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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) OF THE
SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended December 31, 19961998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-9254
UNUM Corporation
(Exact name of registrant as specified in its charter)
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Delaware
01-0405657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2211 Congress Street, Portland, Maine
04122
2211 Congress Street, Portland, Maine (Zip Code)
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (207) 770-2211
Securities registered pursuant to Section 12(b) of the Act:
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 Stock 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: 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] 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 7, 1997,February 19, 1999, was approximately $5,384,300,000.$6,721,800,000.
As of March 7, 1997, 70,832,485February 19, 1999, 138,905,041 shares of the registrant's common
stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Information from the Registrant's proxy statement for the Annual Meeting of
Shareholders on May 9, 1997, is incorporated by reference into Part III.
Exhibit Index appears on page 76.83.
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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 Page
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1. Business ............................................................................................................................................................... 1
A. Description of Business ........................................................................................................................... 1
B. Disability Insurance Segment ................................................................................................................. 2
C. Special Risk Insurance Segment ............................................................................................................ 4
D. Colonial Products Segment ...................................................................................................................... 5
E. Retirement Products Segment .................................................................................................................. 5
F. Investments ......................................................................... 6........................................................................... 5
G. Risk Management and Reinsurance ................................................... 7....................................................... 5
H. Reserves ........................................................................... 8.............................................................................. 6
I. Employees ......................................................................... 8............................................................................. 6
J. Competition ......................................................................... 8........................................................................... 6
K. Regulation ........................................................................ 8............................................................................ 6
L. Participation Fund Account .......................................................... 9............................................................ 7
2. Properties ........................................................................... 10............................................................................... 7
3. Legal Proceedings ..................................................................... 10........................................................................ 7
4. Submission of Matters to a Vote of Security Holders .................................... 10...................................... 7
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters ............ 10................ 8
6. Selected Financial Data ............................................................... 11.................................................................. 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13.... 10
7A. Quantitative and Qualitative Information about Market Risk ............................... 27
8. Financial Statements and Supplementary Data .......................................... 33.............................................. 28
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... 66..... 65
PART III
10. Directors and Executive Officers of the Registrant .................................... 66....................................... 65
A. Directors of the Registrant ......................................................... 66........................................................... 65
B. Executive Officers of the Registrant .................................................................................................. 66
11. Executive and Director Compensation ..................................................................................................................... 67
12. Security Ownership of Certain Beneficial Owners and Management ........................ 67........................... 72
13. Certain Relationships and Related Transactions ....................................... 67........................................... 73
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 68.......................... 74
Signatures ........................................................................... 69............................................................................... 75
Index to Exhibits ..................................................................... 76........................................................................ 83
UNUM Corporation and Subsidiaries
PART I
Item 1--Business1. BUSINESS
A. Description 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 providers 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 insurance. The operations of the subsidiaries, as described 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, the Pacific
Rim and Latin America. UNUM is:
o the leading provider of group long term disability insurance ("group
LTD") in the United States and the Pacific
Rim.
Effective December 31, 1996,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 merged Commercial Life Insurance Company
("Commercial Life") intoconducts operations in North America through wholly-owned subsidiaries
including:
o UNUM Life Insurance Company of America ("UNUM America")
to accelerate growth of its special risk business, increase its commitment to
the Association Group disability business, and to improve operating and capital
efficiencies. Following the merger, UNUM America is a leader in special risk
insurance and professional association insurance marketing.
UNUM conducts its operations in the United States through a number of
wholly-owned subsidiaries including: 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 and long
term care insurance;Canada;
o First UNUM Life Insurance Company ("First UNUM"), a New York life
insurance company;
Duncanson & Holt, Inc. ("D&H"), a New York
corporation and a leading accident and health reinsurance underwriting manager;o Colonial Companies, Inc. ("Colonial Companies"), a Delaware holding
company whose wholly-owned subsidiary, Colonial Life & Accident Insurance
Company ("Colonial"), is a leaderSouth Carolina life insurance company licensed
in payroll-deducted voluntary employee benefits
offered to employees at their worksites;49 states and UNUM Holding Company, a Delaware
corporation. Through UNUM Holding Company, UNUM Corporation also owns Claims
Service International,the 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,delivers integrated information and UNUM Sales Corporation, a Delaware corporation. As
of December 31, 1996, UNUM Sales Corporation is no longer registered as a
licensed broker-dealer coinciding with the sale of UNUM Americaanalysis to help organizations
manage their health and First UNUM's
respective group tax-sheltered annuity ("TSA") businesses as discussed below.
UNUM Corporation also holds all of the outstanding capital stock of UNUM
European Holding Company, which is incorporated in the United Kingdom.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
byo Duncanson & Holt Europe Ltd., a wholly-owned subsidiary of 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 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 ("the merger"), 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 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 shareholders immediately prior to the merger and 42%
of UNUMProvident by current Provident shareholders immediately prior to the
merger.
1
In October 1, 1996, UNUM America and First UNUM closed the sale of their
respective TSAgroup tax-sheltered annuity ("TSA") businesses to The Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("Lincoln"), bothtwo insurance subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
purchase price (ceding commission) at closing was approximately $71 million. The
contracts havewere initially been reinsured on an indemnity basis. Upon consent of the
TSA contractholders and/orand participants, the contracts will beare considered reinsured on
an assumption basis, legally releasing UNUM America and First UNUM from future
contractual obligationobligation. As of December 31, 1998, consents for assumption
reinsurance have been received relating to the respective contractholders and/or
participants.
On March 26, 1993, UNUM merged with Colonial Companies. Under the merger
agreement, UNUM exchanged 0.731 shares of its common stock for each share of
Colonial Companies 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 Companies 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.
To more clearly reflect UNUM's management of its businesses and to more
appropriately group its product portfolios, UNUM began reporting its operations,
effective January 1, 1995, principally in four business segments:
1
Disability Insurance, Special Risk Insurance, Colonial Products and Retirement
Products. Corporate includes transactions that are generally non-insurance
related and interest expense on corporate borrowings. For comparative purposes,
1994 information was previously restated to reflect reporting in these segments.
Refer to Item 7 and Item 8 (Note 16) for more information.substantially all assets under
management.
B. Disability Insurance Segment
The Disability Insurance segment, which in 19961998 accounted for 59.0%57% and 59%
of UNUM's revenues and 63.0% of its income before income taxes, respectively, includes
disability products offered in North America, the United Kingdom and Japan including: group
LTD, group short term disability ("group STD"), individual disability,
Association Group disability, disability reinsurance operations and long term
care insurance.
UNUM America and First UNUM:Japan.
UNUM America and First UNUM market their group insurance and individual
insurance products, which are included in the Disability Insurance and Special Risk
Insurance segments, through a network of 3540 offices in the United States and
Canada which utilize brokers to distribute these products.utilizing brokers. As of December 31, 1996,1998, these branch offices were
organized into five regions and were staffed with approximately 8701,140
management, sales, service and administrative personnel.
Group Long Term Disability
UNUM America and First UNUM's group LTD product is the Disability Insurance
segment's principal product. UNUM America and First UNUM target sales of group
LTD to executive, administrative and management personnel, and other
professionals, such as doctors, attorneys, accountants and engineers. Since
1976, UNUM America and First UNUM combined have been the United States' leading
provider of group LTD according to EMPLOYEE BENEFIT PLAN REVIEW, a recognized
industry publication.
Group LTD provides employees with insurance coverage
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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 in
the event of inability to work due to sickness or injury. Most 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 investment
income.
The group LTD product is sold primarily on a basis that permits annual
repricing. This enables UNUM to adjust the pricing of its products to more
closely match the underlying claim experience and interest rate environment.
Individual Disability
Individual disability 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 1995 INDIVIDUAL HEALTH ISSUES AND INFORCE
SURVEY for the United States and Canada, the most recent available data, UNUM
America and First UNUM combined were the fourth largest provider of individual
disability income policies measured by inforce premium.
On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("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 ("ID") block of business. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM's announcement in late 1994, as discussed below, that it would no
longer market the non-cancellable form of ID coverage in the United States. The
agreement was effective December 31, 1996. For a detailed discussion of the
reinsurance agreement refer to Item 8 (Note 6).
UNUM announced in November 1994 that it would discontinue sales of the
traditional, fixed price, non-cancellable individual disability product
("non-cancellable product") in the United States upon introduction of a new
disability product in each state. During the second quarter of 1995, UNUM
introduced the Lifelong Disability Protection ("LDP") product, which replaces
the non-cancellable product. LDP policies are issued on a "guaranteed renewable"
basis, which means that UNUM cannot refuse to renew any policy, but it does
reserve the right 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
increase premiums for inforce policies. This right to change premiums is or may
be subject to various state insurance department rules, regulations,UNUM Corporation and approvals.
The LDP product provides benefits and transitional support for moderate
disabilities, while providing richer benefits for severe disabilities. Various
options are available that permit tailoring of insurance coverage to the
specific client's needs. The most common options include up to 60% base income
replacement coverage, an option to purchase up to 40% further coverage in the
event of catastrophic injury or illness involving the loss of two or more
Activities of Daily Living, and an automatic option to convert to a long term
care policy at retirement age. Following the approval of the LDP product, sales
of the non-cancellable product have been discontinued in the United States. 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.
Following the completion of its merger with Commercial Life, UNUM America
is a leading provider of disability insurance in the association marketplace,
offering disability income coverage to members of professional associations.
UNUM expects to introduce new conditionally renewable products for sale through
its association channel in the first quarter of 1997, subject to regulatory
approvals. As a result of the merger, UNUM now reports the operations of the
Association Group disability business with the individual disability business.
Group Short Term Disability
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 America and First UNUM combined were the top
provider of group STD for 1995, based on premium and number of inforce lives.
Long Term Care
UNUM America and First UNUM market long term care ("LTC") insurance to
employer groups and individuals. The group LTC 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. LTC provides
insurance coverage for nursing home and home care costs when the insured
sustains the loss of two or more Activities of Daily Living or sustains
cognitive impairment.
LTD Reinsurance
UNUM America assumes certain insurance risks through long term disability
reinsurance operations managed by Duncanson & Holt Services Inc., a leading
manager of group LTD reinsurance in the United States and wholly-owned
subsidiary of D&H.
UNUM Limited:
UNUM Limited was the leading provider for 1995 of group LTD insurance in
the United Kingdom, as reported by EMPLOYERS RE. INTERNATIONAL. UNUM Limited
targets group LTD sales to executive, administrative and management personnel,
and other professionals. These products are marketed through a network of
independent brokers. UNUM Limited's group LTD 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
through brokers and agents to self-employed individuals and those not covered
under group policies. Premiums for group LTD and individual disability insurance
are based upon the expected mortality, morbidity and persistency of the insured
group, as well as assumptions concerning operating expenses and investment
income.
In May 1994, UNUM Limited assumed the management of the group risk
portfolio of Windsor Life Assurance Company Limited ("Windsor Life"), which
included group LTD and group life products. Windsor Life was the third largest
group LTD provider in the United Kingdom in 1993, as reported by EMPLOYERS RE.
INTERNATIONAL.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
UNUM Japan:
On June 20, 1994, the Japanese Ministry of Finance granted UNUM a
provisional license that allowed UNUM 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.
UNUM Japan targets sales of group and individual long term disability
products ("LTD products") to executive, administrative and management personnel,
and other professionals. These products are marketed through contracted
independent agents and brokers. The LTD products provide 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 365-day waiting periods and continue providing benefits until the
employee reaches age 65-70. The benefits of the LTD products are paid monthly
and generally are limited to 60% of the employee's earned income up to a
specified maximum benefit. Premiums for LTD insurance are based upon the
expected mortality, morbidity and persistency of the insured group, as well as
assumptions concerning operating expenses and investment income.
UNUM Japan also acquires premiums as a reinsurer of LTD products
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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. These reinsurance treaty arrangements are mostly quota share
coinsurance. The direct insurer is subject to compliance with UNUM Japan's risk management standards for
pricing, underwriting and claims
management.
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Refer to Item 7 and Item 8 (Note 16) under the caption "Disability Insurance Segment" and Item
8 Note 16 "Segment Information" for more information.
C. Special Risk Insurance Segment
The Special Risk Insurance segment in 19961998 accounted for 20.1%28% and 31% of
UNUM's revenues and 23.2% of its income before income taxes. The Special Risk Insurance
segment includes group life, special risk accident insurance, non-disability
reinsurance operations, reinsurance underwriting management operations and other
special risk insurance products.taxes, respectively. The Special Risk
Insurance segment's group insurance products are 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 America and First UNUM's group life insurance products provide term
insurance to a broad range of employees. As reported by EMPLOYEE BENEFIT PLAN
REVIEW for 1995, UNUM America and First UNUM combined were the seventh largest
writer of group life insurance in the United States, based on number of inforce
contracts. UNUM America and First UNUM also offer group universal life insurance
on a payroll deduction basis through a network of independent brokers and
specialty agents, and group accidental death and dismemberment riders. In
addition, term life insurance is sold through the association group channel.
Following the completion of its merger with Commercial Life, UNUM America
is a leading provider of group special risk accident products, including group
travel and voluntary accident insurance. UNUM America markets special risk
products, which are offered on an employer or employee-paid basis, through a
network of independent brokers and specialty agents.
On July 30, 1992, UNUM purchased D&H, a leading accident and health
reinsurance underwriting manager. As a reinsurance underwriting manager, D&H is
authorized to conduct reinsurance business on behalf of the member companies
participating in its reinsurance facilities. D&H provides pool management
services that may include marketing, underwriting, administration, claims
payment and actuarial services for client companies.
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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 subsidiaries, do
not bear any insurance risk, with the exception of Duncanson & Holt
Underwriters Ltd. ("DHU"), a wholly- ownedwholly-owned subsidiary of Duncanson &and Holt
Europe Ltd. On May 3, 1996,
("D&H acquired three associated reinsurance underwriting managers specializingEurope"), do not bear any insurance risk. DHU participates in
accident and health business. D&H has offices throughout the United States and
in London, Toronto, Bermuda and Singapore.
During 1995, Duncanson & Holt Europe Ltd., an affiliate of D&H based in the
United Kingdom, was authorized byvarious Lloyd's of London to establish two new("Lloyd's") syndicates as a corporate name bearing
insurance risk. D&H Europe owns three Lloyd's Managing Agents and to acquire a third existing Lloyd's Managing Agent. Each
manages a syndicatewhich manage
syndicates that underwritesunderwrite primarily personal accident and other "non-marine" classes of
business at Lloyd's of London.
The non-disability reinsurance operations include UNUM America's
participation in reinsurance facilities managed by D&H, facilities managed by
non-related companies and direct reinsurance arrangements primarily for
4
accident and health, long term care and special risks. As a member company in
reinsurance facilities, UNUM America assumes a share of the insurance risk of
the facility.Lloyd's.
Refer to Item 7 and Item 8 (Note 16) under the caption "Special Risk Insurance Segment" and
Item 8 Note 16 "Segment Information" for more information.
4
D. Colonial Products Segment
The Colonial Products segment, which includes Colonial and its affiliates,
in 19961998 accounted for 13.5%14% and 21% of UNUM's revenues and 27.0% of its income before income
taxes. The Colonial Products
segment includes Colonial and affiliates.taxes, respectively. Colonial markets a broad line of payroll-deducted,
voluntary benefits to employees at their worksites, while
focusing on accident and sickness, cancer and lifeemployee benefit products.
Colonial markets
its products nationwide primarily through a 7,900-member independent contractor
sales force.
Colonial'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 offers a wide range
of life insurance products, with universal life and whole life accounting for
most of the life insurance sold. Colonial's cancer policies are designed to
provide payments for hospitalization and scheduled medical benefits. All of
Colonial's insurance policies are issued on a nonparticipating
- ---------------------------------------------------------------------------------------------------------------------------
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.
More than 98% of Colonial's premiums for 1996 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" basis, which means that Colonial 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.
- ------------------------------------------------------
Life insurance Universal life; whole life.
- ------------------------------------------------------
Cancer policies Designed to provide payments for
hospitalization and scheduled
medical benefits.
- ---------------------------------------------------------------------------------------------------------------------------
Colonial markets 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 1996,
premiums from sales to employees participating in such programs accountedCode,
accounting for approximately 50%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 eliminateeliminating Colonial's ability to
continue marketing its products in this way,way. However, Colonial 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 Companies' subsidiary, BenefitAmerica, Inc. ("BenefitAmerica"),
offers employers administrative services for their employee benefit programs.
The services offered by BenefitAmerica include administration of flexible
spending accounts, 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.
Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial Products Segment" and Item 8
Note 16 "Segment Information" for more information.
E. Retirement Products Segment
The Retirement Products segment in 1998 accounted for 7.0%1% and less than 1%
of UNUM's revenues and 0.4% of its income before income taxes, in 1996.respectively. This segment
includes products no longer actively marketed by UNUM America and First UNUM's tax-sheltered annuities ("TSA"),including: TSAs,
guaranteed investment contracts, deposit administration accounts, 401(k) plans,
individual life and group medical insurance, all of which are no longer actively marketed.insurance. 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 Companyas discussed in Item 1 A "Description of New York ("Lincoln"), both subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
purchase price (ceding commission) at closing was approximately $71 million. The
contracts have initially been reinsured on an indemnity basis. Upon consent of
the TSA contractholders and/or participants, the contracts will be considered
reinsured on an assumption basis, legally releasing UNUM America and First UNUM
from future contractual obligation to the respective contractholders and/or
participants.
Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement Products
Segment" for more information.
5
F. InvestmentsBusiness."
Refer to Item 7 under the caption "Investments""Retirement Products Segment" and Item 8
Note 16 "Segment Information" for more information.
Additional information about UNUM's mortgage loan portfolio is provided below.
Effective January 1, 1996, UNUM began using the categories for geographic
region and property type established by the American Council of Life Insurance.
For comparative purposes, 1995 information has been restated in the tables below
to reflect this change.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, 1996,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 1995, were as follows:
Geographic Region
1996 1995
---- ----
New England ............ 12.4% 12.3%
Mid-Atlantic ............ 12.7 11.3
South Atlantic ......... 16.1 16.6
Mountain ............... 7.5 7.9
Pacific .................. 15.7 14.1
West South Central ...... 6.8 7.8
East South Central ...... 5.4 5.6
West North Central ...... 11.3 10.1
East North Central ...... 12.0 14.2
Other .................. 0.1 0.1
------ ------
Total .................. 100.0% 100.0%
====== ======
Property Type
1996 1995
---- ----
Office Building ......... 26.1% 28.2%
Retail ............... 33.0 33.5
Industrial ............ 27.1 23.3
Apartment ............ 8.2 7.1
Hotel/Motel ............ 3.8 5.6
1-4 Family ............ 0.1 0.1
Other Commercial ...... 1.7 2.2
------ ------
Total ............... 100% 100%
====== ======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, 1996,1998.
Refer to Item 7 under the caption "Investments" and 1995 (dollars in millions):
Geographic Region
1996 1995
---- ----
Mid-Atlantic ............ $3.5 $--
East North Central ...... 2.1 2.8
----- ----
Total .................. $5.6 $2.8
===== ====
Property Type
1996 1995
---- ----
Office Building ...... $-- $2.8
Retail ............... 5.6 --
---- -----
Total ............... $5.6 $2.8
==== =====
Effective January 1, 1995, UNUM adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by CreditorsItem 8 Note 2
"Investments" for Impairment of a Loan," which
defined 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.
Impaired loans by geographic region and property type were as follows at
December 31, 1996, and 1995 (dollars in millions):
Geographic Region
1996 1995
---- ----
New England ............ $14.6 $14.9
Mid-Atlantic ............ 8.4 3.6
South Atlantic ......... 9.1 11.7
Mountain ............... 8.8 12.3
West South Central ...... 4.8 4.8
West North Central ...... 2.6 --
East North Central ...... 2.1 2.8
------ ------
Total .................. $50.4 $50.1
====== ======
Property Type
1996 1995
---- ----
Office Building ...... $22.0 $28.7
Retail ............... 18.2 16.0
Industrial ............ 10.2 5.4
------ ------
Total ............... $50.4 $50.1
====== ======
6
Mortgage loans that were restructured prior to the adoption of FAS 114, by
geographic region and property type were as follows at December 31, 1996, and
1995 (dollars in millions):
Geographic Region
1996 1995
---- ----
New England ............ $0.7 $3.3
South Atlantic ......... 13.3 13.5
Mountain ............... 7.7 7.8
Pacific .................. 7.9 9.6
West South Central ...... 2.5 2.6
West North Central ...... 8.7 8.7
East North Central ...... 14.0 14.4
----- -----
Total .................. $54.8 $59.9
===== =====
Property Type
1996 1995
---- ----
Office Building ...... $24.3 $25.0
Retail ............... 12.5 12.6
Industrial ............ 5.8 5.8
Apartment ............ 4.4 7.0
Hotel/Motel ............ 7.8 7.9
Other Commercial ...... -- 1.6
------ ------
Total ............... $54.8 $59.9
====== ======more information.
G. Risk Management and Reinsurance
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 risk it has underwritten. Reinsurance
allows UNUM to sell policies with higher 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. Within the Disability Insurance and Special Risk Insurance segments, UNUM America and First UNUM have underwritersdoes not generally reinsure risk on a product-specific basis
for group disability, individual
disability, Association Group disability, group life, long term care, and
accidental death and dismemberment products. These underwriting functions are
aligned geographically with UNUM America and First UNUM's five sales regions.
Quotes for prospective customers are based upon UNUM America and First UNUM's
experience with profitability and persistency of the respective employer's risk
category. The maximum group LTD, group STD Association Group disability and LTC
monthly benefit varies, but the usual maximum monthly amount available is
$35,000, $10,000, $10,000 and $6,000, respectively.or association group disability. For group lifeother insurance
products, UNUM retains up to $750,000 per individual life and reinsures benefits over various amounts, depending on the balance with other insurance carriers.type
of coverage. In addition to product-specific reinsurance arrangements, UNUM's
insurance companies are covered by reinsurance for certain catastrophic losses.
UNUM America reinsuresperiodically 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 onfrom its accidental death and dismemberment contracts that exceeds $400,000
on any one life.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.
During 1996, UNUM America entered into an agreement for reinsurance
coverage of the active life reserves of UNUM America'sits existing United States
non-cancellable individual disability block of business. This agreement does
not reinsure any claims incurred prior to January 1, 1996. For more information
on thethis reinsurance agreement refer to Item 1B under the caption "Individual
Disability.8 Note 6 "Reinsurance."
During 1995, UNUM America and First UNUM introduced the guaranteed
renewable Lifelong Disability Protection product ("LDP"), following the decision
in late 1994 to discontinue sales of the traditional fixed price,
non-cancellable individual disability insurance product in the United States. At
the end of 1996, the LDP product has been approved in all 50 states and the
District of Columbia. UNUM requires medical examinations, financial data, and
other information to make a decision on the acceptability of the individual risk
and to appropriately classify an applicant for individual disability insurance
products. On new sales of the LDP product, UNUM retains up to $8,000 basic
monthly indemnity per life for personal disability coverages. UNUM also retains
up to $20,000 per life for business overhead expense coverages and $500,000 per
life for buy/sell coverages.
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 initial 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, and 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 225,000 pounds sterling per individual life.
UNUM (except for Colonial) reinsures the risk of individual life insurance
contracts that exceed $425,000 on any one life. Colonial limits its risk for
death and dismemberment benefits to $100,000 per life. During 1996,
7
Colonial entered into an agreement to reinsure a majority of the mortality risk
on new and inforce universal life business, for which Colonial retains 20% of
the risk under $100,000 per individual life. Colonial also hasTotal reinsurance on
its cancer insurance products that provides coverage for claim payments in
excess of $55,000 in any one year, per claimant, up to a lifetime maximum of $1
million per claimant.
