
United States domiciled insurance company subsidiaries rather than on a
consolidated basis, since the financial information used to develop the ratings
is based on statutory accounting practices in the United States.
UNUM's largest affiliate, UNUM Life Insurance Company of America ("UNUM
America"), had its Best's financial strength rating affirmed at "A++"
(Superior), the highest rating assigned by Best's, in May 1994. Best's again
affirmed UNUM America's "A++" rating in November 1994. In January 1995, S&P
completed its review of UNUM America and lowered its claims-paying ability
rating to "AA" (Excellent) from "AA+" (Excellent). According to S&P, the
downgrade was a result of pressures on risk-adjusted capitalization and higher
financial leverage, due in part to lower profitability. In March 1995, Moody's
completed its review of UNUM America and lowered its financial strength
rating to "Aa2" (Excellent) from "Aa1" (Excellent) citing the outlook for UNUM's
group long term disability business as well as UNUM's increasing leverage and
moderately reduced financial flexibility.
First UNUM Life Insurance Company ("First UNUM") also had its financial strength
rating reaffirmed by Best's in May 1994, at "A+" (Superior). In January 1995,
S&P lowered First UNUM's claims-paying ability rating to "AA" (Excellent) from
"AA+" (Excellent). In March 1995, Moody's confirmed First UNUM's "Aa2"
(Excellent) financial strength rating.
Colonial Life & Accident Insurance Company ("Colonial Life") had its Best's
financial strength rating affirmed as "A+" (Superior) in May 1994. In March
1994, S&P assigned an "AA-" (Excellent) claims-paying ability rating to
Colonial. Subsequently, in January 1995, S&P affirmed Colonial's "AA-"
(Excellent) rating. In March 1995, Moody's lowered Colonial's financial
strength rating to "Aa3" (Excellent) from "Aa2" (Excellent).
Commercial Life Insurance Company had its Best's financial strength rating
upgraded to "A" (Excellent) in July 1994.
UNUM Corporation has the following debt ratings based on consolidated financial
information under generally accepted accounting principles. In January 1995,
S&P lowered the senior debt rating of UNUM Corporation to "A+" (Strong) from
"AA" (Very Strong), and lowered the commercial paper rating to "A-1" (Strong)
from "A-1+" (Extremely Strong). In March 1995, Moody's lowered UNUM
Corporation's senior debt rating to "A1" (Medium Quality) from "Aa3" (High
Quality) and confirmed the commercial paper rating of "P-1" (Superior Ability).
INSURANCE REGULATION
The National Association of Insurance Commissioners adopted a set of Risk-Based
Capital standards for the life and health insurance industry, which became
effective in 1993. These Risk-Based Capital standards are one way to measure
the risk that insurance companies assume in the course of conducting insurance
and investment activities.
The Risk-Based Capital standards for life insurance companies are based on a
formula that establishes capital requirements relating to existing asset default
risk, insurance risk, interest rate (asset/liability mismatch) risk and business
risk. A company's Total Adjusted Capital (statutory capital, surplus, and Asset
Valuation Reserve plus certain other adjustments) is compared to the Authorized
Control Level ("ACL") of Risk-Based Capital produced by the formula. Subject to
certain trend tests to determine the change in the ACL ratio from year to year,
companies with Total Adjusted Capital above 200% of ACL are assumed to be
adequately capitalized. Companies below 200% of ACL are identified as requiring
various levels of regulatory action ranging from increased information
requirements for companies between 150% and 200% of ACL, to mandatory control by
the domiciliary insurance department for companies below 70% of ACL.
At December 31, 1994, the ACL ratios for UNUM America, First UNUM, Colonial Life
and Commercial Life were approximately 305%, 355%, 440% and 380%, respectively.
This compares with ACL ratios at December 31, 1993, of approximately 350%, 390%,
450% and 380%, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments such as options,
futures and forward exchange contracts to hedge certain risks associated with
future investments and certain payments denominated in foreign currencies,
primarily British pound sterling, Canadian dollar and Japanese yen. These
derivative financial instruments are used to protect UNUM from the effect of
market fluctuations in interest and exchange rates between the contract date and
the date on which the hedged transaction occurs. UNUM does not intend to hold
derivative financial instruments for the purpose of trading.
At December 31, 1994, UNUM had no open derivative financial instruments. At
December 31, 1993, UNUM held interest rate futures contracts with commitments to
purchase government securities with total par values of $207.0 million. In
using these instruments, UNUM is subject to the off-balance-sheet risk that the
counterparties to the transactions will fail to completely perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges.
NEW ACCOUNTING PRONOUNCEMENT
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 114 "Accounting by Creditors for Impairment of a
Loan," which defines the principles to measure and record a loan when it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement.
In October 1994, the FASB issued FAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which amends FAS 114
to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan. UNUM will adopt FAS 114 and FAS
118 effective January 1, 1995. Adoption of FAS 114 and FAS 118 is not expected
to have a material effect on UNUM's results of operations or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1994 1993 1992
----------------------------------------------------------------------------------------------
REVENUES
Premiums $2,732.4 $2,474.1 $2,142.4
Investment income 770.2 790.4 809.2
Net realized investment gains 45.6 49.4 41.5
Fees and other income 75.5 83.1 55.4
----------------------------------------------------------------------------------------------
Total revenues 3,623.7 3,397.0 3,048.5
BENEFITS AND EXPENSES
Benefits to policyholders 2,248.1 1,775.7 1,532.6
Interest credited 242.7 281.0 328.4
Operating expenses 715.0 675.6 590.9
Commissions 355.9 326.8 298.9
Increase in deferred policy acquisition costs (155.3) (135.1) (111.7)
Interest expense 18.7 12.7 10.9
----------------------------------------------------------------------------------------------
Total benefits and expenses 3,425.1 2,936.7 2,650.0
----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECTS
OF ACCOUNTING CHANGES 198.6 460.3 398.5
INCOME TAXES
Current 30.4 73.4 68.0
Deferred 13.5 74.9 39.3
----------------------------------------------------------------------------------------------
Total income taxes 43.9 148.3 107.3
----------------------------------------------------------------------------------------------
Income before cumulative effects of accounting changes 154.7 312.0 291.2
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 20.0 --
Postretirement benefits other than pensions, net of tax -- (32.1) --
----------------------------------------------------------------------------------------------
NET INCOME $ 154.7 $ 299.9 $ 291.2
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before cumulative effects of accounting changes $ 2.09 $ 3.96 $ 3.71
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 0.25 --
Postretirement benefits other than pensions, net of tax -- (0.40) --
----------------------------------------------------------------------------------------------
NET INCOME $ 2.09 $ 3.81 $ 3.71
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities:
Held to maturity-principally at amortized cost
(fair value: 1994-$6,168.6; 1993-$7,149.9) $ 6,227.2 $ 6,560.7
Available for sale-at fair value (amortized
cost: $1,701.4) 1,640.6 --
Available for sale-principally at amortized
cost (fair value: $929.9) -- 872.0
Equity securities available for sale-at fair value
(cost: 1994-$492.2; 1993-$508.3) 627.9 730.0
Mortgage loans 1,216.3 1,423.2
Real estate, net 190.8 193.5
Policy loans 201.0 187.9
Other long-term investments 38.1 59.0
Short-term investments 291.9 69.6
-------------------------------------------------------------------------------------------------------
Total investments 10,433.8 10,095.9
Cash 36.1 20.8
Accrued investment income 195.9 184.0
Premiums due 189.7 165.5
Deferred policy acquisition costs 1,035.2 879.1
Property and equipment, net 153.4 143.5
Other assets 737.2 681.8
Separate account assets 345.9 266.7
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Total assets $13,127.2 $12,437.3
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(Continued on next page)
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits $ 1,591.6 $ 1,362.5
Unpaid claims and claim expenses 3,853.9 3,341.5
Other policyholder funds 4,058.8 4,250.7
Income taxes
Current 12.4 31.5
Deferred 348.6 376.7
Notes payable 428.7 238.6
Other liabilities 571.9 466.4
Separate account liabilities 345.9 266.7
-------------------------------------------------------------------------------------------------------
Total liabilities 11,211.8 10,334.6
Stockholders' equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000 shares, issued 99,987,958 shares 10.0 10.0
Additional paid-in capital 1,080.5 1,078.4
Unrealized gains on available for sale securities, net of deferred taxes 49.6 149.1
Unrealized foreign currency translation adjustment (23.7) (24.1)
Retained earnings 1,507.2 1,420.8
-------------------------------------------------------------------------------------------------------
2,623.6 2,634.2
Less:
Treasury stock, at cost (1994-27,575,430 shares;
1993-24,006,816 shares) 706.6 529.8
Restricted stock deferred compensation 1.6 1.7
-------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,915.4 2,102.7
-------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $13,127.2 $12,437.3
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Gains (Losses)
On Available Unrealized
Common for Sale Foreign Restricted
Stock Additional Securities, Net Currency Stock
(DOLLARS IN MILLIONS, $0.10 Par Paid-in Of Deferred Translation Retained Treasury Deferred
EXCEPT PER COMMON SHARE DATA) Value Capital Taxes Adjustment Earnings Stock Compensation Total
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1992 $ 5.0 $ 1,061.1 $ 98.7 $ 7.1 $ 945.9 $ (360.1) $ (2.2) $1,755.5
1992 Transactions:
Net income 291.2 291.2
Unrealized gains on equity
securities, net of deferred taxes 22.4 22.4
Unrealized foreign currency
translation adjustment (28.0) (28.0)
Two-for-one stock split 5.0 (5.0) --
Dividends to stockholders
($0.62 1/2 per common share) (53.1) (53.1)
Employee stock option and
other transactions 10.5 (1.7) 14.6 (0.5) 22.9
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 10.0 1,066.6 121.1 (20.9) 1,182.3 (345.5) (2.7) 2,010.9
1993 Transactions:
Net income 299.9 299.9
Unrealized gains on equity
securities, net of deferred taxes 28.0 28.0
Unrealized foreign currency
translation adjustment (3.2) (3.2)
Dividends to stockholders
($0.76 1/2 per common share) (61.4) (61.4)
Treasury stock acquired (192.5) (192.5)
Employee stock option and
other transactions 11.8 8.2 1.0 21.0
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BALANCE AT DECEMBER 31, 1993 10.0 1,078.4 149.1 (24.1) 1,420.8 (529.8) (1.7) 2,102.7
1994 Transactions:
Net income 154.7 154.7
Unrealized losses on available for sale
securities, net of deferred taxes (99.5) (99.5)
Unrealized foreign currency
translation adjustment 0.4 0.4
Dividends to stockholders
($0.92 per common share) (68.3) (68.3)
Treasury stock acquired (183.3) (183.3)
Employee stock option and
other transactions 2.1 6.5 0.1 8.7
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BALANCE AT DECEMBER 31, 1994 $10.0 $ 1,080.5 $ 49.6 $(23.7) $1,507.2 $ (706.6) $ (1.6) $1,915.4
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-----------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- --------------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
--------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 154.7 $ 299.9 $ 291.2
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effects of accounting changes, net of tax -- 12.1 --
Increase in future policy benefits and unpaid
claims and claim expenses 720.1 412.9 335.7
(Increase) decrease in amounts receivable under
reinsurance agreements (18.6) (129.1) 6.1
Increase (decrease) in income tax liability (3.3) 109.8 51.6
Increase in deferred policy acquisition costs (155.4) (125.5) (111.7)
Other 3.3 (22.8) 26.5
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 700.8 557.3 599.4
--------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Maturities of fixed maturities -- 924.6 783.7
Maturities of fixed maturities held to maturity 754.8 -- --
Maturities of fixed maturities available for sale 41.2 -- --
Sales of fixed maturities held to maturity 46.8 45.7 122.4
Sales of fixed maturities available for sale 407.6 218.2 477.2
Sales of equity securities available for sale 314.1 -- --
Sales and maturities of other investments 414.9 550.2 825.0
Purchases of investments -- (1,832.2) (2,700.7)
Purchases of fixed maturities held to maturity (795.2) -- --
Purchases of fixed maturities available for sale (943.9) -- --
Purchases of equity securities available for sale (216.6) -- --
Purchases of other investments (211.5) -- --
Net (increase) decrease in short-term investments (221.7) 38.8 21.8
Net additions to property and equipment (29.9) (18.2) (23.1)
Investments in subsidiaries, net -- 0.9 (49.3)
--------------------------------------------------------------------------------------------------------
Net cash used in investing activities (439.4) (72.0) (543.0)
--------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Deposits and interest credited to investment contracts 608.6 735.2 835.7
Maturities and withdrawals from investment contracts (800.5) (1,022.4) (871.3)
Dividends to stockholders (68.3) (61.4) (53.1)
Treasury stock acquired (183.3) (192.5) --
Proceeds from notes payable 54.7 51.5 74.6
Repayment of notes payable (1.2) (50.1) (34.6)
Net increase (decrease) in short-term debt 136.6 37.3 (42.9)
Other 7.2 15.1 21.2
--------------------------------------------------------------------------------------------------------
Net cash used in financing activities (246.2) (487.3) (70.4)
--------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 0.1 2.4 0.1
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 15.3 0.4 (13.9)
Cash at beginning of year 20.8 20.4 34.3
--------------------------------------------------------------------------------------------------------
Cash at end of year $ 36.1 $ 20.8 $ 20.4
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(Continued on next page)
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------------------------------
DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 48.8 $ 67.3 $ 41.6
Interest $ 20.4 $ 13.3 $ 11.7
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of UNUM Corporation and
subsidiaries ("UNUM") have been prepared on the basis of generally accepted
accounting principles for stock life insurance companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of UNUM Corporation
and subsidiaries. Significant intercompany accounts and transactions have been
eliminated.
RECLASSIFICATION
Certain December 31, 1993, and 1992 amounts have been reclassified in 1994 for
comparative purposes.
INVESTMENTS
Investments are reported as follows:
- Fixed maturities held to maturity (certain bonds and redeemable preferred
stocks) - principally at amortized cost, less an allowance for probable
losses.
- Fixed maturities available for sale (certain bonds and redeemable
preferred stocks) - commencing January 1, 1994, at fair value. Prior to
January 1, 1994, at lower of aggregate amortized cost less an allowance
for probable losses, or fair value. See Note 3 "Investments" for a
discussion of the adoption of Financial Accounting Standard No. 115.
- Equity securities available for sale (common stocks and non-redeemable
preferred stocks) - at fair value.
- Mortgage loans - at amortized cost less an allowance for probable losses.
- Real estate - at cost less accumulated depreciation.
- Policy loans - at unpaid principal balance.
- Other long-term investments - at cost plus UNUM's equity in undistributed
net earnings since acquisition.
- Short-term investments - at cost.
Fixed maturities that UNUM has the positive intent and ability to hold to
maturity are classified as held to maturity.
Certain fixed maturities and equity securities are classified as available for
sale as they may be sold in response to changes in interest rates, resultant
prepayment risk, liquidity and capital needs, or other similar economic
factors. Related unrealized holding gains and losses, net of deferred taxes,
are reported in a separate component of stockholders' equity.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENTS (Continued)
Real estate held for sale, which is included in other assets in the
Consolidated Balance Sheets, is valued at the lower of fair value less
estimated costs to sell, or cost. UNUM has provided an allowance for probable
losses on real estate held for sale which reduces the carrying value of the
asset to fair value.
If a decline in fair value of an invested asset is considered to be other than
temporary, the investment is reduced to its net realizable value and the
reduction is accounted for as a realized investment loss. Subsequent increases
and decreases in fair value, if not an other than temporary impairment, of
available for sale securities are reported in a separate component of
stockholders' equity, net of deferred taxes.
UNUM discontinues the accrual of investment income on invested assets when it
is determined that collectability is doubtful.
Realized investment gains and losses, which are determined on the basis of
specific identification and include adjustments for allowances for probable
losses, are reported separately in the Consolidated Statements of Income.
If a decline in fair value of an invested asset is considered to be other
than temporary or if a long-lived asset is deemed to be permanently impaired,
the investment is reduced to its net realizable value and the reduction is
accounted for as a realized investment loss.
36
UNUM discontinues the accrual of investment income on invested assets when
it is determined that collectability is doubtful. UNUM recognizes investment
income on impaired loans when the income is received.
Real estate held for sale is included in other assets in the Consolidated
Balance Sheets and is valued net of a valuation allowance that reduces the
carrying value to the lower of fair value less estimated costs to sell or cost.
This valuation allowance is periodically adjusted based on subsequent changes
in UNUM's estimate of fair value less costs to sell.
Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management program.
Therefore, short-term financial instruments are classified as investments in
the Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.
DERIVATIVE FINANCIAL INSTRUMENTS
Gains or losses on hedgesDeferred Policy Acquisition Costs
The costs of existing assets or liabilitiesacquiring new business that vary with and are related
primarily to the production of new business have been deferred to the extent
such costs are deemed recoverable from future profits. Such costs include
commissions, certain costs of policy issue and includedunderwriting and certain
variable field office expenses.
For group disability, individual disability, and group life and health
business, the costs are amortized in proportion to expected future premiums.
For universal life products, the carrying amountscosts are amortized in proportion to estimated
gross profits from interest margins, mortality and other elements of
those assets or liabilities. Gains or
losses related to qualifying hedgesperformance under the contracts. For the Lloyd's of firm commitments or anticipated
transactionsLondon ("Lloyd's") business
the costs are also deferred and recognized in the carrying amount of the
underlying asset or liability when the hedged transaction occurs.
RECOGNITION OF PREMIUM REVENUES AND RELATED EXPENSES
Group insurance premiums are recognized as incomeamortized proportionately over the period the premium is earned.
Amortization may be adjusted periodically to reflect differences between actual
experience and original assumptions, with any resulting changes reflected in
current operating results. The amounts deferred and amortized were as follows:
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- ----------------------------------------------------------- ----------- ----------- -----------
Deferred ............................................... $ 532.7 $ 393.8 $ 334.7
Less amortized ......................................... (297.6) (226.9) (225.4)
-------- -------- --------
Increase in deferred policy acquisition costs ......... $ 235.1 $ 166.9 $ 109.3
======== ======== ========
Separate Accounts
Certain assets from tax-sheltered annuity ("TSA") contracts are in
separate accounts that are pooled investment funds of securities. Investment
income and realized gains and losses on these accounts accrue directly to the
contractholders. Assets, carried at market value, and liabilities of the
separate accounts are shown separately in the Consolidated Balance Sheets. The
assets of the separate accounts are legally segregated and are not subject to
claims that arise out of any other business of UNUM.
Accounting for Participating Individual Life Insurance
Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to its conversion to a stock life insurance
company on November 14, 1986, will remain participating as long as they remain
in force. A Participation Fund Account ("PFA") was established for the benefit
of all Union Mutual's individual participating life and annuity policies and
contracts.
The assets of the PFA provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies and
annuity contracts. This line of business participates in the experience of the
PFA and its operations have been excluded from the Consolidated Statements of
Income. The PFA represented approximately 2.4% and 2.7% of consolidated assets
and 2.9% and 3.3% of consolidated liabilities at December 31, 1998, and 1997,
respectively.
Other Policyholder Funds
Other policyholder funds are liabilities for investment-type contracts and
represent customer deposits plus interest credited to those deposits at various
rates.
Liabilities for Restructuring Activities
Liabilities for restructuring activities are recorded when management,
prior to the balance sheet date, commits to execute an exit plan that will
result in the incurral of costs that have no future economic benefit or
approves
37
UNUM Corporation and Subsidiaries
a plan of termination and communicates sufficient detail of the plan to
employees. Liabilities for restructuring activities are included in other
liabilities in the Consolidated Balance Sheets.
Income Taxes
The provision for income taxes includes amounts currently payable and
deferred income taxes, which the
premiums relate. Individualresult from differences between financial
reporting and tax bases of assets and liabilities and are measured using
enacted tax rates and laws. A valuation allowance is established for deferred
tax assets when it is more likely than not that an amount will not be realized.
Foreign Currency Translation
Foreign subsidiaries' balance sheet and income statement accounts
expressed in local functional currencies are translated into U.S. dollars using
ending and quarterly average exchange rates, respectively. The resulting
translation adjustments are reported in a separate component of stockholders'
equity.
Recognition of Premium Revenues and Related Expenses
Group insurance and individual disability premiums are recognized as
income when due. Benefits and expenses are associatedmatched with earned premiums to
result in recognition of profits over the life of the contracts. This
association is accomplished by recording a provision for future policy benefits
and unpaid claims and claim expenses and by amortizing deferred policy
acquisition costs.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECOGNITION OF PREMIUM REVENUES AND RELATED EXPENSES (Continued):
For retirement and universal life products, premium and other policy fee
revenue consistsconsist of charges for the cost of insurance, policy administration and
surrenders assessed during the period. Charges related to services to be
performed in the future are deferred until earned. The amounts received in
excess of premium and fees are recorded as deposits and included in other
policyholder funds in the Consolidated Balance Sheets. Benefits and expenses
include benefit claims in excess of related account balances, interest credited
at various rates and amortization of deferred policy acquisition costs.
DEFERRED POLICY ACQUISITION COSTSUNUM follows the periodic method of accounting for its Lloyd's business
which requires that the premiums be recognized as revenue over the policy term,
and claims, including an estimate of claims incurred but not reported, are
recognized as they occur.
Premium for the Lloyd's business is based on participation in the
individual syndicate underwriting years that generate premiums over a three-year
period of time. UNUM has participated in the Lloyd's market for a number of
years and uses its historical experience plus information obtained from its
managing agents to estimate revenues, losses, expenses, and the related assets
and liabilities. Additionally, an independent actuarial review of the
syndicates' open reserves is performed annually and management periodically
reviews its estimates as information is received from the Lloyd's syndicates.
Any resulting adjustment to the estimates is reflected in the current results.
Special Item Designation
UNUM excludes special items from its measurement of segment profit or loss.
Special items are defined as items that management deems not to be
representative of ongoing operations. The types of items that fall within this
designation include restructuring charges, significant claim reserve increases,
nonrecurring expenses and nonrecurring gains. This list is not all-inclusive as
new events or circumstances may arise that management deems not to be
representative of ongoing operations. UNUM consistently omits significant claim
increases from its measure of segment profit or loss. Significance is not based
solely on dollar thresholds, but is determined primarily upon management's
analysis as to whether the reserve increase would distort the trends in the
underlying business.
Special items are based on the assumption that the item is not likely to
occur each year. UNUM has not had an item recur in a subsequent year, although
there have been claim reserve increases in consecutive years for different
product lines. When a special item occurs, it results in a portion of the
financial performance for a product line (e.g., premiums) being included in
segment results, while a portion of the costs associated with that premium
(e.g., claim reserve increases) is omitted from segment results.
The chief operating decision maker excludes special items when making
resource allocation decisions and in assessing performance of the segment and
when making other decisions such as product pricing. Special items are
consistently defined and the chief financial officer and chief executive officer
have primary responsibility for making the special item determination and
ensuring consistent measurement of segment profit or loss.
38
Reinsurance
UNUM, through its life insurance subsidiaries, is involved in both the
cession and assumption of reinsurance with other companies. Risks are reinsured
with other companies to reduce UNUM's exposure to large losses and permit
recovery of a portion of direct losses. UNUM remains liable to the insured for
the payment of policy benefits if the reinsurers cannot meet their obligations
under the reinsurance agreements. Deferred policy acquisition costs, premiums,
benefits and expenses are stated net of reinsurance ceded to other companies.
UNUM evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk to minimize exposure to significant losses from
reinsurer insolvencies.
Changes in Accounting Estimates
During fourth quarter 1997, certain reinsurance pools managed by UNUM's
wholly-owned subsidiary, Duncanson & Holt Inc. ("D&H"), received new claim
information from ceding insurance enterprises about certain older pool years
and completed an analysis of recent claims experience deterioration. As a
result of these factors, certain pools have strengthened claim reserves. The
impact to UNUM in fourth quarter 1997 from these pool claim reserve increases
was an $11.7 million reduction in fee income and a $6.7 million increase in
benefits to policyholders reported in the Special Risk Insurance segment,
reducing net income by $12.0 million in the Consolidated Statement of Income.
Accounting Pronouncements Adopted
Effective January 1, 1998, UNUM adopted Financial Accounting Standards
("FAS") No. 130, "Reporting Comprehensive Income," which established standards
for reporting and display of comprehensive income and its components in a
financial statement with the same prominence as other financial statements.
Comprehensive income is defined as net income adjusted for changes in
stockholders' equity resulting from events other than net income or
transactions related to an entity's capital instruments. UNUM has reclassified
financial statements for earlier years as required by FAS 130.
Effective January 1, 1998, UNUM adopted FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which established standards
for reporting information about operating segments. Generally, FAS 131 requires
that financial information about operating segments be reported on the basis
that is used internally for evaluating performance. UNUM has determined that
its current segment reporting structure meets the requirements of FAS 131 and
no restatement of financial information is needed. Additional segment
information has been disclosed as required under FAS 131.
Effective January 1, 1998, UNUM adopted FAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which revised
disclosure requirements for employers' pension and other retiree benefits. FAS
132 did not change the measurement or recognition of pension or other
postretirement benefit plans. UNUM has restated disclosures for earlier years
presented, as required under FAS 132.
Effective January 1, 1998, UNUM implemented Statement of Position ("SOP")
98-1, "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use," which provided guidance on accounting for the costs of
acquiring new business that vary withdeveloping or obtaining computer software for internal use. The adoption of SOP
98-1 did not have a material effect on UNUM's results of operations or
financial position.
Effective December 31, 1997, UNUM adopted FAS No. 128, "Earnings Per
Share," ("EPS") which changed the computation of EPS and arerequires dual
presentation of "basic" and "diluted" EPS. FAS 128 superseded Accounting
Principles Board ("APB") Opinion No. 15, "Earnings Per Share."
Effective December 31, 1997, UNUM adopted FAS No. 129, "Disclosures of
Information About Capital Structure," which consolidated disclosure
requirements related primarily to the productiontype and nature of new business,securities contained in an
entity's capital structure. FAS 129 did not add to or change any of UNUM's
disclosures.
Effective January 1, 1997, UNUM adopted FAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which established accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The statement provides guidance for recognition or derecognition of assets and
liabilities, focusing on the concepts of control and extinguishment. The
adoption of FAS 125 did not have been deferreda material effect on UNUM's results of
operations or financial position.
New Accounting Pronouncements
In October 1998, the Accounting Standards Executive Committee ("AcSEC")
issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk," which
39
UNUM Corporation and Subsidiaries
provides guidance on applying the deposit method of accounting to insurance and
reinsurance contracts that do not transfer insurance risk. UNUM is required to
adopt SOP 98-7 effective January 1, 2000. Previously issued financial
statements should not be restated unless the SOP is adopted prior to the
extent such costs are
deemed recoverable from future profits. Such costs include commissions,effective date and during an interim period. The adoption of SOP 98-7 is not
expected to have a material impact on UNUM's results of operations, liquidity
or financial position.