In addition to the reinsurance arrangements above, UNUM is covered by
catastrophe reinsurance, which provides additional protection against aggregate
losses in excess of $1 million up to a maximum of $250 million. This protection
is activated whenever one catastrophic event causes the disability and/or death
of three or more lives insured under UNUM's disability, life, or personal
accident contracts.
Reinsurance premiums assumed and ceded for the year ended December
31, 1996,1998, were $252.9$320.8 million and $106.4$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.
H. Reserves
The unpaid claims reserves reported in the consolidated financial
statements are liabilities for unpaid losses, with respect to insured events
which have been
computedoccurred, including events not yet reported to UNUM, in accordance
with generally accepted accounting principles ("GAAP"). These reserve balances
generally differ from those specified by the laws of the
various states and 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, and South
Carolina, the United Kingdom and Japan, UNUM's insurance subsidiaries (UNUM
America, First UNUM, Colonial 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 that, 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 federal 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 on 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.
I. Employees
At December 31, 1996,1998, UNUM had approximately 6,7008,200 full-time employees.
UNUM does not have collective bargaining agreements with employees.Some 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 insurance products sold by
UNUM. At the end of 1996,1998, there were more than 1,7001,600 legal reserve life
insurance companies in the United States and Canada, andmore than 240 life
assurance offices in the United Kingdom.Kingdom, approximately 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.
GroupK. Regulation
In common with other insurance is highly competitive because of the large number of insurance
companies, and other entities offering these products.
K. 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, Canada, the United Kingdom and Japan, as applicable.
8
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 from Maine, New
York and South Carolina, and from 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 laws and regulations. UNUM Japan is required to file financial
statements annually 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, accident and health policies and
annuities. These reserves are verified periodically by various regulators.
UNUM's reinsurance underwriting manager, 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 Lloyd's of London and is subject to rules
applicable to such members.
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, and South
Carolina, which is the domiciliary state of Colonial, 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 South Carolina.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 and,measured at December 31, 1996,1998, were
significantly above the required deposit was $313.5
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.ranges 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, 1996,1998, the PFA had
$354.0approximately $371 million in assets, which were held by UNUM America. UNUM agreed
to pay certain expenses associated with the PFA and at December 31, 1996, the
reserve for the present value of such expenses was $13.9 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. 9
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.
Item 2--Properties2. PROPERTIES
UNUM owns home office property consisting of sixseven 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 located in Columbia, South
Carolina, is also owned by UNUM.and
Boston Seguros, respectively. In addition, UNUM leases office space, on periods
principally from threefive to sixten years, office space for use by its home office, affiliates and
sales forces.
Item 3--Legal Proceedings
In the normal course of its business operations, UNUM is involved in
litigation from time3. LEGAL PROCEEDINGS
Refer to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1996. In some instances, these
proceedings include claimsItem 8 Note 15 "Litigation" 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 effectinformation on the consolidated financial
position or the consolidated operating results 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 is
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 has
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.
UNUM believes its claims are meritorious, and has appealed the decision to the
United States Court of Appeals for the First Circuit. The ultimate recovery, if
any, cannot be determined at this time.legal proceedings.
Item 4--Submission of Matters to a Vote of Security Holders4. 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 of 1996.1998.
7
UNUM Corporation and Subsidiaries
PART II
Item 5--Market for the Registrant's Common Equity and Related Stockholder
Matters5. 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, 1996,1998, there were 23,30321,756 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 13).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:
1996 19951998 1997
--------------------------------------------------- ---------------------------------------------------------------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
High ............... $73.500 $66.000 $63.000 $61.875 $56.500 $54.000.................. $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 $46.000
Low ............... $61.000 $56.750$45.125 $40.688 $33.625 $35.313
Close ................. $58.375 $49.688 $55.500 $54.750 $50.625 $45.375 $39.875 $37.750
Close ............... $72.250 $64.125 $62.250 $59.500 $55.000 $52.750 $46.875 $45.250$55.188 $54.375 $45.625 $42.250 $36.500
Dividend Paid ...... $ 0.275 $ 0.275 $ 0.275 $ 0.265 $ 0.265 $ 0.265 $ 0.265 $ 0.240......... $0.1475 $0.1475 $0.1475 $0.1425 $0.1425 $0.1425 $0.1425 $0.1375
108
UNUM Corporation and Subsidiaries
Item 6--Selected Financial Data6. 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,
-------------------------------
1998 1997
(Dollars in millions, except per common share data) --------------- ---------------
Income Statement Data
Revenues:
Premiums and fees and other income: (b)
Disability Insurance Segment ....................... $ 2,167.5 $ 1,882.6
Special Risk Insurance Segment ..................... 1,208.4 947.2
Colonial Products Segment .......................... 556.5 530.8
Retirement Products Segment ........................ 26.6 130.3
Corporate .......................................... -- 0.1
------------ ----------
Total premiums and fees and other income ............ 3,959.0 3,491.0
------------ ----------
Net investment income: (a)
Disability Insurance Segment ....................... 491.4 468.0
Special Risk Insurance Segment ..................... 80.6 71.5
Colonial Products Segment .......................... 67.7 57.6
Retirement Products Segment ........................ 38.6 54.4
Corporate .......................................... 4.1 5.9
------------ ----------
Total net investment income ......................... 682.4 657.4
------------ ----------
Total revenues ...................................... 4,641.4 4,148.4
------------ ----------
Benefits and expenses: (b)
Disability Insurance Segment ....................... 2,352.4 2,037.9
Special Risk Insurance Segment ..................... 1,127.7 917.4
Colonial Products Segment .......................... 517.2 489.6
Retirement Products Segment ........................ 64.6 108.5
Corporate .......................................... 62.1 58.6
------------ ----------
Total benefits and expenses ......................... 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,
---------------------------------------------------------------------------------------------------
1996 1995 1994
1993
----------- ----------- ----------- ----------------(Dollars in millions, except per common share data) --------------- --------------- ---------------
Income Statement Data
Revenues:
Premiums and fees and other income
(expense):income: (b)
Disability Insurance Segment ...... $1,917.7 $1,879.9 $1,716.2....................... $ 1,547.91,917.7 $ 1,879.9 $ 1,716.2
Special Risk Insurance Segment ... 755.4..................... 783.3 702.3 607.1 559.4
Colonial Products Segment ................................... 498.2 475.1 441.3
407.4
Retirement Products Segment .............................. 65.8 34.1 31.4
42.5
Corporate .................................................................. -- 0.1 0.8
--
-------- -------- -------- --------------------- ---------- ----------
Total premiums and fees and other income ... 3,237.1............ 3,265.0 3,091.5 2,796.8
2,557.2
-------- -------- -------- --------------------- ---------- ----------
Net investment income (expense):income: (a)
Disability Insurance Segment ............................. 468.5 592.9 400.3 369.8
Special Risk Insurance Segment ... 56.5..................... 57.6 48.4 40.7 34.8
Colonial Products Segment ................................... 47.3 52.2 32.6
41.4
Retirement Products Segment .............................. 217.2 323.7 338.0
387.6
Corporate .................................................................. 16.1 14.2 4.2
6.2
-------- -------- -------- --------------------- ---------- ----------
Total net investment income ...... 805.6......................... 806.7 1,031.4 815.8
839.8
-------- -------- -------- --------------------- ---------- ----------
Total revenues ..................... 4,042.7...................................... 4,071.7 4,122.9 3,612.6
3,397.0
-------- -------- -------- --------------------- ---------- ----------
Benefits and expenses: (b)
Disability Insurance Segment ............................. 2,170.9 2,255.8 2,060.3 1,603.6
Special Risk Insurance Segment ... 732.7..................... 761.7 690.4 581.9 555.3
Colonial Products Segment ................................... 453.1 439.6 411.2
378.4
Retirement Products Segment .............................. 281.6 312.3 327.4
375.8
Corporate .................................................................. 62.8 42.9 33.2
23.6
-------- -------- -------- --------------------- ---------- ----------
Total benefits and expenses ...... 3,701.1......................... 3,730.1 3,741.0 3,414.0
2,936.7
-------- -------- -------- --------------------- ---------- ----------
Income (loss) before income taxes
and cumulative effects of
accounting changes:taxes: (b)
Disability Insurance Segment ............................. 215.3 217.0 56.2 314.1
Special Risk Insurance Segment ........................ 79.2 60.3 65.9
38.9
Colonial Products Segment ................................... 92.4 87.7 62.7
70.4
Retirement Products Segment .............................. 1.4 45.5 42.0
54.3
Corporate .................................................................. (46.7) (28.6) (28.2)
(17.4)
-------- -------- -------- --------------------- ------------ ------------
Total income before income taxes and
cumulative effects of accounting
changes ............................................... 341.6 381.9 198.6
460.3
-------- -------- -------- --------------------- ------------ ------------
Income taxes (credit) ....................................................... 103.6 100.8 43.9
148.3
-------- -------- -------- ---------
Cumulative effects of accounting
changes ........................... -- -- -- (12.1)(b)
-------- -------- -------- --------------------- ------------ ------------
Net income .................................................................. $ 238.0 $ 281.1 $ 154.7
$ 299.9
======== ======== ======== ===================== ============ ============
Per common share:
Net income ........................income--basic .................................. $ 3.261.63 $ 3.871.93 $ 2.091.04
Net income--diluted ................................ $ 3.81(b)1.61 $ 1.92 $ 1.04
Dividends paid .......................................................... $ 1.090.5450 $ 1.0350.5175 $ 0.920.4600
============= ============= =============
Balance Sheet Data
Assets .............................................. $ 0.765
======== ======== ======== =========
Year Ended December 31,
--------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
----------- ----------- ----------- ---------- --------- -----------
Income Statement Data
Revenues:
Premiums and other income
(expense):
Disability Insurance Segment ...... $1,339.8 $1,214.6 $1,004.715,580.4 $ 803.814,787.8 $ 681.713,127.2
Long-term debt ...................................... $ 630.8
Special Risk Insurance Segment ... 432.8 368.5 347.0 306.2 176.3 165.7
Colonial Products Segment ......... 371.9 325.4 281.1 241.0 216.7 192.1
Retirement Products Segment ...... 52.5 64.4 92.8 130.2 180.0 238.5
Corporate ........................ 0.8 -- (0.1) 0.2 -- 0.9
-------- -------- -------- ------- -------- -------
Total premiums and other income ... 2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0
-------- -------- -------- ------- -------- -------
Net investment income (expense): (a)
Disability Insurance Segment ...... 370.5 333.8 285.4 239.4 193.1 167.8
Special Risk Insurance Segment ... 32.2 26.5 23.4 24.5 12.5 12.1
Colonial Products Segment ......... 35.4 38.5 25.2 26.7 22.3 19.0
Retirement Products Segment ...... 408.7 411.3 426.1 424.0 413.2 418.2
Corporate ........................ 3.9 1.5 (9.0) 5.9 20.3 19.1
-------- -------- -------- ------- -------- -------
Total net investment income ...... 850.7 811.6 751.1 720.5 661.4 636.2
-------- -------- -------- ------- -------- -------
Total revenues ..................... 3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2
-------- -------- -------- ------- -------- -------
Benefits and expenses:
Disability Insurance Segment ...... 1,446.6 1,306.4 1,093.7 878.8 756.0 701.4
Special Risk Insurance Segment ... 418.7 355.2 342.2 312.9 180.4 172.0
Colonial Products Segment ......... 346.8 306.4 259.6 225.5 201.1 178.6
Retirement Products Segment ...... 427.5 484.4 491.6 535.9 580.1 685.0
Corporate ........................ 10.4 12.5 10.8 12.3 9.5 15.7
-------- -------- -------- ------- -------- -------
Total benefits and expenses ...... 2,650.0 2,464.9 2,197.9 1,965.4 1,727.1 1,752.7
-------- -------- -------- ------- -------- -------
Income (loss) before income taxes
and cumulative effects of
accounting changes:
Disability Insurance Segment ...... 263.7 242.0 196.4 164.4 118.8 97.2
Special Risk Insurance Segment ... 46.3 39.8 28.2 17.8 8.4 5.8
Colonial Products Segment ......... 60.5 57.5 46.7 42.2 37.9 32.5
Retirement Products Segment ...... 33.7 (8.7) 27.3 18.3 13.1 (28.3)
Corporate ........................ (5.7) (11.0) (19.9) (6.2) 10.8 4.3
-------- -------- -------- ------- -------- -------
Total income before income taxes and
cumulative effects of accounting
changes ........................... 398.5 319.6 278.7 236.5 189.0 111.5
-------- -------- -------- ------- -------- -------
Income taxes (credit) ............... 107.3 74.3 60.9 51.1 30.1 (4.7)
-------- -------- -------- ------- -------- -------
Cumulative effects of accounting
changes ........................... -- -- -- -- -- --
-------- -------- -------- ------- -------- -------
Net income ........................409.2 $ 291.2457.3 $ 245.3182.1
Stockholders' equity ................................ $ 217.82,263.1 $ 185.42,302.9 $ 158.9 $ 116.2
======== ======== ======== ======= ======== =======
Per common share:
Net income ........................ $ 3.71 $ 3.15 $ 2.73 $ 2.03 $ 1.57 $ 1.06
Dividends paid ..................... $ 0.625 $ 0.49 $ 0.375 $ 0.285 $ 0.23 $ 0.20
======== ======== ======== ======= ======== =======1,915.4
Shares outstanding .................................. 143.6 146.0 144.8
Weighted-average shares outstanding during the year:
Basic .............................................. 145.9 145.4 148.3
Diluted ............................................ 148.0 146.6 149.5
- --------
(a) Includes investment income and net realized investment gains.gains (losses).
(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.
11
UNUM CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars and sharesRefer to the discussion of special items in millions)
December 31,
---------------------------------------------------
Balance Sheet Data 1996 1995 1994 1993
------------ ------------ ------------ ------------
Assets ............... $15,467.5 $14,787.8 $13,127.2 $12,437.3
Long-term debt ......... $ 409.2 $ 457.3 $ 182.1 $ 128.6
Stockholders' equity ... $ 2,263.1 $ 2,302.9 $ 1,915.4 $ 2,102.7
Shares outstanding ... 71.8 73.0 72.4 76.0
Weighted average shares
outstanding during the
year .................. 73.0 72.7 74.2 78.8
December 31,
----------------------------------------------------------------------------
Balance Sheet Data 1992 1991 1990 1989 1988 1987
------------ ------------ ------------ ------------ ------------ -----------
Assets ............... $11,959.8 $11,310.9 $10,063.4 $ 9,045.7 $ 8,592.3 $ 7,783.0
Long-term debt ......... $ 77.2 $ 51.5 $ 77.2 $ 1.5 $ 1.5 $ 1.7
Stockholders' equity ... $ 2,010.9 $ 1,755.5 $ 1,490.1 $ 1,445.0 $ 1,512.3 $ 1,463.8
Shares outstanding ... 79.1 78.2 77.4 82.0 96.8 104.2
Weighted average shares
outstanding during the
year .................. 78.5 77.8 79.9 91.4 101.3 109.1
12
Item 7--Management's7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations,
This management's" as these
items may affect the comparability of the information presented in certain
segments.
9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis reviews the consolidated financial
condition of UNUM at December 31, 1996,1998, 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 in conjunctionas such (see previous section on "Forward-Looking Information"). In
connection with the Consolidated Financial Statements, Notesproposed merger, UNUM is evaluating its processes and
assumptions used to Consolidated Financial Statements,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 Selected Consolidated Financial Data.
To more clearly reflectthe disability businesses of UNUM Limited. The preliminary
estimates of discount rate reductions will result in an estimated increase to
UNUM's managementunpaid claims reserves upon consummation of its businessesthe 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 to more
appropriately group its product portfolios,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 began reporting its operations,
effective January 1, 1995, principally in four business segments: Disability
Insurance, Special Risk Insurance, Colonial ProductsCorporation and Retirement Products.
Corporate includes transactions that are generally non-insurance related. For
comparative purposes, 1994 information was previously restated to reflect the
new reporting segments.Subsidiaries
CONSOLIDATED OVERVIEW
(Dollars and shares in millions,
except per common share amounts, and percentage
increase (decrease) over prior year)data) 1998 % Change 1997 % Change 1996
1995 1994
- --------------------------------------------- ----------------------------- -------------------------------------------------------------------------- ------------- ----------- ------------- ----------- -------------
Income Data
Revenues
Premiums ................................. $3,120.4 3.4% $3,018.2 10.9% $2,721.3....................................... $ 3,841.7 17.7% $ 3,263.7 3.6% $ 3,151.5
Investment income ........................ 802.2 (0.5) 806.3 4.7 770.2.............................. 661.4 nm 661.0 (17.7) 803.3
Net realized investment gains ............(losses) ......... 21.0 nm (3.6) nm 3.4 nm 225.1 nm 45.6
Fees and other income ..................... 116.7 59.2 73.3 (2.9) 75.5
--------.......................... 117.3 (48.4) 227.3 nm 113.5
--------- -------- ------ ------------- ---------- ----- ---------
Total revenues ........................... 4,042.7 (1.9) 4,122.9 14.1 3,612.6................................ 4,641.4 11.9 4,148.4 1.9 4,071.7
Benefits and expenses ..................... 3,701.1 (1.1) 3,741.0 9.6 3,414.0
--------........................... 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 (10.6) 381.9 92.3 198.6
Income taxes .................................................................. 154.0 (7.3) 166.1 60.3 103.6
2.8 100.8 nm 43.9
-------- --------- -------- ------ ------------- ---------- ----- ---------
Net income .................................................................. $ 363.4 (1.9)% $ 370.3 55.6% $ 238.0
(15.3)% $ 281.1 81.7% $ 154.7
======== ========= ======== ====== ============= ========== ===== =========
Net income per common share ...............share:
Diluted ........................................ $ 3.262.57 (0.8)% $ 3.872.59 60.9% $ 2.09
======== ======== ========1.61
Basic .......................................... $ 2.63 (0.8)% $ 2.65 62.6% $ 1.63
========== ===== ========== ===== ==========
Summary of income (loss) before
income taxes
Disability Insurance Segment .................................. $ 215.3 (0.8)306.5 (2.0)% $ 217.0 nm%312.7 45.2% $ 56.2215.3
Special Risk Insurance Segment ............................. 161.3 59.2 101.3 27.9 79.2 31.3 60.3 (8.5) 65.9
Colonial Products Segment ........................................ 107.0 8.3 98.8 6.9 92.4 5.4 87.7 39.9 62.7
Retirement Products Segment ................................... 0.6 (99.2) 76.2 nm 1.4
(96.9) 45.5 8.3 42.0
Corporate ....................................................................... (58.0) 10.3 (52.6) 12.6 (46.7)
63.3 (28.6) 1.4 (28.2)
-------- --------- -------- ------ ------------------ ----- ---------- ----- ----------
Total income before income taxes ....................... $ 517.4 (3.5)% $ 536.4 57.0% $ 341.6
(10.6)% $ 381.9 92.3% $ 198.6
======== ========= ======== ====== ========
Balance Sheet Data
Assets .................................... $15,467.5 $14,787.8 $13,127.2
Notes Payable .............................. $ 526.9 $ 583.8 $ 428.7
Stockholders' equity ........................ $2,263.1 $2,302.9 $1,915.4
Shares outstanding ........................ 71.8 73.0 72.4
Weighted average shares outstanding
during the year ........................... 73.0 72.7 74.2========== ===== ========== ===== ==========
- --------
nm = not meaningful or in excess of 100%
13
(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
CONSOLIDATED OVERVIEW
In 1996, net income decreased by $43.1 million to $238.0 million, or $3.26
per share, from $281.1 million, or $3.87 per share, in 1995. Net income was
$154.7 million, or $2.09 per share, for the year ended December 31, 1994.UNUM Corporation and Subsidiaries
A comparison of net income is impacted by the inclusion of realized
investment gains which were significantly higher in 1995,(losses), and several special items, that occurred in 1998, 1997 and
1996. Operating income in 1998, 1997 and 1996, 1995which is presented on an after
tax basis and 1994.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 discusses thefocuses on results of operations on a pretax
operating income basis, which is defined as income (loss) before income taxes
exclusive of realized investment gains (losses) and certain 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 pretax
operating incomethis discussion as management
considers them to be unusual,as being not representative of our ongoing operations and also
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 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, 1996, 19951998, 1997
and 1994,1996, 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 in millions and percentage increase
(decrease) over prior year)millions) 1998 % Change 1997 % Change 1996
1995 1994
- ---------------------------------------------- ------------------------ -------------------- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
Summary of pretax operating income (loss)
Disability Insurance Segment .......................... $348.3 10.3% $315.8 13.4% $278.4 28.2% $217.2 (1.7)% $220.9
Special Risk Insurance Segment ..................... 159.4 27.7 124.8 38.4 90.2 50.8 59.8 (9.0) 65.7
Colonial Products Segment ................................ 105.1 6.4 98.8 6.6 92.7 20.7 76.8 25.9 61.0
Retirement Products Segment ........................... 1.0 (78.7) 4.7 (65.4) 13.6
(37.3) 21.7 (45.5) 39.8
Corporate ............................................................... (58.0) 12.0 (51.8) 38.1 (37.5)
29.8 (28.9) 4.7 (27.6)
------ ----- ------ ------ --------- ------
Total pretax operating income ..................... $555.8 12.9% $492.3 12.6% $437.4
26.2% $346.6 (3.7)% $ 359.8
====== ===== ====== ====== ========= ======
UNUM reported increased pretax operating income for the year ended
December 31, 1996,1998, as compared with the same period in 1995.1997. The increase was
primarily attributable to improved claims experience and management's continued focus on
risk management programs, both of which lowered the benefit ratiosimprovements in pretax operating income for certain
product lines. In particular, group long term disability ("group LTD") and UNUM
Limited, reported in the Disability Insurance segment, and the group life
business, reported in the
Special Risk Insurance and Disability Insurance segments, primarily resulting
from solid premium growth in each segment. See the segment were favorably
affected by lower benefit ratios. Increased investment income also favorably
affecteddiscussions that
follow for a more detailed analysis of operating results.
For the year ended December 31, 1997, as compared with the same period in
1996, UNUM reported increased pretax operating income, driven by improved
results in the Disability Insurance and Special Risk Insurance segments. Partially offsetting these favorable items weresegments,
resulting primarily from strong premium growth in both segments during 1997.
Special Item in 1998
Disability Claims Reserve Increase
In connection with entering into the merger agreement with Provident in
fourth quarter 1998, UNUM anticipates that as a result of integrating its claim
operations with Provident, there will be a temporary 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 consolidation of operations is complete. During the fourth quarter of 1998,
UNUM increased operating expensesits 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 discussion 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,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 Item 8 Note 6 under the caption "Reinsurance" for further
information on the reinsurance transaction. Management will continue to
evaluate the impacts of the merger on disability claims experience and the
assumptions around expected disability claims duration that were used in the
group life
business reporteddetermination of the claims reserve increase.
Special Items in 1997
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, andreducing
income before income taxes by $18.4 million. The $11.7 million reduction in Corporate. In
addition,fee
income reflects lower profit commission levels in certain other disability products were negatively affected by higher
benefit ratios.older pool years
after the pool claim reserve strengthening. The decrease$6.7 million increase in
pretax operating income in 1995 was primarily attributablebenefits to higher benefit ratios atpolicyholders represents the amount of additional claim reserves
UNUM Limited andrecognized as a result of its participation in the group LTD and group life
businesses, increased interest expense, and lower interest spread margins on the
tax sheltered annuity business. Partially offsetting these items were increased
investment income, a lower benefit ratio in the individual disability business,
and lower expenses.
Realized Investment Gains
During the second quarter of 1995, UNUM sold virtually all of the common
stock portfolio of its United States subsidiaries, primarily due to
consideration of statutory capital requirements associated with investment in
common stocks and to increase future investment income. The sale of the common
stock portfolio contributed to significantly higher pretax realized investment
gains for the year ended December 31, 1995, as compared with 1996 and 1994. UNUM
reinvested the proceeds from the sale of the common stock portfolio primarily in
investment grade fixed income assets, which decreased the required amount of
statutory capital for regulatory purposes and increased investment income.
Dependent on capital considerations and market conditions, UNUM may invest in
equity securities in the future.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 Life Insurance Company of America ("UNUM America") and Centre Life Reinsurance Limited ("Centre Re"),Re, a 14
Bermuda basedBermuda-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 Disability Insurance
segment discussion.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 tax sheltered
annuityTSA 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. TheseThe 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, for the
year ended December 31, 1996.
The charges include the write-off of certain intangible assets, primarily
deferred acquisition costs, totaling $17.0 million. These intangible assets have
been deemed unrecoverable primarily duereflected as benefits to
the expectation of continued losses
in the Association Group disability business. Additionally, in conjunction with
the completion of a review of UNUM's discontinued product portfolio, a $22.4
million charge was taken to establish a reserve for the present value of
expected future losses on certain discontinued products. Future losses for these
products will be charged to the reserve at the time the losses are realized. The
products incorporated in the charge consist of certain discontinued special
risk, retirement and medical products. UNUM is pursuing the sale of some of
these discontinued product lines.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 future severance costs for 120
employees and $4.4
million of lease exit costs, primarily related to the merger.
Special Items in 1995
Disability Reserve Increase from Portfolio Rate Adjustment
Reserves for certain disability products are discounted using an interest
rate which is a composite yield of assets identified with each product. As a
result of the sale of the common stock portfolio, which had partially supported
these disability reserves, and the subsequent reinvestment of the proceeds
primarily in investment grade fixed income assets at yields below the average
portfolio yield, certain reserve discount rates were lowered during second
quarter 1995. For the year ended December 31, 1995, the effect of lowering these
discount rates was an increase to the reserve liabilities and benefits to
policyholders reported in the Disability Insurance segment of $128.6 million.
Group LTD IBNR Increase
During the second quarter of 1995, UNUM increased the group LTD reserves
for incurred but not reported ("IBNR") claims and benefits to policyholders
reported in the Disability Insurance segment by $38.4 million. IBNR reserves,
which are established to fund anticipated case reserves for claims which have
been incurred but not reported to UNUM, are actuarially established based on
various factors, including incidence levels and claims severity. The increased
IBNR reserves were based on management's judgment that claims incurred but not
yet reported would reflect increased levels of claims incidence and severity.
Association Group Disability Reserve Strengthening
In 1995, the Association Group disability business was negatively affected
by unfavorable claims experience, which management attributed to certain
geographical and occupational segments, particularly dentists and physicians.
During the fourth quarter of 1995, UNUM increased reserves for unpaid claims
related to the Association Group disability business by $15.0 million reported
in the Disability Insurance segment. These increased reserves were based on
management's expectations of slower than expected claim recoveries.
15
Other Charges
To strengthen its focus on its core products, UNUM recognized a charge in
the third quarter of 1995 for costs associated with the sale of its dental
business reported in the Special Risk Insurance segment. The charge, which
primarily consisted of the write-off of deferred acquisition costs, reduced
income before income taxes by $2.8 million.
During the second quarter of 1995, UNUM recorded an additional charge for
costs associated with the previously announced decision to discontinue the
individual disability non-cancellable product and organizational changes within
UNUM America, which increased operating expenses by $5.0 million. This charge
reduced income before income taxes by $2.9 million in the Disability Insurance
segment, $1.1 million in the Special Risk Insurance segment, and $1.0 million in
the Retirement Products segment for the year ended December 31, 1995.
Special Items in 1994
Individual Disability Reserve Strengthening
Throughout 1994, UNUM's individual disability business experienced a higher
incidence of new claims and a disproportionate number of large claims, which
management attributed to certain geographic and occupational segments of the
business, particularly physicians. During the third quarter of 1994, management
concluded that the deterioration of claims experience was not a temporary
fluctuation in certain segments of the business, but was indicative of expected
claim trends for the future. As a result, in third quarter 1994, UNUM increased
reserves for existing claims by $83.3 million and strengthened reserves for
estimated future losses by $109.1 million, resulting in an increase to benefits
to policyholders reported in the Disability Insurance segment of $192.4 million.
These increased reserves reflected management's expectations of morbidity trends
for the existing non-cancellable individual disability business. It is not
possible to predict whether morbidity trends will be consistent with UNUM's
assumptions; however, as of December 31, 1996, management believes that the
strengthened reserve levels continue to be adequate.
Restructuring Charges
In the fourth quarter of 1994, UNUM recorded a pretax charge of $14.4
million related to the decision to discontinue the individual disability
non-cancellable product and the acceleration of organizational changes within
UNUM America, which increased operating expenses in the Disability Insurance
segment for the year ended December 31, 1994. The charge consisted of $9.2
million for severance costs for 379 employees and $5.2 million for exit costs of
certain leased facilities and equipment.
16
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, 1996, 19951998, 1997 and 1994:1996:
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........ $215.3 $ 79.2 $ 92.4 $ 1.4 $ (46.7) $ 341.6$(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........... $278.4 $ 90.2 $ 92.7 $ 13.6 $ (37.5) $ 437.4
======= ====$13.6 $(37.5) $437.4
====== ======= ======== =======
Year Ended December 31, 1995:
Income (loss) before income taxes ......... $ 217.0 $ 60.3 $ 87.7 $ 45.5 $ (28.6) $ 381.9
Exclude realized investment gains ......... (184.7) (4.4) (10.9) (24.8) (0.3) (225.1)
------- ---- ------ ------ -------- -------
32.3 55.9 76.8 20.7 (28.9) 156.8
Special items:
Disability reserve increases ............ 128.6 -- -- -- -- 128.6
Group LTD IBNR increase .................. 38.4 -- -- -- -- 38.4
Association Group reserves ............... 15.0 -- -- -- -- 15.0
Other charges ........................... 2.9 3.9 -- 1.0 -- 7.8
------- ---- ------ ------ -------- -------
Pretax operating income (loss) ............ $ 217.2 $ 59.8 $ 76.8 $ 21.7 $ (28.9) $ 346.6
======= ==== ====== ======= ======== =======
Year Ended December 31, 1994:
Income (loss) before income taxes ......... $ 56.2 $ 65.9 $ 62.7 $ 42.0 $ (28.2) $ 198.6
Exclude realized investment (gains) losses (42.1) (0.2) (1.7) (2.2) 0.6 (45.6)
------- ---- ------ ------ -------- -------
14.1 65.7 61.0 39.8 (27.6) 153.0
Special items:
ID reserve strengthening .................. 192.4 -- -- -- -- 192.4
Restructuring charges ..................... 14.4 -- -- -- -- 14.4
------- ---- ------ ------ -------- -------
Pretax operating income (loss) ............ $ 220.9 $ 65.7 $ 61.0 $ 39.8 $ (27.6) $ 359.8
======= ==== ====== ======= ======== ============ ====== ======
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, 1996, 19951998, 1997 and 1994.1996. These
business segment
discussions are based on pretax operating income (loss), which excludes
realized investment gains (losses) and the special items noted above.
17
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 and percentage increase
(decrease) over prior year)millions) 1998 % Change 1997 % Change 1996
1995 1994
- ---------------------------------------------- ------------------------- -------------------------------------------------------------------- ------------- ------------ ------------- ----------- --------------
Revenues
Premiums
Group LTD ................................. $1,094.6 0.6%.............................. $ 1,088.6 14.0%1,385.1 13.6% $ 955.01,219.1 11.4% $ 1,094.6
Group STD ............................................................... 274.4 33.7 205.3 29.9 158.1 19.0 132.9 23.5 107.6
UNUM Limited ......................................................... 166.8 13.5 147.0 10.8 132.7
6.0 125.2 (11.2) 141.0
Individual disability ..................... 420.8 (0.5) 423.0 3.3 409.5Products .................... 131.0 34.6 97.3 17.8 82.6
Other disability insurance .................. 83.7 (2.2) 85.6 5.9 80.8
--------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 1.9 1,855.3 9.5 1,693.9
Investment income ....................... 473.8 0.6 471.1 0.5 468.8 14.8 408.2 14.0 358.2
Net realized investment gains (losses) ...... (0.3) nm 184.7 nm 42.1
Fees and other income ........................................... 52.0 (21.3) 66.1 nm 27.8
13.0 24.6 10.3 22.3
----------------- ------ --------- -------- ------------ ----------
Total operating revenues ........................... 2,386.2 (3.5) 2,472.8 16.8 2,116.5............... 2,651.7 12.7 2,353.7 (1.4) 2,386.5
Benefits and expenses
Benefits to policyholders .................. 1,514.9 (11.5) 1,711.2 8.8 1,572.1............... 1,745.7 16.1 1,503.9 (0.7) 1,514.4
Operating expenses ........................... 511.0 21.3 421.3 1.5 415.0...................... 486.7 7.7 452.0 (1.8) 460.4
Commissions .............................................................. 196.8 17.2 167.9 (8.8) 184.2 (4.8) 193.5 (0.9) 195.3
Increase in deferred policy acquisition
costs (39.2) (44.2) (70.2) (42.5) (122.1)
--------.................................. (125.8) 46.4 (85.9) 68.8 (50.9)
---------- ------ --------- -------- ----------------- ----- -----------
Total benefits and expenses ............... 2,170.9 (3.8) 2,255.8 9.5 2,060.3
--------............ 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 .................. 215.3 (0.8) 217.0 nm 56.2
Exclude realized investment (gains) losses 0.3 (184.7) (42.1)
Special items (a) ........................... 62.8 184.9 206.8
-------- --------- -------
Pretax operating income (a) ..................(c) .......... $ 278.4 28.2% $ 217.2 (1.7)306.5 (2.0)% $ 220.9
========312.7 45.2% $ 215.3
========== ====== ========= ======== ================= ===== ===========
Supplemental information (d):
Sales (annualized new premiums) .........
Group LTD ............................................................... $ 325.2 $ 294.4 $ 218.7
$ 197.9 $ 215.4
Group STD ............................................................... $ 130.1 $ 94.8 $ 74.0
$ 52.4 $ 47.8
UNUM Limited ......................................................... $ 30.6 $ 20.0 $ 14.3
Long Term Care ......................... $ 14.243.0 $ 15.5
Individual disability .....................24.5 $ 26.417.4
Lifelong Disability Protection ......... $ 35.617.0 $ 74.010.6 $ 5.5
Persistency (premiums) ..................
Group LTD ............................................................... 89.4% 87.7% 83.6% 82.8% 84.0%
Group STD ............................................................... 89.6% 86.7% 84.5% 84.8% 83.8%
UNUM Limited ......................................................... 91.2% 91.3% 85.6% 89.1% 89.9%
Individual disability ..................... 92.5% 91.8% 92.4%
Benefit ratio (% of premiums) ............... 80.2% 92.2% 92.8%........... 82.1% 82.8% 80.1%
Operating expense ratio (% of
premiums) ........................... 27.0% 22.7% 24.5%.............................. 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 detailed descriptiondiscussion 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 Overview.
18
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 Disability Insurance segment includes disability products offered
through: UNUM Life Insurance Company of America ("UNUM America") and First UNUM
Life Insurance Company ("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 LTD,long term disability
("group LTD"), group short term disability ("group STD"), individual disability, Association Group disability,
disability reinsurance operations and long term care,
insurance.
Summaryindividual 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, non-
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 separate lines in
UNUM's statements of income; instead, components of the operating results are
combined and reflected as a net amount in fees and other income.
The Disability Insurance segment's pretax operating income increased in
1996,1998, as compared with 1995.1997, 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 lower benefitfavorable operating expense ratios in group LTD and at UNUM
Limited,across most lines of business. These
favorable factors were partially offset by increased operating expenses for the segment and higher benefit ratios in certain
other disability businesses including
individual disability, disability reinsurance operations and Association Group
disability.
On October 23, 1996, UNUM announcedbusinesses.
After adjusting for the executioneffect of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("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 ("ID")claim block of business. This agreement
does not reinsure any claims incurred prior to January 1, 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 that transfers
liabilities to Centre Re based on the level of statutory reserves. At December
31, 1996, active life reserves of $427 million and reserves established for
claims in 1996 of $137 million were ceded to Centre Re. Under the agreement,
Centre Re has an obligation to fund a defined risk layer, while UNUM will retain
the earnings risk related to potential adverse claims experience up to a certain
threshold. This threshold amount represents the existence of an experience layer
with a value of $195 million at December 31, 1996. UNUM has recorded the value
of the experience layer on its Consolidated Balance Sheet as a deposit asset.
UNUM funded its obligation under the agreement by transferring assets totaling
approximately $403 million into a trust account in late December 1996. The
assets transferred were equal to the experience layer plus reserves, determined
under generally accepted accounting principles, net of related deferred
acquisition costs. Future net cash flows of the block will be transferred
to/from the trust account and, together with changes in reserve levels, will
determine the value of UNUM's deposit asset. Changes in the deposit asset will
flow through UNUM's results of operations. The agreement generated slightly more
than $200 million of statutory capital, which will be available to repurchase
UNUM common stock.
Increased investment income inacquisitions, the Disability
Insurance segment for 1996
and 1995 was primarily a resultreported premium growth of the reinvestment of the proceeds from the
sale of the common stock portfolio into investment grade fixed income assets.
During second quarter 1995, UNUM sold virtually all of the common stock
portfolio of its United States subsidiaries, primarily due to consideration of
statutory capital requirements associated with investment15.5% in common stocks and
to increase future investment income. As a result of the sale of the common
stock portfolio and the subsequent reinvestment of the proceeds, certain reserve
discount rates were lowered during the second quarter 1995. The discount rate
used to determine group LTD reserves was reduced to 8.00% at June 30, 1995, as1998 compared with 9.18% at December 31, 1994. Since that timeprior
year's growth of 9.4%, which was also adjusted for $255.4 million of premium
ceded during 1997 under the reserve discount
rates for certain disability products have continued to decline. Management
expects further declines, since current cash flows are investednon-cancellable ID reinsurance agreement. The
improvement in high quality
assets at current yields, which are below the composite yield of the existing
assets purchased in prior years. The group LTD discount ratepremium growth was 7.88%driven by strong sales results and
7.94%
at December 31, 1996, and 1995, respectively. The impact of increased investment
income was partially offset by the effects of these lower discount rates for
certain disability products in 1996 and 1995. UNUM periodically adjusts prices
on both existing and new business in an effort to mitigate the impact of the
current interest rate environment.
Reserves for unpaid claims are estimates based on UNUM's historical
experience and other actuarial assumptions that 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. Management continuously monitors
claim trends and responds by periodically adjusting prices on selected new and
inforce business, refining underwriting guidelines, and strengthening risk
management programs. In addition, reserve estimates and assumptions are
periodically reviewed and updated with any resulting adjustments to reserves
19
reflected in benefits to policyholders of the current operating period. Given
the complexity of the reserving process, the ultimate liability may be more or
less than such estimates indicate.
Deferrals of policy acquisition costs decreased in 1996 and 1995persistency improvements, primarily
due to lower sales of the traditional, fixed price, non-cancellable individual
disability product, as it was discontinued in each state during 1996 and 1995
following regulatory approval of the Lifelong Disability Protection product.
Pretax operating income decreased slightly in 1995, as compared with 1994,
primarily attributable to higher benefit ratios at UNUM Limited and in group LTD and the inclusion of the results of UNUM Japan's operations in the
Disability Insurance segment effective January 1, 1995. Partially offsetting
these decreases were increased investment income, a lower benefit ratio in the
individual disability business, and decreased operating expenses for the
segment.
Claimgroup STD.
One-time premiums, which are generated by claim block acquisitions, which generated one-time premium in the
Disability Insurance segment in 1996, 1995 and 1994, 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 assets at current
yields,
16
which are below the composite yield of existing assets purchased in prior
years, resulting in 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,
premiumin 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 includesand the recapturedisability businesses of
reinsurance premium totaling $10.6UNUM 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 1996.
Year Endedthe reserve
for group and individual disability claims incurred as of December 31, -----------------------------
(Dollars1998.
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 millions) 1996 1995 1994
- ----------------------------------------- -------- -------- -------
Group LTD .............................. $10.0 $63.8 $17.4
UNUM Limited ........................... 1.3 -- 40.2
Long Term Carefuture 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 ............... -- 4.9 14.7
Disability Reinsurance Operations ...... -- 3.6 --
------ ------ ------
Total ................................. $11.3 $72.3 $72.3
====== ====== ======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 1996,1998, group LTD experienced increased pretax operating income for groupthat
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 favorablyunfavorably affected by increased investment income and a lowerhigher benefit ratio partially offset by
increased operating expenses primarily from continued investment in benefit
management practices and product distribution. The lower benefit ratio was
primarily1998,
largely the result of lowerincreased levels of claims incidence, an increase in the
average size of claims and higher claim recoveries,
which management primarily attributes to the continued successa longer duration of its risk
management programs.
Excluding the effects of claim block acquisitions, group LTD reported
premium growth of 5.8% in 1996, reflecting increased new sales and selected
price increases. Group LTD experienced improved sales and persistency in 1996,claims as compared with 1995, when prices were significantly increased1997.
As discussed in the section titled Forward-Looking Information, certain segmentsrisks
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 business resultinghigher levels experienced
in a high level of case terminations for
1995. In general, case terminations from price increases have occurred in less
profitable segments of the business. Management1998. Therefore, management continues to take actions to
increase premium and sales growth, including a focus on improving premium
persistency and strengthening the product distribution channel.
During 1995 and 1994, management implemented and strengthened various risk
management programs to address the unfavorablemonitor claims experience in group
LTD during those periods. In additionand responds to the selected price increases on new and
inforce business, more stringentchanges by periodically adjusting prices, refining
underwriting practices, and the reduction of
benefit options for certain segments of the business, management established
special claims units for both its group LTD and individual disability businesses
to address specific aspects of disability claims, including complex and
fraudulent claims. Additionally, management implemented new group LTD contract
provisions that provide risk managementguidelines, changing product features and claimant rehabilitation
incentives. Management continually reviews the benefits management process to
identify and strengthenstrengthening risk
management policies and procedures. In addition, management will continue to
evaluate 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 cross-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
ForUNUM Limited's pretax operating income declined for the year ended
December 31, 1996, UNUM Limited's pretax operating
income was favorably affected by a lower benefit ratio and increased investment
income,1998, as compared with the corresponding period in 1995.1997. The lowerdecline was primarily due to an
increased benefit ratio was primarily the resultgenerally resulting from a longer duration of a focus on strengthening risk management
programsclaims
and improved newincreased levels of claims experience. Management believes that the level
of future earnings for UNUM Limited will be a function of various factors,
including but not limited to, the effectiveness of these continuing risk
management actions over
20
time. Additionally, UNUM Limited incurred increased operating expenses in 1996,
which were primarily the result of increased investments in information systems
technologyincidence and risk management programs. Due to the relativeaverage size of UNUM
Limited's block of business, operating results can exhibit claims variability.claims. Favorable
expense growth partially offset this decline.
In general, UNUM Limited's earnings expressed in British pound sterlingU.S. dollars are affected
by fluctuations in the exchange rates used in the translation of earnings into U.S. dollars.from
British pounds sterling. The weighted averageweighted-average exchange rate was approximately
$1.56, $1.58$1.66, $1.64 and $1.53$1.56 for the years ended December 31, 1996, 19951998, 1997 and 1994,1996,
respectively. At December 31, 1996,1998, the spot rate was approximately $1.71.$1.66.
17
UNUM Corporation and Subsidiaries
Individual Products
During 1998, the long term care ("LTC") and Lifelong Disability As a resultProtection
("LDP") blocks of the merger of Commercial Life into UNUM America, which was
effective December 31, 1996, UNUM now reports the operations of the Association
Group disability business, with the individual disability business. Current and
prior period information for individual disability has been restatedwhile still relatively small, continued to
reflect
this change.
For the year ended December 31, 1996,contribute favorably to pretax operating incomeincome. LTC and LDP experienced
significant premium growth in 1998, as compared with 1997, reflecting the
strong sales momentum for individual disability wasthese businesses.
Other Disability Insurance
The non-cancellable ID business contributed favorably affected by increased investment income,
partially offsetto the segment's
pretax operating earnings for 1998, largely driven by a higherlower benefit ratio, as
compared with 1997, during which the same periodnon-cancellable ID block incurred higher
levels of claims incidence. Partially offsetting these positive results was a
decline in 1995. The higher benefit ratio was primarily attributable to a decrease in
premium growth and the inclusionoperating results of the Association Group disabilityreinsured block of non-cancellable ID
business whichreported in fees and other income. This decline was affected by unfavorable claims experience. Premium growth continued to
decline as a result of the transition to the guaranteed renewable Lifelong
Disability Protection ("LDP") product as a result of management's decision in
late 1994 to discontinue sales of the traditional, fixed price, non-
cancellable product in the United States. Following the approval of the LDP
product, sales of the non-cancellable individual disability product have been
discontinued in the United States.
Group Short Term Disability
Group STD's contribution to the Disability Insurance segment's pretax
operating income continued to increase in 1996, primarily due to
strong premium
growth, reflecting management's continuing efforts to cross-sell the group STD
products with group LTD and group life products. Partially offsetting the
effects of strong premium growth were higher operating expenses primarily
relating to investments in risk management programs and the inclusion of certain
office relocation expenses in 1996.
Disability Reinsurance Operations
Pretax operating income for the disability reinsurance operations was
adversely affected by unfavorable claims experience generally resulting from an increase in the
average size of claims and decreased premium,a higher level of claims incidence in the reinsured
block. See Item 8 Note 6 under the caption "Reinsurance" for a discussion of
the year ended December 31, 1996, as compared with the same period in 1995.
Management continues to focus on improving risk management programs and
strengthening underwriting standards to address this claims experience.
21
reinsurance transaction.
SPECIAL RISK INSURANCE SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year)millions) 1998 % Change 1997 % Change 1996
1995 1994
- ---------------------------------------------- ------------------------ ------------------------ ---------------------------------------------------- ------------ ---------- ------------ ---------- ------------
Revenues
Premiums
Group life insurance ........................ $439.6 14.2% $384.8 12.1%Life ............................... $ 343.3645.9 22.3% $ 528.1 20.1% $ 439.6
Other special risk products ............... 277.5 (0.1) 277.8 26.4 219.8
------ ------ ------ --------- -------Special Risk Products .............. 513.2 32.5 387.4 25.5 308.6
-------- ----- -------- ---- --------
Total premiums ........................... 717.1 8.2 662.6 17.7 563.1.......................... 1,159.1 26.6 915.5 22.4 748.2
Investment income ........................... 56.2 27.7 44.0 8.6 40.5
Net realized investment gains ............... 0.3 (93.2) 4.4 nm 0.2......................... 78.7 12.3 70.1 22.3 57.3
Fees and other income ........................ 38.3 (3.5) 39.7 (9.8) 44.0
------ ------ ------ --------- -------..................... 49.3 13.6 43.4 23.6 35.1
-------- ----- -------- ---- --------
Total revenues ........................... 811.9 8.2 750.7 15.9 647.8.......................... 1,287.1 25.1 1,029.0 22.4 840.6
Benefits and expenses
Benefits to policyholders .................. 506.5 2.9 492.3 24.8 394.4................. 803.3 26.1 637.2 23.2 517.1
Operating expenses ........................... 184.8 20.7 153.1 4.8 146.1........................ 226.8 17.5 193.1 3.4 186.8
Commissions ................................. 67.0 10.0 60.9 11.7 54.5............................... 176.1 38.1 127.5 42.1 89.7
Increase in deferred policy acquisition
costs (25.6) 61.0 (15.9) 20.5 (13.2)
Interest expense ........................... -- nm -- (100.0) 0.1
------ ------ ------.................................... (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) ............... 732.7 6.1 690.4 18.6 581.9
------ ------ ------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
31.3 60.3 (8.5) 65.9
Exclude realized investment gains ............ (0.3) (4.4) (0.2)
Special items (a) ........................... 11.3 3.9 --
------ ------ -------
Pretax operating income (a) .................. $ 90.2 50.8% $ 59.8 (9.0)% $ 65.7
====== ====== ====== ========= =======
Sales===== ========= ==== =========
Supplemental information (d):
Group life sales (annualized new
premiums) ................................ $ 208.7 $ 175.8 $ 150.0
Group life insurance ........................ $150.0 $106.1 $ 90.8
Persistencypersistency (premiums) Group life insurance ................................. 86.4% 86.5% 85.6% 83.0% 84.8%
Benefit ratio (% of premiums) ............... 70.6% 74.3% 70.0%............. 69.3% 69.6% 69.1%
Operating expense ratio (% of
premiums) ................................. 25.8% 23.1% 25.9%................................ 19.6% 21.1% 25.0%
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income andsee page 12 of the
Consolidated Overview.