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain costsderivatives embedded in other contracts, and for hedging
activities. FAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of policy issuefinancial position and underwriting,measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative under FAS 133 depends on the intended use of the derivative and certain variable field office
expenses.
For individual disability, group disability,its
hedging designation. UNUM is required to adopt FAS 133 effective January 1,
2000. UNUM has not yet determined the impact FAS 133 will have on its results
of operations, liquidity or financial position.
In December 1997, the AcSEC issued SOP 97-3, "Accounting by Insurance and
group lifeOther Enterprises for Insurance-Related Assessments," which provides guidance
on accounting for the recognition and health
business, the costs are amortized in proportion to expected future premiums.
For universal life and certain retirement products, the costs are amortized in
proportion to estimated gross profits from interest margins, mortalitymeasurement of liabilities for guaranty
funds and other elementsinsurance-related assessments. UNUM is required to adopt SOP
97-3 effective January 1, 1999. Previously issued financial statements should
not be restated unless the SOP is adopted prior to the effective date and
during an interim period. The adoption of performance underSOP 97-3 is not expected to have a
material impact on UNUM's results of operations, liquidity or financial
position.
NOTE 2. INVESTMENTS
The following tables summarize the contracts. Amortization is adjusted
periodically to reflect differences between actual experiencecomponents of investment income, net
realized investment gains (losses) and original
assumptions, with any resulting changes reflected in current operating
results. The amounts deferred and amortized were as follows:unrealized gains (losses),
net:
Investment Income
Year Ended December 31,
----------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- ----------------------------------------------------------- ----------- ----------- -----------
Fixed maturities available for sale $ 541.8 $ 539.1 $ 642.2
Mortgage loans ......................................... 105.0 110.6 112.1
Real estate ............................................ 24.9 23.1 20.0
Policy loans ........................................... 8.3 6.7 10.2
Other long-term investments ............................ 0.1 2.8 7.3
Short-term investments ................................. 19.7 17.6 52.3
-------- -------- --------
Gross investment income ............................... 699.8 699.9 844.1
Less investment expenses ............................... (14.3) (14.5) (16.3)
Less investment income on participating individual
life insurance policies and annuity contracts ......... (24.1) (24.4) (24.5)
-------- -------- --------
Investment income ..................................... $ 661.4 $ 661.0 $ 803.3
======== ======== ========
Net Realized Investment Gains (Losses)
Year Ended December 31,
------------------------------------
(Dollars in millions) 1998 1997 1996
- ----------------------------------------------------- ---------- ---------- ----------
Gross realized investment gains:
Fixed maturities available for sale .............. $ 18.6 $ 17.1 $ 22.0
Equity securities available for sale ............. 0.1 0.7 --
Mortgage loans, real estate and other ............ 10.4 6.6 18.2
------- ------- -------
Gross realized investment gains ................. 29.1 24.4 40.2
------- ------- -------
Gross realized investment losses:
Fixed maturities available for sale .............. (2.8) (14.6) (29.2)
Mortgage loans, real estate and other ............ (5.3) (13.4) (7.6)
------- ------- -------
Gross realized investment losses ................ (8.1) (28.0) (36.8)
------- ------- -------
Net realized investment gains (losses) ......... $ 21.0 $ (3.6) $ 3.4
======= ======== =======
40
Change in Unrealized Gains (Losses), Net
Year Ended December 31,
----------------------------------------
(Dollars in millions) 1998 1997 1996
- ------------------------------------------------------ ----------- ----------- ------------
Fixed maturities available for sale ............... $ 129.0 $ 131.9 $ (265.9)
Equity securities available for sale .............. -- 2.1 3.4
Marketable securities held in trust ............... 83.9 127.8 --
Unpaid claims adjustment .......................... (160.7) (68.4) 92.5
Deferred $308.1 $282.8 $237.6
Less amortized (152.8) (147.7) (125.9)
----------------------------------------------------------------------------
Increasetaxes .................................... (15.2) (64.3) 39.2
-------- -------- --------
Total change in deferred policy acquisition
costs $155.3 $135.1 $111.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------unrealized gains (losses), net, as
included in stockholders' equity ................ $ 37.0 $ 129.1 $ (130.8)
======== ======== ========
UNUM's fixed maturities are reported at fair value as a result of being
classified as available for sale. Accordingly, the related liability for unpaid
claims and claims expenses is adjusted to reflect the changes that would have
been necessary if the related fixed maturities were sold at their fair value
and the proceeds were reinvested at current yields. At December 31, 1998, 1997
and 1996, the net unrealized gain on available for sale fixed maturities was
$546.9 million, $417.9 million and $286.0 million, respectively, and the
related unpaid claims adjustment was $397.8 million, $237.1 million and $168.7
million, respectively.
The marketable securities held in trust relate to the individual
disability reinsurance agreement (see Note 6 "Reinsurance"). Changes in fair
value of the assets and the related adjustment to unpaid claims are reflected
in the equity section of UNUM's Consolidated Balance Sheets.
Fixed Maturities
The amortized cost and fair value of fixed maturities available for sale
at December 31, 1998, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------------- ----------- ------------ ------------ ------------
U.S. Government ........................ $ 21.6 $ 3.0 $ -- $ 24.6
U.S. States and municipalities ......... 1,189.4 56.1 -- 1,245.5
Foreign governments .................... 341.9 53.4 -- 395.3
Public utilities ....................... 1,408.8 121.6 (7.8) 1,522.6
Corporate bonds ........................ 4,280.5 334.3 (16.3) 4,598.5
Redeemable preferred stocks ............ 0.2 -- -- 0.2
Mortgage-backed securities ............. 107.6 2.6 -- 110.2
--------- ------- ------- ---------
Total ................................ $ 7,350.0 $ 571.0 $ (24.1) $ 7,896.9
========= ======= ======= =========
The amortized cost and fair value of fixed maturities available for sale
at December 31, 1997, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------------- ----------- ------------ ------------ ------------
U.S. Government ........................ $ 48.8 $ 2.5 $ -- $ 51.3
U.S. States and municipalities ......... 942.5 36.6 (0.2) 978.9
Foreign governments .................... 359.6 40.3 -- 399.9
Public utilities ....................... 1,369.0 89.0 (0.1) 1,457.9
Corporate bonds ........................ 3,964.6 248.7 (1.1) 4,212.2
Redeemable preferred stocks ............ 3.5 -- (0.2) 3.3
Mortgage-backed securities ............. 205.0 2.4 -- 207.4
--------- ------- ------- ---------
Total ................................ $ 6,893.0 $ 419.5 $ (1.6) $ 7,310.9
========= ======= ======== =========
The amortized cost and fair value of fixed maturities available for sale
at December 31, 1998, by contractual maturity date, are shown below. Expected
maturities will differ from contractual maturities since certain borrowers have
the right to call or prepay obligations with or without call or prepayment
penalties.
41
UNUM CORPORATIONCorporation and Subsidiaries
Amortized Fair
(Dollars in millions) Cost Value
- --------------------------------------------------- ------------ -------------
Due in one year or less ........................ $ 384.7 $ 390.2
Due after one year through five years .......... 2,623.4 2,811.4
Due after five years through ten years ......... 3,690.8 3,982.1
Due after ten years ............................ 543.5 603.0
--------- ----------
7,242.4 7,786.7
Mortgage-backed securities .................... 107.6 110.2
--------- ----------
Total ........................................ $ 7,350.0 $ 7,896.9
========= ==========
Equity Securities
The fair values, which also represent carrying amounts, and the cost of
equity securities available for sale were as follows at December 31, 1998:
Fair
(Dollars in millions) Cost Value
- ----------------------------------------------------- ---------- ----------
Common stocks:
Industrial, miscellaneous and all other ......... $ 21.3 $ 31.0
====== ======
Gross unrealized investment gains on equity securities available for sale
totaled $10.5 million, $9.6 million, and $7.5 million at December 31, 1998,
1997 and 1996, respectively. Gross unrealized investment losses were not
material at December 31, 1998, 1997 and 1996.
Mortgages
At December 31, 1998, and 1997, impaired loans totaled $20.7 million and
$43.4 million, respectively. Included in the $20.7 million were $9.0 million of
loans which had a related allowance for probable losses of $2.4 million, and
loans of $11.7 million which had no related allowance for probable losses.
Included in the $43.4 million of impaired loans at December 31, 1997, were
$20.8 million of loans which had a related allowance for probable losses of
$3.5 million, and loans of $22.6 million which had no related allowance for
probable losses.
Restructured mortgage loans amounted to $14.5 million and $39.3 million at
December 31, 1998, and 1997, respectively. Troubled debt restructurings
represent loans that are refinanced with terms more favorable to the borrower.
Interest lost on restructured loans was not material for the years ended
December 31, 1998, 1997, or 1996.
Real Estate and Other
Real estate acquired in satisfaction of debt cumulatively amounted to
$62.4 million at December 31, 1998. Real estate held for sale amounted to $15.6
million at December 31, 1998, and $23.3 million at December 31, 1997.
Real estate with a depreciated cost of $5.2 million and no bonds or
mortgages were non-income producing for the twelve months ended December 31,
1998. Interest lost on these investments was not material in 1998, 1997, or
1996.
UNUM was committed at December 31, 1998, to purchase fixed maturities and
other invested assets in the amount of $45.7 million.
NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSREAL ESTATE
HELD FOR SALE
Changes in the allowance for probable losses on mortgage loans and real
estate held for sale were as follows:
Balance at Balance
beginning at end
(Dollars in millions) of year Additions Deductions of year
- --------------------------------------- ------------ ----------- ------------ ----------
Year Ended December 31, 1998
Mortgage loans .................... $ 33.9 $ 2.3 $ (3.4) $ 32.8
Real estate held for sale ......... 17.8 (1.0) -- 16.8
------- ------ ------ -------
Total ............................ $ 51.7 $ 1.3 $ (3.4) $ 49.6
======= ====== ====== =======
42
Balance at Balance
beginning at end
(Dollars in millions) of year Additions Deductions of year
- --------------------------------------- ----------- ----------- ------------ ---------
Year Ended December 31, 1997
Mortgage loans .................... $ 37.7 $ 3.3 $ (7.1) $ 33.9
Real estate held for sale ......... 14.8 3.0 -- 17.8
------- ------ ------ -------
Total ............................ $ 52.5 $ 6.3 $ (7.1) $ 51.7
======= ====== ====== =======
Year Ended December 31, 1996
Mortgage loans .................... $ 39.2 $ 1.0 $ (2.5) $ 37.7
Real estate held for sale ......... 19.1 (0.4) (3.9) 14.8
------- ------ ------ -------
Total ............................ $ 58.3 $ 0.6 $ (6.4) $ 52.5
======= ====== ====== =======
Additions represent charges to net realized investment gains (losses) less
recoveries, and deductions represent reserves released upon disposal or
restructuring of the related asset.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)4. RESERVES
FOR FUTURE POLICY BENEFITSReserves for Future Policy Benefits
Reserves for future policy benefits are calculated by the net-level
premium method and are based on UNUM's expected morbidity, mortality and
interest rate assumptions at the time a policy is issued. These reserves
represent the portion of premiums received, accumulated with interest and held
to provide for claims that have not yet been incurred. The reserve assumptions
are periodically reviewed and compared with actual experience and may be
revised if it is determined that future expected experience is worse than the
reserve assumptions. Reserves for group insurance policies consist primarily of
unearnedprepaid premiums. The interest rates used in the calculation of reserves for
future policy benefits at December 31, 1994,1998, and 1993,1997, principally ranged from:
1994 1993
------------------------------------------------------------------------------
Individual disability 5.5% to 9.5% 7.0% to 9.5%
Individual life 5.0% to 9.0% 5.0% to 9.0%
Individual accident and health 5.0% to 9.0% 6.0% to 11.8%
Individual and group annuities 5.0% to 9.0% 5.0% to 9.0%
-------------------------------------------------------------------------------
from
4.5% to 9.5% and from 5.0% to 9.5%, respectively. Certain reserve calculations
are based on variable interest rates within these ranges
graded down over periods from 15 to 20 years.
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSESranges.
Reserves for Unpaid Claims and Claim Expenses
Unpaid claims and claim expense reserves represent the amount estimated to
fund claims that have been reported but not settled and claims incurred but not
reported. Reserves for unpaid claims are estimated based on UNUM's historical
experience and other actuarial assumptions whichthat consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to, interest rates and current and anticipated incidence rates, recoveryclaim
resolution rates, and economic and societal conditions. ReserveManagement periodically
performs a review of reserve estimates and assumptions. If management
determines reserve assumptions are periodically reviewed
andneed to be updated, with any resulting adjustmentsadjustment to
reserves is reflected in current operating results.operations. Given the complexity of the reserving process,that insurance products
contain inherent risks and uncertainties, the ultimate liability may be more or
less than such estimates indicate.
The interest rates used in the calculation of disability productclaims reserves
at December 31, 1994,1998, and 1993,1997, were principally as follows:
1994 1993
----------------------------------------------------------------------------1998 1997
--------------- -------------
Group long term disability (North America) 9.18% 9.34%........... 7.76% 7.84%
Group long term disability (United Kingdom) 9.9% 10.5%.......... 8.95% 9.27%
Individual disability 6.75%................................ 5.5% to 9.9% 8.0%8.95% 7.0% to 10.0%
-----------------------------------------------------------------------------9.5%
The discount rate that UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES (Continued)
The interest rate used to discountuses considers the disability reserves is a composite of
thecurrent and expected yields
on assets specifically matchedthat back both product liabilities and the portion of surplus that is
allocated to the product line, adjusted for, among other factors, expected
default costs and costs of assets/liability duration differences. The discount
rate may decline further depending on the interest rate environment. UNUM
periodically adjusts prices on both existing and new business in an effort to
mitigate the impact of the current interest rate environment. See Note 17
"Proposed Merger with each blockProvident and Combined Condensed Pro Forma Financial
Statements (Unaudited)," for a discussion of business.potential impacts to reserve
discount rates subsequent to the proposed merger.
For other accident and health business, reserves are based on projections
of historical claims run-out patterns.
43
UNUM Corporation and Subsidiaries
Activity in the liability for unpaid claims and claim expenses is
summarized as follows:
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------(Dollars in millions) 1998 1997 1996
- --------------------------------------- ------------- ------------- -------------
Balance at January 1 $3,341.5 $2,983.6 $2,808.0
Less reinsurance recoverables (68.0) -- --
------------------------------------------------------------------------------............... $ 5,944.4 $ 5,334.7 $ 4,871.8
Reinsurance receivables ............ (636.6) (381.3) (125.6)
Effect of unrealized gains ......... (236.9) (170.1) (261.2)
---------- ---------- ----------
Net Balancebalance at January 1 3,273.5 2,983.6 2,808.0........... 5,070.9 4,783.3 4,485.0
Incurred related to:
Current year 1,609.3 1,417.8 1,253.6...................... 2,356.7 1,897.6 1,692.0
Prior years 436.0 238.0 126.8
------------------------------------------------------------------------------....................... 399.6 373.1 365.4
---------- ---------- ----------
Total incurred 2,045.3 1,655.8 1,380.4..................... 2,756.3 2,270.7 2,057.4
Paid related to:
Current year 517.6 471.0 405.3...................... 747.2 622.2 535.8
Prior years 1,030.0 894.9 799.5
-------------------------------------------------------------------------------....................... 1,481.9 1,360.9 1,223.3
---------- ---------- ----------
Total paid 1,547.6 1,365.9 1,204.8......................... 2,229.1 1,983.1 1,759.1
Net balance at December 31 ......... 5,598.1 5,070.9 4,783.3
Reinsurance receivables ............ 846.0 636.6 381.3
Effect of unrealized gains ......... 397.1 236.9 170.1
---------- ---------- ----------
Balance at December 31 3,771.2 3,273.5 2,983.6
Plus reinsurance recoverables 82.7 68.0 --
-------------------------------------------------------------------------------
Balance at December 31 $3,853.9 $3,341.5 $2,983.6
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------............. $ 6,841.2 $ 5,944.4 $ 5,334.7
========== ========== ==========
The increase in incurralscomponents of the unpaid claims and claims expenses incurred and
related to prior years was $436.0 million, $238.0
million, and $126.8 million (net of reinsurance),were as follows:
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------------------- ----------- ----------- -----------
Interest accrued on reserves .......................... $ 309.3 $ 300.5 $ 292.9
Changes in reserve estimates and assumptions .......... 90.5 89.8 35.6
Changes in foreign exchange rates ..................... (0.2) (17.2) 36.9
-------- -------- --------
Incurred related to prior years ....................... $ 399.6 $ 373.1 $ 365.4
======== ======== ========
The additional reserves for 1994, 1993 and 1992,
respectively. These increasesamounts incurred related to prior years were
primarily the result of interest accrued on reserves, changes in reserve
estimates and assumptions of interest rates, morbidity, mortality and expense
costs, and changes in foreign exchange rates.rates, primarily related to the
disability reserves of UNUM's United Kingdom-based affiliate, UNUM Limited. Due
to the long-termlong term claims payment pattern of some of UNUM's businesses, certain
reserves, particularly disability, are discounted for interest.
Interest accruedClaim Operations Integration Activities
As noted above, it is UNUM's policy to estimate the ultimate cost of
settling claims in each reporting period based upon the information available
to management at the time. Actual claim resolution results are monitored and
compared to those anticipated in claim reserve assumptions. Claim resolution
rate assumptions are based on reserves increased prior years' incurralsUNUM's experience as well as company actions,
which would have a material impact on claim resolutions. Company actions for
which plans have been established and committed to by approximately
$267management are factors,
which would modify past experience in establishing claims reserves. Adjustments
to the reserve assumptions will be made if expectations change.
During the fourth quarter of 1998, UNUM recorded a $59.4 million $237 million and $225 million in 1994, 1993 and 1992,
respectively. Approximately $154 million of the increase
in prior years'
incurrals in 1994 was primarily related to changes inthe reserve estimates and
assumptions of morbidity, mortality and expense costs of thefor group long term and individual disability reserves, whichclaims incurred as of
December 31, 1998. Incurred claims included claims known as of that date and an
estimate of those claims that had been incurred but not yet reported. Claims
that had been incurred but were not yet reported are considered liabilities of
UNUM. These claims are expected to be reported during 1999 and will be affected
by the claim operations integration activities. The $59.4 million claim reserve
increase represents the estimated value of cash payments to be made to these
claimants as a result of the claim operations integration activities. The cash
payments will be paid over the life of the claims which is expected to average
approximately six years. Management believed the reserve adjustment was required
based upon the integration plan it had in place and to which it had committed,
and based upon its ability to develop a reasonable estimate of the financial
impact of the expected disruption to the claims management process. According to
the integration plan, the planning, training, and implementation of the new
claims management processes are expected to be substantially completed by the
end of 1999.
44
Claims management is an integral part of the disability operations.
Disruptions in that process can create material, short-term increases in claim
costs. The proposed merger of UNUM and Provident is expected to have a near term
adverse impact on the efficiency and effectiveness of UNUM's claims management
function resulting in some delay in claim resolutions and additional claim
payments to policyholders. Claim personnel will be distracted from normal claim
management activities as a result of planning and implementing the integration
of the two companies' claims organizations. In addition, employee turnover and
additional training will further reduce resources and productivity. An important
part of the claims management process is assisting disabled policyholders with
rehabilitation efforts. This complex activity is important to the policyholders
because it can assist them in returning to productive work and lifestyles more
quickly, and it is important to UNUM because it shortens the duration of claim
payments and thereby reduces the ultimate cost of settling claims.
Immediately following the announcement of the merger and continuing into
December of 1998, senior management of UNUM and Provident worked to develop the
strategic direction of the UNUMProvident claims organization. As part of the
strategic direction, senior management committed claims management personnel to
be involved in developing the detailed integration plans and implementing the
plans during 1999. For the first six months of 1999, the plan anticipated that
80 claims managers and benefits specialists will be involved up to 30% of their
time developing the detailed integration plans. Once the merger is consummated,
which was expected to be June 30, 1999, all claims personnel are expected to be
involved in the process of implementing the new work processes and will require
training. The implementation and training effort was estimated to require one
month of productive time from each of the claims staff between June 30, 1999
and December 31, 1999. Management believes that the anticipated twelve month
period is adequate to execute the integration plan. Knowing that those involved
in the claim operations integration activities would not be available full time
to perform their normal claims management functions, management deemed it
necessary to anticipate this effect on the claim reserves at December 31, 1998.
The reserving process begins with the assumptions indicated by past
experience and modifies these assumptions for current trends and other known
factors. UNUM anticipated the merger related developments discussed above would
generate a significant change in claims department productivity, reducing claim
resolution rates, a key assumption when establishing reserves. Management
developed actions to mitigate the impact of the merger on claims department
productivity including the hiring of additional claim staff and restricting
early retirement elections by claims personnel. Where feasible, management also
planned to obtain additional claims management resources through outsourcing.
All such costs will be expensed in the period incurred and management does not
expect these additional costs to be material in relation to results of
operations. Management reviewed its integration plans and the actions intended
to mitigate the impact of the integration with claim managers to determine the
extent of disruption in normal activities. Considering all of the above, the
revised claim resolution rates, as a percentage of the original assumptions
(i.e., excluding the effect of the claim operations integration activities),
were 90% for the first and second quarters of 1999, 81% for the third quarter,
1994 reserve strengthening. Changesand 85% for the fourth quarter of 1999. The revised claim resolution rates for
the third and fourth quarters are lower than the first and second quarters
because all claims staff are expected to be involved in the implementation and
training efforts. The integration activities as indicated in the action plans
were expected to be completed by December 31, 1999. In order to evaluate the
financial effect of merger-related integration activities, UNUM projected the
ultimate costs of settling all claims incurred as of December 31, 1998 using the
revised claim resolution rates. This projection was compared to the projection
excluding the adjustment to the claim resolution rates to obtain the amount of
the charge. UNUM reviewed its estimates of morbidity, mortalitythe financial impact of the claim
operations integration activities with its actuaries and expense costs caused anindependent auditors.
Claim reserves at December 31, 1998 include $59.4 million as the estimated
value of projected additional claim payments resulting from these claims
operations integration activities. This reserve increase was reflected as a
$49.0 million increase in prior years' incurralsbenefits to policyholders and a $10.4 million
reduction in fee income in the Disability Insurance segment. The reduction in
fee income represents increased reserves for the United States non-cancellable
individual disability business that is reinsured with Centre Life Reinsurance
Limited ("Centre Re"). See Note 6 "Reinsurance" for further information on the
reinsurance transaction. The effect of lower claims resolutions is expected to
emerge quarterly in the amount of $14.1 million for each of the first two
quarters of 1999, $18.0 million in the third quarter, and $13.2 million in the
fourth quarter of 1999. If claims resolutions emerge as expected, there will be
no impact to income from operations during 1999. Any variance from the
assumptions noted above will be reflected in income in the current period. The
adverse impact of the claim operations integration activities on resolution
rates is not expected to continue beyond 1999. UNUM will report in its
subsequent filings and will discuss within the Disability
45
UNUM Corporation and Subsidiaries
Insurance segment section of management's discussion and analysis, the status of
the claim operations integration activities, the impact of these activities and
any material variances from the revised estimate of claim resolution rates. As
part of the periodic review of claim reserves, management will review the status
and execution of the claim operations integration plan with the claims
management on a quarterly basis. The review will consider claim operations
integration activities planned for future periods and evaluate whether the
future planned activities will result in claim resolution rates consistent with
those considered in the reserve established at December 31, 1998. The claim
reserves may require further increases or decreases as facts concerning the
merger and its effect on benefits to policyholders emerges. Among the factors
that could affect the reserve assumptions is the possible delay in the
consummation of the merger, thus delaying implementation of integration of the
companies' claim management operations. Other factors include the level of
employee turnover, timing and complexity of computer system conversions, and the
timing and level of training and integration activities of the claim management
staff relative to the original integration plan of UNUM.
NOTE 5. SALE OF TAX-SHELTERED ANNUITY BUSINESS
On October 1, 1996, UNUM America and First UNUM closed the sale of their
respective TSA businesses to The Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $6$3.3 billion. The
contracts were initially reinsured on an indemnity basis. Upon consent of the
TSA contractholders and participants, the contracts are considered reinsured on
an assumption basis, legally releasing UNUM America and First UNUM from future
contractual obligation to the respective contractholders and participants.
To effect the sale of the TSA business, UNUM transferred into a trust
account held for the benefit of Lincoln approximately $2,690 million of assets.
UNUM has recorded a deposit asset in 1993its Consolidated Balance Sheet
representing the assets which support the TSA contracts of those
contractholders and a decrease of approximately $46 million in 1992.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES (Continued)
Foreign exchange translations, primarilyparticipants that have not given consent for assumption
reinsurance. At December 31, 1998, the deposit asset related to the disabilityTSA
transaction was approximately $257 million.
The sale resulted in a deferred pretax gain of $80.8 million, of which
$72.6 million was recognized in income during 1997, reported as fees and other
income, in proportion to contractholder and participant consents for assumption
reinsurance. Additionally, the results for the year ended December 31, 1997,
included $47.0 million of net income and basic and diluted net income per
common share of $0.34 and $0.33, respectively, related to the recognition of
the deferred pretax gain. Through December 31, 1998, consent for assumption
reinsurance has been provided by TSA contractholders and participants owning
substantially all assets under management.
NOTE 6. REINSURANCE
UNUM, through its life insurance subsidiaries, is involved in both the
cession and assumption of reinsurance with other companies.
UNUM periodically monitors the financial condition, and in some cases
holds substantial collateral as security in the form of funds, securities
and/or letters of credit to mitigate credit risk from its reinsurers. At
December 31, 1998, approximately 85% of the reinsurance receivable balance was
due from five reinsurers. These reinsurers had a rating of A or better (Strong)
from Standard & Poor's--a recognized insurance rating agency. Additionally,
UNUM holds collateral in the form of securities comprising 53% of the balance.
On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Re, a Bermuda-based
reinsurance specialist, for reinsurance coverage of the active life reserves of
UNUM'sUNUM America's existing United Kingdom based affiliate, UNUM Limited, caused prior years'
incurrals to increase by approximately $15 million in 1994, and decrease by
approximately $5 million and $52 million in 1993 and 1992, respectively.
EffectiveStates non-cancellable individual disability
("non-cancellable ID") block of business. This agreement reinsures all claims
incurred on or after January 1, 1993,1996. The agreement follows UNUM's announcement
in late 1994 that it would no longer market the non-cancellable form of ID
coverage in the United States.
The agreement is a finite reinsurance arrangement. Under the agreement,
Centre Re has an obligation to absorb losses within a defined risk layer. UNUM
adopted Financial Accounting Standard ("FAS")retains the risk for all experience up to Centre Re's defined risk layer, or
attachment point. Once the attachment point is reached, Centre Re assumes the
risk for all experience up to a contractually defined risk limit. Any
experience above Centre Re's defined risk limit reverts back to UNUM. As of
December 31, 1998, the attachment point had not been reached.