(b) A discussion of special items begins on page 12 of the Consolidated
Overview. For a detailed descriptiondiscussion 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 Overview.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 life, products sold by
UNUM Americaaccidental death
and First UNUM,dismemberment, travel and voluntary accident insurance, special risk
accident insurance previously sold by
Commercial Life, which has been merged with UNUM America,reinsurance operations, and other special risk insurance products.
ThePretax operating income for the Special Risk Insurance segment also includes non-disability reinsurance
operations, which represent UNUM's participation in various reinsurance pools,
and the reinsurance underwriting management operations of Duncanson & Holt, Inc.
Forincreased
for the year ended December 31, 1996,1998, as compared with 1995,1997, primarily driven
by strong premium growth and a lower operating expense ratio across the
Special
Risk Insurance segment reported an increase in pretax operating income. The
increase was primarily due to an improved benefit ratio in the group life
business,segment. Additionally, increased fees and other income, largely from
reinsurance underwriting management operations, and increased investment income
and premium growth driven by strong
sales. These favorable factors werepositively affected pretax operating income for this period. Higher benefit
ratios in certain product lines partially offset by a higher operating
expense ratiothese increases. UNUM's
participation in group life,Lloyd's of London syndicates experienced a higher benefit
ratio, in certain reinsurance
pools, and increased expensesespecially in the fourth quarter, as new information was received about
the profitability of open syndicate years. The profitability of the Lloyd's of
London market and the syndicates in which UNUM participates may continue to
deteriorate and impact future pretax operating income. UNUM is conducting a
strategic review of its reinsurance underwriting management
operations.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's
productssegment can exhibit claims variability.
The improved benefit ratio for group life was primarily attributable to
favorable claims experience, coupled with pricing and risk management actions
implemented in 1995. Solid sales results improvedand stable persistency trends,
22
continued during the year and
continued renewal efforts contributed towere the primary drivers of group life premium growth of 14.2%.22.3% in 1998. Claim
block acquisitions generated one-time premiums for group life of $0.2 million
and $3.6 million, respectively, for 1997 and 1996, and for reinsurance
operations of $3.6$5.1 million and $16.3 million, respectively, for 1996,1998 and $1.3 million and $38.3 million, respectively, for 1995.1996.
Management intends to pursue additional claim block acquisitions in the future.
The decreasesegment's operating expense ratio improved in 1998, primarily driven
by continued expense management combined with the strong premium growth. In
1998, the segment's benefit ratio declined slightly, primarily due to favorable
claims experience in most lines of business offset by unfavorable experience in
certain reinsurance pools.
The increase in pretax operating income for 1995,1997, as compared with 1994,1996,
was primarily attributabledue to increased claimsstrong premium growth in the group life business, lower
expense ratio across most lines, increased investment income and special
risk accident insurance businesses, combined with reduced feeadditional
fees and other income predominately from the reinsurance underwriting management
operations. Partially offsetting these
decreasesThese favorable factors were continued premium growth, and favorable claims experiencepartially offset by higher benefit
ratios in certain reinsurance pools.lines of business.
19
UNUM Corporation and Subsidiaries
COLONIAL PRODUCTS SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year)millions) 1998 % Change 1997 % Change 1996
1995 1994
- ---------------------------------------------- ----------------------- ----------------------- -------------------------------------------- ------------ ---------- ------------ ---------- ------------
Revenues
Premiums ............................................................... $552.7 5.2% $525.4 6.4% $493.7 4.4% $472.7 7.7% $439.1
Investment income ............................................. 65.8 14.2 57.6 21.0 47.6 15.3 41.3 33.7 30.9
Net realized investment gains (losses) ...... (0.3) nm 10.9 nm 1.7
Fees and other income ...................................... 3.8 (29.6) 5.4 20.0 4.5 87.5 2.4 9.1 2.2
------ ----- ------ --------- ------
Total operating revenues ........................... 545.5 3.5 527.3 11.3 473.9......... 622.3 5.8 588.4 7.8 545.8
Benefits and expenses
Benefits to policyholders ............................ 268.7 3.5 259.7 8.5 239.3 1.8 235.1 6.3 221.1
Interest credited ............................................. 16.6 37.2 12.1 61.3 7.5 15.4 6.5 30.0 5.0
Operating expenses ............................................ 139.4 7.1 130.2 6.2 122.6
6.9 114.7Commissions ........................ 123.3 7.1 107.1
Commissions .................................115.1 6.8 107.8 (1.0) 108.9 12.6 96.7
Increase in deferred policy acquisition
costs (24.1) (5.9) (25.6) 36.9 (18.7)
------ ----- ------ ----- ------................................. $(30.8) 12.0% $(27.5) 14.1% $(24.1)
------- ---- ------- ---- -------
Total benefits and expenses ......................... 517.2 5.6 489.6 8.1 453.1
3.1 439.6 6.9 411.2
------ ----- ------ ----- ------------- ---- ------- ---- -------
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% $ 98.8 6.9% $ 92.4
5.4 87.7 39.9 62.7
Exclude realized investment (gains) losses 0.3 (10.9) (1.7)
------ ------ ------
Pretax operating income (a) .................. $ 92.7 20.7% $ 76.8 25.9% $ 61.0
====== ===== ====== ===== ============= ==== ======= ==== =======
Supplemental information (c):
Sales (annualized first month's
premiums) .............................................................. $203.9 $224.7 $213.6 $200.4 $183.1
Benefit ratio (% of premiums) ......................... 48.6% 49.4% 48.5% 49.7% 50.4%
Operating expense ratio (% of
premiums) .............................................................. 25.2% 24.8% 24.3% 24.4%24.8%
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income see page 12 of the
Consolidated Overview.
(b) The Colonial Products 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. 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. Accidentworksites and sickness, cancer
and life insurance products are marketed by Colonial primarily through independent
sales representatives.
ThePretax operating income for the Colonial Products segment reported increased pretax operating income for
the year ended December 31, 1996,1998, as compared with 1995.1997. The increase in
pretax operating income was
primarily attributable to favorableadditional investment income and a reduced benefit
ratiosratio in the life,accident, sickness and accident and sicknessdisability product lines, and increased investment
income,line, partially offset
by an increased operating expense ratio. During 1996,increase in interest credited and a higher benefit ratio in the cancer
product line. The increase in investment income and interest credited, is
largely due to the assumption of worksite-marketed universal life insurance
under reinsurance agreements Colonial entered into an agreementin 1998 and 1997. During
1998, management continued to reinsure a majority of the mortality riskimplement organizational changes to focus on
new and inforce universal life business. The reinsurance agreement negatively
affects reported premium growth and related expense ratios while positively
affecting reported benefit ratios.specific distribution channels to market Colonial products.
Colonial's pretax operating income increased in 19951997, as compared to 1994, primarily because of increased investment income
and an improved benefit ratio.
23
Colonial's benefit ratio improved again in 1996 to 48.5%, as compared with
49.7% in 1995 and 50.4% in 1994, primarily driven by the effect of the universal
life reinsurance agreement, continued favorable claims experience, and improved
incidence rates in the life, and accident and sickness product lines.
Investment income increased during 1996, primarily because of increased
cash flows resulting from a product mix shift and a change in asset mix to
higher yielding securities. Investment income increased during 1995, primarily
because of increased cash flows and additional income realized from the
reinvestment of the proceeds from the second quarter 1995 sale of Colonial's
equity portfolio into investment grade fixed income assets.
The expense ratio increased in
1996, primarily due to the impactadditional investment income, premium growth and reduced
operating expense ratios across most lines of the
universal life reinsurance agreement. Excluding the impact of the universal life
reinsurance agreement, the expense ratio declined slightly compared to 1995 as a
result of continuing expense management efforts.
During 1996, Colonial experienced slower growth in sales and premium as
compared with 1995, reflecting the effects of weaker sales growth during the
third and fourth quarters of the year. Management is focusing on increasing
sales and premium at Colonial by enhancing collaborative sales across the UNUM
enterprise, introducing several new products and developing alternative
distribution channels.business.
20
RETIREMENT PRODUCTS SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year)millions) 1998 1997 1996
1995 1994
- ---------------------------------------------- --------------------------- -------------------------------------------------------------------- --------- --------- ----------
Revenues
Premiums ....................................Pretax operating income (a) ............. $ 19.7 (28.6)%1.0 $ 27.6 9.5%4.7 $ 25.2
Investment income ........................... 214.4 (28.3) 298.9 (11.0) 335.8
Net realized investment13.6
Special items (b) ....................... -- 72.6 (15.0)
Realized gains ...............(losses) ................. (0.4) (1.1) 2.8
(88.7) 24.8 nm 2.2
Fees and other income ........................ 46.1 nm 6.5 4.8 6.2
------ ---------- ------- --------- -------
Total revenues ........................... 283.0 (20.9) 357.8 (3.1) 369.4
Benefits and expenses
Benefits to policyholders .................. 64.0 17.6 54.4 5.8 51.4
Interest credited ........................... 193.1 (12.6) 220.9 (7.1) 237.7
Operating expenses ........................... 22.1 (33.8) 33.4 10.6 30.2
Commissions ................................. 5.2 (21.2) 6.6 (29.8) 9.4
Increase in deferred policy acquisition costs (2.8) (6.7) (3.0) nm (1.3)
------ ---------- ------- --------- -------
Total benefits and expenses ............... 281.6 (9.8) 312.3 (4.6) 327.4
------ ---------- ------- --------- -------
Income before income taxes ..................(c) .......... $ 0.6 $ 76.2 $ 1.4
(96.9) 45.5 8.3 42.0
Exclude realized investment gains ............ (2.8) (24.8) (2.2)
Special items (a) ........................... 15.0 1.0 --
------ ------- -------
Pretax operating income (a) .................. $ 13.6 (37.3)% $ 21.7 (45.5)% $ 39.8
====== ========== ======= ========= =======
Invested assets under management for
tax sheltered annuities, at end of
period .................................... $ 305.3 $3,074.3 $3,065.0
====== ======= =======
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income and a detailed descriptionsee page 12 of the
Consolidated Overview.
(b) A discussion of special items seebegins on page 12 of the 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 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 the Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Selected Consolidated Financial Data
included elsewhere in the Form 10-K (as amended).
The Retirement Products segment includes tax sheltered annuities ("TSA") inproducts no longer actively
marketed by UNUM America and First UNUM,including: TSAs, guaranteed investment contracts ("GICs"),
deposit administration accounts ("DAs"), 401(k) plans, individual life and
group medical insurance, all of which are no longer actively marketed by UNUM.
24
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 $3.3 billion. The
purchase price (ceding commission) paid upon closing was approximately $71
million, and the transaction generated statutory capital of approximately $160
million. The contracts have initially been reinsured on an indemnity basis. Upon
consent of the TSA contractholders and/or participants, the contracts will be
considered reinsured on an assumption basis, legally releasing UNUM America and
First UNUM from future contractual obligation to the respective contractholders
and/or participants. The sale resulted in a deferred pretax gain of $80.8
million, which will be recognized in income as a special item in proportion to
contractholder and/or participant consents for assumption reinsurance, the
majority of which management believes will occur during 1997. Through March 1,
1997, consent for assumption reinsurance has been provided by TSA
contractholders and/or participants owning approximately 60% of assets under
management.
Fees and other income reported by the TSA business increased in 1996,
reflecting a $38.2 million reimbursement of interest credited from Lincoln under
the reinsurance agreement. UNUM will continue to report the amount of interest
credited to TSA contracts for which the consent to transfer from indemnity
reinsurance to assumption reinsurance has not been received, with an equivalent
amount being reported in fees and other income for the reimbursement from
Lincoln. The group TSA businesses accounted for $13.5 million, $16.4 million and
$31.6 million of the Retirement Products segment's pretax operating income in
1996, 1995 and 1994, respectively.insurance. For the yearyears ended December 31, 1996,1998, and 1997, the Retirement Products
segment reported decreased pretax operating income as compared with the
same periodrespective prior year. The decline in 1995. The decreaseoperating income in both periods was
primarily due to reduced earnings from the runoff of
GICs, DAs and 401(k) plans during the year and lower interest spread margins on
tax sheltered annuities through October 1, 1996, the effective dateresult of the sale of UNUM's TSA sale.business in October 1996, as
discussed in Item 8 Note 5 "Sale of Tax-Sheltered Annuity Business." For 1995,1997,
the decrease in pretax operating incomeTSA results was primarily
attributable to lower interest spread margins on tax sheltered annuities, as
compared with the unusuallypartially offset by favorable levels experienced during 1994.
During 1996, investment income declined reflecting the transfer of $2,690
million of assets to Lincoln on October 1, 1996, to effect the sale of the TSA
business, and the shifting of assets to lower yielding, highly liquid,
instruments during the year in anticipation of the transfer. During 1995,
investment income decreased primarily due to investments in lower yielding
tax-exempt securities and a reduced average investment yield caused by the low
interest rate environment. In addition, the reduced asset base under management
for GICs, DAs and 401(k) plans has resulted in lower investment income and
reduced amounts of interest credited during 1996 and 1995. Management expects
continued decreasesvolatility in the
amountsrun-off of investment incomecertain other discontinued products. UNUM expects these blocks of
business to continue to decline in size over several years and interest credited as
the related GICs, DAs and 401(k) contracts mature or terminate.experience
earnings volatility, reflecting their run-off nature.
CORPORATE
(Dollars in millions) 1998 1997 1996
1995 1994
- -------------------------------------------------- ---------------- ---------------- -------------------------------------------------- ----------- ----------- -----------
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 ........................(c) ............ $ (58.0) $ (52.6) $ (46.7)
$ (28.6) $ (28.2)
Exclude realized investment (gains) losses ...... (0.9) (0.3) 0.6
Special items (a) .............................. 10.1 -- --
----- ----- -------
Pretax operating loss (a) ........................ $ (37.5) $ (28.9) $ (27.6)
===== ============ ======= =======
- --------
(a) For the definition of pretax operating loss and a detailed descriptionincome see page 12 of the
Consolidated Overview.
(b) A discussion of special items seebegins 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.
TheFor the year ended December 31, 1998, as compared with the same period in 1997,
the increased pretax operating loss in Corporate for the year ended December 31,
1996, as compared with 1995, was primarily the result of increased international
development costs anddue to higher interest
expense on corporate borrowings,and decreased investment income, partially offset by increased investment income.lower operating
expenses. The increased pretax operating loss in 1995,for 1997, compared with 1994, was
primarily attributable to increased interest expense, partially offset by
reduced operating expenses. Effective January 1, 1995, the operations of UNUM
Japan are reported in the Disability Insurance segment. Costs related to UNUM's
investment in Japan prior to January 1, 1995, were reported as operating
expenses in Corporate.
25
INCOME TAXES
Effective tax rates, which reflect income tax expense as a percentage of
income before income taxes, were 30.3%, 26.4% and 22.1% for 1996, 1995 and 1994,
respectively. Reported income tax expense was below the federal statutory tax
rate of 35% primarily due to tax savings from investments in tax-exempt
securities. The increase in the effective tax rate over the three year period was
primarily due to reduced tax-exemptdecreased investment income, both in amountprincipally
21
UNUM Corporation and as a
percentageSubsidiaries
from the Company's increased use of income before income taxes. Beginning in late 1996, UNUM commenced
a plancapital to increase purchasesrepurchase shares of tax-exempt bondsits common
stock, and mortgages.higher operating expenses.
INVESTMENTS
Overview
UNUM's long term investment strategyobjective is to invest primarily in investment
grade bonds and commercial mortgages. UNUM evaluatesoptimize total expectedasset return after
consideration of associated expenses and losses, within
appropriate risk 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 with 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 applicable 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
fair 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.
UNUM's invested assets were $8.7 billion$9,837.7 million and $11.7 billion$8,958.9 million at
December 31, 1996,1998, and 1995,1997, respectively. The decrease from 1995 reflects asset transfers
that occurred in the fourth quarter of 1996, as discussed below. The composition of UNUM's invested
assets at December 31, 1996,1998, was 79.6%80.3% fixed maturities, 13.0%13.2% mortgage loans,
2.8%2.6% real estate and 4.6%3.9% other invested assets.
In late December 1996, UNUM transferred approximately $403 million in cash
into a trust account held for the benefit of Centre Life Reinsurance Limited
("Centre Re"), in accordance with the reinsurance agreement between UNUM America
and Centre Re, which became effective December 31, 1996 (see Note 6 in Item 8).
On October 1, 1996, UNUM transferred approximately $2,690 million of assets into
a trust account held for the benefit of Lincoln to effect the sale of the TSA
business (see Note 5 in Item 8). The assets transferred consisted of
approximately $1,826 million of short-term investments, $589 million of fixed
maturities and $275 million of cash.
During the second quarter of 1995, UNUM sold virtually all of the common
stock portfolio of its United States subsidiaries, primarily due to
consideration of statutory capital requirements associated with investment in
common stocks and to increase future investment income. UNUM reinvested the
proceeds from the sale of the common stock portfolio primarily in investment
grade fixed income assets. Dependent on capital considerations and market
conditions, UNUM may invest in equity securities in the future.
Gross realized investment gains were $40.2$29.1 million, $287.0$24.4 million and
$117.0$40.2 million, and gross realized investment losses were $36.8$8.1 million, $61.9$28.0
million and $71.4$36.8 million for the years ended December 31, 1996, 19951998, 1997 and 1994,1996,
respectively.
Fixed Maturities
Fixed maturities at fair value were $7,896.9 million and $7,310.9 million
at December 31, 1998, and 1997, respectively. Management believes UNUM's fixed
maturity portfolio is concentrated in high quality
intermediate term bonds, which management believes are well diversified by company and industry sector. At December 31, 1996, over 80% of the bond
portfolio was rated "A" or better. FixedThe
fixed maturity ratings are obtained from
external rating agencies or are determined by UNUM internally using similar
methods if external ratings are not available. The bond portfolio is primarily composedcomprised of taxable corporate bonds.
In late 1996, UNUM commenced a plan to
increase purchases of tax-exempt bonds and mortgages due to after-tax yield
considerations. Dependent on market conditions and tax considerations, these
tax-exempt securities can provide attractive after-tax yields as compared with
similarly rated taxable securities.
26
The table below summarizes fixed maturity holdings by credit quality as of
December 31, 1996, and 1995.
Bond Credit Quality Ratings 1996 1995
- ----------------------------- ---------- ----------
AAA ........................ 10.6% 12.0%
AA ........................ 12.2 12.4
A ........................... 57.3 57.1
BAA ........................ 18.4 17.0
Below BAA .................. 1.5 1.5
------ ------
Total ..................... 100.0% 100.0%
====== ======
Bond credit quality ratings are based on the capacity of the borrower to
meet interest and principal payments as they come due. Capacity is considered
extremely strong for AAA rated issues; AA very strong; A strong; and BAA
adequate. Bonds rated below BAA are considered to have a vulnerability to
default.
At December 31, 1996,1998, and 1995,1997, the fixed maturity portfolio included
$102.0$89.1 million and $139.4$83.7 million, respectively, of below investment grade bonds
(below "BAA") recorded at fair value. These bonds had an associated amortized
cost of $101.7$86.2 million and $133.8$80.2 million, respectively. Virtually all of the
belowFixed maturity ratings
are obtained from external rating agencies or are determined internally by UNUM
using similar methods if external ratings are not available. Below investment
grade bonds were purchased atare inherently more risky than investment grade but were
subsequently downgraded.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 amount ofThere were no fixed
maturities delinquent 60 days or more was zero at December 31, 1996,1998, and 1995.
In November 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," which provided a one-time opportunity to reassess the
appropriateness of the classifications of securities described in Financial
Accounting Standard ("FAS") No. 115, and to reclassify fixed maturities from the
held to maturity category without calling into question the intent to hold other
debt securities to maturity in the future. On December 31, 1995, UNUM reassessed
its fixed maturity portfolio, and as allowed under the implementation guidance,
reclassified fixed maturities with an amortized cost of $6,082.8 million and a
related unrealized gain of $393.0 million from the held to maturity category to
available for sale. The unrealized gain on the total available for sale fixed
maturity portfolio was $551.9 million at December 31, 1995. In connection with
the reclassification of the held to maturity fixed maturities to available for
sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to
reflect the changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized. At December 31, 1996, the unrealized gain on available for sale fixed
maturities was $286.0 million and the related unpaid claims adjustment was
$168.7 million.1997.
Mortgages
At December 31, 1996,1998, and 1995,1997, UNUM's mortgage loans were $1,132.1$1,303.4
million and $1,163.4$1,131.0 million, respectively. UNUM invests new funds in commercial
properties in targeted geographical areas that meet UNUM's underwriting
standards. Management uses a comprehensive
rating system to evaluate the investment and credit risk of each mortgage loan
and to identify specific properties for inspection and reevaluation. Management
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, as summarized in Item 1 F. Investments.types. UNUM's incidence of new problem
mortgage loans and foreclosure activity has remainedcontinued to remain very low in
1996,1998, reflecting improvements in overall economic activity and improving real
estate markets in the geographic areas where UNUM has mortgage loans.
Management expects a modest level of delinquencies and problem loans in the
future. The percentage ofThere were no delinquent mortgage loans delinquent 60 days or more
on a contract delinquency basis was 0.5% and 0.2% at December 31, 1996,1998, and 1995, respectively.
Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors
for Impairment of a Loan," and FAS 118, "Accounting by Creditors for Impairment
of a Loan-- Income Recognition and Disclosures," which definedat
December 31, 1997, 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 termsamount was 0.7% of the loan
agreement. The adoption of FAS 114 and FAS 118 did not have a material affect on
UNUM's results of operations or financial position.
27
portfolio.
At December 31, 1996,1998, and 1995,1997, impaired loans totaled $50.4$20.7 million and
$50.1$43.4 million, respectively. Included in the $50.4$20.7 million of impaired loans at
December 31, 1996,1998, were $38.9$9.0 million of loans which had a related allowance for
probable losses of $5.7$2.4 million, and a loan$11.7 million of $11.5 millionloans which had no
related allowance for probable losses. Interest lost on impaired loans in 1996,
19951998,
1997 and 1994,1996 was not material.
Realized investment losses related to impaired mortgage loans amounted to
$2.3 million, $3.3 million and $1.0 million $9.2 millionfor 1998, 1997 and $8.5 million for 1996, 1995 and 1994,
respectively. Impaired mortgage loans as of December 31, 1996,1998, are not expected
to have a significant impact on UNUM's results of operations, liquidity or
capital resources.