46
The following discloses the various layers in the agreement at December
31, 1998:
(Dollars in millions)
- -------------------------------------------
Net GAAP reserves ...................... $486
UNUM's experience layer ................ 249
----
Attachment point ...................... 735
Centre Re's defined risk layer ......... 235
----
Defined risk limit .................... $970
====
Under the agreement, UNUM funds a trust account equal to the amount of
UNUM's exposure (i.e., up to the attachment point). These trust assets provide
security (i.e., collateral) to Centre Re for amounts due by UNUM prior to
reaching the attachment point. UNUM acts as the investment manager for 80% of
the assets in the trust with Centre Re managing the remaining 20%.
The actual operating results of the non-cancellable ID block of business
are accounted for under FAS No. 113 "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts,Contracts." which eliminatedThis reinsurance agreement
transfers risk and is accounted for as reinsurance in accordance with the
practice by insurance
enterprises of reporting assets and liabilities relating to reinsured
contracts net of the effects of reinsurance. Since UNUM did not restate its
financial statements upon adoptionrequirements of FAS 113 reserve balances prior to
December 31, 1993,for reinsurance of long-duration contracts. The
underlying operating results of the reinsured block are shown net of reinsurance recoverables.
CHANGE IN ACCOUNTING ESTIMATE
During 1994, UNUM increased reserves for existing claims by $83.3 millionreflected in fees and
established a reserve for estimated future losses of $109.1 million. These
increased reserves reflect management's current expectations of morbidity
trends for the existing individual disability business, as reported in the
Individual Disability segment. This change in accounting estimate resulted in
an increase to benefits to policyholders in the Consolidated Statement of
Income of $192.4 million, and a decrease to net income of $125.1 million, or
$1.69 per share.
OTHER POLICYHOLDER FUNDS
Other policyholder funds are liabilities for investment-type contracts and
represent customer deposits plus interest credited to those deposits at
various rates.
SEPARATE ACCOUNTS
Certain assets of UNUM's defined benefit plans, 401(k) contracts and tax
sheltered annuity contracts are in separate accounts that are pooled
investment funds of securities. Investmentother income and realized gains and losses from sales of assets are reflected
as realized investment gains (losses) in UNUM's Consolidated Statements of
Income.
UNUM has a deposit asset at December 31, 1998, of approximately $419
million reflected in the Consolidated Balance Sheet. The deposit asset is
comprised of UNUM's experience layer and unrealized gains or losses on these accounts accrue directlythe
marketable securities held in the trust. Unrealized gains or losses on
marketable securities held in the trust and the related effects on claim
reserves are reflected as unrealized gains or losses in the equity section of
UNUM's Consolidated Balance Sheets.
UNUM controls the management of the business, including premium collection
and claims management, under this agreement. All premiums, less amounts for
management expenses and claim payments, are transferred to the contractholders. Assets,
carried at markettrust account on
a quarterly basis.
In 1994 UNUM recorded a premium deficiency reserve strengthening related
to the non-cancellable ID block of business in conjunction with its
announcement to exit the non-cancellable form of ID coverage in the United
States. The reinsurance fees due Centre Re are expenses that were not
contemplated when reserves were strengthened in 1994. Since these fees would
have caused the non-cancellable ID block of business to be in a loss situation,
UNUM recognized a pretax charge of $49.7 million in the fourth quarter of 1996.
The charge represented the present value and liabilities of the separate accountsanticipated minimum amount of
fees to be paid to Centre Re under the agreement for a period of six years.
UNUM has the right, but no obligation, to recapture the business after six
years without penalty. UNUM paid $9.4 million in fees to Centre Re during 1998
and 1997.
The effect of all reinsurance on premiums earned and written for the years
ended December 31, 1998, 1997 and 1996, was as follows:
(Dollars in millions) 1998 1997 1996
- ------------------------------- ------------- ------------- -------------
Premiums earned:
Direct .................... $ 3,935.2 $ 3,384.9 $ 3,005.0
Assumed ................... 320.8 281.6 252.9
Ceded ..................... (414.3) (402.8) (106.4)
---------- ---------- ----------
Premiums earned .......... $ 3,841.7 $ 3,263.7 $ 3,151.5
========== ========== ==========
Premiums written:
Direct .................... $ 3,918.9 $ 3,390.2 $ 3,039.2
Assumed ................... 380.4 330.3 289.3
Ceded ..................... (431.0) (436.3) (131.0)
---------- ---------- ----------
Premiums written ......... $ 3,868.3 $ 3,284.2 $ 3,197.5
========== ========== ==========
47
UNUM Corporation and Subsidiaries
For the years ended December 31, 1998, 1997 and 1996, recoveries
recognized under reinsurance agreements offset benefits to policyholders by
$376.3 million, $309.7 million and $90.8 million, respectively.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
Business Restructuring
Charges of $6.0 million and $7.2 million were recorded in 1997 and 1996,
respectively. The charge in 1997 was related to a management and field office
reorganization within the North American reinsurance operations, and consisted
of $4.0 million of lease exit costs, $1.4 million of severance related costs,
and $0.6 million of abandoned assets. The charge in 1996 was related to the
merger of Commercial Life Insurance Company ("Commercial Life") into UNUM
America. As of December 31, 1998, a liability was no longer being carried in
the Consolidated Balance Sheet for these charges.
Intangible Asset Write-offs and Future Loss Reserves
In connection with the merger of Commercial Life into UNUM America, the
sale of the tax-sheltered annuity business (see Note 5 "Sale of Tax-Sheltered
Annuity Business"), as well as UNUM's continued efforts to strengthen its focus
on its core products, the company initiated a review of certain products, which
resulted in the recognition of pretax charges totaling $39.4 million during
1996. The charges included the write-off of certain intangible assets and the
establishment of a reserve for the present value of expected future losses on
certain discontinued products. These charges reduced income before income taxes
by $13.1 million in the Disability Insurance segment, $11.3 million in the
Special Risk Insurance segment, and $15.0 million in the Retirement Products
segment. On an after tax basis the charges reduced net income by $26.3 million.
48
NOTE 8. NOTES PAYABLE
Notes payable consisted of the following at December 31:
(Dollars in millions) 1998 1997
- ------------------------------------------------------------------- ----------- -----------
Short-term debt:
Commercial paper, with weighted-average interest rates of
5.5% and 6.3% in 1998 and 1997, respectively ................. $ 85.7 $ 50.9
Other notes payable, with weighted-average interest rates of
1.1% and 1.0% in 1998 and 1997, respectively ................. 8.9 7.7
Medium-term notes payable, due 1999, with interest
rates of 7.0% ................................................ 21.4 68.0
Other borrowing with an effective interest rate of
5.8%, $168.3 million issued net of unamortized offering
costs of $0.8 million and $0.6 million in 1998 and 1997,
respectively ................................................. 167.5 --
-------- --------
Total short-term debt ....................................... 283.5 126.6
-------- --------
Long-term debt:
Long-term notes payable, due 2028, with an interest rate of
6.75%, $250.0 million issued, net of unamortized hedging
costs and issuance fees of $21.9 million..................... 228.1 --
Medium-term notes payable, due 2000 to 2028, with interest
rates ranging from 5.9% to 7.5% .............................. 202.7 174.2
Monthly income debt securities, due 2025, with an interest rate
of 8.8%, $172.5 million issued net of unamortized offering
costs of $5.0 million and $5.2 million in 1998 and 1997,
respectively ................................................ 167.5 167.3
Other borrowing, due 2007, with an effective interest rate of
5.8%, $168.3 million issued net of unamortized offering
costs of $0.8 million and $0.6 million in 1998 and 1997,
respectively ................................................ -- 167.7
-------- --------
Total long-term debt ........................................ 598.3 509.2
-------- --------
Total notes payable ......................................... $ 881.8 $ 635.8
======== ========
At December 31, 1998, UNUM Corporation had a $500 million committed
revolving credit facility that expires on October 1, 2001. UNUM's commercial
paper program is supported by the revolving credit facility and is available
for general liquidity needs, capital expansion, acquisitions and stock
repurchase. The committed revolving credit facility contains certain covenants
which, among other provisions, require maintenance of certain levels of
stockholders' equity and limits on debt levels.
On December 15, 1998, UNUM issued $250 million notes due December 15,
2028, with interest payable semi-annually. The notes are shown
separatelyredeemable, in whole
or in part, at the option of UNUM at any time at or above par. UNUM used the
net proceeds to repay short term-debt and for general corporate purposes.
On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3
million) through a private placement with an investor in the United Kingdom. The
borrowing has an expected term of 10 years. Upon issuance of the [British
pound]100 million borrowing, UNUM entered into currency and interest rate swap
agreements that converted the principal amount to U.S. dollars and the interest
obligation on the debt from a pound sterling based fixed rate to a U.S. dollar
fixed rate. The borrowing is callable by either party over the life of the
agreement, under certain circumstances. UNUM anticipates the debt will be called
in 1999. Therefore, UNUM is currently evaluating various financing alternatives
and intends to substitute a debt instrument to match the maturity and terms of
the interest rate swap agreement.
Aggregate maturities of notes payable are as follows: 1999--$283.5
million; 2000--$60.0 million; 2001--
none; 2002--$35.0 million, 2003 and thereafter--$503.3 million.
49
UNUM Corporation and Subsidiaries
In the normal course of business, UNUM enters into letters of credit,
primarily to satisfy capital requirements related to certain subsidiary
transactions. UNUM had outstanding letters of credit of $149.7 million and
$84.6 million at December 31, 1998, and 1997, respectively, which are not
reflected in the Consolidated Balance Sheets.
NOTE 9. EMPLOYEE BENEFIT AND INCENTIVE PLANS
Pension Plans
In 1997, UNUM changed the measurement date for the valuation of its
pension plan and postretirement benefit plan assets and actuarially determined
obligations from December 31, to September 30. The change in measurement date
had no effect on 1997 or prior years' net pension and periodic postretirement
benefit costs.
Changes in the projected benefit obligation and plan assets, as determined
by the plan's actuaries were as follows:
(Dollars in millions) 1998 1997
- ---------------------------------------------------------------- ----------- -----------
Benefit obligation at beginning of period ................... $ 230.4 $ 203.2
Service cost--benefits earned during the period ............. 14.0 9.0
Interest cost ............................................... 16.7 11.4
Actuarial loss .............................................. 12.1 7.6
Benefits paid ............................................... (2.0) (0.8)
-------- --------
Benefit obligation at end of period ........................ 271.2 230.4
-------- --------
Fair value of plan assets at beginning of period ............ 324.2 267.7
Actual return on plan assets ................................ 26.9 61.4
Employer contributions ...................................... 11.2 --
Benefits paid ............................................... (2.0) (0.8)
Other transfers ............................................. -- (4.1)
-------- --------
Fair value of plan assets at end of period ................. 360.3 324.2
-------- --------
Projected benefit obligation less than plan assets .......... 89.1 93.8
Unrecognized net actuarial gain ............................. (66.8) (86.8)
Unrecognized prior service cost ............................. (23.1) (25.8)
Unamortized net obligation .................................. 1.1 1.5
-------- --------
Prepaid (accrued) pension cost ............................. $ 0.3 $ (17.3)
======== =========
At December 31, 1998, the plan assets included 448,784 shares of UNUM
Corporation common stock with a fair value of $26.2 million. The amount of
dividends paid on these shares during 1998 was not material.
Net pension cost included the following components:
Year Ended December 31,
-------------------------------------
(Dollars in millions) 1998 1997 1996
- ------------------------------------------------------------ ---------- ----------- ----------
Service cost--benefits earned during the period ......... $ 14.0 $ 12.9 $ 13.5
Interest cost ........................................... 16.7 15.2 15.1
Expected return on assets ............................... (30.3) (24.0) (19.5)
Recognized prior service cost ........................... (2.7) (2.6) (1.0)
Recognized net actuarial gain ........................... (4.5) (1.4) --
Amortization of net obligation .......................... 0.4 0.4 0.3
------- -------- -------
Net pension cost (benefit) ............................. $ (6.4) $ 0.5 $ 8.4
======== ======== =======
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
separate
accountsprojected benefit obligation were 6.75% and 4.25%, respectively, at September
30, 1998, and 7.25% and 4.75%, respectively, at September 30, 1997. The
expected long-term rate of return on plan assets was 9.25% in 1998 and 9.0% in
1997 and 1996. Prior year service costs are legally segregatedbeing amortized on a straight-line
basis over expected employment periods for active employees.
50
Postretirement Health Care and Life Insurance Benefits
UNUM provides certain health care and life insurance benefits for retired
employees and covered dependents. The underlying plans are not currently
funded. The cost of these plans was $4.5 million, $4.3 million and $10.3
million for the years ended December 31, 1998, 1997 and 1996, respectively. At
December 31, 1998, and 1997, the liability associated with these plans was
$85.8 million and $83.2 million, respectively.
Retirement Savings Plans
Effective January 1, 1997, UNUM introduced a single retirement savings
plan for all domestic employees. Dependent upon the employee's annual earnings,
eligible employees may contribute up to 15% of their annual compensation,
including incentive payouts. UNUM matches 100% of the employee's contribution
up to 3% of the employee's compensation, plus 50% of the employee's
contribution on the next 2% of the employee's compensation, to a maximum of 4%
after eligibility requirements of one year of service is met. Employees become
100% vested immediately upon becoming eligible. Expense for the retirement
savings plans amounted to $10.3 million, $9.6 million and $8.4 million in 1998,
1997 and 1996, respectively.
Annual Incentive Plans
UNUM has several annual incentive plans for certain employees and
executive officers that provide additional compensation based on achievement of
predetermined annual corporate and affiliate financial and non-financial goals.
In 1998, 1997 and 1996, expense for these plans was $33.8 million, $37.2
million and $41.7 million, respectively.
NOTE 10. STOCKHOLDERS' EQUITY
Common Stock
Effective November 23, 1998, UNUM's Board of Directors rescinded the
Company's stock repurchase program, related to the announced merger with
Provident Companies, Inc.
On March 14, 1997, UNUM's Board of Directors authorized a two-for-one
common stock split, subject to claims which arise outshareholder approval of any other businessa proposal to increase
the number of UNUM.
ACCOUNTING FOR PARTICIPATING INDIVIDUAL LIFE INSURANCE
Participating policiesauthorized shares of common stock. On May 9, 1997, UNUM's
shareholders approved an increase in the number of authorized shares of common
stock to 240 million from 120 million. The stock split was completed on June 2,
1997, through the distribution of one additional share for each share of stock
already issued, to holders of record on May 19, 1997. Accordingly, all numbers
of common shares and per common share data were restated to reflect the stock
split. Par value of $10.0 million was transferred to common stock from
additional paid-in capital in second quarter 1997.
Changes in the number of common shares outstanding were as follows:
(Shares in millions) 1998 1997 1996
- --------------------------------------------------- ---------- ---------- ----------
Shares outstanding, beginning of year .......... 138.3 143.6 146.0
Shares issued under stock plans ................ 1.7 1.8 1.4
Shares reacquired .............................. (1.3) (7.1) (3.8)
------ ------ ------
Shares outstanding, end of year ................ 138.7 138.3 143.6
====== ====== ======
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income
available to common stockholders by the former Union Mutual Life Insurance
Company ("Union Mutual") priorweighted-average number of common
shares outstanding. Diluted EPS is computed by dividing net income available to
UNUM's conversioncommon stockholders by the weighted-average number of common shares outstanding
while giving effect to a stock life insurance
company on November 14, 1986, will remain participatingall dilutive potential common shares outstanding.
The approximate number of shares used to calculate EPS was as long as they remain
in force. A Participation Fund Account ("PFA") has been established for the
sole benefit of all of Union Mutual's individual participating life and
annuity policies and contracts.follows:
(Shares in millions) 1998 1997 1996
- ---------------------------------------------------- ---------- ---------- ----------
Weighted-average number of shares outstanding for
basic EPS ...................................... 138.3 139.9 145.9
Effect of dilutive securities ................... 3.1 3.0 2.1
----- ----- -----
Weighted-average number of shares outstanding for
diluted EPS .................................... 141.4 142.9 148.0
===== ===== =====
51
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTING FOR PARTICIPATING INDIVIDUAL LIFE INSURANCE (Continued)Corporation and Subsidiaries
The assetsfollowing number of the PFA areoutstanding options to provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies
and annuity contracts. This line of business participates in the experience of
the PFA and its operations have beenpurchase shares were
excluded from the diluted weighted-average calculation as the options' exercise
prices were greater than the average market prices.
(Options in millions) 1998 1997 1996
- ---------------------------------------------- -------- -------- --------
Antidilutive options outstanding .......... 1.7 0.2 0.1
=== === ===
Stock Options
At December 31, 1998, UNUM had four stock-based compensation plans, which
are described below. Had compensation cost for options issued under UNUM's four
stock-based compensation plans been determined based on the fair value at the
grant dates, UNUM's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
(Dollars in millions except per common share data) 1998 1997 1996
- ---------------------------------------------------- ----------- ----------- -----------
Net income:
As reported ..................................... $ 363.4 $ 370.3 $ 238.0
Pro forma ....................................... $ 360.8 $ 361.4 $ 231.9
Earnings per common share:
Basic
As reported .................................... $ 2.63 $ 2.65 $ 1.63
Pro forma ...................................... $ 2.61 $ 2.58 $ 1.59
Diluted
As reported .................................... $ 2.57 $ 2.59 $ 1.61
Pro forma ...................................... $ 2.55 $ 2.53 $ 1.57
The fair value of each option granted is estimated on the date of grant
using a modified Black-Scholes option-pricing model with the following
assumptions:
1998 1997 1996
---------------- ---------------- ---------------
Dividend yield ........................... 1.0% 1.0% 1.5%
Expected stock price volatility .......... 23.8% to 26.4% 22.7% to 24.2% 23.1% to 24.8%
Risk-free interest rate .................. 4.2% to 5.3% 5.7% to 6.8% 5.2% to 6.5%
Expected option lives .................... 4 to 8 years 4 to 8 years 4 to 8 years
Forfeiture rates are updated based on actual experience, and the
cumulative adjustments made to the current year's pro forma amounts. Because
some options vest over several years and additional awards generally are made
each year, the pro forma amounts above may not be representative of the effects
on net income for future years.
The 1987 Executive Stock Option Plan ("Option Plan") provided for granting
to officers and key employees options to purchase UNUM Corporation common stock
over ten years. Options were granted at the discretion of the Compensation
Committee of the Board of Directors ("the Committee") and had vesting schedules
of one to four years. The number of shares subject to options under the Option
Plan could not exceed 5.0 million. Grants are no longer made under this plan.
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for
granting of options to officers, non-employee directors of UNUM Corporation and
key employees, to purchase UNUM Corporation common stock over ten years.
Options may be granted annually at the discretion of the Committee and vest in
one to five years.
The Incentive Plan also provides for granting to key officers restricted
stock awards whose vesting is contingent upon UNUM achieving prescribed
financial performance objectives, with the exception of 11,600 shares granted
in 1996 and 10,000 shares granted in 1995, which will vest upon the grantee
remaining in UNUM's employ for a specified period of time or a defined change
in control. Plan participants are entitled to voting rights on their respective
shares at grant. The compensation cost related to restricted stock grants was
not material in 1998, 1997 and 1996.
The unamortized market value of the restricted shares issued under the
Incentive Plan has been recorded as deferred compensation and is included as a
reduction of stockholders' equity in the Consolidated Balance Sheets.
52
The number of shares subject to issuance under the Incentive Plan cannot
exceed 13.6 million, including both options and shares of restricted stock. At
December 31, 1998, 1997 and 1996, 1,617,701 shares, 1,603,580 shares, and
1,385,036 shares, respectively, were available for grant under the Incentive
Plan.
The 1996 Long-Term Stock Incentive Plan ("1996 Incentive Plan") provides
for granting of options to officers, non-employee directors of UNUM
Corporation, and key employees to purchase UNUM Corporation common stock over
ten years. The 1996 Incentive Plan also provides for granting to key officers
restricted stock awards whose vesting is contingent upon achieving prescribed
financial performance objectives or upon the grantee remaining in UNUM's employ
for a specified period of time. Options and restricted stock may be granted
annually at the discretion of the Committee. The number of shares subject to
issuance cannot exceed 7.0 million. At December 31, 1998, 1997 and 1996,
3,389,860 shares, 5,003,480 shares and 6,990,000 shares, respectively, were
available for grant under the 1996 Incentive Plan.
The 1998 Goals Stock Option Plan ("1998 Option Plan") provides for
granting to all eligible employees up to 300 options to purchase UNUM
Corporation common stock. The options will vest to the employee nine years from
the date of grant. Vesting may be accelerated to an earlier date at the
discretion of the plan administrator. Grants of 166,200 shares and 205,000
shares were made in 1997 and 1996 , respectively. No 1998 Option Plan grants
were made in 1998, and no further grants can be made under this plan.
For all of UNUM's stock-based compensation plans, the exercise price of
each option is not less than 100% of the fair market value of UNUM's stock on
the date of grant.
In connection with the pending merger (see Note 17 "Proposed Merger with
Provident and Pro Forma Combined Condensed Financial Statements (Unaudited),")
outstanding options which have otherwise not vested will do so as a result of a
change in control as defined by the plans. For outstanding options related to
the Option Plan, Incentive Plan and the 1998 Option Plan, a change in control
will occur at the time shareholders vote in favor of the merger. Outstanding
options related to the 1996 Incentive Plan will vest upon the consummation of
the merger.
A summary of the status of UNUM's four stock-based compensation plans as
of December 31, 1998, 1997 and 1996, and changes during the years then ended
are presented below:
Restricted
(Per share amounts are weighted-average) Options Stock
- ------------------------------------------------------------ --------------- -------------
Outstanding at January 1, 1996 .......................... 10,395,268 284,400
1996 Activity:
Granted at $30.38 per share.............................. 2,161,380 --
Granted for restricted stock at $29.68 per share......... -- 186,600
Exercised at $18.86 per share............................ (1,274,522) --
Forfeited at $23.39 per share for options................ (543,482) (65,200)
---------- -------
Outstanding at December 31, 1996 ........................ 10,738,644 405,800
---------- -------
1997 Activity:
Granted at $39.18 per share.............................. 2,064,820 --
Granted for restricted stock at $37.75 per share......... -- 224,700
Exercised at $20.59 per share............................ (1,617,469) --
Forfeited at $26.88 per share for options................ (734,850) (128,800)
---------- --------
Outstanding at December 31, 1997 ........................ 10,451,145 501,700
---------- --------
1998 Activity:
Granted at $52.75 per share.............................. 1,659,455 --
Granted for restricted stock at $52.68 per share......... -- 124,660
Lapse of restrictions on restricted stock ............... -- (41,450)
Exercised at $22.88 per share............................ (1,642,846) --
Forfeited at $31.84 per share for options................ (363,916) (68,950)
---------- --------
Outstanding at December 31, 1998 ........................ 10,103,838 515,960
========== ========
The weighted-average exercise price of options outstanding at December 31,
1998, 1997 and 1996, was $31.07, $26.32 and $22.93 per share, respectively.
53
UNUM Corporation and Subsidiaries
The number and weighted-average exercise price of exercisable shares as of
December 31, 1998, 1997 and 1996, was 4,802,071 shares at $25.50 per share,
4,686,562 shares at $22.71 per share and 4,763,184 shares at $20.73 per share,
respectively.
The weighted-average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996, was $12.88, $8.56 and $6.92, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------ ---------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- -------------- ------------- ------------------ ------------------ ------------- -----------------
$ 10 to 15 412,222 1.83 $ 12.22 412,222 $ 12.22
16 to 24 2,976,487 5.59 19.78 1,367,806 20.20
25 to 37 3,323,867 6.03 28.62 2,483,938 27.85
38 to 58 3,391,262 8.50 45.68 538,105 38.27
- ------------ --------- ---- -------- --------- --------
$ 10 to 58 10,103,838 6.63 $ 31.07 4,802,071 $ 25.50
========== =========
Between 1991 and 1994, certain officers were granted limited stock
appreciation rights ("LSARs") in conjunction with their options for those
years. If a change in control of UNUM Corporation, as defined in the plans,
should occur, the option holder can exercise the LSAR. The LSARs were amended
such that the proposed merger with Provident would not be a change in control
of UNUM Corporation. An LSAR is meant to compensate an officer if the
associated options lose value due to a change in control by allowing the
officer to receive payment for the difference between the option exercise price
and the higher of (a) highest price paid per share in connection with the
change in control or (b) the highest fair market value per share as reported in
the Wall Street Journal at any time during the sixty day period preceding the
change of control. As an underlying stock option is exercised, the LSARs are
automatically canceled. At December 31, 1998, 1997 and 1996, there were 495,750
LSARs, 557,800 LSARs and 796,600 LSARs outstanding, respectively.
Preferred Stock Purchase Rights
UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan,
each Right, under specific circumstances, entitles the holder to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at a
purchase price of $150. The Rights become exercisable at a specified time after
(1) a person or group acquires 10% or more of UNUM Corporation common stock or
(2) a tender or exchange offer for 10% or more of UNUM Corporation common
stock. The Shareholder Rights Plan was amended in 1998 such that Provident, as
a result of the merger and related transactions contemplated by the merger,
will not be deemed to be an Acquiring Person as defiend in the Rights
Agreement. The Rights expire at the close of business on March 13, 2002, unless
earlier redeemed by the Company under certain circumstances at a price of $0.01
per Right.
NOTE 11. DIVIDEND RESTRICTIONS
UNUM is subject to various state insurance regulatory restrictions that
limit the maximum amount of dividends available from its United States
domiciled insurance subsidiaries without prior approval. The amount available
under current law for payment of dividends during 1999 to UNUM Corporation from
all U.S. domiciled insurance subsidiaries without state insurance regulatory
approval is approximately $150 million. Dividends in excess of this amount may
only be paid with state insurance regulatory approval. The aggregate statutory
capital and surplus of the United States domiciled insurance subsidiaries of
UNUM Corporation was approximately $1,330 million and $1,186 million, at
December 31, 1998, and 1997, respectively. The aggregate statutory net
operating income, which excludes realized investment gains and losses net of
tax, of UNUM Corporation's United States domiciled insurance subsidiaries was
approximately $55 million, $227 million and $167 million for 1998, 1997 and
1996, respectively. State insurance regulatory authorities prescribe statutory
accounting practices that differ in certain respects from generally accepted
accounting principles. The significant differences relate to deferred
acquisition costs, deferred income taxes, non-admitted asset balances, required
investment risk reserves and reserve calculation assumptions. UNUM Corporation
also has the ability to draw a dividend from its United Kingdom-based
affiliate, UNUM Limited. Such dividends are limited in amount, based on
insurance company legislation in the United Kingdom, which requires a minimum
solvency margin. The amount available under current law for payment of
dividends to UNUM Corporation from UNUM Limited during 1999 is approximately
$20 million.