MortgageRestructured mortgage loans that were restructured prior to the adoption of FAS 114 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, 1996,1998, restructured
mortgage loans totaled $54.8$14.5 million, as compared with $59.9$39.3 million at
December 31, 1995.1997. Interest lost on restructured loans was not material in
1996, 19951998, 1997 or 1994.1996.
Real Estate
At December 31, 1996,1998, investment real estate amounted to $248.1$250.6 million,
compared with $222.2$231.5 million at December 31, 1995. UNUM purchases investment
real estate in selected markets when certain investment criteria are met.1997. Investment real estate is intended to be held long-term and is
carried at cost less accumulated depreciation. Real estate acquired through
foreclosure is valued at fair value at the date of foreclosure and may be
classified as investment real estate if it meets UNUM's investment criteria. If
investment real estate is determined to be permanently impaired, the carrying
amount of the asset is reduced to fair value. Occasionally, investment real
estate is reclassified and revalued as real estate held for sale when it no
longer meets UNUM's investment criteria. Real estate acquired through
foreclosure is not expected to have a significant effect on UNUM's results of
operations, liquidity or capital resources.
At December 31, 1996,1998, and 1995,1997, real estate held for sale amounted to
$9.4$15.6 million and $35.5$23.3 million, respectively. Real estate acquired through
foreclosure is valued at fair value at the date of foreclosure and may be
classified as investment real estate, if it meets UNUM's investment criteria. Real estate held for sale is
included in other assets in the Consolidated Balance Sheets and is valued net
of a valuation allowance whichthat 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.
Additions to the allowance for probable losses related to real estate held
for sale resulted in a realized investment gain of $0.4 million and realized
investment losses of $6.3 million and $0.8 million for the years ended December
31, 1996, 1995 and 1994, respectively. Additions to the allowance represent
charges to net realized investment gains less recoveries. Current and
anticipated real estate acquired through foreclosure is not expected to have a
significant affect on UNUM's results of operations, liquidity, or capital
resources.
Effective January 1, 1996, UNUM adopted FAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long- lived assets and certain identifiable intangibles to
be disposed of. FAS 121 applies to both real estate held for investment and real
estate held for sale. The adoption of FAS 121 did not have a material affect on
UNUM's results of operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
UNUM's businesses produce positive cash flows thatwhich are invested primarily
in intermediate term, fixed maturity investments intended to reflect the
anticipated cash obligations of insurance benefit payments and insurance
contract maturities and to optimize investment returns at appropriate risk
levels. Unexpected cash requirements and liquidity needs can be met through
UNUM's investment portfolio of 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 costs and corporate
development.costs. Net statutory
operating income, which excludes realized investment gains and losses 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
28
from generally accepted accounting principles, are mandated by
regulators in an insurance company's state of domicile. In 1996, UNUM's United States insurance subsidiaries reportedaddition to the
level of net statutory operating income, UNUM's determination of approximately $167 million, compared with approximately $143
million in 1995.amounts to be
dividended by affiliates to UNUM Corporation 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 certain 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 19971999 to UNUM Corporation from all
U.S. domiciled insurance subsidiaries without state insurance regulatory
approval is approximately $153 million, as
compared with approximately $135 million for 1996.$150 million. UNUM Corporation also has the ability to
draw a dividend from its United Kingdom-based affiliate, UNUM Limited, subject to certain U.S. tax consequences.
In connection with the closing of the TSA saleLimited. Such
dividends are limited in amount, based on October 1, 1996, as
describedinsurance company legislation in the
Retirement Products segment, UNUM America paid an extraordinary
dividendUnited Kingdom which requires a minimum solvency margin. The amount available
under current law for payment of $123 million to UNUM Corporation during the fourth quarter of 1996.
As a result of the reinsurance of the individual disability business, discussed
in the Disability Insurance segment, UNUM America and First UNUM intend to pay
extraordinary dividends to UNUM Corporation from UNUM Limited
during 1997, subject1999 is approximately $20 million. It is not uncommon for an insurance
entity to request regulatory approval andfor 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 capital considerations.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, measured at
December 31, 1998, were significantly above the ranges that would require
regulatory action.
Cash flow requirements are also supported by a committed revolving credit
facility totaling $500 million. On October 29, 1996, a new committed revolving
credit facility became effective, expiring onmillion, which expires October 1, 2001, which replaced a
previously existing facility of the same amount.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 that, among other provisions, require maintenance of certain levels
of stockholders' equity and limits on debt levels.
On July 16, 1996,December 15, 1998, UNUM filedCorporation issued $250 million of senior
notes, which mature in 2028, under an omnibus shelf registration with the
Securities and Exchange Commission, which became effective August 2, 1996,
relating1996. UNUM
used the proceeds to repay 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 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 borrowing 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 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.
At December 31, 1996,1998, UNUM had short-term and long-term debt totaling
$117.7$283.5 million and $409.2$598.3 million, respectively. At December 31, 1996,1998,
approximately $439$414 million was available for additional financing under the
existing revolving credit facility and $500$200 million of investment grade debt
instruments was available for issuance under the shelf registration. Contingent
upon market conditions and corporate needs, management may refinance short-term
notes payable for longer term securities. 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 $56.7$149.7 million and $12.3$84.6 million at
December 31, 1996,1998, and 1995,1997, respectively.
Effective OctoberNovember 23, 1996,1998, UNUM's Board of Directors approved an expansion
ofrescinded the
Company'scompany's stock repurchase program to 6.0 million shares by authorizing
an additional 3.7 million shares. At December 31, 1996, approximately 4.5
million sharesas a result of common stock remained authorized for repurchase.the pending merger agreement
with Provident. During 1998, 1997 and 1996, UNUM acquired approximately 1.91.3
million, 7.1 million and 3.8 million shares, respectively, of its common stock
in the open market at an aggregate cost of $65.0 million, $285.2 million and
$119.1 million. UNUM did not acquire any shares
in the open market in 1995. During 1994, UNUM repurchased 3.9 million, shares in
the open market at an aggregate cost of $183.3 million.respectively.
UNUM was committed at December 31, 1996,1998, to purchase fixed maturities and
other invested assets in
the amount of $104.3$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 and claims paying
ability are available for
the individual United States
24
domiciled insurance company subsidiaries rather thansubsidiaries. Financial strength ratings are based
primarily on a consolidated basis, since theU.S. statutory financial information used to developfor the ratings is based on statutory accounting
practices in the United States.individual U.S.
domiciled insurance companies. Debt ratings for UNUM Corporation are based
primarily on consolidated financial information prepared using generally
accepted accounting principles. 29
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
claims paying ability and financial strength ratings for UNUM's United States domiciled insurance company
subsidiaries at March 7, 1997:February 26, 1999:
Standard
& Poor's Moody's A.M. Best
----------------- ---------------------- --------------------------------------- ------------------------------------- --------------------------
UNUM Corporation Ratings:
Senior Debt (MTN program)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)
Subordinated Debt (MIDS) A A2
(Strong) (Upper Medium Grade)
Claims PayingRating affirmed, 11/23/98 Rating confirmed, 11/23/98
United States Subsidiaries' Ratings: Ability Rating Financial Strength Rating
UNUM America AA Aa2 A++
(Excellent)(Very Strong) (Excellent) (Superior)
CreditWatch with negative On review for possible Under review with
implications downgrade developing implications
First UNUM AA Aa2 A+
(Excellent)(Very Strong) (Excellent) (Superior)
CreditWatch with negative On review for possible Under review with
implications downgrade developing implications
Colonial AA Aa3 A+
(Excellent)(Very Strong) (Excellent) (Superior)
CreditWatch with negative On review for possible Under review with
implications upgrade developing implications
At March 7, 1997,February 26, 1999, the unsold portion of the shelf registration related
to preferred stock carried a rating of "(P)"a1" ""a1/a2" (Upper-Medium Quality) from
Moody's.
INSURANCE REGULATION
The Risk-Based Capital standardsDERIVATIVES
Refer to Item 8 Note 14 "Derivative Financial Instruments" for
life insurance companies, as
prescribed by the National Association of Insurance Commissioners, are based on
a formula that establishes capital requirements relatinginformation.
LITIGATION
Refer 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 requirementsItem 8 Note 15 "Litigation" 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, 1996, the ACL ratios for UNUM America, First UNUM, and
Colonial were 406%, 467%, and 389%, respectively. This compares with ACL ratios
at December 31, 1995, of 382%, 382%, and 436%, respectively. For 1996, UNUM
America's ACL ratio reflects the merger of Commercial Life into UNUM America as
of December 31, 1996. At December 31, 1995, Commercial Life had an ACL ratio of
329% that is not included in the UNUM America 1995 ACL ratio.
DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments such as
options, futures and forward exchange contracts to hedge certain risks
associated with anticipated purchases and sales of 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. In using these instruments, UNUM is subject to the
off-balance-sheet risk that the counterparties of the transactions will fail to
perform as contracted. UNUM manages this risk by only entering into contracts
with highly rated institutions and listed exchanges. UNUM does not hold
derivative financial instruments for the purpose of trading.
At December 31, 1996, UNUM had open interest rate futures contracts with
notional amounts of $178.2 million to hedge anticipated sales of investments in
1997. These contracts had a related net unrealized gain of $1.6 million. At
December 31, 1995, UNUM had no open derivative financial instruments.
30
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, 1996. 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 of UNUM.
On December 29, 1993, UNUM filed suit in the United States District Court
for the District of Maine, seeking a federal income tax refund. The suit is
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 has
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.
UNUM believes its claims are meritorious, and has appealed the decision to the
United States Court of Appeals for the First Circuit. The ultimate recovery, if
any, cannot be determined at this time.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.
ACCOUNTING CHANGES
Effective January 1, 1996,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 adopted Financial Accounting Standard
("FAS") No. 121, "Accountinghas 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 Impairmentyear 2000 is organized into a number of
Long-Lived Assetsphases 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 Long-Lived Assetsmore 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 Disposed Of,"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 established accounting standards forare 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 impairment of long-lived assets, certain identifiable intangibles,project and goodwill relatedthe 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 assetsplans.
Failure by UNUM to be heldmake the required modifications to existing systems and
used and for long-lived assets
and certain identifiable intangiblesconversions to be disposed of. The adoption of FAS 121
did notnew 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 position.
Effective Januaryand 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 1996, UNUM adopted FAS 123,under the caption "Accounting Pronouncements
Adopted" for Stock-Based Compensation." FAS 123 establishedinformation.
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
accountinginstruments are exposed to market risk, which is the risk of market volatility
and reporting standards for stock-based employee compensation plans. The statement
defines a new methodpotential 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 accounting for employee stock compensation plans using a
fair value based method, under which compensation cost is measuredearnings, cash flows and
recognized in results of operations. Alternatively, FAS 123 allows an entity to
retain the accounting for employee stock compensation plans defined under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." UNUM retained the accounting defined under APB No. 25, and as
required, will disclose in a footnote the pro forma effects of stock-
based compensation using the fair value based method defined under FAS 123.
Referof
financial instruments to Note 9 in Item 8 for the related disclosures.
Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors
for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures," which defined 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. The adoption of FAS 114 and FAS 118 did not have a material
effect on UNUM's results of operations or financial position.
Effective January 1, 1994, UNUM adopted FAS 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. In November 1995, the Financial Accounting Standards Board
("FASB") issued "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," which provided a one-time
opportunity to reassess the appropriateness of the classifications of securities
described in FAS 115, and to reclassify fixed maturities from the held to
maturity category without calling into question the
31
intent to hold other debt securities to maturitychanges in the future. On December 31,
1995, UNUM reassessed its fixed maturity portfolio and, as allowed under the
implementation guidance, reclassified fixed maturities with an amortized costlevel of $6,082.8 million and a related unrealized gain of $393.0 million from the held
to maturity category to available for sale.interest rates. In connectionaccordance
with the reclassificationSecurities and Exchange Commission's Financial Reporting Release No.
48, the following quantitative analysis provides the estimated loss in fair
value of the held to maturity fixed maturities to available for sale,
on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to
reflect the changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued FAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes accounting and reporting standards for transfers and servicing ofcertain market sensitive financial assets and extinguishmentsliabilities 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 liabilities.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 statement provides
guidanceobjective
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 recognition or derecognitioneach 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 focusingare equal, interest rate exposure is
effectively neutralized on an economic basis as the conceptschange in value of
controlfinancial 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 extinguishment. UNUM is required to adopt FAS 125
effective January 1, 1997. The adoption of FAS 125 is not expected to have a
material effect on UNUM's results of operations or financial position.
In March 1997, the FASB issued FAS No. 128, "Earnings Per Share," which is
intended to simplify the computation and presentation of earnings per share
("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." FAS 128 will eliminate the concept of "primary" EPS and
require dual presentation of "basic" and "diluted" EPS. Diluted EPS under FAS
128 is similar to "fully diluted" EPS as defined by APB 15. UNUM is required to
adopt FAS 128 effectivedeposit assets held at December 31, 1997. As stated1998, 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 Note 1interest 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
underNote 14 "Derivative Financial Instruments." Based upon the caption "Earnings Per Share,"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 assumed exercisenear term would
not materially affect the fair value of UNUM's outstanding
stocknotes payable.
Additionally, UNUM periodically uses options, doesfutures 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 resultmaterially 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 a material dilution of earnings per share.
In March 1997, the FASB issued FAS No. 129, "Disclosures of Information
About Capital Structure," which clarifies disclosure requirements relatedforeign exchange rates to the
type, and nature, of securities contained in an entity's capital structure. UNUM
is required to adopt FAS 129 effective December 31, 1997.
32
translated amount.
Item 8--Financial Statements and Supplementary Data8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX Page
- ------------------------------------------------------------------------------------------ ----------- -----
Report of Independent Accountants ...................................................... 34........................................................ 29
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 1995 and 1994 35.. 30
Consolidated Balance Sheets as of December 31, 1996,1998, and 1995 ........................ 361997 ........................... 31
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998,
1997
and 1996 1995 and 1994 ........................................................................ 38.............................................................................. 32
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 33
1996
1995Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998,
1997
and 39
19941996 .............................................................................. 35
Notes to Consolidated Financial Statements ............................................. 40............................................... 36
3328
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
UNUM Corporation
We have auditedIn 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 as listedat December 31,
1998, and 1997, and the results of their operations and their cash flows for
each of the three years in Item 8 andthe period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules as listed in the index appearing under Item 14(a) of this Form 10-K.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 consolidated financial statements and financial statement schedules are
the responsibility of the Corporation's
management. OurUNUM'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 of these statements in accordance with
generally accepted auditing standards. Those standards which 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 includesstatements, assessing the accounting principles used and significant estimates
made by management, as well asand evaluating the overall
consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In ourthe
opinion the 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.expressed above.
/s/COOPERS & LYBRAND L.L.P. PRICEWATERHOUSECOOPERS LLP
Portland, Maine
February 5, 1997,
except for Note 5 for which the date is March 1, 1997,
and Note 18 for which the date is March 14, 1997
342, 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
1995 1994
- ----------------------------------------------------- ----------- ----------- ----------------------------------------------------------------- ------------- ------------- -------------
Revenues
Premiums $3,120.4 $3,018.2 $2,721.3.............................................. $ 3,841.7 $ 3,263.7 $ 3,151.5
Investment income ................................. 802.2 806.3 770.2..................................... 661.4 661.0 803.3
Net realized investment gains .....................(losses) ................ 21.0 (3.6) 3.4 225.1 45.6
Fees and other income .............................. 116.7 73.3 75.5
-------- -------- --------................................. 117.3 227.3 113.5
--------- ---------- ---------
Total revenues .................................... 4,042.7 4,122.9 3,612.6...................................... 4,641.4 4,148.4 4,071.7
Benefits and expenses
Benefits to policyholders ........................... 2,324.7 2,493.0 2,239.0............................. 2,886.2 2,438.8 2,342.2
Interest credited ...................................................................... 46.4 83.5 200.6
227.4 242.7
OperatingSalaries and related expenses ................................. 862.6 728.2 713.0......................... 479.3 433.4 424.0
Other operating expenses .............................. 401.1 370.3 445.0
Commissions ....................................... 364.2 369.9 355.9........................................... 496.2 410.5 386.9
Increase in deferred policy acquisition costs ...... (91.7) (114.7) (155.3)......... (235.1) (166.9) (109.3)
Interest expense .......................................................................... 49.9 42.4 40.7
37.2 18.7
-------- -------- ------------------ ---------- ----------
Total benefits and expenses ..................... 3,701.1 3,741.0 3,414.0
-------- -------- --------......................... 4,124.0 3,612.0 3,730.1
---------- ---------- ----------
Income before income taxes .................................................... 517.4 536.4 341.6 381.9 198.6
Income taxes
Current ............................................................................................ 27.9 68.3 122.3
98.6 30.4
Deferred ........................................................................................ 126.1 97.8 (18.7)
2.2 13.5
-------- -------- ------------------ ---------- ----------
Total income taxes ................................................................ 154.0 166.1 103.6
100.8 43.9
-------- -------- ------------------ ---------- ----------
Net income ...................................................................................... $ 363.4 $ 370.3 $ 238.0
$ 281.1 $ 154.7
======== ======== ================== ========== ==========
Net income per common share ........................share:
Basic ................................................ $ 3.262.63 $ 3.872.65 $ 2.09
======== ======== ========1.63
Diluted .............................................. $ 2.57 $ 2.59 $ 1.61
See notes to consolidated financial statements.
3530
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------------------------------
(Dollars in millions) 1996 19951998 1997
- --------------------------------------------------------- ------------ ------------------------------------------------------------------------- ------------- --------------
ASSETS
Investments
Fixed maturities available for sale--at fair value
(amortized cost: 1996--1998--$6,656.7; 1995--7,350.0; 1997--$8,583.5) ...... $6,942.7 $9,135.46,893.0) ........... $ 7,896.9 $ 7,310.9
Equity securities available for sale--at fair value
(cost: 1996--1998--$23.8; 1995--21.3; 1997--$21.1) ..................... 31.3 25.2............................. 31.0 30.7
Mortgage loans ....................................... 1,132.1 1,163.4.............................................. 1,303.4 1,131.0
Real estate, net ....................................... 248.1 222.2............................................ 250.6 231.5
Policy loans .......................................... 232.9 219.2................................................ 137.6 128.5
Other long-term investments ........................... 14.2 30.4................................. 2.0 1.8
Short-term investments ................................. 123.4 896.7
--------- ---------...................................... 216.2 124.5
---------- -----------
Total investments .................................... 8,724.7 11,692.5......................................... 9,837.7 8,958.9
Cash ................................................... 77.0 42.5......................................................... 80.5 56.8
Accrued investment income .............................. 166.1 208.5.................................... 167.4 160.3
Premiums due .......................................... 252.4 224.3................................................. 518.1 390.9
Deferred policy acquisition costs ..................... 844.2 1,142.3............................ 1,266.0 1,031.7
Property and equipment, net ........................... 181.0 153.7.................................. 237.9 196.2
Reinsurance receivables ................................. 1,113.8 420.9...................................... 1,770.0 1,441.2
Deposit assets .......................................... 2,846.6 --............................................... 729.7 688.3
Other assets .......................................... 518.0 370.9................................................. 540.3 486.2
Separate account assets ................................. 743.7 532.2
--------- ---------...................................... 35.3 29.6
---------- -----------
Total assets .......................................... $15,467.5 $14,787.8
========= =========
See notes to consolidated financial statements.
36
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------------- ------------ -----------
.............................................. $ 15,182.9 $ 13,440.1
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits ....................................... $1,881.1 $1,718.7...................................... $ 2,360.2 $ 2,108.4
Unpaid claims and claim expenses ........................... 5,289.3 4,856.4............................ 6,841.2 5,944.4
Other policyholder funds .................................... 3,533.6 3,840.3875.4 1,004.9
Income taxes
Current ................................................... 61.3.................................................... 47.3 20.7
Deferred ................................................... 341.8 392.0625.8 496.2
Notes payable ................................................ 526.9 583.8............................................... 881.8 635.8
Other liabilities .......................................... 826.7 540.8........................................... 778.2 765.3
Separate account liabilities ................................. 743.7 532.2
-------- --------................................ 35.3 29.6
---------- -----------
Total liabilities .......................................... 13,204.4 12,484.9......................................... 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
120,000,000240,000,000 shares, issued 99,987,958199,975,916 shares ............... 10.0 10.0.............. 20.0 20.0
Additional paid-in capital ................................. 1,103.4 1,088.2.................................. 1,151.2 1,123.0
Retained earnings ........................................... 2,444.9 2,162.5
Accumulated other comprehensive income:
Unrealized gains, on available for sale securities, net ...... 82.3 213.1...................................... 248.4 211.4
Unrealized foreign currency translation adjustment ......... (1.2) (23.1)
Retained earnings .......................................... 1,871.4 1,713.2
-------- --------
3,065.9 3,001.4(19.4) (16.0)
---------- -----------
Total accumulated other comprehensive income .............. 229.0 195.4
---------- -----------
3,845.1 3,500.9
Less:
Treasury stock, at cost (1996--28,165,594(1998--61,266,501 shares;
1995--26,980,3311997--61,703,924 shares) .................................... 792.2 691.6.................................. 1,085.9 1,050.3
Restricted stock deferred compensation ..................... 10.6 6.9
-------- --------...................... 21.5 15.8
---------- -----------
Total stockholders' equity ................................. 2,263.1 2,302.9
-------- --------.................................. 2,737.7 2,434.8
---------- -----------
Total liabilities and stockholders' equity .................. $15,467.5 $14,787.8
======== ========................ $ 15,182.9 $ 13,440.1
========== ===========
See notes to consolidated financial statements.
3731
UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
Unrealized
Gains (Losses) Unrealized
Common On Available Foreign RestrictedAccumulated
Stock Additional for Sale Currency StockOther
(Dollars in millions, $0.10 Par Paid-in Securities, TranslationComprehensive
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) Value Capital Net Adjustment Earnings Stock Compensation Total
- -------------------------------- --------- ------------------------------------------------ ------------- ----------- -------- -------- ------------ ------------------- -------------- -------------
Balance at January 1, 1994 .... $10.0 $1,078.41996 .......... $ 149.11,713.2 $ (24.1) $1,420.8(691.6) $ (529.8)(6.9) $ (1.7) $2,102.7
1994 Transactions:
Net income ................... 154.7 154.7
Unrealized losses on available
for sale securities, net .... (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
----- --------- ------- -------- -------- -------- ------ --------
Balance at December 31, 1994 .. 10.0 1,080.5 49.6 (23.7) 1,507.2 (706.6) (1.6) 1,915.4
1995 Transactions:
Net income ................... 281.1 281.1
Unrealized gains on available
for sale securities, net .... 163.5 163.5
Unrealized foreign currency
translation adjustment ....... 0.6 0.6
Dividends to stockholders
($1.035 per common share) .... (75.1) (75.1)
Employee stock option and
other transactions .......... 7.7 15.0 (5.3) 17.4
----- --------- ------- -------- -------- -------- ------ --------
Balance at December 31, 1995 .. 10.0 1,088.2 213.1 (23.1) 1,713.2 (691.6) (6.9) 2,302.9
1996 Transactions:
Net income ............................................ 238.0 238.0
Unrealized losses on available
for sale securities, net .... (130.8) (130.8)
Unrealized foreign currency
translation adjustment ....... 21.9 21.9Other comprehensive income ......... (108.9)
Dividends to stockholders
($1.090.545 per common share) ............... (79.8) (79.8)
Treasury stock acquired ................... (119.1) (119.1)
Employee stock option and
other transactions ................ 15.2 18.5 (3.7) 30.0
----- --------- ----------------- ---------- -------- -------- -------- ------ ------------------
Balance at December 31, 1996 .. $10.0 $1,103.4........ 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 ........ $ 82.32,444.9 $ (1.2) $1,871.4(1,085.9) $ (792.2) $(10.6) $2,263.1
====== ========= ======= =======(21.5) $ 2,737.7
========== ========== ======== ======== ====== ==================
See notes to consolidated financial statements.
3832
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------ ------------- ------------- ----------------------
Operating activities:
Net income .............................................................................................................. $ 238.0363.4 $ 281.1370.3 $ 154.7238.0
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in future policy benefits and unpaid claims and
claim expenses ................................................ 630.1 905.3 720.1.................................................. 980.1 726.6 743.0
Increase in amounts receivable under reinsurance agreements . (686.7) (61.0) (18.6)receivables .............................. (327.8) (277.5) (721.2)
Increase (decrease)in premiums due ......................................... (127.1) (94.8) (72.6)
Increase in income tax liability ................................................... 140.5 52.8 20.4 (3.5) (3.3)
(Increase) decrease in deferred policy acquisition costs ...... 299.2 (114.9) (155.4)
Increase......... (234.2) (163.3) 274.3
(Increase) decrease in deposit assets ................................................................ 12.3 (55.9) (432.1)
-- --
DeferredDeferral (recognition) of gain on sale of tax shelteredtax-sheltered
annuities ...................................................................... (3.3) (72.6) 80.8 -- --
Charge for individual disability reinsurance fees ............ 49.7................ -- -- Realized investment (gains) losses ........................... 4.0 (242.0) (59.0)49.7
Other ......................................................... 76.4 (8.9) 62.3
--------- --------- -------............................................................ 6.8 6.4 112.4
---------- ---------- ----------
Net cash provided by operating activities .................. 279.8 756.1 700.8
--------- --------- -------...................... 810.7 492.0 292.7
---------- ---------- ----------
Investing activities:
Maturities of fixed maturities held to maturity ............... -- 835.7 754.8
Maturities of fixed maturities available for sale ................................ 405.4 457.7 775.2 99.3 41.2
Sales of fixed maturities held to maturity ..................... -- 2.8 46.8
Sales of fixed maturities available for sale ........................................ 715.0 652.1 2,514.4 577.3 407.6
Sales of equity securities available for sale .................. -- 836.7 314.1
Sales and maturities of other investments .............................................. 144.5 234.9 269.5 312.0 414.9
Purchases of fixed maturities held to maturity .................. -- (230.2) (795.2)
Purchases of fixed maturities available for sale ................................. (1,557.0) (1,360.6) (1,890.9) (1,971.9) (943.9)
Purchases of equity securities available for sale ............... -- (131.3) (216.6)
Purchases of other investments ..................................................................... (374.4) (216.3) (263.0)
(322.4) (211.5)
Net increase(increase) decrease in short-term investments ........................ (1,051.9) (604.8) (221.7)................. (91.7) 10.7 (1,063.9)
Net additions to property and equipment ................................................... (41.1) (26.1) (54.3)
(28.9) (29.9)
--------- --------- ----------------- ---------- ----------
Net cash provided by (used in) investing activities ......... 299.0 (625.7) (439.4)
--------- --------- -------............... (799.3) (247.6) 287.0
---------- ---------- ----------
Financing activities:
Deposits and interest credited to investment contracts ..................... 100.7 285.1 597.1 669.6 608.6
Maturities and withdrawals from investment contracts .......................... (217.2) (327.2) (903.8) (888.1) (800.5)
Dividends to stockholders ................................................................................ (81.0) (79.2) (79.8) (75.1) (68.3)
Treasury stock acquired .................................................................................. (65.0) (285.2) (119.1) -- (183.3)
Proceeds from notes payable ........................................................................... 278.1 168.3 -- 291.5 54.7
Repayment of notes payable ............................................................................ (68.1) (48.5) (15.0) (1.3) (1.2)
Net increase (decrease) in short-term debt ............................................. 36.0 (10.6) (42.3)
(135.1) 136.6
Other ...................................................................................................................... 27.3 32.8 18.9
13.8 7.2
--------- --------- ----------------- ---------- ----------
Net cash used inprovided by (used in) financing activities .................................... 10.8 (264.5) (544.0)
(124.7) (246.2)
--------- --------- ----------------- ---------- ----------
Effect of exchange rate changes on cash ................................................... 1.5 (1.0) (0.3)
0.7 0.1
--------- --------- ----------------- ---------- ----------
Net increase (decrease) in cash .......................................... 34.5 6.4 15.3................................... 23.7 (21.1) 35.4
Cash at beginning of year ................................................................................ 56.8 77.9 42.5
36.1 20.8
--------- --------- ----------------- ---------- ----------
Cash at end of year ............................................................................................ $ 77.080.5 $ 42.556.8 $ 36.1
========= ========= =======77.9
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes ........................................................................................................ $ 31.4 $ 76.1 $ 76.4
Interest ......................................................... $ 82.650.9 $ 48.8
Interest ...................................................... $ 40.843.3 $ 44.7 $ 20.440.8
See notes to consolidated financial statements.
33
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of noncash operating and investing activities:
In conjunctionFor the year ended December 31, 1997, in connection with contractholder
and participant consents for assumption reinsurance related to the
sale of UNUM's tax shelteredtax-sheltered annuity business as
discussedUNUM sold in Note 5,1996, 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.
3934
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.principles ("GAAP"). The preparation of financial statements in
conformity with generally accepted accounting principlesGAAP 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
1995other 1997 and 19941996 amounts have been reclassified in 19961998 for comparative
purposes.
Investments
Investments are reported as follows:
[bullet]o Fixed maturities available for sale (certain bonds and redeemable
preferred stocks)--at fair value.
[bullet]o Equity securities available for sale (common stocks and non-redeemable
preferred stocks)--at fair value.
[bullet]o Mortgage loans--at amortized cost less an allowance for probable losses.
[bullet]o Real estate--at cost less accumulated depreciation.
[bullet]o Policy loans--at unpaid principal balance.
[bullet]o Other long-term investments--at cost plus UNUM's equity in undistributed
net earnings since acquisition.
[bullet]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.
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.
4036
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 whichthat 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 orDeferred Policy Acquisition Costs
The costs of acquiring 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 underwriting 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 costs are amortized in proportion to estimated
gross profits from interest margins, mortality and other elements of
performance under the contracts. For the Lloyd's of London ("Lloyd's") business
the costs are amortized 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 hedgesthese accounts accrue directly to the
contractholders. Assets, carried at market value, and liabilities of existingthe
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
liabilitiesapproves
37
UNUM Corporation and Subsidiaries
a plan of termination and communicates sufficient detail of the plan to
employees. Liabilities for restructuring activities are deferred
and included in the carrying amounts of those assets or liabilities. Gains or
losses related to qualifying hedges of firm commitments or anticipated
transactions are also deferred and recognizedother
liabilities in the carryingConsolidated Balance Sheets.
Income Taxes
The provision for income taxes includes amounts currently payable and
deferred income taxes, which result 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 the
underlying asset or liability when the hedged transaction occurs.stockholders'
equity.
Recognition of Premium Revenues and Related Expenses
Group insurance premiums are recognized as income over the period to which
the premiums relate. Individualand 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.
For retirement and universal life products, premium and other policy fee
revenue consist 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 Costs
The costsUNUM follows the periodic method of acquiring newaccounting for its Lloyd's business
which requires that vary withthe premiums be recognized as revenue over the policy term,
and are related
primarily to the productionclaims, including an estimate 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 underwriting, and certain
variable field office expenses.
For individual disability, group disability, and group life and health
business, the costs are amortized in proportion to expected future premiums. For
universal life products, the costs are amortized in proportion to estimated
gross profits from interest margins, mortality and other elements of performance
under the contracts. Amortization is 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) 1996 1995 1994
- -------------------------------------------------------- ---------- ---------- -----------
Deferred ............................................. $ 305.6 $ 308.3 $ 308.1
Less amortized ....................................... (213.9) (193.6) (152.8)
------- ------- -------
Increase in deferred policy acquisition costs ...... $ 91.7 $ 114.7 $ 155.3
======= ======= =======
41
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reserves 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 to actual experience and are revised if it is determined
that future expected experience is different from the reserve assumptions.
Reserves for group insurance policies consist primarily of unearned premiums.
The interest rates used in the calculation of reserves for future policy
benefits at December 31, 1996, and 1995, principally ranged from:
1996 1995
--------------- --------------
Individual disability ............... 6.0% to 9.5% 5.5% to 9.5%
Individual life ..................... 5.0% to 9.0% 5.0% to 9.0%
Individual accident and health ...... 5.0% to 9.0% 5.0% to 9.0%
Individual and group annuities ...... 5.0% to 9.0% 5.0% to 9.0%
Certain reserve calculations are based on interest rates within these
ranges graded down over periods from 15 to 20 years.
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. Reservesreported, are
recognized as they occur.
Premium for unpaid claims are estimatedthe Lloyd's business is based on UNUM'sparticipation 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 otherthe related assets
and liabilities. Additionally, an independent actuarial assumptions that considerreview of the
effects of current
developments, anticipated trends, risksyndicates' open reserves is performed annually and management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limitedperiodically
reviews its estimates as information is received from the Lloyd's syndicates.
Any resulting adjustment to interest rates and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. Reservethe estimates and assumptions
are periodically reviewed and updated with any resulting adjustments to reservesis reflected in the current operating results.
GivenSpecial 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 complexity ofreserve increase would distort the reserving
process, the ultimate liability may be more or less than such estimates
indicate.
The interest rates usedtrends in the
calculation of disability claims reserves at
December 31, 1996, and 1995, were principally as follows:
1996 1995
----------------- ----------------
Group long term disability (North America) ......... 7.88% 7.94%
Group long term disability (United Kingdom) ...... 9.46% 9.67%
Individual disability .............................. 6.75% to 9.46% 6.75% to 9.67%
The interest rate used to discount the disability reserves is a composite
of the yields on assets specifically identified with each block ofunderlying business.
Management expects the reserve discount rate for certain disability products
will further decline, since current cash flows are invested in high quality
assets at current yields, which are below the composite yield of the existing
assets purchased in prior years. UNUM periodically adjusts prices on both
existing and new business in an effort to mitigate the impact of the current
interest rate environment.
For other accident and health business, reservesSpecial items are based on projections
of historical claims run-out patterns.
42
the assumption that the item is not likely to
occur each year. UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Activityhas not had an item recur in the liabilitya subsequent year, although
there have been claim reserve increases in consecutive years for unpaid claims and claim expenses is
summarized as follows:
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------- ------------------- ------------------ ------------------
Balance at January 1 ................................. $4,856.4 $3,853.9 $3,341.5
Less reinsurance recoverables ..................... (115.4) (82.7) (68.0)
Effect of unrealized gains on fixed maturities ...... (261.2) -- --
---- ----- -----
Net Balance at January 1 ........................... 4,479.8 3,771.2 3,273.5
Incurred related to:
Current year ....................................... 1,673.9 1,825.0 1,609.3
Prior years ....................................... 366.0 507.0 436.0
---- ----- -----
Total incurred ....................................... 2,039.9 2,332.0 2,045.3
Paid related to:
Current year ....................................... 532.8 523.9 517.6
Prior years ....................................... 1,214.5 1,099.5 1,030.0
---- ----- -----
Total paid .......................................... 1,747.3 1,623.4 1,547.6
Net Balance at December 31 ........................... 4,772.4 4,479.8 3,771.2
Plus reinsurance recoverables ..................... 346.8 115.4 82.7
Effect of unrealized gains on fixed maturities ...... 170.1 261.2 --
---- ----- -----
Balance at December 31 .............................. $5,289.3 $4,856.4 $3,853.9
==== ===== =====
The componentsdifferent
product lines. When a special item occurs, it results in a portion of the
increasefinancial performance for a product line (e.g., premiums) being included in
unpaid claims and claims expenses
incurred and related to prior years were as follows:
(Dollars in millions) 1996 1995 1994
- ----------------------------------------------------- --------- --------- --------
Interest accrued on reserves ..................... $292.9 $270.0 $267.0
Changes in reserve estimates and assumptions ...... 36.2 239.0 154.0
Changes in foreign exchange rates .................. 36.9 (2.0) 15.0
------- ------ -------
Increase in incurrals related to prior years ...... $366.0 $507.0 $436.0
======= ====== =======
The increases in incurrals 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, primarily related to the disability reserves of UNUM's United
Kingdom-based affiliate, UNUM Limited. Due to the long-term claims payment
pattern of some of UNUM's businesses, certain reserves, particularly disability,
are discounted for interest.
The effects of changes in reserve estimates and assumptions were more
significant in 1995 and 1994, primarily assegment results, while a result of increased reserves from
lower discount rates for certain disability products following the saleportion of the common stock portfoliocosts 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 1995, and adjustments to strengthen certain disability
reserves in 1995 and 1994.
Beginning in 1995, as explained in Note 2, unpaid claims are adjusted to
reflect changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized. Where applicable, UNUM has reflected those adjustments in the
liability balances with corresponding credits or charges, net of related
deferred taxes, reported as a component of unrealized gains on available for
sale securities in stockholders' equity.
43
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Changes in Accounting Estimates
During 1995, UNUM sold virtually allassessing performance of the common stock portfolio of its
United States subsidiaries. The sale of the common stock portfolio, which
partially supported certain disability reserves,segment and
when making other decisions such as product pricing. Special items are
consistently defined and the reinvestmentchief financial officer and chief executive officer
have primary responsibility for making the special item determination and
ensuring consistent measurement of the
proceeds primarily in investment grade fixed income assets at yields below the
average portfolio yield, resulted in lower reserve discount rates for certain
disability products reported in the Disability Insurance segment. This change in
accounting estimate to lower certain discount rates resulted in an increase of
$128.6 million to benefits to policyholders in the Consolidated Statement of
Income, and a decrease to net income of $83.6 million,segment profit or $1.15 per share.
During 1995, UNUM increased the group long term disability reserves for
incurred but not reported ("IBNR") claims, as reported in the Disability
Insurance segment. The increased IBNR reserves were based on management's
judgment that claims incurred but not yet reported would reflect increased
levels of claims incidence and severity. This change in accounting estimate
resulted in an increase to benefits to policyholders in the Consolidated
Statement of Income of $38.4 million, and a decrease to net income of $25.0
million, or $0.34 per share.
During 1995, UNUM increased reserves for unpaid claims related to the
Association Group disability business by $15.0 million to reflect management's
expectations of slower than expected claim recoveries. This change in accounting
estimate, which was reflected in the Disability Insurance segment, decreased net
income by $9.8 million, or $0.14 per share.
During 1994, UNUM increased reserves for existing claims by $83.3 million
and strengthened reserves for estimated future losses by $109.1 million. These
increased reserves reflected management's expectations of morbidity trends for
the existing non-cancellable individual disability business, reported in the
Disability Insurance 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.
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 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.
Separate Accounts
Certain assets from tax sheltered annuity ("TSA") contracts and UNUM's
defined benefit plans 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.
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 (see Note 5). For legal considerations, the
separate account's TSA-related assets were not transferred on October 1, 1996.
TSA-related assets will be transferred only upon receipt of a contractholder
and/or participant's consent for assumption reinsurance. Beginning in 1997, the
assets of UNUM's defined benefit plan are no longer held in the separate
accounts (see Note 8).
44loss.
38
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Participating Individual Life Insurance
Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to UNUM's 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 sole
benefit of all of Union Mutual's individual participating life and annuity
policies and contracts.
The assets of the PFA are 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 been excluded from the Consolidated Statements of
Income. The PFA represented approximately 2.3% and 2.5% of consolidated assets
and 2.7% and 2.8% of consolidated liabilities at December 31, 1996, and 1995,
respectively.
Income Taxes
The provision for income taxes includes amounts currently payable and
deferred income taxes, which result from differences between financial reporting
and tax bases of assets and liabilities, and are measured using enacted tax
rates and laws. Deferred U.S. income taxes have not been provided on accumulated
earnings of UNUM's foreign subsidiaries. These earnings could generate
additional U.S. tax if remitted to UNUM Corporation. 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.
Earnings Per Share
The weighted average number of shares outstanding used to calculate
earnings per share was approximately 72,969,000, 72,677,000 and 74,158,000 in
1996, 1995 and 1994, respectively. The assumed exercise of outstanding stock
options does not result in a material dilution of earnings per share.
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.
LettersChanges 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 Credit
Inrecent 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 normal courseSpecial Risk Insurance segment,
reducing net income by $12.0 million in the Consolidated Statement of business,Income.
Accounting Pronouncements Adopted
Effective January 1, 1998, UNUM enters into lettersadopted Financial Accounting Standards
("FAS") No. 130, "Reporting Comprehensive Income," which established standards
for reporting and display of credit,
primarilycomprehensive 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 satisfyan 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
developing 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 requires 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 to certain subsidiary
transactions.the type and nature of 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 had outstanding letters of credit of $56.7 million and $12.3
million at December 31, 1996, and 1995, respectively.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS")adopted FAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which establishesestablished 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
45
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
liabilities, focusing on the concepts of control and extinguishment. UNUM is
required to adopt FAS 125 effective January 1, 1997. The
adoption of FAS 125 isdid not expected to have a material effect on UNUM's results of
operations or financial position.
New Accounting Pronouncements
In March 1997,October 1998, the FASBAccounting 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
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. 128, "Earnings Per Share,133, "Accounting for Derivative Instruments and Hedging Activities," which
is
intended to simplifyestablishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. FAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the computationstatement of financial position and presentationmeasure those
instruments at fair value. The accounting for changes in the fair value of earnings per share
("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." FAS 128 will eliminate the concept of "primary" EPS and
require dual presentation of "basic" and "diluted" EPS. Diluted EPSa
derivative under FAS 128 is similar to "fully diluted" EPS as defined by APB 15.133 depends on the intended use of the derivative and its
hedging designation. UNUM is required to adopt FAS 128133 effective December 31, 1997. As stated in NoteJanuary 1,
under2000. UNUM has not yet determined the caption "Earnings Per Share," the assumed exerciseimpact FAS 133 will have on its results
of UNUM's outstanding stock
options does not result in a material dilution of earnings per share.operations, liquidity or financial position.
In MarchDecember 1997, the FASBAcSEC issued FAS No. 129, "Disclosures of Information
About Capital Structure,SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments," which clarifies disclosure requirements related toprovides guidance
on accounting for the type,recognition and nature,measurement of securities contained in an entity's capital structure.liabilities for guaranty
funds and other insurance-related assessments. UNUM is required to adopt FAS 129SOP
97-3 effective December 31, 1997.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 SOP 97-3 is not expected to have a
material impact on UNUM's results of operations, liquidity or financial
position.
NOTE 2. INVESTMENTS
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities," which
provided a one-time opportunity to reassess the appropriateness of the
classifications of securities described in FAS 115, and to reclassify fixed
maturities from the held to maturity category without calling into question the
intent to hold other debt securities to maturity in the future. On December 31,
1995, UNUM reassessed its fixed maturity portfolio and as allowed under the
implementation guidance, reclassified fixed maturities with an amortized cost of
$6,082.8 million and a related unrealized gain of $393.0 million from the held
to maturity category to available for sale. The unrealized gain on the total
available for sale fixed maturity portfolio was $551.9 million at December 31,
1995. In connection with the reclassification of the held to maturity fixed
maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid
claims by $261.2 million to reflect the changes that would have been necessary
if the unrealized gains and losses related to fixed maturities classified as
available for sale had been realized. At December 31, 1996, the unrealized gain
on available for sale fixed maturities was $286.0 million and the related unpaid
claims adjustment was $168.7 million.
The following tables summarize the components of investment income, net
realized investment gains (losses) and changes in unrealized investment gains on
available for sale securities:
46
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)(losses),
net:
Investment Income
Year Ended December 31,
-------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
1995 1994
- ------------------------------------------------------ --------- --------- --------------------------------------------------------------------- ----------- ----------- -----------
Fixed maturities:
Available for sale ................................. $642.2 $182.2 $ 87.9
Held to maturity ................................. -- 488.0 548.1
Equity securitiesmaturities available for sale ............... -- 5.3 10.4$ 541.8 $ 539.1 $ 642.2
Mortgage loans ............................................................................. 105.0 110.6 112.1 119.9 137.4
Real estate ................................................................................... 24.9 23.1 20.0 15.2 15.8
Policy loans ....................................... 10.2 8.6........................................... 8.3 6.7 10.2
Other long-term investments .................................................... 0.1 2.8 7.3 1.6 0.9
Short-term investments .............................. 51.2 27.1 8.5
------ ------ ------................................. 19.7 17.6 52.3
-------- -------- --------
Gross investment income ........................... 843.0 847.9 819.2............................... 699.8 699.9 844.1
Less investment expenses .......................................................... (14.3) (14.5) (16.3) (17.0) (23.9)
Less investment income on participating individual
life insurance policies and annuity contracts ............... (24.1) (24.4) (24.5)
(24.6) (25.1)
------ ------ -------------- -------- --------
Investment income ................................. $802.2 $806.3 $770.2
====== ====== ======..................................... $ 661.4 $ 661.0 $ 803.3
======== ======== ========
Net Realized Investment Gains (Losses)
Year Ended December 31,
----------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
1995 1994
- ---------------------------------------------- --------- -------------------------------------------------------------- ---------- ---------- ----------
Gross realized investment gains:
Fixed maturities:
Availablematurities available for sale ...................................... $ 22.018.6 $ 14.217.1 $ 10.2
Held to maturity ........................... -- 0.1 0.222.0
Equity securities available for sale ................... 0.1 0.7 -- 253.3 93.1
Mortgage loans, real estate and other .................. 10.4 6.6 18.2
19.4 13.5
------ ------ ------------- ------- -------
Gross realized investment gains ............................. 29.1 24.4 40.2
287.0 117.0
------ ------ ------------- ------- -------
Gross realized investment losses:
Fixed maturities:
Available for sale ........................ (29.2) (12.8) (28.8)
Held to maturity ........................... -- (0.7) (6.8)
Equity securitiesmaturities available for sale ...... -- (18.7) (12.2).............. (2.8) (14.6) (29.2)
Mortgage loans, real estate and other .................. (5.3) (13.4) (7.6)
(29.7) (23.6)
------ ------ ------------- ------- -------
Gross realized investment losses ......................... (8.1) (28.0) (36.8)
(61.9) (71.4)
------ ------ ------------- ------- -------
Net realized investment gains ............(losses) ......... $ 21.0 $ (3.6) $ 3.4
$225.1 $ 45.6
====== ====== ============= ======== =======
4740
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
Change in Unrealized Gains on Available For Sale Securities(Losses), Net
Year Ended December 31,
------------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
1995 1994
- -------------------------------------------------------------------------------------------------------------- ----------- ---------- ---------------------------- ------------
Fixed maturities available for sale ................................. $ (265.9)129.0 $ 612.7131.9 $ (60.8)(265.9)
Equity securities available for sale ................................ -- 2.1 3.4
(131.6) (86.0)Marketable securities held in trust ............... 83.9 127.8 --
Unpaid claims adjustment ........................................................ (160.7) (68.4) 92.5 (261.2) --
Deferred taxes ........................................................................... (15.2) (64.3) 39.2
(56.4) 47.3
-------- ------- --------------- --------
Total change in unrealized gains on available for sale
securities,(losses), net, as
included in stockholders' equity ...................... $ 37.0 $ 129.1 $ (130.8)
$ 163.5 $ (99.5)
======== ======= =============== ========
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 valuesvalue of fixed maturities available for sale
at December 31, 1996,1998, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------- ----------- ------------ ------------- ------------- ---------------------- ------------
U.S. Government .......................................... $ 57.021.6 $ 3.63.0 $ -- $ 60.624.6
U.S. States and municipalities ......... 550.2 14.9 (0.8) 564.31,189.4 56.1 -- 1,245.5
Foreign governments ............... 379.9 32.6 (0.7) 411.8.................... 341.9 53.4 -- 395.3
Public utilities .................. 1,354.7 60.4 (4.2) 1,410.9....................... 1,408.8 121.6 (7.8) 1,522.6
Corporate bonds .................. 4,299.7 197.5 (17.1) 4,480.1........................ 4,280.5 334.3 (16.3) 4,598.5
Redeemable preferred stocks ...... 3.6............ 0.2 -- (0.7) 2.9-- 0.2
Mortgage-backed securities ...... 11.6 0.5............. 107.6 2.6 -- 12.1
-------- ------ ------ --------110.2
--------- ------- ------- ---------
Total ........................... $6,656.7 $309.5 $(23.5) $6,942.7
======== ====== ====== ========................................ $ 7,350.0 $ 571.0 $ (24.1) $ 7,896.9
========= ======= ======= =========
The amortized cost and fair valuesvalue of fixed maturities available for sale
at December 31, 1995,1997, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------- ----------- ------------ ------------- ------------- ---------------------- ------------
U.S. Government .......................................... $ 402.6 $10.348.8 $ 2.5 $ -- $ 412.951.3
U.S. States and municipalities ......... 670.5 23.7 (0.7) 693.5942.5 36.6 (0.2) 978.9
Foreign governments ............... 229.4 26.1 (0.5) 255.0.................... 359.6 40.3 -- 399.9
Public utilities .................. 1,617.8 117.6 (0.6) 1,734.8....................... 1,369.0 89.0 (0.1) 1,457.9
Corporate bonds .................. 5,617.9 377.3 (2.7) 5,992.5........................ 3,964.6 248.7 (1.1) 4,212.2
Redeemable preferred stocks ...... 27.8 1.5 (1.2) 28.1............ 3.5 -- (0.2) 3.3
Mortgage-backed securities ...... 17.5 1.1............. 205.0 2.4 -- 18.6
-------- ------ ----- --------207.4
--------- ------- ------- ---------
Total ........................... $8,583.5 $557.6 $(5.7) $9,135.4................................ $ 6,893.0 $ 419.5 $ (1.6) $ 7,310.9
========= ======= ======== ====== ===== =================
48
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
The amortized cost and fair value of fixed maturities available for sale
at December 31, 1996,1998, 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 Corporation and Subsidiaries
Amortized Fair
(Dollars in millions) Cost Value
- ---------------------------------------------------------------------------------------------------------------------- ------------ -----------------------
Due in one year or less .................................................................. $ 279.4384.7 $ 288.9390.2
Due after one year through five years ........................... 2,181.8 2,292.6.......... 2,623.4 2,811.4
Due after five years through ten years ........................... 3,551.3 3,674.9......... 3,690.8 3,982.1
Due after ten years ............................................. 632.6 674.2
-------- --------
6,645.1 6,930.6............................ 543.5 603.0
--------- ----------
7,242.4 7,786.7
Mortgage-backed securities (primarily due after 10 years) ...... 11.6 12.1
-------- --------.................... 107.6 110.2
--------- ----------
Total ......................................................... $6,656.7 $6,942.7
======== ========........................................ $ 7,350.0 $ 7,896.9
========= ==========
During 1995, UNUM sold fixed maturities of two issuers classified as held
to maturity with an amortized cost of $4.0 million due to evidence of
significant deterioration of the issuers' creditworthiness, as evidenced by
bankruptcy filings. These sales resulted in a net realized loss of $1.2 million
in 1995. During 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 deterioration of the issuers' creditworthiness. These sales resulted
in a net realized loss of $3.0 million in 1994.