54
NOTE 12. INCOME TAXES
A reconciliation of income taxes computed by applying the federal income
tax rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------- ----------- ----------- -----------
Tax at federal statutory rate of 35% ......... $ 181.1 $ 187.7 $ 119.6
Tax-exempt income ............................ (26.9) (20.3) (18.8)
Other ........................................ (0.2) (1.3) 2.8
-------- -------- --------
Income taxes ................................. $ 154.0 $ 166.1 $ 103.6
======== ======== ========
Deferred income tax liabilities and assets consist of the following:
December 31,
-------------------------
(Dollars in millions) 1998 1997
- -------------------------------------------- ----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs ......... $ 292.0 $ 239.4
Policy reserve adjustments ................ 175.7 118.0
Net unrealized gains ...................... 204.1 144.0
Value of business acquired ................ 25.9 23.2
Invested assets ........................... 28.3 12.0
Other ..................................... 48.0 12.2
-------- --------
Gross deferred tax liabilities ........... 774.0 548.8
-------- --------
Deferred tax assets:
Alternative minimum tax credits ........... 35.2 --
Net realized losses ....................... 17.6 6.9
Postretirement benefits ................... 30.4 26.6
Deferred gains ............................ 1.6 2.2
Accrued liabilities ....................... 34.5 13.3
Other ..................................... 37.1 10.6
-------- --------
Gross deferred tax assets ................ 156.4 59.6
Less valuation allowance ................... 8.2 7.0
-------- --------
Net deferred tax assets .................. 148.2 52.6
-------- --------
Net deferred tax liability ................. $ 625.8 $ 496.2
======== ========
UNUM has not provided for a deferred tax liability of approximately $11
million that arose prior to 1984, which related to the policyholders' surplus
accounts of UNUM's life insurance subsidiaries. Under current law, management
believes the conditions under which such taxes would be paid to be remote.
UNUM's Consolidated Statements of Income. The PFA represents approximately 2.5%Income for 1998, 1997 and 3.0%1996, included
the following amounts of total assetsincome subject to foreign taxation and 3.0%the related
foreign income tax expense:
Year Ended December 31,
------------------------------------
(Dollars in millions) 1998 1997 1996
- ------------------------------------ ---------- ---------- ----------
Pretax income subject to foreign
taxation .......................... $ 46.2 $ 46.7 $ 27.4
======= ======= =======
Foreign income tax expense (credit):
Current ........................... $ 6.7 $ 23.3 $ 10.4
Deferred .......................... 9.8 (7.6) 1.8
------- ------- -------
Total ............................ $ 16.5 $ 15.7 $ 12.2
======= ======= =======
55
UNUM Corporation and 3.5%Subsidiaries
UNUM subsidiaries had operating loss carryforwards totaling $15.3 million
and alternative minimum tax credit carryforwards totaling $35.2 million as of total liabilities at
December 31, 1994, and 1993,
respectively.
INCOME TAXES1998. The provision for income taxes includes amounts currently payable and deferred
income taxes, which result from differences between financial reporting andoperating loss carryforwards will expire, if not
utilized, in 1999 through 2004; the alternative minimum tax bases of assets and liabilities, and are measured using enacted tax rates
and laws. Deferred U.S. income taxes havecredits do not
been provided on accumulated
earnings of UNUM's foreign subsidiaries. These earnings would become subject
to U.S. tax if remitted to UNUM Corporation.
EARNINGS PER SHARE
The weighted average number of shares outstanding used to calculate earnings
per share was approximately 74,158,000, 78,779,000 and 78,542,000 in 1994,
1993 and 1992, respectively. The assumed exercise of outstanding stock
options does not result in a material dilution of earnings per share.expire.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values are based on quoted market prices, when available. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. These valuation
techniques require management to develop a significant number of assumptions,
including discount rates and estimates of future cash flow. Derived fair value
estimates cannot be substantiated by comparison to independent markets or to
disclosures by other companies with similar financial instruments. These fair
value disclosures do not purport to be the amount whichthat could be realized in
immediate settlement of the financial instrument.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The following table summarizes the carrying amounts and fair values of
UNUM's financial instruments at December 31, 1994,1998, and 1993:1997:
1994 1993
----------------------- ---------------------------1998 1997
----------------------------- -----------------------------
Carrying Fair Carrying Fair
(DOLLARS IN MILLIONS)(Dollars in millions) Amount Value Amount Value
---------------------------------------------------------------------------------------------------------- --------------------------------------------- ------------- ------------- ------------- -------------
Financial assets:
Fixed maturities:
Held to maturity $6,227.2 $6,168.6 $6,560.7 $7,149.9
Availablematurities available for sale 1,640.6 1,640.6 872.0 929.9..... $ 7,896.9 $ 7,896.9 $ 7,310.9 $ 7,310.9
Equity securities available for sale 627.9 627.9 730.0 730.0sale..... 31.0 31.0 30.7 30.7
Mortgage loans 1,216.3 1,265.4 1,423.2 1,558.4.......................... 1,303.4 1,425.2 1,131.0 1,243.7
Policy loans 201.0 201.0 187.9 187.9............................ 137.6 137.6 128.5 128.5
Short-term investments 291.9 291.9 69.6 69.6.................. 216.2 216.2 124.5 124.5
Cash 36.1 36.1 20.8 20.8.................................... 80.5 80.5 56.8 56.8
Accrued investment income 195.9 195.9 184.0 184.0............... 167.4 167.4 160.3 160.3
Deposit assets .......................... 729.7 729.7 688.3 688.3
Financial liabilities:
Other policyholder funds: ...............
Investment-type insurance contracts: .....
With defined maturities ................. $ 667.069.3 $ 685.084.6 $ 847.0141.6 $ 956.0159.3
With no defined maturities 3,013.0 2,948.0 3,044.0 2,952.0.............. 259.5 257.4 332.0 328.0
Individual annuities and
supplementary contracts not
involving life contingencies 84.6 84.6 89.0 89.0............ 63.9 63.9 67.1 67.1
Notes payable 428.7 414.5 238.6 241.9........................... 881.8 944.0 635.8 656.0
Off-balance sheet financial
instruments:
Interest rate futures contracts ......... -- 110.7 -- -- -- 0.3
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
FIXED MATURITIES:Fixed Maturities Available for Sale: Fair values for fixed maturities are
based on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality and maturity of the investments.
EQUITY SECURITIES AVAILABLE FOR SALE:Equity Securities Available for Sale: Fair values for equity securities
available for sale are based on quoted market prices and are reported in the
Consolidated Balance Sheets at these values.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
MORTGAGE LOANS:Mortgage Loans: Fair values for mortgage loans are estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar mortgage loans to borrowers with similar credit ratings and
maturities. Mortgage loans with similar characteristics are aggregated for
purposes of the calculations.
POLICY LOANS: Fair values for policy loans approximate the carrying amounts
reported in the Consolidated Balance Sheets.
SHORT-TERM INVESTMENTS, CASH AND ACCRUED INVESTMENT INCOME:Policy Loans, Short-term Investments, Cash, Accrued Investment Income and
Deposit Assets: Fair values for these instruments approximate the carrying
amounts reported in the Consolidated Balance Sheets.
INVESTMENT-TYPE INSURANCE CONTRACTS:Investment-type Insurance Contracts: Fair values for liabilities under
investment-type insurance contracts with defined maturities are estimated
using discounted cash flow calculations based on interest rates that would be
56
offered currently for similar contracts with maturities consistent with those
remaining for the contracts being valued. Fair values for liabilities under
investment-type insurance contracts with no defined maturities are the amounts
payable on demand after surrender charges at the balance sheet date. Fair
values for liabilities under investment-type insurance contracts with defined
maturities are estimated using discounted cash flow calculations based on
interest rates that would be offered currently for similar contracts with
maturities consistent with those remaining for the contracts being valued.
The estimated fair values of liabilities under all insurance contracts
(investment-type and other than investment-type) are taken into consideration
in UNUM's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
INDIVIDUAL ANNUITIES AND SUPPLEMENTARY CONTRACTS NOT INVOLVING LIFE
CONTINGENCIES:Individual Annuities and Supplementary Contracts not Involving Life
Contingencies: Fair values approximate the carrying amounts reported in other
policyholder funds in the Consolidated Balance Sheets.
NOTES PAYABLE:Notes Payable: Fair values of short-term borrowings approximate the carrying
amount. Fair values of long-term notes are estimated using discounted cash
flow analyses based on UNUM's current incremental borrowing rates for similar
types of borrowing arrangements.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS:Off-Balance Sheet Financial Instruments: Fair valuesvalue for off-balance-sheetoff-balance sheet
financial instruments are based on current settlement values.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENT
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" which defines the principles to measure and record a
loan when it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
In October 1994, the FASB issued FAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which amends FAS
114 to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan. UNUM will adopt FAS 114 and
FAS 118 effective January 1, 1995. Adoption of FAS 114 and FAS 118 is not
expected to have a material effect on UNUM's results of operations or
financial position.
NOTE 2. COLONIAL MERGER
On December 3, 1992, UNUM and Colonial Companies, Inc. ("Colonial"), signed a
definitive merger agreement. On March 26, 1993, Colonial Class A common stock
shareholders voted to approve the merger. Under the agreement, UNUM exchanged
0.731 shares of its common stock for each share of Colonial Class A and
Class B common stock outstanding on March 26, 1993. UNUM issued approximately
11.4 million shares of common stock from treasury in connection with the
merger. In addition, outstanding options to acquire shares of Colonial
Class B common stock were converted into options to acquire shares of UNUM
common stock. The merger was accounted for as a pooling of interests.
Net income for the year ended December 31, 1993, included a $9.6 million
charge, or $0.12 per share, for expenses incurred to effect the merger.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after
January 1, 1994, which are classified and accounted for as follows:
- Fixed maturities that UNUM has the positive intent and ability to hold to
maturity are classified as "held to maturity" and are reported at
amortized cost, less an allowance for probable losses.
- Fixed maturities and equity securities classified as "available for sale"
are reported at fair value. Related unrealized holding gains and losses,
net of deferred taxes, are reported in a separate component of
stockholders' equity.
Upon the adoption of FAS 115, UNUM increased unrealized gains on available for
sale securities included in stockholders' equity on January 1, 1994, by $41.8
million (net of deferred taxes of $22.5 million) to reflect the unrealized
holding gains on fixed maturities classified as available for sale which were
previously carried at amortized cost. In accordance with FAS 115, prior year
consolidated financial statements and disclosures have not been restated to
reflect the change in accounting principle. UNUM reclassified certain
fixed maturities from held to maturity to available for sale on January 1,
1994, in connection with the adoption of FAS 115.
The following tables summarize the components of investment income, realized
investment gains (losses) and changes in unrealized investment gains (losses):
INVESTMENT INCOME
Year Ended December 31,
--------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Fixed maturities:
Held to maturity $548.1 $570.1 $568.2
Available for sale 87.9 59.5 56.9
Equity securities available for sale 10.4 12.6 14.7
Mortgage loans 137.4 165.2 187.2
Real estate 15.8 12.8 14.1
Policy loans 10.2 10.4 10.6
Other long-term investments 0.9 4.5 2.1
Short-term investments 8.5 7.1 7.1
-------------------------------------------------------------------------------
Gross investment income 819.2 842.2 860.9
Less investment expenses (23.9) (26.6) (25.8)
Less investment income on participating
individual life insurance policies and
annuity contracts (25.1) (25.2) (25.9)
-------------------------------------------------------------------------------
Investment income $770.2 $790.4 $809.2
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
GROSS REALIZED INVESTMENT GAINS (LOSSES)
Year Ended
December 31, 1994
--------------------
(DOLLARS IN MILLIONS) Gains Losses
---------------------------------------------------------------------------
Fixed maturities:
Held to maturity $ 0.2 $ (6.8)
Available for sale 10.2 (28.8)
Equity securities available for sale 93.1 (12.2)
Mortgage loans, real estate and other 13.5 (23.6)
----------------------------------------------------------------------------
Gross realized investment gains (losses) $ 117.0 $ (71.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET REALIZED INVESTMENT GAINS (LOSSES)
Year Ended
December 31,
-------------------
(DOLLARS IN MILLIONS) 1993 1992
-----------------------------------------------------------------------------
Fixed maturities:
Held to maturity $ 9.5 $ 7.6
Available for sale 7.8 9.1
Equity securities available for sale 48.3 38.3
Mortgage loans, real estate and other (16.2) (13.5)
------------------------------------------------------------------------------
Net realized investment gains $49.4 $41.5
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
CHANGE IN UNREALIZED INVESTMENT GAINS (LOSSES)
Year Ended December 31,
----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Fixed maturities available for sale $(60.8) $ -- $ --
Equity securities available for sale (86.0) 43.2 34.0
Deferred taxes 47.3 (15.2) (11.6)
-------------------------------------------------------------------------------
Total change in unrealized
investment gains on available
for sale securities, as included
in stockholders' equity $(99.5) $28.0 $22.4
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The following changes in unrealized investment gains (losses) were not
reflected in the consolidated financial statements as these securities
are carried at amortized cost:
Year Ended December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Fixed maturities:
Held to maturity $(647.8) $154.2 $ 14.2
Available for sale -- 30.9 (1.3)
-------------------------------------------------------------------------------
Total $(647.8) $185.1 $ 12.9
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES
The amortized cost and estimated fair values of fixed maturities at December
31, 1994, were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(DOLLARS IN MILLIONS) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
Held to maturity:
U. S. Government $ 10.9 $ -- $ -- $ 10.9
States and municipalities 631.8 9.1 (31.3) 609.6
Foreign governments 176.1 12.4 (1.4) 187.1
Public utilities 1,375.5 12.8 (46.8) 1,341.5
Corporate bonds 4,014.3 92.7 (106.8) 4,000.2
Mortgage-backed securities 10.8 0.5 -- 11.3
Other debt securities 7.8 0.2 -- 8.0
----------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,227.2 $ 127.7 $ (186.3) $ 6,168.6
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Available for sale:
U. S. Government $ 353.2 $ 0.8 $ (7.5) $ 346.5
States and municipalities 433.2 2.3 (13.9) 421.6
Foreign governments 58.9 0.2 (1.5) 57.6
Public utilities 229.4 3.8 (9.6) 223.6
Corporate bonds 552.1 0.8 (31.8) 521.1
Redeemable preferred stocks 63.2 2.9 (7.0) 59.1
Mortgage-backed securities 11.4 0.1 (0.4) 11.1
----------------------------------------------------------------------------------------------------------
Total available for sale $ 1,701.4 $ 10.9 $ (71.7) $ 1,640.6
----------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
The amortized cost and estimated fair values of fixed maturities at December
31, 1993, were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(DOLLARS IN MILLIONS) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
Held to maturity:
U. S. Government $ 10.0 $ 0.6 $ -- $ 10.6
States and municipalities 718.7 64.5 (0.2) 783.0
Foreign governments 255.3 50.3 (0.2) 305.4
Public utilities 1,333.7 98.6 (1.6) 1,430.7
Corporate bonds 4,186.8 377.7 (5.0) 4,559.5
Certificates of deposit 36.4 1.1 -- 37.5
Mortgage-backed securities 15.2 2.6 -- 17.8
Other debt securities 4.6 0.8 -- 5.4
----------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,560.7 $ 596.2 $ (7.0) $ 7,149.9
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Available for sale:
U. S. Government $ 388.9 $ 27.7 $ (0.3) $ 416.3
States and municipalities 73.5 5.1 -- 78.6
Foreign governments 13.7 1.3 -- 15.0
Public utilities 107.3 6.5 -- 113.8
Corporate bonds 166.0 10.1 (0.6) 175.5
Redeemable preferred stocks 105.8 7.7 (1.0) 112.5
Mortgage-backed securities 16.8 1.4 -- 18.2
----------------------------------------------------------------------------------------------------------
Total available for sale $ 872.0 $ 59.8 $ (1.9) $ 929.9
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
The amortized cost and estimated fair value of fixed maturities at December
31, 1994, by contractual maturity date, are shown below. Expected maturities
will differ from contractual maturities since certain borrowers have the right
to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(DOLLARS IN MILLIONS) Cost Fair Value
-------------------------------------------------------------------------------------------------------
Held to maturity:
Due in one year or less $ 619.6 $ 622.3
Due after one year through five years 2,555.2 2,551.3
Due after five years through ten years 2,465.5 2,387.1
Due after ten years 576.1 596.6
-------------------------------------------------------------------------------------------------------
6,216.4 6,157.3
Mortgage-backed securities (primarily due after 10 years) 10.8 11.3
--------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,227.2 $ 6,168.6
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Available for sale:
Due in one year or less $ 46.8 $ 47.3
Due after one year through five years 845.2 816.3
Due after five years through ten years 500.8 482.0
Due after ten years 297.2 283.9
--------------------------------------------------------------------------------------------------------
1,690.0 1,629.5
Mortgage-backed securities (primarily due after 10 years) 11.4 11.1
--------------------------------------------------------------------------------------------------------
Total available for sale $ 1,701.4 $1,640.6
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Gross gains of $12.4 million and $18.9 million, and gross losses of $1.3
million and $3.5 million, were realized on sales of fixed maturities in 1993
and 1992, respectively.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
During fourth quarter 1994, UNUM sold fixed maturities of five issuers
classified as held to maturity with an amortized cost of $49.8 million
due to evidence of significant unexpected deterioration of the issuers'
creditworthiness. These sales resulted in a net realized loss of $3.0 million.
EQUITY SECURITIES
The fair values, which also represent carrying amounts, and the cost of equity
securities available for sale were as follows at December 31, 1994:
Fair
(DOLLARS IN MILLIONS) Cost Value
-----------------------------------------------------------------------------
Common stocks:
Public utilities $ 57.5 $ 53.1
Industrial, miscellaneous and all other 434.7 574.8
------------------------------------------------------------------------------
Total $ 492.2 $ 627.9
------------------------------------------------------------------------------
------------------------------------------------------------------------------
At December 31, 1994, cumulative gross unrealized investment gains on equity
securities available for sale totaled $158.7 million and losses totaled
$(23.0) million.
MORTGAGE LOANS
Restructured mortgage loans at amortized cost amounted to $73.6 million and
$65.9 million at December 31, 1994, and 1993, respectively. Troubled debt
restructurings represent loans that are refinanced with terms more favorable
to the borrower. Interest foregone on these loans was not material for the
years ended December 31, 1994, 1993 or 1992.
OTHER
Real estate acquired in satisfaction of debt cumulatively amounts to $119.3
million at December 31, 1994. Real estate held for sale amounted to $31.0
million at December 31, 1994, and $24.7 million at December 31, 1993.
At December 31, 1994, bonds with an amortized cost of $16.1 million, real
estate with a depreciated cost of $4.7 million and no mortgage loans were
non-income producing for the twelve months ended December 31, 1994. Interest
lost on these investments was not material in 1994, 1993 or 1992.
UNUM was committed at December 31, 1994, to purchase fixed maturities and
other invested assets in the amount of $37.5 million.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND
REAL ESTATE HELD FOR SALE
Changes in the allowance for probable losses on invested assets and real
estate held for sale were as follows:
Balance at Balance
beginning Addi- Deduc- at end
(DOLLARS IN MILLIONS) of year tions tions of year
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994
Fixed maturities held to maturity and
available for sale $ 0.3 $ 4.1 $ -- $ 4.4
Mortgage loans 48.6 8.5 (13.9) 43.2
Real estate held for sale 20.9 0.8 (8.5) 13.2
---------------------------------------------------------------------------------------------------------
Total $ 69.8 $13.4 $ (22.4) $ 60.8
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1993
Fixed maturities held to maturity and
available for sale $ 4.1 $(3.8) $ -- $ 0.3
Mortgage loans 51.5 4.8 (7.7) 48.6
Real estate held for sale 13.6 18.8 (11.5) 20.9
---------------------------------------------------------------------------------------------------------
Total $ 69.2 $19.8 $ (19.2) $ 69.8
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1992
Fixed maturities held to maturity $ 5.5 $(1.0) $ (0.4) $ 4.1
Mortgage loans 43.1 26.5 (18.1) 51.5
Real estate held for sale 15.9 7.2 (9.5) 13.6
---------------------------------------------------------------------------------------------------------
Total $ 64.5 $32.7 $ (28.0) $ 69.2
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Additions represent charges to net realized investment gains less recoveries,
and deductions represent reserves released upon disposal or restructuring of
the related asset.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5.14. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses options, futures, forward exchange contracts and
interest rate swaps, which are common derivative financial instruments, such as options,
futures and forward exchange contracts to
hedge certain risks associated with futureanticipated purchases and sales of
investments, anticipated debt issuance and certain payments denominated in
foreign currencies, primarily British poundpounds sterling, Canadian dollardollars and
Japanese yen. These derivative financial instruments are used to protect UNUM
from the effect of market fluctuations in interest and exchange rates between
the contract date and the date on which the hedged transaction occurs.
Additionally, UNUM does not intenduses swap agreements to hold derivative financialconvert foreign currency based debt
instruments for the purpose of trading.
At December 31, 1994, UNUM had no open derivative financial instruments. At
December 31, 1993, UNUM held interestto U.S. dollars and to convert variable rate futures contracts with commitmentsdebt to purchase government securities with total par values of $207.0 million.a fixed rate.
In using these instruments, UNUM is subject to the off-balance-sheet
credit risk that the counterparties toof the transactions will fail to completely perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges. NOTE 6. REINSURANCE
UNUM through its life insurance subsidiaries, is involved in both the cession
and assumption of reinsurance with other companies. Risks are reinsured with
other companies to reduce UNUM's exposure to large losses and permit recovery
of a portion of direct losses. UNUM remains liable to the insureddoes not hold or issue derivative
financial instruments for the paymentpurpose of policy benefits if the reinsurers cannot meet their obligations
under the reinsurance agreements. Deferred policy acquisition costs,
premiums and expenses are stated net of reinsurance ceded to other companies.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," which eliminated the practice by insurance enterprises of reporting
assets and liabilities relating to reinsured contracts net of the effects of
reinsurance. The standard required prepaid reinsurance premiums and
reinsurance receivables, for amounts to be recovered, to be reported as
assets. It also prescribed conditions required for a contract with a
reinsurer to be accounted for as reinsurance and defined accounting standards
for short-duration and long-duration reinsurance contracts. As permitted,
consolidated financial statements prior to adoption have not been restated.
The effect of the adoption on the Consolidated Balance Sheet was an increase
in other assets of $80.0 million and a corresponding increase in future policy
benefits and unpaid claims and claim expenses.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. REINSURANCE (continued)
The effect of reinsurance on premiums earned and written for the years ended
December 31, 1994, and 1993, was as follows:
1994 1993
-------------------- --------------------
(DOLLARS IN MILLIONS) Earned Written Earned Written
-------------------------------------------------------------------------------
Direct $2,674.2 $2,702.7 $2,331.5 $2,335.6
Assumed 170.7 170.9 192.6 196.2
Ceded (112.5) (112.6) (50.0) (50.5)
-------------------------------------------------------------------------------
Premiums $2,732.4 $2,761.0 $2,474.1 $2,481.3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
For the years ended December 31, 1994, and 1993, recoveries recognized under
reinsurance agreements reduced benefits to policyholders by $53.3 million and
$28.9 million, respectively.
Reinsurance premiums ceded and assumed were $51.5 million and $136.2 million,
respectively, for 1992.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1994, UNUM recorded pretax charges totaling $14.4
million, or $0.13 per share, which were reflected as operating expenses in the
Consolidated Statement of Income. Of this total, the Individual Disability
segment recorded $12.3 million related to the restructuring of the individual
disability business and resulting consolidation of home office operations in
UNUM America, which was comprised of $7.1 million for severance costs for 150
field and 150 home office employees and $5.2 million for exit costs of certain
leased facilities and equipment, expiring through 1998. The remaining $2.1
million, recorded in the Employee Benefits segment, was for termination
benefits for approximately 100 employees related to the acceleration of
organizational changes within UNUM America. All employee related costs are
expected to be paid by the end of 1995.
During 1992, UNUM released the restructuring reserve remaining for the costs of
withdrawal and reassignment of employees associated with the 401(k) business in
excess of amounts incurred, since actual costs were less than expected, which
resulted in a pretax gain of $5.3 million. The gain associated with the
release of this restructuring reserve reduced operating expenses in the 1992
Consolidated Statement of Income.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS
PENSION PLANStrading.
Historically, all positions UNUM has a noncontributory defined benefit pension plan covering substantially
all domestic employees, excluding employees of Colonial Companies, Inc., and
Duncanson & Holt, Inc. The plan provides benefits based on the employee's
years of service and compensation during the highest five consecutive years
out of the last ten years of employment. UNUM funds the plantaken in derivative contracts have
qualified for hedge accounting in accordance with the requirementscriteria established by
FAS 52, "Foreign Currency Translation," and FAS 80, "Accounting for Futures
Contracts." Upon entering a derivative contract, UNUM uses this criteria to
evaluate the correlation of risk protection provided by a derivative contract
to the risk created by market fluctuations to ensure hedge accounting is
appropriate for the contract. Accordingly, gains or losses related to
qualifying hedges of firm commitments or anticipated transactions involving
investment purchases and debt issuance are deferred and recognized as an
adjustment to the carrying amount of the Employee Retirement Income Security Actunderlying asset or liability when the
hedged transaction occurs. Gains or losses related to qualifying hedges of
1974,
as amended. Plan assets consist primarilyanticipated transactions involving the sale of group annuityinvestments are deferred and
recognized in income when the hedged transaction occurs. No gains or losses
related to qualifying hedges of anticipated transactions involving payments
denominated in foreign currencies are recorded if the hedged transaction is
likely to occur.
The amount of any deferred gains or losses on outstanding interest rate
futures contracts, which require daily cash settlement, are included in fixed
maturities in UNUM's Consolidated Balance Sheets. The fair values of any
outstanding forward exchange rate contracts, options and include approximately 224,392 shares of UNUM Corporation common stock.
Net pension cost included the following components:
Year Ended December 31,
----------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 9.2 $ 8.6 $ 7.5
Interest cost on projected benefit obligation 11.6 10.9 9.4
Actual return on plan assets 3.3 (16.5) (14.5)
Net amortization and deferral (16.5) 5.2 4.1
-------------------------------------------------------------------------------
Net pension cost $ 7.6 $ 8.2 $ 6.5
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The funded status of the plan and amountsswap agreements, which
do not require daily cash settlement, are not recognized in UNUM's Consolidated
Balance Sheets,Sheets.
Any resulting gains or losses from early termination of a derivative
designated as determined bya hedge are deferred and recognized in income or as an adjustment
of the plan's actuaries, werecarrying amount of the underlying asset or liability when the hedged
transaction occurs. Any gains or losses that result when the designated item is
extinguished, such as follows:
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefit obligation $ 96.2 $ 102.3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Accumulated benefit obligation $ 99.1 $ 104.8
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date $(141.9) $(147.6)
Plan assets at fair value 153.5 156.7
-------------------------------------------------------------------------------
Projected benefit obligation less than plan assets 11.6 9.1
Unrecognized net gain (26.2) (21.6)
Unrecognized prior service cost (3.3) (6.1)
Unamortized net obligation 2.7 3.1
-------------------------------------------------------------------------------
Accrued pension cost $ (15.2) $ (15.5)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
maturity, sale, or termination, or when the hedged
transaction is no longer likely to occur, are included in income in the period
in which the extinguishment takes place or it is known that the hedged
anticipated transaction will not occur.
On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3
million) through a private placement with an investor in the United Kingdom (see
Note 8 "Notes Payable"). Upon issuance of the [British pound]100 million
borrowing, UNUM entered into currency and interest rate swap agreements that
converted the principal amount to U.S. dollars and the interest obligation on
the debt from a pound sterling based fixed rate to a U.S. dollar fixed rate. No
gains or
57
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
PENSION PLANS (Continued)
The weighted average discount rateCorporation and rate of increaseSubsidiaries
losses on the swap agreements, which qualify for hedge accounting, are recorded
while the related debt is outstanding. These swap agreements expire in future compensation
levels used in determiningDecember
2007 and have notional amounts that equal the actuarial present valueprincipal amount of the projected benefit
obligation were 8.25% and 5.20%, respectively,loan.
In addition to the swap agreements discussed previously, UNUM had open
interest rate futures contracts at December 31, 1994, and 7.25%
and 4.70%, respectively, at December 31, 1993. The expected long-term rate1998, with notional amounts of
return on plan assets was 9.0%$111.0 million to hedge anticipated cash flows in 1994 and 8.25% in 1993 and 1992. Prior year
service costs are being amortized on1999. These futures contracts
had a straight-line basis over expected
employment periods for active employees.
UNUM also administers certain supplemental retirement plans for eligible
employees and officers and certain other pension plans. The cost of these
plans was not significant for the years ended December 31, 1994, 1993 and 1992.
RETIREMENT SAVINGS PLANS
UNUM has several retirement savings and profit sharing plans for substantially
all full-time and part-time employees who work 1,000 hours a year and have been
employed for at least one year. Dependent upon which plan the employee
participates in, eligible employees may contribute primarily up to 10% of their
annual salary, and UNUM matches a portion of each employee's contribution up to
6% of the employee's bi-weekly compensation. Participants may become 100%
vested immediately upon becoming eligible to participate, or incrementally over
a five year period. In 1994, 1993 and 1992, expense for these plans amounted
to $8.4 million, $8.3 million and $6.5 million, respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
UNUM provides certain health care and life insurance benefits for retired
employees and covered dependents. Substantially all domestic employees of UNUM
may become eligible for these benefits if they meet minimum age and service
requirements, if they are eligible for retirement benefits and if they agree to
contribute a portion of the cost. UNUM has the right to modify or terminate
these benefits. The underlying plans are not currently funded.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard ("FAS")
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," which changed the method for recognition of the cost of these
benefits from a cash basis to an accrual basis over the years in which the
employees render the related services. UNUM elected to immediately recognize
the FAS 106 liability at January 1, 1993, of $48.8 million as a cumulative
effect of an accounting change, which decreased net income by $32.1 million, or
$0.40 per share, during 1993.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (Continued)
Postretirement benefits expense included the following components:
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Service cost $ 3.8 $ 3.4
Interest cost 4.4 4.0
-------------------------------------------------------------------------------
Postretirement benefits expense $ 8.2 $ 7.4
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The following represents the unfunded accumulated postretirement benefits
obligation as determined by the plans' actuaries:
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Retirees $21.3 $19.6
Active employees fully eligible 4.5 6.5
Other active participants 38.9 29.7
-------------------------------------------------------------------------------
Accumulated postretirement benefits obligation 64.7 55.8
Unrecognized other amounts (1.0) 1.2
-------------------------------------------------------------------------------
Accrued postretirement benefits cost $63.7 $57.0
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Under UNUM's plans, the cost of covered health care benefits is assumed to
increase 10.00% and 10.75% for retirees less than 65 years old, and 7.50% and
8.25% for retirees 65 years and older for 1995. These rates are assumed to
decrease incrementally to 5.50% and 6.25% by 2001, and remain at that level
thereafter. The weighted average discount rates used in determining the
accumulated postretirement benefits obligation were 8.00% and 8.25%, at
December 31, 1994, and 7.25% and 7.50%, at December 31, 1993. The rates of
increase in future compensation levels used in determining the accumulated
postretirement benefits obligation were 5.2% and 4.7%, at December 31, 1994
and 1993, respectively.
At December 31, 1994, a 1% increase in the trend rate for health care costs
would increase the accumulated postretirement benefits obligation by $13.4
million and postretirement benefits expense by $1.8 million.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPTION AND INCENTIVE PLANS
LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for
granting of restricted shares of UNUM Corporation common stock to key officers.
The Incentive Plan also provides for granting of options to officers,
non-employee directors of UNUM Corporation and key employees, to purchase UNUM
Corporation common stock over ten years at a price not less than 100% of the
fair market value on the date of grant. The maximum number of shares reserved
for issuance under the Incentive Plan was 6,800,000 in 1994 and 1993, and
3,500,000 in 1992. At December 31, 1994, 1993 and 1992, 2,511,145 shares,
3,316,734 shares, and 1,006,684 shares, respectively, were available for grant
under the Incentive Plan.
The restriction period for each restricted stock award under the Incentive Plan
is in excess of three years, with the restrictions lapsing as a result of the
achievement of prescribed financial performance objectives during each three
year period, with the exception of 10,000 shares of restricted stock granted in
1994 on which restrictions will lapse on January 6, 1998, provided the grantee
remains continuously in the employ of UNUM. Plan participants are entitled to
cash dividends and voting rights on their respective shares. In 1994,
restrictions lapsed on 80,800 shares granted for the 1991 - 1993 performance
period. All other restricted stock shares issued remained subject to
restrictions.
The market value of the restricted shares issued under the Incentive Plan has
been recorded as deferred compensation and is included as a reduction of
stockholders' equity in the Consolidated Balance Sheets.
The 1987 Executive Stock Option Plan ("Option Plan") provided for granting to
officers and key employees options to purchase UNUM Corporation common stock
over ten years at a price not less than 100% of the fair market value on the
date of grant. Options outstanding under the Option Plan are included in the
summary of stock options.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPTION AND INCENTIVE PLANS (Continued)
LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN (Continued)
Beginning in 1991, certain officers were granted limited stock appreciation
rights ("LSARs") in tandem with their outstanding options. LSARs afford the
optionee the right to receive payment upon a change in control as defined in
the plans equal to the higher of the excess of the highest price per share
paid in connection with such change in control or the fair market value per
share, over the option price per share. As an underlying stock option is
exercised, the LSARs are automatically canceled. At December 31, 1994, 1993
and 1992, there were 590,275 LSARs, 556,500 LSARs, and 685,550 LSARs
outstanding, respectively.
The following is a summary of stock options and restricted stock information:
Restricted
Options Stock
-------------------------------------------------------------------------------
Outstanding at January 1, 1992 3,085,014 80,800
1992 Activity:
Granted at $33.17 to $40.70 per share 1,043,969 --
Granted for restricted stock -- 34,600
Exercised at $7.13 to $54.00 per share (860,147) --
Canceled/reissued (141,954) --
-------------------------------------------------------------------------------
Outstanding at December 31, 1992 3,126,882 115,400
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1993 Activity:
Granted at $52.88 to $57.75 per share 1,031,650 --
Granted for restricted stock -- 32,525
Exercised at $9.03 to $36.75 per share (655,300) --
Canceled/reissued (100,278) (1,500)
-------------------------------------------------------------------------------
Outstanding at December 31, 1993 3,402,954 146,425
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1994 Activity:
Granted at $38.00 to $51.31 per share 884,375 --
Granted for restricted stock -- 46,850
Lapse of restrictions on restricted stock -- (80,800)
Exercised at $9.03 to $47.88 per share (282,729) --
Canceled/reissued (151,578) (2,525)
-------------------------------------------------------------------------------
Outstanding at December 31, 1994 3,853,022 109,950
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The number of exercisable shares as of December 31, 1994, 1993 and 1992, were
1,975,219 shares, 1,396,182 shares, and 1,305,720 shares, respectively.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPTION AND INCENTIVE PLANS (Continued)
LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN (Continued)
In connection with the March 26, 1993, merger with Colonial Companies, Inc.
("Colonial"), outstanding options to acquire shares of Colonial Class B common
stock were converted into options to acquire shares of UNUM common stock, and
are included in the preceding summary of stock options. Pursuant to the
merger, no further options will be granted under the Colonial stock option
plans.
THE 1998 GOALS STOCK OPTION PLAN
The 1998 Goals Stock Option Plan ("1998 Option Plan") was introduced in January
1995. The 1998 Option Plan provides for granting to all eligible employees up
to 150 options to purchase UNUM Corporation common stock at a price not less
than 100% of the fair market value on the date of the grant. The options will
vest to the employee in January 2004; however, if UNUM achieves its 1998 goals,
vesting will be accelerated to early 1999.
ANNUAL INCENTIVE PLANS
UNUM has several annual incentive plans for certain employees and executive
officers, which provide additional compensation based on achievement of
predetermined annual corporate and affiliate financial and non-financial
goals. In 1994, 1993 and 1992, expense for these plans was $7.5 million,
$27.9 million and $24.6 million, respectively.
NOTE 10. INCOME TAXES
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 109,
"Accounting for Income Taxes," which changed the method for calculating and
reporting deferred income taxes in the financial statements from the deferred
method to the liability method. The liability method of accounting for income
taxes requires that deferred tax liabilities or assets at the end of each
period be determined using the tax rate expected to be in effect when taxes are
actually paid or recovered. Under this method, income tax will increase or
decrease in the same period in which a change in tax rate is enacted. The
cumulative effect of this accounting change amounted to a $20.0 million
increase in net income, or $0.25 per share, for the year ended December 31,
1993.
On August 10, 1993, legislation was enacted to increase the federal corporate
income tax rate of 34% to 35%, retroactive to January 1, 1993. The tax rate
increase resulted in a charge to net income totaling $11.4 million, or $0.15
per share, which included $3.6 million, or $0.05 per share, related to 1993
pretax income, and a $7.8 million, or $0.10 per share, adjustment to the
deferred income tax liability.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES (Continued)
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Tax at federal statutory rate (35% for 1994 and 1993,
34% for 1992) $ 69.5 $161.1 $135.5
Tax-exempt income (32.0) (29.4) (31.8)
Prior years' taxes -- (2.0) (2.0)
State income tax 2.2 3.9 3.7
Tax on foreign operations -- 0.1 0.1
Adjustment to deferred tax liability due to
tax rate increase -- 7.8 --
Other 4.2 6.8 1.8
-------------------------------------------------------------------------------
Income taxes $ 43.9 $148.3 $107.3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Deferred income tax liabilities and assets were comprised of the following:
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs $298.9 $257.8
Policy reserve adjustments 59.3 69.6
Net unrealized gains 27.1 79.4
Value of business acquired 17.9 19.0
Invested assets 28.9 10.5
Other 10.6 7.4
-------------------------------------------------------------------------------
Total deferred tax liabilities 442.7 443.7
-------------------------------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit carryforwards 45.3 20.2
Net realized losses 15.0 17.3
Postretirement benefits 20.3 19.7
Loss carryforward 5.9 8.0
Other 7.6 1.8
-------------------------------------------------------------------------------
Total deferred tax assets 94.1 67.0
------------------------------------------------------------------------------
Net deferred tax liability $348.6 $376.7
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES (Continued)
Deferred income taxes relating to cumulative net unrealized gains on available
for sale securities were $27.1 million, $79.4 million and $57.4loss of $0.3 million at December 31, 1994, 1993 and 1992, respectively. At December 31, 1994, $5.0
million of1998. Other
than the $27.1 million deferred income taxes was reflected in retained
earnings, while the remaining $22.1 million was netted against the unrealized
gains component of stockholders' equity.
As of December 31, 1994, deferred U.S. income taxes have not been provided on
the accumulated earnings of UNUM's foreign subsidiaries. These earnings would
become subject to U.S. tax if remitted toswap agreements discussed previously, UNUM Corporation.
Prior to the Tax Reform Act of 1984 ("1984 Act"), half the excess of the tax
basis gain from operations of a life insurance company over its taxable
investment income was currently taxable. Thehad no other half was set aside in a
Policyholders Surplus Account, together with certain special life insurance
company deductions. The cumulative amount in the Policyholders Surplus Account
as of December 31, 1983, was frozen by the 1984 Act and amounted to $31.8
millionopen
derivative financial instruments at December 31, 1994. Any direct or indirect distributions from this
account would be taxed at current tax rates; however, no provision has been
made for related taxes. If the amount set aside in this account were taxed at
the current rate at December 31, 1994, for all life insurance subsidiaries,
the tax would have amounted to $11.1 million.
UNUM's Consolidated Statements of Income for 1994, 1993 and 1992, included the
following amounts of foreign income and related income tax expense:
Year Ended December 31,
------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Foreign income $24.2 $ 20.9 $32.7
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Income tax expense (credit):
Current $ 0.7 $(12.5) $ 1.6
Deferred 9.7 20.2 10.4
-------------------------------------------------------------------------------
Total $10.4 $ 7.7 $12.0
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM subsidiaries had operating loss carryforwards totaling $16.5 million and
alternative minimum tax ("AMT") credit carryforwards totaling $45.3 million as
of December 31, 1994. Substantially all of the operating loss carryforwards
relate to foreign operations and can be carried forward indefinitely. The AMT
credits can also be carried forward indefinitely.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1994, and 1993:
December 31,
-----------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Short-term debt:
Commercial paper $216.5 $109.9
Other notes payable, with weighted average interest
rate of 2.7% 30.1 0.1
-------------------------------------------------------------------------------
Total short-term debt 246.6 110.0
-------------------------------------------------------------------------------
Long-term debt:
Medium-term notes payable due 1996 to 2024
with interest rates ranging from 5.1% to 7.5% 180.8 126.1
Other notes payable 1.3 2.5
-------------------------------------------------------------------------------
Total long-term debt 182.1 128.6
-------------------------------------------------------------------------------
Total notes payable $428.7 $238.6
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
At December 31, 1994, UNUM Corporation had a $500 million committed revolving
credit facility which expires on October 1, 1999. UNUM's commercial paper
program is supported by the revolving credit facility and is available for
general liquidity needs, capital expansion, acquisitions or stock repurchase.
The committed revolving credit facility contains certain covenants which, among
other provisions, require maintenance of certain levels of stockholders' equity
and limits on level of debt. The commercial paper outstanding at December 31,
1994, and 1993, had a weighted average interest rate of approximately 6.34% and
3.41%, respectively.
Aggregate maturities of long-term debt are as follows: 1995-$0; 1996-$16.2
million; 1997-$48.2 million; 1998-$29.8 million; 1999-$21.4 million;
thereafter-$66.5 million.
On February 28, 1995, UNUM borrowed $100 million under the revolving credit
facility, which was infused into UNUM America in exchange for surplus
debentures. Repayment of principal and interest on the surplus debentures is
subject to state insurance regulatory approval.
NOTE 12. CAPITAL STOCK
In September 1993, UNUM announced the resumption of a program to repurchase its
common stock pursuant to an existing Board of Directors' resolution. On
February 11, 1994, UNUM's Board of Directors voted to expand UNUM's
authorization to repurchase an additional 5.0 million shares, bringing the
total number of shares authorized for repurchase to 44.0 million shares. Since
the resumption of the stock repurchase program, UNUM has acquired approximately
7.6 million shares of its common stock through December 31, 1994, in the open
market at an aggregate cost of $375.8 million. No shares were acquired in the
open market during 1992 or 1991. At December 31, 1994, approximately 2.7
million shares remained authorized for repurchase.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. CAPITAL STOCK (Continued)
Under the Long-Term Stock Incentive Plan and Executive Stock Option Plan and
the plans of Colonial Companies, Inc. (see Note 9 "Option and Incentive
Plans"), 329,579 shares, 687,825 shares, and 894,747 shares were issued in
1994, 1993 and 1992, respectively.
NOTE 13. PREFERRED STOCK PURCHASE RIGHTS
On March 13, 1992, UNUM's Board of Directors ordered redemption of the 1988
Rights Agreement and adopted a new Shareholder Rights Plan. Shareholders of
record on March 23, 1992, received $0.05 for every two shares of common stock
held, which was distributed April 2, 1992. The total amount of the redemption
was $1.7 million.
As a result of the adoption of a new Shareholder Rights Plan, a dividend
distribution was declared of one Right for each share of outstanding Common
Stock to stockholders of record at the close of business on March 23, 1992.
Each Right under certain specific circumstances entitles the holder to purchase
one one-hundredth of a share of Series A Junior Participating Preferred Stock
at a purchase price of $150.
The Rights become exercisable at a specified time after (1) a person or group
acquires 10% or more of UNUM's Common Stock or (2) a tender or exchange offer
for 10% or more of UNUM's Common Stock.
The Rights expire at the close of business on March 13, 2002, unless earlier
redeemed by the Company under certain circumstances at a price of $0.01 per
Right.
NOTE 14. DIVIDEND RESTRICTIONS
UNUM is subject to various state insurance regulatory restrictions that limit
the maximum amount of dividends available from its United States domiciled
insurance subsidiaries without prior approval. Under current law, during 1995
approximately $81.3 million will be available for payment of dividends to UNUM
Corporation without state insurance regulatory approval. Dividends in excess
of this amount may only be paid with state insurance regulatory approval. The
aggregate statutory capital and surplus of the United States domiciled
insurance subsidiaries of UNUM Corporation was approximately $840.1 million
and $953.9 million, at December 31, 1994, and 1993, respectively. The
aggregate statutory net income of UNUM Corporation's United States domiciled
insurance subsidiaries was approximately $70.4 million, $216.0 million and
$154.1 million for 1994, 1993 and 1992, respectively. State insurance
regulatory authorities prescribe statutory accounting practices that differ in
certain respects from generally accepted accounting principles. The
significant differences relate to deferred acquisition costs, deferred income
taxes, non-admitted asset balances, required investment risk reserves and
reserve calculation assumptions.
UNUM Corporation also has the ability to draw a dividend of approximately $30
million from its United Kingdom based affiliate, UNUM Limited, subject to
certain U.S. tax consequences.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1997.
NOTE 15. LITIGATION
In the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1994.1998. In some instances, these
proceedings include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position, or the
consolidated operating results or liquidity of UNUM.
On December 29, 1993, UNUM filed a suit in the United States District
Court for the District of Maine, seeking a federal income tax refund. The suit
was based on a claim for a deduction in certain prior tax years for $652
million in cash and stock distributed to policyholders in connection with the
1986 conversion of Union Mutual Life Insurance Company to a stock company. UNUM
fully paid, and provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure. On
December 2, 1997, the United States Court of Appeals affirmed the decision of
the District Court denying UNUM's claim for refund. UNUM filed a petition
requesting that the United States Supreme Court review the decision of the
United States Court of Appeals, which was denied October 5, 1998; no further
appeal is available.
NOTE 16. SEGMENT INFORMATION
UNUM's four reportable operating segments include: Disability Insurance,
Special Risk Insurance, Colonial Products and Retirement Products. Each
operating segment represents a product grouping based on the similarity of the
products in such areas as risk-relief, economic characteristics, market
potential and the specific markets being targeted for these products. The
Disability Insurance segment includes disability products offered in North
America, the United Kingdom and Japan including: group long term disability,
group short term disability, long term care, individual disability and
disability reinsurance operations. The Special Risk Insurance segment includes
group life, accidental death and dismemberment, travel and voluntary accident
insurance, special risk reinsurance operations and other special risk insurance
products. The Colonial Products segment includes Colonial Life & Accident
Insurance Company and affiliates, which offer payroll-deducted, voluntary
employee benefit products, including accident and sickness, disability, cancer
and life insurance. The Retirement Products segment includes products no longer
actively marketed by UNUM reportsincluding: tax-sheltered annuities, guaranteed
investment contracts, deposit administration accounts, 401(k) plans, individual
life and group medical insurance. In addition, UNUM records transactions that
are generally non-insurance related in Corporate. Interest expense is reported
by Corporate and totaled $49.9 million, $42.4 million and $40.7 million in
1998, 1997 and 1996, respectively.
UNUM's markets for its insurance products are the United States, its
principal market, Canada, the United Kingdom, the Pacific Rim and Argentina.
Through its affiliates, UNUM is the leading provider of group long term
disability insurance, its principal product, in the United States and the
United Kingdom. Products are marketed through sales personnel, independent
contractors and brokers, and specialty agents. UNUM targets sales of its
disability products to executive, administrative and management personnel, and
other professionals such as educators, consultants, health care providers,
accountants and engineers.
UNUM evaluates performance and allocates resources based on pretax
operating income, which is defined as income (loss) before income taxes
exclusive of realized investment gains (losses) and special items. Realized
investment gains (losses) are excluded from management's evaluation of segment
performance as management believes the volatility in gains and losses
associated with the selling of invested assets in the financial markets is not
representative of ongoing operations. Special items are excluded from
management's evaluation of segment performance as management considers them as
being not representative of ongoing operations principallyand believes a discussion of the
results on a pretax operating income basis provides a better understanding of
the results of ongoing operations. The accounting polices of the operating
segments are the same as those described in six business segments: Employee
Benefits, Related Businesses, Colonial Companies, Individual Disability,
Retirement Security and Other Operations.Note 1, "Summary of Significant
Accounting Policies."
58
Investment income and net realized investment gains and losses are
allocated to the segments based on designation of ownership of assets
identified to the segments.products in each segment. Operating expenses are allocated to
the segments based on direct association with a product whenever possible. If however,
the expense cannot be readily associated with a particular product, the costs
are allocated based on ratios of the relative time spent, extent of usage or
varying volume of work performed for each segment.
The Employee Benefits segment includes group long term disability, group life
and other employee benefits products, including short term disability,
accidental death and dismemberment and dental insurance. The Related
Businesses segment includes UNUM Limited in the United Kingdom, Commercial
Life Insurance Company, and reinsurance operations including Duncanson & Holt,
Inc. The Colonial Companies segment includes Colonial Companies, Inc. and
subsidiaries, which offer payroll-deducted, voluntary employee benefits to
employees at their worksites. The Individual Disability segment includes
disability income products. The Retirement Security segment includes tax
sheltered annuities, long term care insurance and lifestyle security protection
products. The Other Operations segment includes individual life insurance
business of UNUM Life Insurance Company of America, group medical operations,
guaranteed investment contracts, deposit administration accounts, and 401(k)
plans, all of which are no longer actively marketed by UNUM. Corporate
includes transactions which are generally non-insurance related and expenses
incurred to effect the March 26, 1993, merger of UNUM and Colonial.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. SEGMENT INFORMATION (Continued)
Summarized financial information for the six businessfour reportable operating
segments and Corporate is as follows:
Year Ended December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- --------------------------------------------- ------------- ------------- -------------
Revenues:
Employee BenefitsPremiums:
Disability Insurance ....................... $ 1,714.92,125.9 $ 1,597.31,816.5 $ 1,350.6
Related Businesses 567.1 488.0 446.01,889.9
Special Risk Insurance ..................... 1,159.1 915.5 748.2
Colonial Companies 473.9 448.8 407.3
IndividualProducts .......................... 552.7 525.4 493.7
Retirement Products ........................ 4.0 6.3 19.7
---------- ---------- ----------
Total premiums ............................ $ 3,841.7 $ 3,263.7 $ 3,151.5
========== ========== ==========
Investment Income:
Disability 442.1 405.0 367.9Insurance ....................... $ 473.8 $ 471.1 $ 468.8
Special Risk Insurance ..................... 78.7 70.1 57.3
Colonial Products .......................... 65.8 57.6 47.6
Retirement Security 289.4 271.8 261.1
Other Operations 131.3 179.9 210.9Products ........................ 39.0 55.5 214.4
Corporate 5.0 6.2.................................. 4.1 6.7 15.2
---------- ---------- ----------
Total investment income ................... $ 661.4 $ 661.0 $ 803.3
========== ========== ==========
Deferred acquisition cost amortization:
Disability Insurance ....................... $ 64.8 $ 52.1 $ 87.3
Special Risk Insurance ..................... 143.3 94.0 53.9
Colonial Products .......................... 89.5 80.7 72.5
Retirement Products ........................ -- 0.1 --
---------- ---------- ----------
Total amortization ........................ $ 297.6 $ 226.9 $ 213.7
========== ========== ==========
Pretax operating income (loss):
Disability Insurance ....................... $ 348.3 $ 315.8 $ 278.4
Special Risk Insurance ..................... 159.4 124.8 90.2
Colonial Products .......................... 105.1 98.8 92.7
Retirement Products ........................ 1.0 4.7 -------------------------------------------------------------------------------13.6
Corporate .................................. (58.0) (51.8) (37.5)
---------- ---------- ----------
Total revenues $ 3,623.7 $ 3,397.0 $ 3,048.5
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Income (loss) beforepretax operating income taxes and
cumulative effects............. 555.8 492.3 437.4
Taxes on pretax operating income ............ 167.6 150.6 135.7
---------- ---------- ----------
Operating income .......................... 388.2 341.7 301.7
Special items, net of accounting changes:
Employee Benefits $ 257.8 $ 239.1 $ 222.5
Related Businesses 60.3 57.3 53.4
Colonial Companies 62.7 70.4 60.5
Individual Disability (188.2) 69.0 44.6
Retirement Security 25.7 21.1 6.7
Other Operations 8.5 20.8 16.5
Corporate (28.2) (17.4) (5.7)
-------------------------------------------------------------------------------
Income before income taxes and cumulative
effectstax ................... (38.6) 30.8 (66.0)
Realized gains (losses), net of accounting changes 198.6 460.3 398.5
Income taxes 43.9 148.3 107.3
-------------------------------------------------------------------------------
Income before cumulative effects of accounting
changes 154.7 312.0 291.2
Cumulative effects of accounting changes -- (12.1) --
-------------------------------------------------------------------------------tax ......... 13.8 (2.2) 2.3
---------- ---------- ----------
Net income .................................. $ 154.7363.4 $ 299.9370.3 $ 291.2
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------238.0
========== ========== ==========
December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- ------------------------------------------- -------------- -------------- --------------
Identifiable Assets:
Employee BenefitsDisability Insurance ..................... $ 3,660.69,683.4 $ 3,294.58,546.6 $ 2,936.4
Related Businesses 1,467.2 1,269.0 1,113.27,846.8
Special Risk Insurance ................... 2,268.2 1,821.6 1,410.0
Colonial Companies 846.2 819.2 745.9
Individual Disability 1,756.5 1,516.3 1,349.1Products ........................ 1,519.4 1,334.7 1,094.1
Retirement Security 3,384.8 3,249.3 3,051.7
Other Operations 1,213.6 1,493.9 1,982.7Products ...................... 966.3 1,115.9 4,478.8
Corporate 451.3 452.3 442.8................................ 374.5 254.0 396.7
Individual Participating Life and Annuity 347.0 342.8 338.0
-------------------------------------------------------------------------------Annuity. 371.1 367.3 354.0
----------- ----------- -----------
Total assets $13,127.2 $12,437.3 $11,959.8
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------............................ $ 15,182.9 $ 13,440.1 $ 15,580.4
=========== =========== ===========
59
UNUM CORPORATIONCorporation and Subsidiaries
Information concerning principal geographic areas is as follows:
Year Ended December 31,
---------------------------------------------
(Dollars in millions) 1998 1997 1996
- ----------------------------------- ------------- ------------- -------------
Geographic information on premiums:
United States .................... $ 3,391.7 $ 2,938.1 $ 2,900.4
Foreign countries ................ 450.0 325.6 251.1
---------- ---------- ----------
Total premiums .................. $ 3,841.7 $ 3,263.7 $ 3,151.5
========== ========== ==========
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- ---------------------------------------- ----------- ----------- -----------
Geographic information on income
before income taxes:
United States ......................... $ 473.3 $ 497.5 $ 315.2
Foreign countries ..................... 44.1 38.9 26.4
-------- -------- --------
Total income before income taxes ..... $ 517.4 $ 536.4 $ 341.6
======== ======== ========
December 31,
------------------------------------------------
(Dollars in millions) 1998 1997 1996
- -------------------------------------- -------------- -------------- --------------
Geographic information on identifiable
assets:
United States ....................... $ 13,703.7 $ 11,941.7 $ 14,239.8
Foreign countries ................... 1,479.2 1,498.4 1,340.6
----------- ----------- -----------
Total assets ....................... $ 15,182.9 $ 13,440.1 $ 15,580.4
=========== =========== ===========
UNUM's long-lived assets are not material to the total consolidated assets
and are not presented by geographic region.