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, 1996:1998:
Fair
(Dollars in millions) Cost Value
- ------------------------------------------------- -------- ------------------------------------------------------------ ---------- ----------
Common stocks:
Industrial, miscellaneous and all other ...... $23.8 $31.3......... $ 21.3 $ 31.0
====== ======
Gross unrealized investment gains on equity securities available for sale
totaled $7.5$10.5 million, $9.6 million, and $5.5$7.5 million at December 31, 1998,
1997 and 1996, and 1995,
respectively. There were no grossGross unrealized investment losses were not
material at December 31, 1996,1998, 1997 and gross unrealized investment losses totaled $1.4 million, at December
31, 1995.1996.
Mortgages
Effective January 1, 1995, UNUM adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and FAS No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," which defined the principles to measure and record an impaired
loan. When it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of a loan agreement, the loan is deemed
impaired. Once a loan is determined to be impaired, an allowance for probable
losses is established for the difference between the carrying amount of the loan
and its estimated value. The estimated value is based on either the present
value of expected future cash flows discounted using the loan's effective
interest rate, the loan's observable market price, or the fair value of the
collateral. The adoption of FAS 114 and FAS 118 did not have a material effect
on UNUM's results of operations or financial position.
At December 31, 1996,1998, and 1995,1997, impaired loans totaled $50.4$20.7 million and
$50.1$43.4 million, respectively. Included in the $50.4$20.7 million were $38.9$9.0 million of
loans which had a related allowance for probable losses of $5.7$2.4 million, and
a
loanloans of $11.5$11.7 million which had no related allowance for probable losses.
Included in the $50.1$43.4 million of impaired loans at December 31, 1995,1997, were
$38.4$20.8 million of loans which had a related allowance for probable losses of
$7.1$3.5 million, and a loanloans of $11.7$22.6 million which had no related allowance for
probable losses.
MortgageRestructured mortgage loans that were restructured prior to the adoption of FAS 114 amounted to $54.8$14.5 million and $59.9$39.3 million at
December 31, 1996,1998, and 1995,1997, respectively. Troubled debt restructurings
represent loans that are
49
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued) refinanced with terms more favorable to the borrower.
Interest lost on restructured loans was not material for the years ended
December 31, 1996, 19951998, 1997, or 1994.1996.
Real Estate and Other
Effective January 1, 1996, UNUM adopted FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. FAS 121 applies to both real estate held for investment and real
estate held for sale. The adoption of FAS 121 did not have a material effect on
UNUM's results of operations or financial position.
Real estate acquired in satisfaction of debt cumulatively amountsamounted to
$86.4$62.4 million at December 31, 1996.1998. Real estate held for sale amounted to $9.4$15.6
million at December 31, 1996,1998, and $35.5$23.3 million at December 31, 1995.1997.
Real estate with a depreciated cost of $7.7$5.2 million and no bonds or
mortagesmortgages were non-income producing for the twelve months ended December 31,
1996.1998. Interest lost on these investments was not material in 1996, 19951998, 1997, or
1994.1996.
UNUM was committed at December 31, 1996,1998, to purchase fixed maturities and
other invested assets in the amount of $104.3$45.7 million.
NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE
HELD FOR SALE
Changes in the allowance for probable losses on invested assetsmortgage 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, 19961997
Mortgage loans .................. $39.2.................... $ 1.037.7 $ (2.5) $37.73.3 $ (7.1) $ 33.9
Real estate held for sale ...... 19.1 (0.4) (3.9)......... 14.8 ------ -----3.0 -- 17.8
------- ------ ------ -------
Total ........................... $58.3............................ $ 0.652.5 $ (6.4) $52.5
====== =====6.3 $ (7.1) $ 51.7
======= ====== ====== =======
Year Ended December 31, 19951996
Mortgage loans .................. $43.2.................... $ 9.2 $(13.2) $39.239.2 $ 1.0 $ (2.5) $ 37.7
Real estate held for sale ...... 13.2 6.3......... 19.1 (0.4) 19.1
------ -----(3.9) 14.8
------- ------ ------ -------
Total ........................... $56.4 $15.5 $(13.6) $58.3
====== =====............................ $ 58.3 $ 0.6 $ (6.4) $ 52.5
======= ====== ====== Year Ended December 31, 1994
Fixed maturities held to maturity
and available for sale ......... $ 0.3 $ -- $ (0.3) $ --
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 $ 9.3 $(22.7) $56.4
====== ===== ====== =============
Additions represent charges to net realized investment gains (losses) less
recoveries, and deductions represent reserves released upon disposal or
restructuring of the related asset.
50NOTE 4. RESERVES
Reserves 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
prepaid premiums. The interest rates used in the calculation of reserves for
future policy benefits at December 31, 1998, and 1997, principally ranged 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.
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 that 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, claim
resolution rates, and economic and societal conditions. Management periodically
performs a review of reserve estimates and assumptions. If management
determines reserve assumptions need to be updated, any resulting adjustment to
reserves is reflected in current operations. Given 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 claims reserves
at December 31, 1998, and 1997, were principally as follows:
1998 1997
--------------- -------------
Group long term disability (North America) ........... 7.76% 7.84%
Group long term disability (United Kingdom) .......... 8.95% 9.27%
Individual disability ................................ 5.5% to 8.95% 7.0% to 9.5%
The discount rate that UNUM uses considers the current and expected yields
on assets that 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 Provident and Combined Condensed Pro Forma Financial
Statements (Unaudited)," for a discussion of 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments suchCorporation and Subsidiaries
Activity in the liability for unpaid claims and claim expenses is
summarized as options, futuresfollows:
(Dollars in millions) 1998 1997 1996
- --------------------------------------- ------------- ------------- -------------
Balance at January 1 ............... $ 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 balance at January 1 ........... 5,070.9 4,783.3 4,485.0
Incurred related to:
Current year ...................... 2,356.7 1,897.6 1,692.0
Prior years ....................... 399.6 373.1 365.4
---------- ---------- ----------
Total incurred ..................... 2,756.3 2,270.7 2,057.4
Paid related to:
Current year ...................... 747.2 622.2 535.8
Prior years ....................... 1,481.9 1,360.9 1,223.3
---------- ---------- ----------
Total paid ......................... 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 ............. $ 6,841.2 $ 5,944.4 $ 5,334.7
========== ========== ==========
The components of the unpaid claims and forward exchange contractsclaims expenses incurred and
related to hedge certain risks
associated with anticipated purchasesprior years 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 amounts incurred related to prior years were
primarily the result of interest accrued on reserves, changes in reserve
estimates and salesassumptions of investmentsinterest rates, morbidity, mortality and certain
payments denominatedexpense
costs, and changes in foreign currencies,exchange rates, primarily British pound sterling,
Canadian dollarrelated to the
disability reserves of UNUM's United Kingdom-based affiliate, UNUM Limited. Due
to the long term claims payment pattern of some of UNUM's businesses, certain
reserves, particularly disability, are discounted for interest.
Claim 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
Japanese yen.compared to those anticipated in claim reserve assumptions. Claim resolution
rate assumptions are based on UNUM'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 management 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 increase
in the reserve for group and individual disability claims 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 derivativeclaims 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
instrumentsimpact 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 usedexpected to protectbe 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 market fluctuationsthe claim operations integration activities),
were 90% for the first and second quarters of 1999, 81% for the third quarter,
and 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 interestthe implementation and
exchangetraining 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 betweento obtain the contract dateamount of
the charge. UNUM reviewed its estimates of the financial impact of the claim
operations integration activities with its actuaries and independent 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 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 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
date on whichtiming and level of training and integration activities of the hedged
transaction occurs. In using these instruments, UNUM is subjectclaim management
staff relative to the off-balance-sheet risk that the counterpartiesoriginal integration plan of the transactions will fail to
perform as contracted. UNUM manages this risk by only entering into contracts
with highly rated institutions and listed exchanges. UNUM does not hold
derivative financial instruments for the purpose of trading.
At December 31, 1996, UNUM had open interest rate futures contracts with
notional amounts of $178.2 million to hedge anticipated sales of investments in
1997. These contracts had a related net unrealized gain of $1.6 million. At
December 31, 1995, UNUM had no open derivative financial instruments.UNUM.
NOTE 5. SALE OF TAX SHELTEREDTAX-SHELTERED ANNUITY BUSINESS
On October 1, 1996, UNUM Life Insurance Company of America ("UNUM America") and First UNUM Life Insurance Company ("First UNUM") closed the sale of their
respective group tax-sheltered annuity ("TSA")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 $3.3 billion. The
contracts havewere initially been reinsured on an indemnity basis. Upon consent of the
TSA contractholders and/orand participants, the contracts will beare considered reinsured on
an assumption basis, legally releasing UNUM America and First UNUM from future
contractual obligation to the respective contractholders and/orand 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.
The assets transferred consisted of approximately $1,826 million of short-
term investments, $589 million of fixed maturities, and $275 million of cash.
The amount of assets in the trust will increase or decrease in conjunction with
the on-going activity in participant accounts, and assets will be released from
the trust to Lincoln upon consents for assumption reinsurance. UNUM has recorded a deposit asset in its Consolidated Balance Sheet
representing the assets remaining in the trust, which supportssupport the TSA contracts of those
contractholders and/orand participants that have not given consent for assumption
reinsurance. At December 31, 1996,1998, the deposit asset related to the TSA
transaction was approximately $2,651$257 million.
The sale resulted in a deferred pretax gain of $80.8 million, of which
will be$72.6 million was recognized in income during 1997, reported as fees and other
income, in proportion to contractholder and/orand participant consents for assumption
reinsurance,reinsurance. Additionally, the majorityresults for the year ended December 31, 1997,
included $47.0 million of which management believes will occur
during 1997. The purchase price (ceding commission) paid upon closing was
approximately $71 million,net income and basic and diluted net income per
common share of $0.34 and $0.33, respectively, related to the transaction generated statutory capitalrecognition of
approximately $160 million. As of March 1, 1997,the deferred pretax gain. Through December 31, 1998, consent for assumption
reinsurance has been provided by TSA contractholders and/orand participants owning
approximately 60% ofsubstantially all assets under management.
Historical results of the TSA business included in UNUM's Consolidated
Statements of Income were as follows:
Year Ended December 31,
--------------------------------
(Dollars in millions, except per common share data) 1996 1995 1994
- ------------------------------------------------------ --------- --------- --------
Revenues .......................................... $206.7 $247.6 $238.1
Net income .......................................... $ 12.8 $ 31.1 $ 29.9
Net income per common share ........................ $ 0.18 $ 0.43 $ 0.40
51
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Life Reinsurance Limited
("Centre Re"),Re, a Bermuda basedBermuda-based
reinsurance specialist, for reinsurance coverage of the active life reserves of
UNUM America's existing United States non-cancellable individual disability
("non-cancellable ID") block of business. This agreement does not reinsure anyreinsures all claims
incurred prior toon or after January 1, 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 that transfers
liabilities to Centre Re based on the level of statutory reserves. At December
31, 1996, active life reserves of $427 million and reserves established for
claims in 1996 of $137 million were ceded to Centre Re.arrangement. Under the agreement,
Centre Re has an obligation to fundabsorb losses within a defined risk layer. UNUM
retains the risk for all experience up to Centre Re's defined risk layer, while UNUM will retainor
attachment point. Once the earningsattachment point is reached, Centre Re assumes the
risk related to potential adverse claimsfor all experience up to a certain
threshold. This threshold amount representscontractually defined risk limit. Any
experience above Centre Re's defined risk limit reverts back to UNUM. As of
December 31, 1998, the existence of an experience layer
with a value of $195 millionattachment point had not been reached.
46
The following discloses the various layers in the agreement at December
31, 1996. UNUM has recorded the value
of the experience layer on its Consolidated Balance Sheet as a deposit asset.
UNUM funded its obligation under1998:
(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, by transferring assets totaling
approximately $403 million intoUNUM funds a trust account in late December 1996. The
assets transferred were 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." This reinsurance agreement
transfers risk and is accounted for as reinsurance in accordance with the
requirements of FAS 113 for reinsurance of long-duration contracts. The
underlying operating results of the reinsured block are reflected in fees and
other 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 plusand unrealized gains or losses on the
marketable securities held in the trust. Unrealized gains or losses on
marketable securities held in the trust and the related effects on claim
reserves determined
under generally accepted accounting principles, netare reflected as unrealized gains or losses in the equity section of
related deferred
acquisition costs. Future net cash flowsUNUM's Consolidated Balance Sheets.
UNUM controls the management of the block will bebusiness, including premium collection
and claims management, under this agreement. All premiums, less amounts for
management expenses and claim payments, are transferred to/fromto the trust account and, togetheron
a quarterly basis.
In 1994 UNUM recorded a premium deficiency reserve strengthening related
to the non-cancellable ID block of business in conjunction with changes in reserve levels, will
determineits
announcement to exit the valuenon-cancellable form of UNUM's deposit asset. ChangesID coverage in the deposit asset will
flow through UNUM's resultsUnited
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 operations. The agreement generated slightly more
than $200 million of statutory capital.
In fourth quarter 1996,business to be in a loss situation,
UNUM recognized a pretax charge of $49.7 million which representsin the fourth quarter of 1996.
The charge represented the present value of the anticipated minimum amount of
fees to be paid to Centre Re under the agreement.agreement for a period of six years.
UNUM has the right, but no obligation, to recapture the business after fivesix
years with certain penalties.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, 1996, 19951998, 1997 and 19941996, was as follows:
Year Ended December 31,
--------------------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------- ----------- ----------- ----------
Premiums earned:
Direct .................. $2,973.9 $2,842.9 $2,663.1
Assumed ............... 252.9 241.5 170.7
Ceded .................. (106.4) (66.2) (112.5)
-------- -------- --------
Premiums earned ...... $3,120.4 $3,018.2 $2,721.3
======== ======== ========
Premiums written:
Direct .................. $3,008.1 $2,877.2 $2,702.7
Assumed ............... 289.3 250.4 170.9
Ceded .................. (131.0) (64.4) (112.6)
-------- -------- --------
Premiums written ...... $3,166.4 $3,063.2 $2,761.0
======== ======== ========
(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, 1996, 19951998, 1997 and 1994,1996, recoveries
recognized under reinsurance agreements reducedoffset benefits to policyholders by
$90.8$376.3 million, $58.9$309.7 million and $53.3$90.8 million, respectively.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
Business Restructuring
Charges of $7.2 million, $8.4$6.0 million and $14.4$7.2 million were recorded in 1997 and 1996,
1995respectively. The charge in 1997 was related to a management and 1994, respectively.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 52
UNUM
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES (Continued)
UNUM America, and consisted of $2.8 million of severance costs for 120 employees
and $4.4 million of lease exit costs. The charges in 1995 and 1994 relate to the
acceleration of organizational changes within UNUM America and the decision to
discontinue the individual disability non-cancellable product. Partially
offsetting the charge recorded in 1995 was a $3.4 million curtailment gain,
related to workforce reductions in UNUM Corporation's noncontributory defined
benefit pension plan.America. As of December 31, 1996, the1998, a liability was no longer being carried in
the Consolidated Balance Sheet for all three charges was $5.3 million.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)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-taxafter 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 or $0.36 per sharecommitted
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 1996.general liquidity needs, capital expansion, acquisitions and stock
repurchase. The charges include the write-offcommitted revolving credit facility contains certain covenants
which, among other provisions, require maintenance of certain intangible assets, primarily
deferred acquisition costs, totaling $17.0 million. These intangible assets have
been deemed unrecoverable primarilylevels 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 redeemable, in whole
or in part, at the option of UNUM at any time at or above par. UNUM used the
net proceeds to the expectation of continued lossesrepay 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 Association Group disability business. Additionally, in conjunction withUnited Kingdom. The
borrowing has an expected term of 10 years. Upon issuance of the completion[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 a review of UNUM's discontinued product portfolio, a $22.4
million charge was taken to establish a reserve for the
present value of
expected future losses onagreement, under certain discontinued products. Future losses for these
productscircumstances. UNUM anticipates the debt will be chargedcalled
in 1999. Therefore, UNUM is currently evaluating various financing alternatives
and intends to substitute a debt instrument to match the reservematurity 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 the time the lossesDecember 31, 1998, and 1997, respectively, which are realized. The
products incorporatednot
reflected in the charge consist of certain discontinued special
risk, retirement and medical products. UNUM is pursuing the sale of some of
these discontinued product lines.Consolidated Balance Sheets.
NOTE 8.9. 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, 1996, UNUM had a noncontributory defined benefit pension1998, the plan covering substantially all domestic employees, excluding employees of
Colonial Companies, Inc. ("Colonial Companies") and Duncanson & Holt, Inc.
("D&H"), who were covered under separate plans through 1996. The plan provided
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. Plan
assets which were held in UNUM's separate accounts, consisted primarily of
group annuity contracts and 224,392included 448,784 shares of UNUM
Corporation common stock.
UNUM funds its pension plan in accordance with the requirements of the Employee
Retirement Income Security Act of 1974, as amended.
Effective January 1, 1997, UNUM replaced its existing pension plansstock with a new noncontributory defined benefit pension plan ("Lifecycle Plan") covering
substantially all domestic employees, including employeesfair value of Colonial Companies
and D&H. Under the Lifecycle Plan, a new benefit formula is used, resulting in
benefits being earned more consistently over an employee's career, and is based$26.2 million. The amount of
dividends paid on the employee's age at retirement, years of service, and earningsthese shares during the
highest five of the last ten years of employment. Beginning in 1997, plan assets
were transferred from UNUM's separate accounts into a trust for the exclusive
benefit of plan participants.
The calculation of the December 31, 1996, benefit obligations shown below
is based on the Lifecycle Plan, reflecting the impacts of adding Colonial
Companies and D&H employees to the plan, merging Colonial Companies' previous
defined benefit plan, and changes in certain actuarial assumptions related to
the new benefit formula.
53
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)1998 was not material.
Net pension cost included the following components:
Year Ended December 31,
------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
1995 1994
- ------------------------------------------------------ --------------------------------------------------------------------- ---------- ----------- ----------
Service cost--benefits earned during the year ......period ......... $ 14.0 $ 12.9 $ 13.5
$ 7.7 $ 9.2
Interest cost on projected benefit obligation ................................................. 16.7 15.2 15.1
12.3 11.6
ActualExpected return on plan assets ........................ (57.1) (42.5) 3.3
Net amortization and deferral ..................... 36.9 28.2 (16.5)
Curtailment............................... (30.3) (24.0) (19.5)
Recognized prior service cost ........................... (2.7) (2.6) (1.0)
Recognized net actuarial gain ............................................................... (4.5) (1.4) --
(3.4) --
------ ------ ------Amortization of net obligation .......................... 0.4 0.4 0.3
------- -------- -------
Net pension cost .................................(benefit) ............................. $ (6.4) $ 0.5 $ 8.4
$ 2.3 $ 7.6
====== ====== ======
The funded status of the plan and amounts recognized in UNUM's Consolidated
Balance Sheets, as determined by the plan's actuaries, were as follows:
December 31,
------------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------------------ ---------- -----------
Actuarial present value of benefit obligation:
Vested benefit obligation .................................... $ 166.9 $ 174.4
======= =======
Accumulated benefit obligation ................................. $ 189.3 $ 178.7
======= =======
Projected benefit obligation for service rendered to date ...... $(203.2) $(183.9)
Plan assets at fair value ....................................... 267.7 192.7
------- -------
Projected benefit obligation less than plan assets ............ 64.5 8.8
Unrecognized net gain .......................................... (54.7) (0.7)
Unrecognized prior service cost ................................. (28.4) (17.0)
Unamortized net obligation .................................... 1.8 2.1
------- -------
Accrued pension cost .......................................... $ (16.8) $ (6.8)
=============== ======== =======
The weighted averageweighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.50%6.75% and 5.00%4.25%, respectively, at December 31,
1996,September
30, 1998, and 7.25% and 4.70%4.75%, respectively, at December 31, 1995.September 30, 1997. The
expected long-term rate of return on plan assets was 9.25% in 1998 and 9.0% in
1996, 19951997 and 1994.1996. Prior year service costs are being amortized on 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, 1996, 1995 and 1994.50
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. The cost of these plans was $10.3$4.5 million, $10.0$4.3 million and $8.2$10.3
million for the years ended December 31, 1996, 19951998, 1997 and 1994,1996, respectively. At
December 31, 1996,1998, and 19951997, the liability associated with these plans was
$80.9$85.8 million and $72.4$83.2 million, respectively.