The following is provided to reconcile certain financial information for
the reportable segment totals to consolidated totals and provide a description
of the reconciling items:
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- --------------------------------------------- ----------- ----------- -----------
Deferred acquisition cost amortization:
Total amortization for reportable
segments ................................... $ 297.6 $ 226.9 $ 213.7
Special item -- deferred acquisition
cost write-offs (a) ........................ -- -- 11.7
-------- -------- --------
Total consolidated amortization ........... $ 297.6 $ 226.9 $ 225.4
======== ======== ========
Income before income taxes:
Total pretax operating income for
reportable segments and Corporate .......... $ 555.8 $ 492.3 $ 437.4
Realized investment gains (losses) ......... 21.0 (3.6) 3.4
Special items:
Disability claims reserve
increase (b) ............................ (59.4) -- --
TSA deferred gain recognition (c) ......... -- 72.6 --
Reorganization costs (a) .................. -- (6.5) --
Reinsurance pool results (d) .............. -- (18.4) --
Individual disability reinsurance fees (e). -- -- (49.7)
Write-offs and future loss
reserves (a) ............................ -- -- (39.4)
Merger and integration costs (f) .......... -- -- (10.1)
-------- -------- --------
Total consolidated income before
income taxes ............................ $ 517.4 $ 536.4 $ 341.6
======== ======== ========
60
As previously discussed, management's evaluation of segment performance
excludes realized investment gains (losses) and special items. The following
describes or references the special items that reconcile total segment amounts
to total consolidated amounts:
(a) See Note 7 "Business Restructuring and Other Charges." The $13.1
million charge in the Disability Insurance segment included an $11.7
million write-off of deferred acquisition costs. Additionally, $0.5
million of direct costs, primarily relocation expenses, were recognized
during fourth quarter 1997.
(b) See Note 4 "Reserves."
(c) See Note 5 "Sale of Tax-Sheltered Annuity Business."
(d) See the Changes in Accounting Estimates section of Note 1 "Summary of
Significant Accounting Policies."
(e) See Note 6 "Reinsurance."
(f) During third quarter 1996, actions related to the merger of Commercial
Life into UNUM America resulted in a $10.1 million increase in operating
expenses for Corporate.
NOTE 17. PROPOSED MERGER WITH PROVIDENT AND SUBSIDIARIES
NOTES TO CONSOLIDATEDPRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma combined condensed financial statements
and explanatory notes are presented to show the impact on the historical
financial positions and results of operations of UNUM and Provident of the
planned merger under the "pooling of interests" method of accounting. The
unaudited pro forma combined condensed financial statements combine the
historical financial information of UNUM and Provident as of December 31, 1998,
and for the years ended December 31, 1998, 1997 and 1996. The unaudited pro
forma combined condensed statements of income give effect to the merger as if
it had been completed at the beginning of the earliest period presented. The
unaudited pro forma combined condensed balance sheet assumes the merger was
completed on December 31, 1998.
On November 22, 1998, UNUM entered into an agreement with Provident,
pursuant to which UNUM and Provident will merge under the name UNUMProvident.
Under the merger agreement, each outstanding share of Provident common stock
will be reclassified and converted into 0.73 of a share of UNUMProvident common
stock and each outstanding share of UNUM common stock will be converted into
one share of UNUMProvident common stock. The merger will be accounted for as a
pooling of interests. The merger is subject to regulatory and UNUM stockholder
and Provident stockholder approval.
The unaudited pro forma combined condensed financial statements as of
December 31, 1998, and for each of the three years ended December 31, 1998,
1997 and 1996, are based on and derived from, and should be read in conjunction
with the UNUM and Provident historical consolidated financial statements and
related notes.
On the date the merger is completed UNUMProvident will record an expense
related to the merger of approximately $138.0 million ($101.0 million net of
income taxes). The estimated expenses related to the merger include amounts for
severance and related costs, exit costs for duplicative facilities and asset
abandonments, and investment banking, legal and accounting fees. In addition,
Provident will record an expense related to the early retirement offer on the
date the merger is consummated of approximately $14.0 million ($9.0 million net
of income taxes). The early retirement offer to Provident's employees is
subject to acceptance by the employees and the closing of the merger. Generally
accepted accounting principles ("GAAP") requires both contingencies to be met
before the charge is recognized. UNUM will record an expense related to the
early retirement offer of approximately $58.0 million ($38.0 million net of
income taxes). The UNUM early retirement offer to employees is not contingent
upon the closing of the merger; therefore, under GAAP, the charge will be
recorded as soon as the employees accept the offer. The employees have until
June 17, 1999 to accept the offer or the offer will expire.
The estimated expenses related to the merger and the early retirement
offers to employees have not been reflected in the unaudited pro forma combined
condensed balance sheet or statements of income and related per share
calculations. The estimated expenses represent management's best estimates
based on available information at this time. Actual charges will differ from
these estimates.
The unaudited pro forma financial statements are presented for comparative
purposes only and are not necessarily indicative of the results of operations
that would have been realized had the merger been completed
61
UNUM Corporation and Subsidiaries
during the periods or as of the date for which the pro forma financial
statements are presented, nor are they necessarily indicative of the results of
operations in future periods or the future financial position of UNUMProvident.
UNUM/Provident Unaudited Pro Forma Combined Condensed Consolidated
Statements of Income (a)
Year Ended December 31,
---------------------------------------------
(Dollars and shares in millions except per common share data) 1998 1997 1996
- --------------------------------------------------------------- ------------- ------------- -------------
Revenues
Premium income ............................................. $ 6,189.1 $ 5,317.4 $ 4,327.2
Net investment income ...................................... 2,035.4 2,015.7 1,893.4
Net realized investment gains .............................. 55.0 11.5 (5.2)
Other income ............................................... 299.9 357.0 148.2
--------- --------- ----------
Total revenues ............................................ 8,579.4 7,701.6 6,363.6
Benefits and Expenses
Policyholder benefits ...................................... 5,509.8 4,880.4 4,204.0
Commissions ................................................ 826.5 716.2 555.2
Operating expenses ......................................... 1,462.2 1,286.7 1,087.1
Increase in deferred policy acquisition costs .............. (325.8) (236.0) (116.7)
Amortization of value of business acquired and
goodwill .................................................. 66.6 52.7 7.7
Interest and debt expense .................................. 119.9 84.9 58.5
---------- ---------- ----------
Total benefits and expenses ............................... 7,659.2 6,784.9 5,795.8
---------- ---------- ----------
Income before income taxes ................................. 920.2 916.7 567.8
Income taxes ............................................... 302.8 299.1 184.2
---------- ---------- ----------
Net income ................................................ 617.4 617.6 383.6
Preferred stock dividends .................................. 1.9 12.7 12.7
---------- ---------- ----------
Net income available to common shareholders ............... $ 615.5 $ 604.9 $ 370.9
========== ========== ==========
Net income per common share
Basic ..................................................... $ 2.60 $ 2.62 $ 1.75
Diluted ................................................... $ 2.54 $ 2.57 $ 1.72
========== ========== ==========
Average shares outstanding--basic (a) ...................... 237.0 230.7 212.4
Average shares outstanding--diluted (a) .................... 242.3 235.8 215.3
(a) The above unaudited pro forma combined condensed consolidated statements
of income reflect the combined results of the operations of UNUM and
Provident for the periods presented. No adjustments have been made to
arrive at net income available to common shareholders. The pro forma
combined basic and diluted earnings per share for the respective periods
presented are based on the combined weighted-average number of common and
dilutive potential common shares and adjusted weighted-average shares of
UNUM and Provident. The number of weighted-average common shares and
adjusted weighted-average shares, including all dilutive potential common
shares, reflect the reclassification of Provident common stock on a 0.73
to 1.0 basis and the conversion of each outstanding share of UNUM common
stock into one share of UNUMProvident common stock in the merger.
62
UNUM Corporation and Provident Companies, Inc.
Unaudited Pro Forma Combined Condensed Balance Sheet
As of December 31, 1998
Historical
------------------------------- UNUM/Provident
Pro Forma Pro Forma
UNUM Provident Adjustments Combined
-------------- -------------- ----------------- ---------------
(Dollars in millions)
- -----------------------------------------
ASSETS
Invested assets ...................... $ 9,837.7 $ 17,332.7 $ -- $ 27,170.4
Reinsurance receivables .............. 1,770.0 3,101.0 -- 4,871.0
All other assets ..................... 3,539.9 2,276.7 -- 5,816.6
Separate account assets .............. 35.3 377.7 -- 413.0
----------- ----------- --------- -----------
Total assets ........................ $ 15,182.9 $ 23,088.1 $ -- $ 38,271.0
=========== =========== ========= ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Policy liabilities, accruals and
unearned premiums ................... $ 9,201.4 $ 14,343.0 $ 230.0(b) $ 23,774.4
Other policyholders' funds ........... 875.4 3,227.3 -- 4,102.7
All other liabilities ................ 2,333.1 1,431.6 (80.0)(b) 3,684.7
Separate account liabilities ......... 35.3 377.7 -- 413.0
----------- ----------- --------- -----------
Total liabilities ................... 12,445.2 19,379.6 150.0 31,974.8
Company Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust Holding
Soley Junior Subordinated Debt
Securities of the Company ........... -- 300.0 -- 300.0
----------- ----------- --------- -----------
Common stock ......................... 20.0 135.7 (131.9)(c) 23.8
Additional paid-in capital ........... 1,151.2 762.0 (954.0)(c) 959.2
Accumulated other comprehensive
income .............................. 229.0 685.7 -- 914.7
Retained earnings .................... 2,444.9 1,834.3 (150.0)(b) 4,129.2
Treasury stock ....................... (1,085.9) (9.2) 1,085.9 (c) (9.2)
Restricted stock deferred
compensation ........................ (21.5) -- -- (21.5)
----------- ----------- --------- -----------
Total stockholders' equity .......... 2,737.7 3,408.5 (150.0) 5,996.2
----------- ----------- --------- -----------
Total liabilities and stockholders'
equity ............................ $ 15,182.9 $ 23,088.1 $ -- $ 38,271.0
=========== =========== ========= ===========
(b) UNUM and Provident are in the process of reviewing their accounting
policies and financial statement classifications and as a result of this
review, it may be necessary to adjust the combined financial statements
to conform to those accounting policies and classifications that are
determined to be most appropriate.
One aspect of this preliminary review has indicated that UNUM's process
and assumptions used to calculate the discount rate for claim reserves of
certain disability businesses differs from that used by Provident. While
UNUM and Provident's current methods for calculating the discount rate
for disability claim reserves are in accordance with generally accepted
accounting principles, both companies' management believe that the
combined entity should have consistent discount rate accounting policies
and methods for applying these policies for similar products. Anticipated
in the merger was the combination of the investment functions of UNUM and
Provident. UNUMProvident's investment function will be managed by
Provident's personnel and the current investment strategies of Provident
will be utilized by the combined entity. The current UNUM methodology
uses the same investment strategy for assets backing both liabilities and
surplus. The Provident
63
UNUM Corporation and Subsidiaries
methodology allows for different investment strategies for assets backing
surplus than those backing product liabilities which management has
determined to be the most appropriate approach for the combined entity.
Accordingly, UNUM will adopt Provident's method of calculating the
discount rate for claim reserves.
UNUM estimated the impact of this change in method on the estimate of
unpaid claims reserves and will record a pretax charge effective with the
merger of approximately $230 million ($150.0 million after-tax). This
estimated merger related adjustment has not been reflected in the
unaudited pro forma combined condensed statements of income and related
per share calculations. This estimate, which will be reported in
operating earnings, was based on a projection of UNUM's investment
portfolio and claim liabilities as of June 30, 1999, the expected
completion date of the merger. For the discount rates affected by the
change in methodology, the current interest rates used to discount claim
reserves, and the projected interest rates using the Provident method as
of June 30, 1999, are as follows:
December 31, Projected as of
1998 June 30, 1999
Group long term disability (North America) ................. 7.76% 6.65%
Group long term disability and individual disability (United
Kingdom) .................................................. 8.95% 7.74%
Individual disability (North America) ...................... 7.39% 6.79%
UNUM's unpaid claim reserves for these disability lines as of June 30,
1999, were estimated to be $5,376 million using the UNUM method for
determining reserve discount rates, and $5,606 million using the
Provident method.
(c) The pro forma adjustments to common stock, additional paid-in capital
and treasury stock reflect the retirement of shares of UNUM common stock
held in treasury, the reduction in par value of Provident common stock
from one dollar to ten cents, and the reclassification of Provident
common stock on a 0.73 to 1.0 basis that results in 98.7 million shares
issued to replace the 135.2 million shares of Provident common stock held
by Provident stockholders on December 31, 1998, and the issuance to UNUM
stockholders of 138.7 million shares of UNUMProvident common stock
pursuant to the merger (calculated by multiplying the number of shares of
UNUM common stock outstanding at December 31, 1998, of 138.7 million by
the exchange ratio of 1.0 to 1.0 representing the number of shares UNUM
stockholders will receive for each share of UNUM common stock they own
immediately prior to consummation of the merger). The number of shares of
UNUMProvident common stock that will be issued after completion of the
merger will be based on the actual number of shares of UNUM common stock,
and Provident common stock (after reclassification on a 0.73 to 1.0
basis) outstanding at the effective time of the merger.
NOTE 17.18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for 19941998 and 1993:1997:
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
-------------------------------------------------------------------------------
1994
-------------------------------------------------------------------------------1998
(Dollars in millions, except per common share data) -----------------------------------------------------
4th 3rd 2nd 1st
-------------------------------------------------------------------------------
Premiums $705.7 $670.3 $701.4 $655.0......................................... $ 983.9 $ 977.2 $ 962.2 $ 918.4
Investment income 194.4 192.3 192.4 191.1................................ 168.0 164.9 165.2 163.3
Net realized investment gains 9.6 11.6 12.5 11.9.................... 8.4 7.2 2.3 3.1
Benefits to policyholders 539.8 708.2 518.7 481.4........................ 779.9 717.2 710.0 679.1
Net income (loss) $ 54.0 $(61.7) $ 85.3 $ 77.1
-------------------------------------------------------------------------------
Net....................................... 66.8 104.4 98.7 93.5
Basic net income (loss) per common share $................ 0.48 0.75 $(0.84) $ 1.14 $ 1.02
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1993
-------------------------------------------------------------------------------0.71 0.68
Diluted net income per common share .............. 0.47 0.74 0.70 0.66
1997
-----------------------------------------------------
4th 3rd 2nd 1st
------------------------------------------------------------------------------------------ ----------- ----------- -----------
Premiums $647.7 $622.9 $624.6 $578.9....................................... $ 860.5 $ 833.8 $ 786.7 $ 782.7
Investment income 193.2 196.4 200.3 200.5.............................. 165.5 164.3 165.7 165.5
Net realized investment gains 8.5 10.6 9.8 20.5(losses) ......... (1.1) 2.7 (3.0) (2.2)
Benefits to policyholders 460.5 446.9 449.8 418.5...................... 635.7 629.6 585.0 588.5
Net income $ 83.1 $ 72.1 $ 80.8 $ 63.9
-------------------------------------------------------------------------------
Net..................................... 76.2 91.5 87.6 115.0
Basic net income per common share $ 1.08 $ 0.91 $ 1.02 $.............. 0.55 0.66 0.63 0.81
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------Diluted net income per common share ............ 0.54 0.64 0.62 0.79
64
ITEMItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 2, 1993, the Registrant determined not to reappoint Ernst & Young
L.L.P. as the Registrant's independent auditors for 1993. Also on August 2,
1993, the Registrant engaged Coopers & Lybrand L.L.P. as the Registrant's
independent auditors. In connectionNo disagreements with the audit of the fiscal year ended
December 31, 1992, and for the interim period dating from January 1, 1993, until
August 2, 1993, there were no disagreements between Ernst & Young L.L.P. and the
Registrantaccountants on any matter of accounting principles
or practices or financial statementsstatement disclosure or auditing scope or procedure, which, if not resolvedhave been reported on a Form 8-K
during the past two years prior to the satisfaction of Ernst & Young L.L.P., would have resulted in reference or
disclosure in Ernst & Young L.L.P.'s reports.
Ernst & Young L.L.P.'s report for the fiscal year ended December 31, 1992,
contained no adverse opinion, no disclaimer of opinion and no qualification or
modification of opinion as to uncertainty, audit scope, or accounting
principles.
The change of independent auditors was recommended by the Audit Committeedate of the Registrant's Board of Directors and approved by the Board of Directors.
most recent financial
statements.
PART III
ITEMItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS OF THE REGISTRANTDirectors of the Registrant
Set forth below is information about each director, including age,
position(s) held with UNUM, principal occupation, business history for at least
five years and other directorships held.
Age (as of Term
Name March 31, 1999) Director Since Position(s) held Expires
- -------------------------- ----------------- ---------------- ------------------------- --------
James F. Orr III 56 1986 Chairman, President and 1999
Chief Executive Officer
Gayle O. Averyt 65 1993 Director 2000
Robert E. Dillon, Jr. 67 1990 Director 1999
Gwain H. Gillespie 67 1991 Director 2000
Ronald E. Goldsberry 56 1993 Director 1999
Donald W. Harward 59 1990 Director 1999
George J. Mitchell 65 1995 Director 2001
Cynthia A. Montgomery 46 1990 Director 2000
James L. Moody, Jr. 67 1988 Director 2000
Lawrence R. Pugh 66 1988 Director 2001
Lois Dickson Rice 66 1993 Director 2001
John W. Rowe 53 1988 Director 2001
Mr. Orr, Chairman, President and Chief Executive Officer, UNUM, was
elected Chairman of the Board of UNUM in February 1988. Additionally, he has
served as President and Chief Executive Officer since September 1987. Mr. Orr
joined UNUM in 1986. Mr. Orr also serves as a director of Nashua Corporation.
Mr. Averyt retired as Chairman of Colonial Companies, Inc. in December
1993, a post he had held since 1989. Additionally, Mr. Averyt served as
Chairman of Colonial Life & Accident Insurance Company from 1970 to December
1993.
Mr. Dillon retired as Executive Vice President of Sony Electronics Inc., a
New Jersey-based electronics firm, in December 1995, a post he had held since
1981.
Mr. Gillespie retired as Vice Chairman of UNUM in October 1992, a post he
had held since 1991. Mr. Gillespie joined UNUM in September 1988.
Dr. Goldsberry is Vice President of Global Service Business Strategy at
Ford Motor Company, a post he has held since January 1999. Previously, Dr.
Goldsberry served as Global Vice President and General Manager of Global Ford
Customer Service Operations from January 1997 to January 1999 and General
Manager of the Customer Service Division from February 1994 to December 1996.
He is also Chairman of UNC Ventures, Inc., a venture capital firm and serves as
director of Case Corporation.
Dr. Harward is President of Bates College in Maine, a post he has held
since October 1989.
Senator Mitchell associated with the firm of Verner, Liipfert, Bernhard,
McPherson & Hand, Washington, D.C., as special counsel in January 1995 and
associated with the firm of Preti, Flaherty, Beliveau & Pachios, Portland,
Maine, as senior counsel in April 1997. He also serves as an advisor to B.T.
Wolfensohn, an investment banking firm. At the request of the British and Irish
governments, he served as chairman of the peace negotiations in Northern
Ireland. Previously, he served as a United States senator from Maine from 1980
to 1994 and additionally as Senate Majority Leader from 1989 to 1994. Senator
Mitchell also serves as a director or trustee of Federal Express
65
UNUM Corporation and Subsidiaries
Corporation, KTI, Inc., Staples, Inc., Starwood Hotels and Resorts, Unilever
PLC, The information underWalt Disney Company and Xerox Corporation.
Ms. Montgomery is a professor of competition and strategy at Harvard
University Graduate School of Business Administration, a post she has held
since 1989, and was named Timken Professor of Business Administration in 1998.
She also serves as a director of Newell Co. and certain Merrill Lynch mutual
funds.
Mr. Moody retired as Chairman of Hannaford Bros. Co. ("Hannaford"), a
Maine-based food retailing company, in May 1997, a post he had held since 1984.
Mr. Moody joined Hannaford in 1959. He is also a director of Empire Company
Limited, IDEXX Laboratories, Inc., Penobscot Shoe Company, Staples, Inc. and
several funds of the caption "ElectionColonial Group of Directors" includedmutual funds.
Mr. Pugh retired as Chairman of VF Corporation, an apparel company in
UNUM's
proxy statement datedPennsylvania, in October 1998, a post he had held since 1983. Additionally, Mr.
Pugh served as Chief Executive Officer from 1983 to 1995. He is also a director
of Mercantile Stores Company, Inc. and Milliken & Company.
Ms. Dickson Rice is a guest scholar at The Brookings Institution, a post
she has held since October 1991. She also serves as a director of Fleet
Financial Group, Inc., HSB Group, Inc., International Multifoods Corporation
and The McGraw-Hill Companies.
Mr. Rowe is Chairman, President and Chief Executive Officer of Unicom
Corporation and its principal subsidiary, Commonwealth Edison Company, a post
he assumed in March 28, 1995,1998. Previously, Mr. Rowe was President and Chief
Executive Officer of New England Electric System from 1989 to February 1998. He
is incorporated by reference.also a director of Bank of Boston Corporation, First National Bank of Boston
and Wisconsin Central Transportation Corp.
B. EXECUTIVE OFFICERS OF THE REGISTRANTExecutive Officers of the Registrant
The executive officers of UNUM are as follows:
AGE (AS OF AN OFFICER
NAME MARCH 24, 1995) POSITION HELD WITHAge (as of An Officer
Name March 31, 1999) Position held with UNUM SINCESince
- ----------------------- ------------------- ------------------------------------------------------------------ --------------------------- --------------------------- -----------
James F. Orr III 5256 Chairman, President and 1986
Chief Executive Officer
1986
Thomas G. BrownRobert E. Broatch 50 ExecutiveSenior Vice President 1992
Stephen B. Center 57 Executive Vice President 1972and 1996
Chief Financial Officer
Robert W. Crispin 4852 Executive Vice President 1995
Rodney N. Hook 48 Senior Vice President and Chief Financial Officer 1989
Peter J. Moynihan 5155 Senior Vice President 1979
Kevin P. O'Connell* 49 SeniorO'Connell 53 Executive Vice President UNUM America 1987
Elaine D. Rosen* 42 SeniorRosen 46 Executive Vice President UNUM America 1983
Robert E. Staton* 48 Chairman,52 President, Colonial Life 19841993
------------- --------
*Denotes an executiveofficer of UNUM America or Colonial Lifea subsidiary who is not an officer of the CorporationUNUM but who is
considered an "executive officer" under regulations of the Securities and
Exchange Commission.Commission ("SEC").
The officers are elected annually and hold office until their respective
successors have been chosen and qualified, or until death, resignation or
removal. The UNUM Board may also appoint or delegate the appointment of
officers, assistant officers and agents as it may deem necessary for such
periods as the President,By-Laws, the By-LawsUNUM Board, or the UNUM Boarddelegatee may prescribe.
Mr. Orr was elected Chairman of the Board of UNUM in February 1988. HeIn
addition, he has served as President and Chief Executive Officer since
September 1987. HeMr. Orr joined UNUM in 1986. He also serves as a director of
Nashua Corporation.
Mr. BrownBroatch was elected Senior Vice President of UNUM in May 1996. In
addition, he was elected as Chief Financial Officer in September 1997. Prior to
joining UNUM in 1996, Mr. Broatch served as Senior Vice President of Finance at
Aetna Life & Casualty Company from 1993 until May 1996.
Mr. Crispin was elected Executive Vice President of UNUM in January 1995.
In addition, he continues to serve as President and Chief Executive Officer of
Duncanson & Holt, Inc. ("D&H"), a post he has held since 1987. D&H became a
wholly-owned subsidiary of UNUM in July 1992.
Mr. Center was elected President of UNUM America and Executive Vice
President of UNUM in September 1992. Previously, he served as Group Executive
Vice President of UNUM AmericaChief Financial Officer from May 1990 to August 1992, Executive Vice
President for the Employee Benefits Division from1995 until
September 1989 to May 1990,
and Senior Vice President for the Employee Benefits Division from October 1985
to September 1989. He joined UNUM America in 1963.
Mr. Crispin was elected Executive Vice President of UNUM in January 1995.1997. Prior to joining UNUM in 1995, Mr. Crispin served as Vice
Chairman and Chief Investment Officer of The Travelers Insurance Companies from
July 1991 to January 1995 and
as Executive Vice President of Lincoln National Corporation from 1986 to 1991.
Mr. Hook was elected Senior Vice President and Chief Financial Officer in
April 1989. He served additionally as Treasurer from May 1989 to September 1992.
Prior to joining UNUM in April 1989, Mr. Hook served as a consultant to The
Equitable Life Assurance Society of New York from September 1988 to April 1989.1995.
66
Mr. Moynihan was elected Senior Vice President of UNUM in September 1993
and Senior Vice President for Investments of UNUM America in October 1987. He joined UNUM
America in 1973.
Mr. O'Connell was elected SeniorExecutive Vice President of UNUM in February
1996 and Executive Vice President of UNUM America in January
1992.May 1995. Previously, he
served as Senior Vice President for Group Life and Healthof UNUM America from November 1988 to January 1992 and additionally for Group Retirement
Products from May 1990 to January 1992.1995.
He joined UNUM America in 1968.
Ms. Rosen was elected Executive Vice President of UNUM in May 1998 and
President of UNUM America in January 1997. Previously, she served as Executive
Vice President of UNUM America from May 1995 to December 1996 and as Senior
Vice President of UNUM America in January 1991.
Previously, she served as Senior Vice President for Long Term Disability from November 1988 to January 1991.May 1995. She joined UNUM
America in 1975.
Mr. Staton was elected President of Colonial in January 1997. Previously
he served as Chairman of Colonial Life infrom December 1993.1993 to December 1996, and
additionally as Chief Executive Officer from July 1995 to December 1996.
Previously, he served as Senior Vice President from February 1990 to December
1993 and Vice President from August 1985 to February 1990; and additionally as1993; General Counsel from August 1985 to November 1993,1993; and Corporate
Secretary from February 1992 to August 1993. He joined Colonial LifeColonial's parent company merged
with UNUM in 1984.
ITEMMarch 1993.
Item 11. EXECUTIVE AND DIRECTOR COMPENSATION
The informationfollowing Summary Compensation Table shows compensation paid by UNUM
Corporation and by UNUM America, a wholly-owned subsidiary of UNUM Corporation,
to the Chief Executive Officer and the other four most highly compensated
executive officers of UNUM during any of the past three fiscal years during
which such person served as an executive officer.
67
UNUM Corporation and Subsidiaries
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
------------------------ ----------------------------------
Number of
Securities
Name and Incentive Restricted Underlying All Other
Principal Position Year Salary Payment(1) Stock Award (2) Options Compensation (5)
- ------------------------------- ------ ----------- ------------ -------------------- ------------- -----------------
James F. Orr III 1998 $860,000 $1,006,200 $ 0 (3) 400,000 (3) $ 20,000
Chairman, President and CEO 1997 $838,461 $1,142,000 $1,642,084 (4) 79,000 $ 20,000
1996 $739,923 $ 740,000 $ 912,600 (4) 82,400 $ 9,000
Robert W. Crispin 1998 $549,999 $ 426,900 $ 651,775 (4) 28,190 $ 20,000
Executive Vice President 1997 $540,384 $ 324,200 $ 687,384 (4) 33,200 $227,673
1996 $500,000 $ 363,000 $ 450,450 (4) 40,600 $266,884
Elaine D. Rosen 1998 $431,666 $ 265,000 $ 462,550 (4) 20,000 $ 20,000
Executive Vice President 1997 $340,000 $ 249,000 $ 565,182 (4) 27,200 $ 12,605
1996 $296,154 $ 184,900 $ 228,150 (4) 20,500 $ 9,000
Robert E. Broatch 1998 $359,999 $ 235,200 $ 344,810 (4) 14,910 $ 95,749
Senior Vice President and CFO 1997 $312,693 $ 172,000 $ 400,974 (4) 19,300 $ 83,872
Kevin P. O'Connell 1998 $308,333 $ 177,600 $ 336,400 (4) 14,550 $ 18,333
Executive Vice President 1997 $300,000 $ 212,000 $ 412,430 (4) 19,800 $ 18,782
1996 $296,154 $ 169,500 $ 228,150 (4) 20,500 $ 9,000
(1) Cash incentive payments for 1998, 1997 and 1996 performance have been
listed in the year earned, but were actually paid in the following fiscal
year. Such amounts include special cash payments relative to 1997 for Mr.
Orr: $270,000; Ms. Rosen: $62,000; and Mr. O'Connell: $62,000.
(2) The aggregate number and average market value as of December 31, 1998,
($58.97 per share) of shares of restricted stock held by the five named
executive officers were as follows: Mr. Orr: 74,200, $4,375,574; Mr.
Crispin: 45,800, $2,700,826; Ms. Rosen: 31,400, $1,851,658; Mr. Broatch:
36,460, $2,150,046; and Mr. O'Connell: 25,000, $1,474,250.
(3) In 1998, 400,000 options were granted to Mr. Orr in recognition of his
record of leadership. Due to the magnitude of that grant, no restricted
stock was awarded to Mr. Orr in 1998 for the 1998-2000 performance cycle.
(4) The restrictions may lapse on some or all of the shares represented by the
restricted stock awards shown for each named executive, provided that UNUM
attains targeted three-year return-on-equity goals and that the executive
remains in the company's employ as provided in the 1990 and 1996 plans. If
no determination has been made concerning achievement of such
return-on-equity goals at the time of a "change in control" as defined in
the applicable plan (consummation of the merger for grants made in 1998
and 1997, and shareholder approval of the merger for grants made in 1996),
restrictions will lapse on all shares.
(5) Except as noted below, the stated amounts are UNUM's matching contributions
to UNUM's qualified and nonqualified 401(k) plans. In the case of Mr.
Crispin, UNUM made payments of $220,000 in 1997 and 1996 to compensate him
for foregone compensation from his previous employer and provided
relocation assistance of $37,384 relative to 1996. In the case of Mr.
Broatch, UNUM paid $75,000 in 1998 and 1997 to compensate him for foregone
compensation from his previous employer.
68
OPTION GRANTS IN FISCAL 1998
Number of
Securities % of Total
Underlying Options Granted Potential Realized Value
Options to Employees in Exercise Expiration At Expiration(3)
Name Granted Fiscal Year Price Date 0%($) 5%($) 10%($)
- -------------------- ------------- ----------------- ---------- ----------- ------- -------------- --------------
James F. Orr III 400,000 (1) 24.10% $ 52.59 3/13/08 $0 $13,230,383 $33,528,389
Robert W. Crispin 28,190 (2) 1.70% $ 52.59 3/13/08 $0 $ 932,411 $ 2,362,913
Elaine D. Rosen 20,000 (2) 1.21% $ 52.59 3/13/08 $0 $ 661,519 $ 1,676,419
Robert E. Broatch 14,910 (2) 0.90% $ 52.59 3/13/08 $0 $ 493,163 $ 1,249,771
Kevin P. O'Connell 14,550 (2) 0.88% $ 52.59 3/13/08 $0 $ 481,255 $ 1,219,595
(1) Options were granted under the captions "Compensation1996 Incentive Plan on March 13, 1998, based
on the average market value on that date. Twenty-five percent of Directors"the
options became exercisable on March 13, 1999. An additional 25 percent
will become exercisable on each of March 13, 2000, 2001 and "Executive2002, or upon
consummation of the merger, whichever is earlier.
(2) Options were granted under the 1996 Incentive Plan on March 13, 1998, based
on the average market value on that date. Thirty-three percent of the
options became exercisable on March 13, 1999. An additional 33 and 34
percent become exercisable on March 13, 2000, and 2001, respectively, or
upon consummation of the merger, whichever is earlier.
(3) Potential realizable value at expiration is based on an assumption that the
stock price of UNUM Corporation common stock appreciates at the annual
rate shown (compounded annually) from the date of grant until the end of
the ten-year term. These numbers are calculated based on the requirements
promulgated by the SEC and do not reflect UNUM's estimate of future stock
price growth.
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Acquired Options at Fiscal Year-End at Fiscal Year-End(1)
On Exercise Value ------------------------------- ---------------------------------
Name Of Options Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ---------------- ---------- ------------- --------------- ------------- --------------
James F. Orr III -- -- 473,254 481,246 $17,653,083 $4,503,684
Robert W. Crispin -- -- 147,752 64,538 $ 5,132,505 $1,064,664
Elaine D. Rosen -- -- 46,306 45,494 $ 1,357,830 $ 729,271
Robert E. Broatch -- -- 31,099 51,811 $ 840,161 $1,051,026
Kevin P. O'Connell 12,000 $307,874 31,864 35,086 $ 906,475 $ 589,777
(1) Potential unrealized value is (i) the average fair market value as of
December 31, 1998, ($58.97 per share) less the option exercise price times
(ii) the number of shares acquired on exercise of options.
69
UNUM Corporation and Subsidiaries
PENSION PLAN
The following table illustrates the combined estimated annual benefits
payable under the UNUM Employees Pension Plan and Trust (the "Pension Plan")
and the Supplemental Retirement Plan (the "Supplemental Plan") upon normal
retirement of participants with varying Final Average Earnings (as defined
below) and years of Credited Service. The amounts shown are annual payments for
the life of a participant who retires at age 65. As of December 31, 1998,
Messrs. Orr, Crispin, Broatch and O'Connell, and Ms. Rosen had 12, 8, 6, 30 and
23 years of Credited Service, respectively. If each of the above were to
continue his or her employment until age 65, the respective years of Credited
Service would be 21, 27, 23, 42 and 42 for purposes of computing benefits.
Estimated Annual Benefits by Years of Credited Service
-------------------------------------------------------------------------------------------------
Final Average
Earnings 10 15 20 25 30 35 40 45
- -------------- ---------- ----------- ----------- ----------- ----------- ------------ ------------ ------------
$ 500,000 $ 75,400 $114,700 $155,200 $196,800 $239,400 $ 272,900 $ 306,300 $ 339,700
600,000 91,100 138,700 187,600 237,900 289,400 329,800 370,200 410,600
700,000 106,900 162,700 220,100 279,000 339,400 386,800 434,100 481,400
800,000 122,700 186,700 252,500 320,100 389,400 443,700 498,000 552,200
900,000 138,500 210,700 285,000 361,200 439,400 500,600 561,900 623,100
1,000,000 154,300 234,700 317,400 402,300 489,400 557,600 625,700 693,900
1,100,000 170,000 258,700 349,900 443,400 539,400 614,500 689,600 764,700
1,200,000 185,800 282,700 382,300 484,500 589,400 671,500 753,500 835,600
1,300,000 201,600 306,700 414,700 525,600 639,400 728,400 817,400 906,400
1,400,000 217,400 330,700 447,200 566,800 689,400 785,400 881,300 977,200
1,500,000 233,100 354,700 479,600 607,900 739,400 842,300 945,200 1,048,100
1,600,000 248,900 378,700 512,100 649,000 789,400 899,300 1,009,100 1,118,900
1,700,000 264,700 402,700 544,500 690,100 839,400 956,200 1,073,000 1,189,700
1,800,000 280,500 426,700 577,000 731,200 889,400 1,013,100 1,136,900 1,260,600
1,900,000 296,300 450,700 609,400 772,300 939,400 1,070,100 1,200,700 1,331,400
2,000,000 312,000 474,700 641,900 813,400 989,400 1,127,000 1,264,600 1,402,200
The above table reflects the amendment of the Pension Plan to a Lifecycle
formula effective January 1, 1997. Retirement benefits under this plan include
a Basic Benefit based upon age at retirement, years of Credited Service, Final
Average Earnings and Social Security Covered Compensation and an additional
Transition Benefit based on the preceding factors and also upon each
participant's age at December 31, 1996. The plan also includes limited duration
grandfathered formulas in effect prior to 1997. "Final Average Earnings" is
defined as the average of salary plus annual cash incentive payments for the
five years in which earnings were highest within the last 10 years of
employment. "Social Security Covered Compensation" includedmeans the average of the
annual Social Security taxable wage bases in effect during the 35 year period
ending when the employee reaches Social Security Retirement Age. Accrued
benefits are 100 percent vested after five years of service. Because the
Transition Benefit varies based upon age at December 31, 1996, and Social
Security Covered Compensation varies with year of birth, the retirement
benefits shown above are averages; benefits for individual executives may be 10
to 15 percent higher or lower than shown.
The Supplemental Plan provides benefits equal to the difference between
what the Pension Plan can pay reflecting the limits imposed by Sections
401(a)(17) and 415 of the Code and what the Pension Plan otherwise would have
paid had these limits not existed. All participants in the Pension Plan who
retire or terminate after January 1, 1983, and are affected by the limits are
eligible to participate in the Supplemental Plan, including Messrs. Orr,
Crispin, O'Connell and Broatch, and Ms. Rosen. Effective January 1, 1997, the
Supplemental Plan also pays benefits that would have been paid by the Pension
Plan had compensation not been deferred.
The Supplemental Executive Retirement Plan (the "SERP") provides benefits
for certain executives who have been designated to participate by UNUM's proxy statement dated March 28,
1995,board,
including certain of the named executive officers. The SERP benefits for
Messrs. Orr and Crispin equal 2.5 percent of Final Average Earnings for each
year of Credited Service, up to a maximum of 20 years, less benefits payable
from the Pension and Supplemental Plans. Mr. O'Connell and Ms. Rosen are
eligible to participate in a modified SERP; however, their benefits under the
Pension and Supplemental Plans are expected to exceed the minimum benefits
guaranteed under the SERP formula.
70
COMPENSATION OF DIRECTORS
Non-employee directors are paid an annual retainer of $27,500 by UNUM.
Directors who chair a committee of UNUM's board are paid an additional annual
retainer of $4,000. Directors are also paid an attendance fee of $1,000 for
each board meeting attended, and an additional $1,000 for each committee
meeting attended. Directors may defer their compensation pursuant to a
nonqualified deferred compensation plan, including an opportunity to invest in
phantom UNUM Corporation common stock. Directors are also reimbursed for
out-of-pocket expenses relating to attendance at meetings.
In order to further align the interests of the directors with those of the
stockholders, during 1997 the Board of Directors adopted stock ownership
expectations which provide that over a five-year period each director is incorporatedto
accumulate UNUM stock (exclusive of stock options) valued at three-times the
annual retainer paid to the director. In addition, during 1997, the Board
determined to discontinue the consulting fee arrangement that was previously in
place in favor of a stock-based form of compensation. Specifically, effective
as of the 1997 Annual Meeting, further benefits under that consulting fee
arrangement ceased to accrue, so that upon termination of Board service, each
eligible director will be entitled to receive an annual consulting fee fixed at
$27,500 for only the number of full years each such director had served as of
May 31, 1997. In lieu of the continued accrual of benefits under the consulting
fee arrangement, the Board of Directors voted to increase the size of the
existing annual non-employee director stock option grants under the 1990
Long-Term Stock Incentive Plan. As of May 10, 1997, each continuing
non-employee director receives an annual automatic grant of an option to
purchase 4,000 shares of UNUM Corporation common stock. Each newly elected
non-employee director will receive an automatic grant of an option to purchase
6,000 shares of UNUM Corporation common stock.
OTHER AGREEMENTS AND TRANSACTIONS
Severance Agreements
UNUM has entered into severance agreements (the "Severance Agreements")
with each of Messrs. Orr, Crispin, and Broatch and Ms. Rosen providing for
payments and other benefits to the officer if, within two years after a Change
in Control of UNUM, as defined in the Severance Agreements, his or her
employment is terminated (a) involuntarily other than for willful and continued
failure by reference.
ITEMthe officer to perform substantially his or her duties or willful
conduct which is demonstrably and materially injurious to the employer; or (b)
voluntarily by the officer, if for Good Reason as defined in the Severance
Agreements. Under the Severance Agreements, an officer whose employment so
terminates will receive, in addition to accrued salary and prorated incentive
compensation, (1) a lump sum payment equal to three times the sum of his or her
salary in effect at termination or immediately prior to the Change in Control,
whichever is greater, plus three times the average of the annual incentive
compensation awards received by the officer in respect of the preceding three
years; (2) a lump sum payment equal to the present value of the reduction in
retirement payments resulting from the termination, assuming employment had
continued for three additional years; and (3) continuation of life, disability
and accident and health insurance benefits for a maximum of three years, except
to the extent that equivalent benefits are provided by a subsequent employer.
In the event of a Potential Change in Control, as defined in the Severance
Agreements, UNUM is obligated to fund a trust in an amount sufficient to
provide for all cash payments under the such agreements.
Employment Agreements
Pursuant to an agreement entered into between UNUM and Mr. Crispin at the
time of his hire, Mr. Crispin is entitled to a partially nonqualified pension
arrangement whereby he receives the equivalent of two years credit under the
Corporation's retirement plans in which executive officers participate for each
of his first ten years of employment. Furthermore, in the event of termination
of Mr. Crispin's employment for any reason (except in connection with a change
of control of the Corporation) other than resignation or cause during the first
five years of employment, the agreement provides that Mr. Crispin will receive
a severance payment equivalent to two years' base salary.
Pursuant to an agreement entered into between UNUM and Mr. Broatch at the
time of his hire, Mr. Broatch is entitled to a partially nonqualified pension
arrangement whereby he receives the equivalent of two years credit under the
Corporation's retirement plans in which executive officers participate for each
of his first five years of employment. Furthermore, in the event of termination
of Mr. Broatch's employment for any reason (except in connection with a change
of control of the Corporation) other than resignation or cause, the agreement
provides that Mr. Broatch will receive a severance payment equivalent to one
years' base salary.
71
UNUM Corporation and Subsidiaries
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Indicated below are the number of shares beneficially owned as of December
31, 1998, by holders of more than five percent of UNUM Corporation common stock
as reported to the SEC by such holders on Form 13G and the percentage of the
total shares of UNUM Corporation common stock outstanding, which such holdings
represented on such date.
o FMR Corp., 82 Devonshire Street, Boston, MA 02109, reported beneficial
ownership of 8,593,853 shares (6.2%), including sole voting power over
422,883 shares and sole dispositive power over all such shares.
o J.P. Morgan & Co. Incorporated, 60 Wall Street, New York, NY 10260,
reported beneficial ownership of 10,084,034 shares (7.3%), including sole
voting power over 7,303,438 shares, shared voting power over 194,600
shares, sole dispositive power over 9,864,984 shares and shared dispositive
power over 216,850 shares.
SECURITY OWNERSHIP
The following table sets forth information regarding the beneficial
ownership of UNUM Corporation common stock, as of March 1, 1999, by each
director, nominee and named executive officer, and by all directors, nominees
and executive officers of UNUM as a group. The share holdings reported for all
directors, nominees and executive officers as a group total 1.67 percent of the
outstanding shares on March 1, 1999, as calculated pursuant to the rules of the
SEC. All other amounts reported total less than one percent of the outstanding
shares on such date.
Number of Shares
Beneficially Owned
Shares Subject to Options Total Shares
Directors and Named Beneficially Exercisable as of Beneficially
Executive Officers Owned(1)(2) April 30, 1999 Owned(1)(2)
- ----------------------------------------------------- ------------------ -------------------- ----------------
James F. Orr III ................................. 302,967 (3) 627,340 930,307 (3)
Gayle O. Averyt .................................. 300,251 (4) 6,000 306,251 (4)
Robert E. Dillon, Jr. ............................ 11,647 17,000 28,647
Gwain H. Gillespie ............................... 63,356 (5) 12,000 79,356 (5)
Ronald E. Goldsberry ............................. 7,537 14,000 21,537
Donald W. Harward ................................ 6,000 (6) 12,000 18,000 (6)
George J. Mitchell ............................... 3,583 10,000 15,583
Cynthia A. Montgomery ............................ 9,071 (7) 18,000 27,071 (7)
James L. Moody, Jr. .............................. 8,898 20,000 28,898
Lawrence R. Pugh ................................. 15,988 20,000 35,988
Lois Dickson Rice ................................ 2,382 14,000 16,382
John W. Rowe ..................................... 3,938 12,000 15,938
Robert W. Crispin ................................ 101,041 181,814 282,855
Elaine D. Rosen .................................. 62,662 68,852 131,514
Robert E. Broatch ................................ 39,323 54,958 94,281
Kevin P. O'Connell ............................... 58,024 50,169 108,193
All directors and executive officers as a group
(18 persons including the above named)* ......... 1,116,204 (8) 1,305,075 2,421,279 (8)
- --------
(1) The number of shares reflected which, under applicable SEC regulations, are
deemed to be beneficially owned. Unless otherwise indicated, the caption "Security Ownership" includedperson
indicated holds sole voting and dispositive power.
(2) Includes restricted stock units with a value equivalent to 30,400 shares of
UNUM Corporation common stock held by Mr. Crispin; the following number of
shares of phantom UNUM Corporation common stock credited to the named
executive officers' accounts under UNUM's Nonqualified 401(k) Plan: Mr. Orr:
2,108 shares; Mr. Crispin: 2,080 shares; Ms. Rosen: 1,333 shares; Mr.
Broatch: 1,198 shares; and Mr. O'Connell: 1,831 shares; and the following
number of shares of phantom UNUM Corporation common stock credited to the
non-employee directors' accounts under UNUM's Director Deferred Compensation
Plan: Mr. Dillon: 6,047; Mr. Gillespie: 5,610; Dr. Goldsberry: 5,737;
Senator Mitchell: 2,583; Ms. Montgomery: 1,871; Mr. Moody: 898; Mr. Pugh:
11,988; Ms. Rice: 1,782; and Mr. Rowe: 2,938.
(3) Includes 30,459 shares held by Mr. Orr's spouse and child.
(4) Includes 33,349 shares held by Mr. Averyt's spouse and 111,698 shares held
in UNUM's
proxy statement dated March 28, 1995, is incorporatedtrust for the benefit of the family members under various trusts
pursuant to which Mr. Averyt, as trustee, has sole or shared voting or
dispositive power. Mr. Averyt disclaims beneficial ownership of 19,077 of
these shares held in trust.
(5) Includes 51,694 shares held jointly with or by reference.
ITEMMr. Gillespie's spouse.
72
(6) Includes 6,000 shares held jointly with Dr. Harward's spouse.
(7) Includes 7,200 shares held jointly with Ms. Montgomery's spouse.
(8) Includes 192,806 shares held in the name of a spouse, child or certain
other relative sharing the same home as the director or executive officer,
or held by the director or executive officer, or the spouse of the
director or executive officer, as a trustee or as a custodian for family
members.
* Includes officers of subsidiaries who are not officers of UNUM but are
considered "executive officers" of UNUM under rules of the SEC.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The informationSee Item 11 "Executive and Director Compensation" under the caption "Executive Compensation" included in
UNUM's proxy statement dated March 28, 1995, is incorporated by reference."Other
Agreements and Transactions" for this information.
73
UNUM Corporation and Subsidiaries
PART IV
ITEMItem 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.8-K
(a)Documents filed:
1.The Index of documents filed as part of this report:
1. The following Consolidated Financial Statements of UNUM Corporation
and subsidiaries are included in Item 8.
Page
-----
Report of Independent Accountants ..................................... 29
Consolidated Statements of Income for the Years Ended
December 31, 1994, 19931998, 1997 and 1992............................1996 .................................... 30
Consolidated Balance Sheets as of December 31, 1994,1998 and 1993.....................................................1997 .......... 31
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 19931998, 1997 and 1992..............1996 .................................... 32
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 19931998, 1997 and 1992........................1996 .................................... 33
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1998, 1997 and 1996 .............................. 35
Notes to Consolidated Financial Statements........................................................................Statements ............................ 36
2. Financial Statement Schedules
II Condensed Financial Information of UNUM Corporation (Registrant) 76
III Supplementary Insurance Information 80
IV Reinsurance 81
V Valuation and Qualifying Accounts and Reserves 82
2.Financial Statement Schedules. See Index to Financial Statement
Schedules on page of this report.
3. Exhibits. See Index to Exhibits on page 83 of this report.
(b)Reports on Form 8-K:
No reportsOn November 30, 1998, UNUM filed a current report on Form 8-K/A which
amended and replaced in its entirety Form 8-K filed on November 25, 1998, with
respect to UNUM entering into an Agreement and Plan of Merger dated as of
November 22, 1998, pursuant to which UNUM and Provident will merge under the
name UNUMProvident Corporation.
On December 11, 1998, in connection with the previously announced plan to
merge between UNUM and Provident, UNUM filed a current report on Form 8-K were filed byfor
the Registrant duringpurpose of filing the fourth quarterCondensed Consolidated Financial Statements and notes
thereto of 1994.Provident for the periods ended September 30, 1998, December 31,
1997, December 31, 1996, and Condensed Pro Forma Combined Financial Statements
and notes thereto of UNUM and Provident at September 30, 1998, and for the nine
months ended September 30, 1998 and 1997, and for the years ended December 31,
1997, 1996 and 1995.
Schedules and exhibits required by Article 7 of Regulation S-X other than
those listed are omitted because they are not required, are not applicable, or
equivalent information has been included in the financial statements, and notes
thereto, or elsewhere herein.
74
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTIONPursuant to the requirements of Section 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OFor 15(d) of the Securities
Exchange Act of 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
PORTLAND, STATE OF MAINE, ON MARCH 24, 1995.the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Portland, State of Maine, on March 31, 1999.
UNUM Corporation
By /s/ JAMES F. ORR III
-------------------------------------------------------------------------
James F. Orr III (Chairman, President
and Chief Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OFPursuant to the requirements of the Securities Exchange Act of 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
NAME TITLE DATEName Title Date
- --------------------------------------------------------- --------------------------------------------------------- ------------------------------------------ ---------------
/s/ JAMES F. ORR III Chairman, President and
- ------------------------------------- Chief Executive Officer March 24, 1995
-------------------------------------------31, 1999
(James F. Orr III)
/s/ RODNEY N. HOOKROBERT E. BROATCH Senior Vice President
- ------------------------------------- and Chief Financial Officer March 24, 1995
-------------------------------------------
(Rodney N. Hook)31, 1999
(Robert E. Broatch)
/s/ STEPHEN D. ROBERTSJOHN M. LANG, JR. Vice President and
- ------------------------------------- Corporate Controller March 24, 1995
-------------------------------------------
(Stephen D. Roberts)31, 1999
(John M. Lang, Jr.)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(Gayle O. Averyt)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------
(Kenneth S. Axelson)
* Director March 24, 1995
-------------------------------------------31, 1999
(Robert E. Dillon, Jr.)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(Gwain H. Gillespie)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(Ronald E. Goldsberry)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(Donald W. Harward)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(George J. Mitchell)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(Cynthia A. Montgomery)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(James L. Moody, Jr.)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(Lawrence R. Pugh)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(Lois Dickson Rice)
*
- ------------------------------------- Director March 24, 1995
-------------------------------------------31, 1999
(John W. Rowe)
*/s/ JOHN-PAUL DEROSA
-------------------------------------------
(John-Paul DeRosa,/s/ KEVIN J. TIERNEY
- -------------------------------------
*(Kevin J. Tierney, as Attorney-in-fact
for each of the persons indicated)
(Assistant(Senior Vice President, General Counsel & Secretary)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
UNUM Corporation
We have audited the consolidated financial statements and the financial
statement schedules of UNUM Corporation and subsidiaries listed in Item 14(a) of
this Form 10-K as of and for the years ended December 31, 1994 and 1993. These
consolidated financial statements and financial statement schedules are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 1994 and 1993 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of UNUM Corporation and subsidiaries as of December 31, 1994 and 1993,
and the consolidated results of their operations and their cash flows for the
two years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. In addition, in our opinion, the 1994 and 1993
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
As discussed in Notes 3, 8 and 10 of the consolidated financial statements,
the Corporation changed its method of accounting for certain investments in debt
securities in 1994 and its method of accounting for postretirement benefits
other than pensions, and accounting for income taxes in 1993.
/s/ COOPERS & LYBRAND L.L.P.
Portland, Maine
February 7, 1995, except for Note 11 for
which the date is February 28, 1995
REPORT OF INDEPENDENT AUDITORS
To the Directors and Stockholders
UNUM Corporation
Portland, Maine
We have audited the consolidated statements of income, stockholders' equity,
and cash flows of UNUM Corporation and Subsidiaries for the year ended December
31, 1992. Our audit also included the financial statement schedules for 1992
listed in the Index at Item 14(a). These financial statements and schedules are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of UNUM Corporation and subsidiaries for the year ended December
31, 1992, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG L.L.P.
Boston, Massachusetts
March 26, 199375
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULES
The following financial statement schedules of UNUM Corporation and
subsidiaries are included in Item 14(a):
PAGE(S)
-------
II Condensed Financial Information of UNUM Corporation (Registrant)..
III Supplementary Insurance Information...............................
IV Reinsurance.......................................................
UNUM CORPORATION (PARENT COMPANY)(Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBERYear Ended December 31,
-----------------------------
1994 1993 1992--------------------------------------
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------------------- ---------- ----------- -----------
------------------------------------------------------------------------------------------------------
Revenues
Dividends from subsidiaries*........................................ $102.0 $131.8 $110.8 ......................... $ 44.2 $ 462.4 $ 259.7
Investment income...................................................income .................................... 0.2 0.1 0.2 0.8
Net realized investment gains....................................... -- -- 1.90.3
Interest income on loans to subsidiaries* ............ 3.3 2.6 2.5
Fees and other income............................................... 0.8income ................................ -- 0.1 --
------- ------- --------------- --------
Total revenues.................................................. 102.9 132.0 113.5revenues ...................................... 47.7 465.2 262.5
Expenses
Operating expenses.................................................. 8.7 11.6 9.2expenses ................................... 7.5 8.3 4.7
Interest expense.................................................... 18.6 12.4 10.7expense ..................................... 40.9 41.7 40.7
Interest expense on loans from subsidiaries*........................ 2.3 ......... 17.4 2.5 0.1
--
------- -------- --------
Total expenses ...................................... 65.8 52.5 45.5
------- -------
Total expenses.................................................. 29.6 24.1 19.9
------- ------- --------------- --------
Income (loss) before income taxes............................................ 73.3 107.9 93.6taxes ..................... (18.1) 412.7 217.0
Income tax expense (benefit).......................................... (6.2) (5.7) 3.5benefit .................................... 29.6 17.3 15.1
------- ------- --------------- --------
Income before equity in undistributed net income
(loss) of subsidiaries...... 79.5 113.6 90.1subsidiaries ............................... 11.5 430.0 232.1
Equity in undistributed net income (loss) of
subsidiaries*................... 75.2 186.3 201.1 ........................................ 351.9 (59.7) 5.9
------- ------- --------------- --------
Net income............................................................ $154.7 $299.9 $291.2
------- ------- -------
------- ------- -------
------------income ............................................ $ 363.4 $ 370.3 $ 238.0
======= ======== ========
- --------
*Eliminated in consolidation
See note to condensed financial statements.
76
UNUM CORPORATION (PARENT COMPANY)(Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(DOLLARS IN MILLIONS)
DECEMBERDecember 31,
1994 1993-----------------------------
(Dollars in millions) 1998 1997
- ---------------------------------------------------------------- ------------- -------------
----------------------------------------------------------------------------------------------------
Assets
Investments
Investment in subsidiaries*................................................. $2,386.0 $2,376.9 ............................... $ 3,661.5 $ 3,085.2
Short-term investments...................................................... 0.5 4.4
-------- --------investments .................................... 4.5 2.1
---------- ----------
Total investments......................................................... 2,386.5 2,381.3
Cash.......................................................................... 2.0 1.3investments ........................................ 3,666.0 3,087.3
Cash ....................................................... 0.1 --
Amounts receivable from subsidiaries, net* ................. -- 16.2
Notes receivable from subsidiary* .......................... 51.3 35.7
Income taxes receivable .................................... 18.4 12.49.0 --
Other assets ............................................... 5.1 --
Property and equipment, net................................................... 16.7 17.3
-------- --------net ................................ 31.5 28.8
---------- ----------
Total assets.............................................................. $2,423.6 $2,412.3
-------- --------
-------- --------assets ............................................. $ 3,763.0 $ 3,168.0
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Notes payable...............................................................payable ............................................ $ 427.4713.5 $ 236.0467.5
Notes payable to subsidiary*................................................ 60.0 60.0 ............................. 257.1 245.8
Amounts payable to subsidiaries, net* .................... 54.7 --
Income taxes................................................................ 2.7 2.3taxes ............................................. -- 8.3
Other liabilities........................................................... 18.1 11.3
-------- --------liabilities ......................................... -- 11.6
---------- ----------
Total liabilities......................................................... 508.2 309.6liabilities ....................................... 1,025.3 733.2
Stockholders' Equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000240,000,000 shares, issued 99,987,958 shares................................................... 10.0 10.0199,975,916 shares ............ 20.0 20.0
Additional paid-in capital.................................................. 1,062.4 1,062.3capital ................................. 1,098.7 1,086.0
Unrealized gains, on available for sale securities of subsidiaries, net of
deferred taxes............................................................. 67.7 165.2...................................... 300.9 248.4
Unrealized foreign currency translation adjustment.......................... (23.7) (24.1)adjustment ......... (19.4) (16.0)
Retained earnings (including undistributed earnings of
subsidiaries of $1,114.3$1,694.0 million and $1,039.1$1,342.1 million in
19941998 and 1993,1997, respectively)...... 1,507.2 1,420.8
-------- --------
2,623.6 2,634.2 ............................. 2,444.9 2,162.5
---------- ----------
3,845.1 3,500.9
Less:
Treasury stock, at cost (1994-27,575,430(1998--61,266,501 shares; 1993-24,006,8161997--
61,703,924 shares).... 706.6 529.8 ....................................... 1,085.9 1,050.3
Restricted stock deferred compensation...................................... 1.6 1.7
-------- --------compensation ..................... 21.5 15.8
---------- ----------
Total stockholders' equity................................................ 1,915.4 2,102.7
-------- --------equity ................................ 2,737.7 2,434.8
---------- ----------
Total liabilities and stockholders' equity................................ $2,423.6 $2,412.3equity ................ $ 3,763.0 $ 3,168.0
========== ==========
- -------- --------
-------- --------
*Eliminated in consolidation
See note to condensed financial statements.
77
UNUM CORPORATION (Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBERYear Ended December 31,
-------------------------
1994 1993 1992---------------------------------------
(Dollars in millions) 1998 1997 1996
- -------------------------------------------------------------- ----------- ----------- -----------
-----------------------------------------------------------------------------------------------------------
Operating activities:
Net income....................................................................income ............................................... $ 154.7363.4 $ 299.9370.3 $ 291.2238.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase (decrease) in income tax liability............................................ 0.4 2.3 3.2liability ............. (17.3) (8.2) 11.7
(Increase) decrease in amounts due to/from
subsidiaries..................... (6.0) 7.5subsidiaries* .......................................... 70.9 (1.2) Other....................................................................... 11.1 4.6 (5.4)(8.4)
Other ................................................... (6.6) 11.3 16.1
Equity in undistributed net income of
subsidiaries*........................... (75.2) (186.3) (201.1)
------- ------- ------- .......................................... (351.9) (104.1) (5.9)
-------- -------- --------
Net cash provided by operating activities................................. 85.0 128.0 86.7
------- ------- -------activities .............. 58.5 268.1 251.5
-------- -------- --------
Investing activities:
Sales of investments.......................................................... -- -- 86.2
Purchases of investments...................................................... -- 0.3 (89.9)
Investment in subsidiaries, net*.............................................. (30.6) 0.9 (43.8) ......................... (174.9) (107.8) (13.1)
Issuance of notes receivable from subsidiaries* .......... (15.6) (3.2) (32.5)
Repayment of notes receivable from subsidiaries* ......... -- -- 50.0
Net (increase) decreaseincrease in short-term investments............................. 3.9 (2.3) 1.4investments ................... (2.4) (1.5) --
Net additions to property and equipment....................................... (3.3) (2.4) (1.7)
------- ------- -------equipment .................. (4.1) (10.7) (8.6)
-------- -------- --------
Net cash used in investing activities..................................... (30.0) (3.5) (47.8)
------- ------- -------activities .................. (197.0) (123.2) (4.2)
-------- -------- --------
Financing activities:
Dividends to stockholders..................................................... (68.3) (61.4) (41.9)stockholders ................................ (81.0) (79.2) (79.8)
Treasury stock acquired....................................................... (183.3) (192.5) --acquired .................................. (65.0) (285.2) (119.1)
Proceeds from notes payable................................................... 54.7 51.5 74.6payable .............................. 278.1 -- --
Repayment of notes payable.................................................... -- (50.0) (25.0)
Increasepayable ............................... (68.0) (48.5) (15.0)
Net increase (decrease) in short-term debt........................................ 136.7 58.1 (58.1)
Net proceedsdebt ............... 36.0 (10.6) (42.3)
Proceeds from notes payable to subsidiaries*.............................. ............. 11.3 245.8 --
60.0 1.3
Other......................................................................... 5.9 10.4 10.7
------- ------- -------Repayment of notes payable to subsidiaries* .............. -- -- (10.0)
Other .................................................... 27.2 32.8 18.9
-------- -------- --------
Net cash used inprovided by (used in) financing
activities..................................... (54.3) (123.9) (38.4)
------- ------- -------activities ............................................. 138.6 (144.9) (247.3)
-------- -------- --------
Net increase in cash............................................................ 0.7 0.6 0.5cash ...................................... 0.1 -- --
Cash at beginning of year....................................................... 1.3 0.7 0.2
------- ------- -------year ................................. -- -- --
-------- -------- --------
Cash at end of year.............................................................year ....................................... $ 2.00.1 $ 1.3-- $ 0.7
------- ------- -------
------- ------- ---------
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Income taxes................................................................taxes ........................................... $ (6.6)(13.2) $ (8.1)(10.6) $ (4.7)
Interest....................................................................(25.8)
Interest ............................................... $ 18.140.3 $ 12.143.3 $ 11.040.8
Interest to subsidiaries*................................................... .............................. $ 2.217.5 $ -- $ --0.2
Supplemental disclosure of noncash operating and investing activities:
During 1997, UNUM Corporation received a $168.3 million note receivable in
satisfaction of a dividend payment from one affiliate, which was immediately
contributed to another affiliate.
- --------
*Eliminated in consolidationconsolidation.
See note to condensed financial statements.
78
UNUM CORPORATION (PARENT COMPANY)(Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS
NOTENote 1. BASIS OF PRESENTATIONBasis of Presentation
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes of UNUM
Corporation and subsidiaries, which are included in Item 8.
Certain December 31, 1993, and 1992 amounts have been reclassified in 1994
for comparative purposes.79
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARYIII--SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN MILLIONS)(Dollars in millions)
(1)(2)
FUTURE
POLICY AMORTIZATION
BENEFITS, BENEFITS TO OF
DEFERRED AND UNPAIDFuture policy
Deferred benefits, and (4)(5)
POLICYHOLDERS DEFERRED (5)
POLICY CLAIMS ANDpolicy unpaid claims (3) NET AND POLICY OTHER (6)
ACQUISITION CLAIM PREMIUM INVESTMENT INTEREST ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES REVENUE INCOME CREDITED COSTS EXPENSES WRITTENNet
acquisition and claim Premium investment
Segment costs expenses revenue income
- ------------------------------------------- ------------- --------------- ------------- ------------
Year Ended December 31, 1998
Disability Insurance ..................... $ 651.8 $ 6,721.6 $ 2,167.5 $ 491.4
Special Risk Insurance ................... 281.3 1,318.2 1,208.4 80.6
Colonial Products ........................ 332.9 533.9 556.5 67.7
Retirement Products ...................... -- 627.7 26.6 38.6
Corporate ................................ -- -- -- 4.1
--------- ---------- ---------- --------
Total ................................... $ 1,266.0 $ 9,201.4 $ 3,959.0 $ 682.4
========= ========== ========== ========
Year Ended December 31, 1997
Disability Insurance ..................... $ 526.7 $ 5,977.4 $ 1,882.6 $ 468.0
Special Risk Insurance ................... 202.9 1,001.3 947.2 71.5
Colonial Products ........................ 302.1 458.6 530.8 57.6
Retirement Products ...................... -- 615.5 130.3 54.4
Corporate ................................ -- -- 0.1 5.9
--------- ---------- ---------- --------
Total ................................... $ 1,031.7 $ 8,052.8 $ 3,491.0 $ 657.4
========= ========== ========== ========
Year Ended December 31, 1996
Disability Insurance ..................... $ 443.1 $ 5,526.0 $ 1,917.7 $ 468.5
Special Risk Insurance ................... 150.5 727.9 783.3 57.6
Colonial Products ........................ 274.6 410.8 498.2 47.3
Retirement Products ...................... 0.9 618.6 65.8 217.2
Corporate ................................ -- -- -- 16.1
--------- ---------- ---------- --------
Total ................................... $ 869.1 $ 7,283.3 $ 3,265.0 $ 806.7
========= ========== ========== ========
Amortization
Benefits to of deferred (5)
policyholders policy Other (6)
and interest acquisition operating Premiums
Segment credited costs expenses written
- ------------------------------------------- --------------- ------------- ----------- -------------
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994
Employee Benefits......1998
Disability Insurance ..................... $ 308.2 $2,301.1 $1,451.4 $263.5 $1,117.01,794.7 $ 39.6 $300.5 $1,108.8
Related Businesses..... 33.3 887.8 477.5 89.6 333.2 8.0 165.6 358.464.8 $ 492.9 $ 2,114.8
Special Risk Insurance ................... 803.3 143.3 181.1 414.5
Colonial Companies..... 224.8 330.5 441.3 32.6 226.1 60.7 124.4 388.1
Individual Disability.. 409.9 1,289.1 357.5 84.6 487.2 39.5 103.6 346.6Products ........................ 285.3 89.5 142.4 484.0
Retirement Security.... 57.5 137.0 62.5 226.9 212.1 4.2 47.4 57.8
Other Operations....... 1.5 500.5 16.9 114.4 115.2Products ...................... 49.3 -- 15.3 0.8
6.8 12.3
Corporate.............. -- (0.5) 0.8 4.2Corporate ................................ -- -- 33.262.1 --
----------- ------------ ---------- --------- ------------------- -------- ----------
--------- ----------
Total................ $1,035.2 $5,445.5 $2,807.9 $815.8 $2,490.8 $152.8 $781.5 $2,272.0
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------Total ................................... $ 2,932.6 $ 297.6 $ 893.8 $ 3,014.1
========== ======== ======== ==========
Year Ended December 31, 1993
Employee Benefits......1997
Disability Insurance ..................... $ 249.4 $2,080.8 $1,362.6 $234.7 $1,018.31,503.9 $ 42.1 $297.8 $1,060.6
Related Businesses..... 25.6 795.4 402.5 85.5 268.7 1.1 160.9 282.252.1 $ 481.9 $ 1,828.5
Special Risk Insurance ................... 643.9 94.0 179.5 311.2
Colonial Companies..... 206.0 282.2 407.4 41.4 211.7 56.1 110.6 365.4
Individual Disability.. 348.2 949.1 322.5 82.5 212.0 35.3 88.7 313.1Products ........................ 271.8 80.7 137.1 467.2
Retirement Security.... 47.5 106.4 36.3 235.5 196.6 10.6 43.5 34.4
Other Operations....... 2.4 490.6 25.9 154.0 149.4Products ...................... 102.7 0.1 5.7 2.5
7.2 14.0
Corporate.............. -- (0.5) -- 6.2Corporate ................................ -- -- 23.658.6 --
----------- ------------ ---------- --------- ------------------- -------- ----------
--------- ----------
Total................Total ................................... $ 879.1 $4,704.0 $2,557.2 $839.8 $2,056.7 $147.7 $732.3 $2,069.7
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------2,522.3 $ 226.9 $ 862.8 $ 2,609.4
========== ======== ======== ==========
Year Ended December 31, 1992
Employee Benefits......1996
Disability Insurance ..................... $ 206.8 $1,865.6 $1,116.2 $234.41,514.9 $ 808.099.0 $ 34.4 $285.7557.0 $ 895.1
Related Businesses..... 18.0 696.5 354.4 91.6 262.7 (2.9) 132.8 287.11,893.0
Special Risk Insurance ................... 524.0 53.9 183.8 251.2
Colonial Companies..... 185.7 243.0 371.9 35.4 191.5 50.5 104.8 330.8
Individual Disability.. 293.1 827.7 292.9 75.0 204.4 31.2 87.7 283.5Products ........................ 246.8 72.5 133.8 446.5
Retirement Security.... 35.8 90.0 32.3 228.8 211.7 9.4 33.3 11.9
Other Operations....... 14.4 475.0 29.3 181.6 182.7 3.3 8.4 0.9
Corporate..............Products ...................... 257.1 -- 24.5 15.0
Corporate ................................ -- -- 0.8 3.962.8 --
-- 10.4 --
----------- ------------ ---------- --------- ------------------- -------- ----------
--------- ----------
Total................Total ................................... $ 753.8 $4,197.8 $2,197.8 $850.7 $1,861.0 $125.9 $663.1 $1,809.3
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------2,542.8 $ 225.4 $ 961.9 $ 2,605.7
========== ======== ======== ==========
(1) Excludes other policyholder funds, as follows:
DECEMBERDecember 31,
------------------------------------
SEGMENT 1994 1993 1992--------------------------------------
Segment 1998 1997 1996
- ------------------------------------- --------- ------------ -----------
--------------------------------------------------------------------
Employee Benefits.............Disability Insurance ........... $ 6.35.9 $ 6.82.4 $ 5.8
Related Businesses............ 4.2 4.0 8.95.9
Special Risk Insurance ......... 13.3 15.4 12.7
Colonial Companies............ 100.1 76.0 57.0
Individual Disability......... -- -- --Products .............. 287.5 258.1 156.6
Retirement Security........... 3,192.0 3,204.1 3,229.9
Other Operations.............. 756.2 959.8 1,236.3
---------- ---------- ----------
Total.....................Products ............ 568.7 729.0 3,358.4
------- --------- ---------
Total .......................... $ 4,058.8875.4 $ 4,250.71,004.9 $ 4,537.9
---------- ---------- ----------
---------- ---------- ----------
3,533.6
======= ========= =========
(2) Includes unearned premiums, other policy claims and benefits payable.
(3) Includes fees and other income (expense).
(4) Includes investment income (expense) and net realized investment gains.
(5) Investment income and net realized investment gains are allocated to
the segments based on designation of ownership of assets identified to
the segments. Operating expenses are allocated to the segments based on
direct association with a product whenever possible. If, however, the
expense cannot be readily associated with a particular product, the
costs are allocated based on ratios of the relative time spent, extent
of usage or varying volume of work performed for each segment.
(6) Premiums written for health and disability income policies.
Certain December 31, 1993, and 1992 amounts have been reclassified in 1994
for comparative purposes.80
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(DOLLARS IN MILLIONS)IV--REINSURANCE
(Dollars in millions)
-------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------------------------------------------------------------------------------------------------------------------Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
Amount companies companies Amount to net
--------------- -------------- ------------ --------------- -----------
---------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 19941998
Life insurance in force..................... $145,425.9 $4,425.3inforce ..................... $ -- $141,000.6 --
---------- --------- ------ ----------
---------- --------- ------ ----------314,783.7 $ 15,755.0 $ 670.6 $ 299,699.3 0.2%
============ =========== ========= ============ ====
Premiums
Life insurance and individual annuities...annuities .... $ 517.9788.9 $ 15.738.3 $ 1.616.3 $ 503.8 0.3%766.9 2.1%
Accident and health insurance............. 2,135.0 96.8 169.1 2,207.3 7.7%insurance .............. 3,145.5 376.0 304.5 3,074.0 9.9%
Group annuities........................... 21.3annuities ............................ 0.8 -- -- 21.30.8 --
---------------------- ----------- --------- ------ ---------------------- ----
Total premiums........................premiums ........................... $ 2,674.23,935.2 $ 112.5 $170.7414.3 $ 2,732.4
---------- --------- ------ ----------
---------- --------- ------ ----------320.8 $ 3,841.7
============ =========== ========= ============
Year Ended December 31, 19931997
Life insurance in force................... $130,323.4 $2,247.9inforce ..................... $ -- $128,075.5 --
---------- --------- ------ ----------
---------- --------- ------ ----------260,014.8 $ 16,036.5 $ 2,069.7 $ 246,048.0 0.8%
============ =========== ========= ============ ====
Premiums
Life insurance and individual annuities...annuities ... $ 487.2650.7 $ 11.933.9 $ 1.69.0 $ 476.9 0.3%625.8 1.4%
Accident and health insurance............. 1,818.6 38.1 191.0 1,971.5 9.7%insurance ............. 2,656.7 368.9 272.6 2,560.4 10.6%
Group annuities........................... 25.7annuities ........................... 2.5 -- -- 25.72.5 --
---------------------- ----------- --------- ------ ---------------------- ----
Total premiums........................premiums ........................... $ 2,331.53,309.9 $ 50.0 $192.6402.8 $ 2,474.1
---------- --------- ------ ----------
---------- --------- ------ ----------281.6 $ 3,188.7
============ =========== ========= ============
Year Ended December 31, 19921996
Life insurance in force..................... $105,361.0inforce ..................... $ 586.8199,019.2 $ 11,476.5 $ -- $104,774.2$ 187,542.7 --
---------- --------- ------ ----------
---------- --------- ------ ----------============ =========== ========= ============ ====
Premiums
Life insurance and individual annuities...annuities ... $ 409.9552.0 $ 6.228.6 $ 0.5-- $ 404.2 0.1%523.4 --
Accident and health insurance............. 1,615.7 45.3 135.7 1,706.1 8.0%insurance ............. 2,406.9 77.8 252.9 2,582.0 9.8%
Group annuities........................... 32.1annuities ........................... 15.0 -- -- 32.115.0 --
---------------------- ----------- --------- ------ ---------------------- ----
Total premiums........................premiums ........................... $ 2,057.72,973.9 $ 51.5 $136.2106.4 $ 2,142.4
---------- --------- ------ ----------
---------- --------- ------ ----------252.9 $ 3,120.4
============ =========== ========= ============
81
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in millions)
Additions
------------------------------
Balance at Charged to
beginning costs and Charged to Balance at end
Description of period expenses other accounts Deductions of period
- --------------------------------------- ------------ ----------- ---------------- ------------ ---------------
Allowances for probable losses:
Mortgage loans .................... $ 33.9 $ 2.3 $-- $ (3.4) $ 32.8
Real estate held for sale ......... $ 17.8 $ (1.0) $-- $ -- $ 16.8
82
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
NUMBER DESCRIPTION METHOD OF FILING PAGE NO.
--------- -------------------------------------------------- --------------------------------------------------Number Description Method of Filing
- -------- ------------------------------ ---------------------------------------------------------------------
3.1 Certificate of Incorporation of UNUM Corporation, Filed as Exhibit 3.1 to the Registrant's Annual as amended Report on Form
of UNUM Corporation, as 10-K dated March 25, 1992,10, 1998, and incorporated herein by reference.
amended
3.2 By-Laws of UNUM Corporation Filed as Exhibit 3.2 to the Registrant's Annual Report on Form
Corporation 10-K dated March 25, 1992,1997, and incorporated herein by reference.
4 Rights Agreement Filed as Exhibit 1 to the Registrant's Current Report on Form 8-K
dated March 18, 1992, and incorporated herein by reference.reference and as
amended and filed as Exhibit 1 to the Registrant's Registration
Statement on Form 8-A/A dated June 21, 1996, and as amended
and filed as Exhibit 3 to the Registrant's Registration Statement on
Form 8-A/A dated November 25, 1998.
10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual Report on Form
10-K dated March 26, 1991,27, 1996, and incorporated herein by reference.
10.2 Annual Incentive Compensation Plan Filed as Exhibit 10.23.2 to the Registrant's Annual Report on Form
for Designated Executive 10-K dated March 29, 1993,25, 1997, and incorporated herein by reference.
10.2.1 Annual Incentive Plan-Summary of Significant Filed herewith.
ChangesOfficers
10.3 1987 Executive Stock Option Plan Filed as Exhibit 10.3 to the Registrant's Annual Report on Form
Option Plan 10-K dated March 29, 1993,27, 1996, and incorporated herein by reference.
10.4 1990 Long-Term Stock Filed herewith.
Incentive Plan
10.5 1996 Long-Term Stock Filed as Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K dated March 29, 1993, and
incorporated herein by reference.
10.5 Supplementalherewith.
Incentive Plan
10.6 Supplementary Retirement Plan Filed as Exhibit 10.4 to the Registrant's Registration Statement on
Plan Form S-1 (Registration No. 33-6571) dated June 18, 1986, and
incorporated herein by reference.
10.610.7 Supplemental Executive Retirement Plan Filed as Exhibit 10.6 to the Registrant's Annual Report on Form
Retirement Plan 10-K dated March 26, 1991, and incorporated herein by reference.
10.710.8 Form of Executive Severance Agreement Filed as Exhibit 10.7 to the Registrant's Annual Report on Form
Severance Agreement 10-K dated March 25, 1992, and incorporated herein by reference.
10.8 Colonial Life & Accident Insurance Co.10.9 Non-Qualified 401(k) Plan Filed as Exhibit 3.2 to the Registrant's Annual Report on Form
10-K dated March 25, 1997, and incorporated herein by reference.
10.10 (a) Employment Letter Filed herewith.
Incentive Plan
10.9as Exhibit 10.10 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
(b) Employment Letter Filed as Exhibit 10.9(b) to the Registrant's Annual Report on
Form 10-K dated March 10, 1998, and incorporated herein by
reference.
10.11 $500 Million Revolving Filed as Exhibit 10.9 to the Registrant's Annual Report on Form
Credit Agreement Filed herewith10-K dated March 24, 1995, and incorporated herein by reference.
12 Computation of Ratio of Earnings to Fixed Charges Filed herewith.
16 Letter Regarding Change in Certifying Accountant Filed as Exhibit 16Earnings to the Registrant's Current
Report on Form 8-K dated August 9, 1993, and
incorporated herein by reference.Fixed Charges
83
Number Description Method of Filing
- -------- ------------------------- -----------------
21 Subsidiaries of UNUM Corporation Filed herewith.
23.1Corporation
23 Consent of Independent Accountants Filed herewith.
23.2 Consent of Independent Auditors Filed herewith.Accountants
24 Power of Attorney Filed herewith.
27 Financial Data Schedule Filed herewith.
84