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
54
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
plan the employee participates in, eligible employees may contribute primarily
up to 10% of their annual base salary, and UNUM matches a portion of each
employee's contribution up to 6% of the employee's compensation. Employees may
become 100% vested immediately upon becoming eligible to participate, or
incrementally over a five year period. Expense for these plans amounted to $8.4
million in 1996, 1995 and 1994, respectively.
Effective January 1, 1997, UNUM introduced a single retirement savings
plan for all domestic employees who meet the eligibility requirement of one year of
service, including all employees eligible under the former plans.employees. Dependent upon the employee's annual earnings,
eligible employees may contribute up to 15% of their annual compensation,
including incentive payouts. UNUM will matchmatches 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 eligibleeligible. Expense for the retirement
savings plans amounted to participate.$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 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS
Stock-Based Compensation Plans10. STOCKHOLDERS' EQUITY
Common Stock
Effective January 1,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 shareholder approval of a proposal to increase
the number of authorized 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 weighted-average number of common
shares outstanding. Diluted EPS is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
while giving effect to all dilutive potential common shares outstanding.
The approximate number of shares used to calculate EPS was as 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 adopted FAS No. 123, "Accounting for
Stock-Based Compensation." FAS 123 established financial accountingCorporation and reporting standards for stock-based employee compensation plans.Subsidiaries
The statement
defines a new methodfollowing number of accounting for employee stock compensation plans using a
fair value based method, under which compensation cost is measured and
recognized in results of operations. Alternatively, FAS 123 allows an entityoutstanding options to retainpurchase shares were
excluded from the accounting for employee stock compensation plans defined under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting fordiluted 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 Issued
to Employees." UNUM retained the accounting defined in APB No. 25, under which
no compensation expense is recognized for fixed stock option grants. As
required, UNUM will disclose the pro forma effects of stock-based compensation
using the fair value based method defined under FAS 123.Options
At December 31, 1996,1998, 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, consistent with the methods defined under FAS 123, 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
1995
- ------------------------------------------------------ --------- ------------------------------------------------------------ ----------- ----------- -----------
Net income:
As reported ....................................... $238.0 $281.1..................................... $ 363.4 $ 370.3 $ 238.0
Pro forma .......................................... $231.9 $277.2....................................... $ 360.8 $ 361.4 $ 231.9
Earnings per common share:
Basic
As reported ........................................................................... $ 3.262.63 $ 3.872.65 $ 1.63
Pro forma ................................................................................ $ 3.182.61 $ 3.812.58 $ 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-
pricingoption-pricing model with the following
assumptions:
1998 1997 1996
1995
----------------- ---------------- ---------------- ---------------
Dividend yield ................................................... 1.0% 1.0% 1.5% 1.9%
Expected stock price volatility ................ 23.8% to 26.4% 22.7% to 24.2% 23.1% to 24.8%
24.8% to 25.9%
Risk-free interest rate ................................. 4.2% to 5.3% 5.7% to 6.8% 5.2% to 6.5%
5.4% to 7.9%
Expected option lives ................................... 4 to 8 years 4 to 8 years 4 to 8 years
55
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)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 2.55.0 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-
employeenon-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'sUNUM achieving prescribed
financial performance objectives, with the exception of 5,80011,600 shares granted
in 1996 20,200 shares granted in 1995 and 10,000 shares granted in 1994,1995, which will vest upon the grantee
remaining in UNUM's employ for a specified period of time.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 1996, 19951998, 1997 and 1994.1996.
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 6.813.6 million, including both options and shares of restricted stock. At
December 31, 1998, 1997 and 1996, 1995 and 1994, 692,5181,617,701 shares, 1,680,2351,603,580 shares, and
2,511,1451,385,036 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 3.57.0 million. At December 31, 1998, 1997 and 1996,
3,495,0003,389,860 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 150300 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 if it is determined that UNUM has
attainedat the
1998 Goals.discretion of the plan administrator. Grants of 102,500166,200 shares and 1,105,350205,000
shares were made in 1997 and 1996 , respectively. No 1998 Option Plan grants
were made in 1998, and 1995, respectively. Additionalno further grants willcan be made in 1997. The
number of shares subject to options under this plan cannot exceed 1.5 million.plan.
For all of UNUM's stock basedstock-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.
56
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)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, 1996, 19951998, 1997 and 1994,1996, and changes during the years then ended
isare presented below:
Restricted
(Per share amounts are weighted-average) Options Stock
- -------------------------------------------------------- ------------ ------------------------------------------------------------------------ --------------- -------------
Outstanding at January 1, 1994 ........................ 3,402,954 146,425
19941996 .......................... 10,395,268 284,400
1996 Activity:
Granted at $50.92$30.38 per share ........................... 884,375share.............................. 2,161,380 --
Granted for restricted stock at $50.05$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 --
46,850Granted 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 ........................... -- (80,800)(41,450)
Exercised at $24.99$22.88 per share ........................ (282,729)share............................ (1,642,846) --
Forfeited at $46.08$31.84 per share for options ............ (151,578) (2,525)options................ (363,916) (68,950)
---------- --------
Outstanding at December 31, 1994 ..................... 3,853,022 109,950
---------- --------
1995 Activity
Granted at $41.06 per share ........................... 2,200,000 --
Granted for restricted stock at $42.99 per share ...... -- 70,950
Lapse of restrictions on restricted stock ............ -- (33,100)
Exercised at $25.75 per share1998 ........................ (541,188) --
Forfeited at $46.85 per share for options ............ (314,200) (5,600)
---------- --------
Outstanding at December 31, 1995 ..................... 5,197,634 142,200
---------- --------
1996 Activity
Granted at $60.75 per share ........................... 1,080,690 --
Granted for restricted stock at $59.36 per share ...... -- 93,300
Exercised at $37.72 per share ........................ (637,261) --
Forfeited at $46.78 per share for options ............ (271,741) (32,600)
---------- --------
Outstanding at December 31, 1996 ..................... 5,369,322 202,90010,103,838 515,960
========== ========
The weighted-average exercise price of options outstanding at December 31,
1998, 1997 and 1996, 1995was $31.07, $26.32 and 1994, was $45.85, $41.81 and $40.32$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, 1995 and 1994 was 2,381,5924,802,071 shares at $41.45$25.50 per share,
2,108,0604,686,562 shares at $39.13$22.71 per share and 1,975,2194,763,184 shares at $32.54$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 1995 was $13.83 and $10.20,$6.92, respectively.
57
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)
The following table summarizes information about stock options outstanding
at December 31, 1996:1998:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- ---------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 12/31/9698 Contractual Life Exercise Price at 12/31/9698 Exercise Price
- ------------ -------------- ------------------- ------------------- --------------------------- ------------------ ------------------ ------------- -----------------
$10$ 10 to 30 487,086 3.49 $23.38 487,086 $23.38
3115 412,222 1.83 $ 12.22 412,222 $ 12.22
16 to 48 2,414,512 7.35 39.43 970,009 38.78
4924 2,976,487 5.59 19.78 1,367,806 20.20
25 to 72 2,467,724 7.81 56.57 924,497 53.76
---------- ---------- ------ ------- ---------- -------
$1037 3,323,867 6.03 28.62 2,483,938 27.85
38 to 72 5,369,322 7.21 $45.85 2,381,592 $41.4558 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, 1996, 19951998, 1997 and 1994,1996, there were 398,300495,750
LSARs, 480,825557,800 LSARs and 590,275796,600 LSARs outstanding, 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 1996, 1995 and 1994, expense for these plans was $41.7 million, $19.9 million
and $7.5 million, respectively.
NOTE 10. 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) 1996 1995 1994
- --------------------------------------------- ---------- ----------------- ----------
Tax at federal statutory rate of 35% ...... $119.6 $ 133.7 $ 69.5
Tax-exempt income ........................ (18.8) (30.0) (32.0)
Prior years' taxes ........................ (1.2) (6.6) --
State income tax ........................... 2.5 3.8 2.2
Realized investment gains .................. -- (5.0) (1.3)
Other .................................... 1.5 4.9 5.5
------ ---- ------
Income taxes .............................. $103.6 $ 100.8 $ 43.9
====== ==== ======
58
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. INCOME TAXES (Continued)
Deferred income tax liabilities and assets consist of the following:
December 31,
--------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------ --------- --------
Deferred tax liabilities:
Deferred policy acquisition costs .................. $210.7 $321.6
Policy reserve adjustments ........................ 106.5 --
Net unrealized gains .............................. 101.7 174.0
Value of business acquired ........................ 19.8 17.7
Invested assets .................................... 9.6 10.9
Other ............................................. 11.0 16.0
------- -------
Gross deferred tax liabilities .................. 459.3 540.2
------- -------
Deferred tax assets:
Alternative minimum tax credit carryforwards ...... 1.1 29.0
Policy reserve adjustments ........................ -- 65.9
Net realized losses .............................. 17.4 25.1
Postretirement benefits ........................... 26.7 22.1
Deferred gains .................................... 28.5 --
Accrued liabilities .............................. 27.0 --
Other ............................................. 26.8 12.1
------- -------
Gross deferred tax assets ........................ 127.5 154.2
Less valuation allowance ........................... 10.0 6.0
------- -------
Net deferred tax assets ........................... 117.5 148.2
------- -------
Net deferred tax liability ........................ $341.8 $392.0
======= =======
Deferred income taxes relating to cumulative net unrealized gains on
available for sale fixed maturity and equity securities were $101.7 million,
$174.0 million and $27.1 million at December 31, 1996, 1995 and 1994,
respectively.
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. The 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
million at December 31, 1996. 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, 1996, for all life insurance subsidiaries, the tax
would have amounted to $11.1 million.
UNUM's Consolidated Statements of Income for 1996, 1995 and 1994, included
the following amounts of foreign income and related income tax expense:
Year Ended December 31,
------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------ -------- --------- -------
Foreign income ............ $27.4 $ (1.2) $24.2
====== ====== ======
Income tax expense (credit):
Current .................. $10.4 $ 1.4 $ 0.7
Deferred .................. 1.8 (0.2) 9.7
------ ------ ------
Total ..................... $12.2 $ 1.2 $10.4
====== ====== ======
59
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. INCOME TAXES (Continued)
UNUM subsidiaries had operating loss carryforwards totaling $3.6 million as
of December 31, 1996. The operating loss carryforward will expire, if not
utilized, in 1999 through 2002.
NOTE 11. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1996, and 1995:
December 31,
--------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------------- --------- --------
Short-term debt:
Commercial paper, with weighted average interest rates of
5.5% in 1996 and 5.9% in 1995 .............................. $60.6 $82.4
Other notes payable, with weighted average interest rates of
0.7% in 1996 and 1.0% in 1995 .............................. 8.6 29.1
Medium-term notes payable, due 1997, with interest rates
ranging from 6.0% to 6.7% ................................. 48.5 15.0
------ ------
Total short-term debt .................................... 117.7 126.5
------ ------
Long-term debt:
Medium-term notes payable, due 1998 to 2024, with interest
rates ranging from 5.1% to 7.5% ........................... 242.1 290.4
Monthly income debt securities, due 2025, with interest rate
of 8.8%, $172.5 million issued net of unamortized offering
costs of $5.4 million in 1996 and $5.6 million in 1995 ...... 167.1 166.9
------ ------
Total long-term debt .................................... 409.2 457.3
------ ------
Total notes payable ....................................... $526.9 $583.8
====== ======
At December 31, 1996, 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 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 debt levels.
Aggregate maturities of notes payable are as follows: 1997-$117.7 million;
1998-$68.0 million; 1999-$21.5 million; 2000-$60.0 million; thereafter-$259.7
million.
NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS
Effective October 23, 1996, UNUM's Board of Directors approved an expansion
of the Company's stock repurchase program to 6.0 million shares by authorizing
an additional 3.7 million shares. At December 31, 1996, approximately 4.5
million shares of common stock remained authorized for stock repurchase. During
1996, UNUM acquired approximately 1.9 million shares of its common stock in the
open market at an aggregate cost of $119.1 million. UNUM did not acquire any
shares in the open market in 1995. During 1994, UNUM repurchased 3.9 million
shares in the open market at an aggregate cost of $183.3 million.
Under UNUM's stock-based compensation plans and the plans of Colonial
Companies (see Note 9), 730,561 shares, 612,138 shares and 329,579 shares were
issued in 1996, 1995 and 1994, respectively.Preferred Stock Purchase Rights
UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan,
each Right, under certain specific circumstances, entitles the holder to purchase one
one-hundredth of a share of Series A Junior Participating
60
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS (Continued) 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 13.11. 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 19971999 to UNUM Corporation from
all U.S. domiciled insurance subsidiaries without state insurance regulatory
approval is approximately $153$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 $1,205$1,330 million and $1,149$1,186 million, at
December 31, 1996,1998, and 1995,1997, 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 $143 millionfor 1998, 1997 and
$33 million for 1996, 1995 and 1994, 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 basedKingdom-based
affiliate, UNUM Limited, subject to certain U.S. tax consequences.
NOTE 14. LITIGATION
In the normal course of its business operations, UNUM is involvedLimited. Such dividends are limited in litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1996. 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 effectamount, based on
the consolidated financial
position or the consolidated operating results of UNUM.
On December 29, 1993, UNUM filed a suitinsurance company legislation in the United States District CourtKingdom, which requires a minimum
solvency margin. The amount available under current law for the Districtpayment of
Maine, seeking adividends 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 refund. The suit is
based on a claimrate 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 deduction in certaindeferred tax liability of approximately $11
million that arose 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 has
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.
UNUM believes its claims are meritorious, and has appealed the decision1984, which related to the United States Courtpolicyholders' surplus
accounts of AppealsUNUM'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 for 1998, 1997 and 1996, included
the First Circuit.following amounts of income subject to foreign taxation and 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 Subsidiaries
UNUM subsidiaries had operating loss carryforwards totaling $15.3 million
and alternative minimum tax credit carryforwards totaling $35.2 million as of
December 31, 1998. The ultimate recovery,operating loss carryforwards will expire, if any, cannot be determined at this time.not
utilized, in 1999 through 2004; the alternative minimum tax credits do not
expire.
NOTE 15.13. 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 that could be realized in
immediate settlement of the financial instrument.
61
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The following table summarizes the carrying amounts and fair values of
UNUM's financial instruments at December 31, 1996,1998, and 1995:1997:
1996 1995
--------------------------- ------------------------1998 1997
----------------------------- -----------------------------
Carrying Fair Carrying Fair
(Dollars in millions) Amount Value Amount Value
- ----------------------------------------- ----------- ----------- ----------- ------------------------------------------------------- ------------- ------------- ------------- -------------
Financial assets:
Fixed maturities available for sale ... $6,942.7 $6,942.7 $9,135.4 $9,135.4..... $ 7,896.9 $ 7,896.9 $ 7,310.9 $ 7,310.9
Equity securities available for sale .. 31.3 31.3 25.2 25.2sale..... 31.0 31.0 30.7 30.7
Mortgage loans ........................ 1,132.1 1,213.4 1,163.4 1,274.9.......................... 1,303.4 1,425.2 1,131.0 1,243.7
Policy loans ........................ 232.9 232.9 219.2 219.2............................ 137.6 137.6 128.5 128.5
Short-term investments ............... 123.4 123.4 896.7 896.7.................. 216.2 216.2 124.5 124.5
Cash ................................. 77.0 77.0 42.5 42.5.................................... 80.5 80.5 56.8 56.8
Accrued investment income ............ 166.1 166.1 208.5 208.5............... 167.4 167.4 160.3 160.3
Deposit assets ..................... 2,846.6 2,846.6 -- --.......................... 729.7 729.7 688.3 688.3
Financial liabilities:
Other policyholder funds: ...............
Investment-type insurance contracts: .....
With defined maturities ............................. $ 191.069.3 $ 216.084.6 $ 400.0141.6 $ 440.0159.3
With no defined maturities ......... 2,901.0 2,839.0 3,031.0 2,967.0.............. 259.5 257.4 332.0 328.0
Individual annuities and
supplementary contracts not
involving life contingencies ........ 76.2 76.2 81.4 81.4............ 63.9 63.9 67.1 67.1
Notes payable ........................ 526.9 542.5 583.8 610.8........................... 881.8 944.0 635.8 656.0
Off-balance sheet financial
instruments:
Interest rate futures contracts ......... -- 110.7 -- --
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
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: 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.
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, 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: 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.
62
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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: Fair values approximate the carrying amounts reported in other
policyholder funds in the Consolidated Balance Sheets.
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: Fair value for off-balance sheet
financial instruments are based on current settlement values.
NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses options, futures, forward exchange contracts and
interest rate swaps, which are common derivative financial instruments, to
hedge certain risks associated with anticipated purchases and sales of
investments, anticipated debt issuance and certain payments denominated in
foreign currencies, primarily British pounds sterling, Canadian dollars 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 uses swap agreements to convert foreign currency based debt
instruments to U.S. dollars and to convert variable rate debt to a fixed rate.
In using these instruments, UNUM is subject to the off-balance-sheet
credit risk that the counterparties of the transactions will fail to perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges. UNUM does not hold or issue derivative
financial instruments for the purpose of trading.
Historically, all positions UNUM has taken in derivative contracts have
qualified for hedge accounting in accordance with the criteria 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 underlying asset or liability when the
hedged transaction occurs. Gains or losses related to qualifying hedges of
anticipated transactions involving the sale of investments 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 swap agreements, which
do not require daily cash settlement, are not recognized in UNUM's Consolidated
Balance Sheets.
Any resulting gains or losses from early termination of a derivative
designated as a hedge are deferred and recognized in income or as an adjustment
of the carrying 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 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
losses on the swap agreements, which qualify for hedge accounting, are recorded
while the related debt is outstanding. These swap agreements expire in December
2007 and have notional amounts that equal the principal amount of the loan.
In addition to the swap agreements discussed previously, UNUM had open
interest rate futures contracts at December 31, 1998, with notional amounts of
$111.0 million to hedge anticipated cash flows in 1999. These futures contracts
had a related net unrealized loss of $0.3 million at December 31, 1998. Other
than the swap agreements discussed previously, UNUM had no other open
derivative financial instruments at December 31, 1997.
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, 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, 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 including: 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, and the Pacific Rim.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 doctors, attorneys,educators, consultants, health care providers,
accountants and engineers.
To more clearly reflect UNUM'sUNUM 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 its businesses and to more
appropriately group its product portfolios, UNUM began reporting its operations,
effective January 1, 1995, principallyinvested assets in four business segments: Disability
Insurance,the financial markets is not
representative of ongoing operations. Special Risk Insurance, Colonial Products and Retirement Products.
For comparative purposes, 1994 information was previously restated to reflect
reporting in these segments.
The Disability Insuranceitems are excluded from
management's evaluation of segment includes disability products offered in
North America, the United Kingdom and Japan including: group long term
disability, group short term disability, individual disability, Association
Group disability, disability reinsuranceperformance as management considers them as
being not representative of ongoing operations and long term care
insurance.believes a discussion of the
results on a pretax operating income basis provides a better understanding of
the results of ongoing operations. The Special Risk Insurance segment includes group life, special risk
accident insurance, non-disability reinsurance operations, reinsurance
underwriting management operations and other special risk insurance products.
The Colonial Products segment includes Colonial Companies, Inc. and
subsidiaries, which offer payroll-deducted, voluntary employee benefits
including accident and sickness, cancer and life insurance products to employees
at their worksites. The Retirement Products segment includes tax sheltered
annuities, guaranteed investment contracts, deposit administration accounts,
401(k) plans, individual life and group medical products, allaccounting polices of whichthe operating
segments are no
longer actively marketed by UNUM. Corporate includes transactions that are
generally non-insurance related.the same as those described in 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 products in each segment. Operating expenses are allocated to
the segments based on direct association with a product whenever possible. If
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.
63
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. SEGMENT INFORMATION (Continued)
Summarized financial information for the four businessreportable operating
segments and Corporate is as follows:
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------ ----------- ----------- -----------
Revenues:
Disability Insurance ............ $2,386.2 $2,472.8 $2,116.5
Special Risk Insurance ......... 811.9 750.7 647.8
Colonial Products ............... 545.5 527.3 473.9
Retirement Products ............ 283.0 357.8 369.4
Corporate ........................ 16.1 14.3 5.0
-------- -------- --------
Total revenues .................. $4,042.7 $4,122.9 $3,612.6
======== ======== ========
Income (loss) before income taxes:
Disability Insurance ............ $ 215.3 $ 217.0 $ 56.2
Special Risk Insurance ......... 79.2 60.3 65.9
Colonial Products ............... 92.4 87.7 62.7
Retirement Products ............ 1.4 45.5 42.0
Corporate ........................ (46.7) (28.6) (28.2)
-------- -------- --------
Income before income taxes ...... 341.6 381.9 198.6
Income taxes ..................... 103.6 100.8 43.9
-------- -------- --------
Net income ..................... $ 238.0 $ 281.1 $ 154.7
======== ======== ========
Year Ended December 31,
---------------------------------------------
(Dollars in millions) 1998 1997 1996
- --------------------------------------------- ------------- ------------- -------------
Premiums:
Disability Insurance ....................... $ 2,125.9 $ 1,816.5 $ 1,889.9
Special Risk Insurance ..................... 1,159.1 915.5 748.2
Colonial Products .......................... 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 Insurance ....................... $ 473.8 $ 471.1 $ 468.8
Special Risk Insurance ..................... 78.7 70.1 57.3
Colonial Products .......................... 65.8 57.6 47.6
Retirement Products ........................ 39.0 55.5 214.4
Corporate .................................. 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 pretax operating income ............. 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 tax ................... (38.6) 30.8 (66.0)
Realized gains (losses), net of tax ......... 13.8 (2.2) 2.3
---------- ---------- ----------
Net income .................................. $ 363.4 $ 370.3 $ 238.0
========== ========== ==========
December 31,
-----------------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
1995 1994
- --------------------------------------------------- ------------ ------------ ------------------------------------------------------ -------------- -------------- --------------
Identifiable Assets:
Disability Insurance ........................... $7,846.8 $7,280.3 $6,131.9..................... $ 9,683.4 $ 8,546.6 $ 7,846.8
Special Risk Insurance ........................ 1,297.1 1,056.5 846.8................... 2,268.2 1,821.6 1,410.0
Colonial Products ...................................................... 1,519.4 1,334.7 1,094.1 996.5 846.2
Retirement Products ................................................. 966.3 1,115.9 4,478.8
4,717.4 4,504.0
Corporate ....................................................................... 374.5 254.0 396.7 372.9 451.3
Individual Participating Life and Annuity ......Annuity. 371.1 367.3 354.0
364.2 347.0----------- ----------- -----------
Total assets ............................ $ 15,182.9 $ 13,440.1 $ 15,580.4
=========== =========== ===========
59
UNUM Corporation 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 PRO 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 ................................. $15,467.5 $14,787.8 $13,127.2........................ $ 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
=========== =========== ========= ====================
64(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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)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 19961998 and 1995:1997:
1996
--------------------------------------------1998
(Dollars in millions, except per common share data) -----------------------------------------------------
4th 3rd 2nd 1st
- ------------------------------------------------------ --------- --------- --------- --------
Premiums .......................................... $793.8 $796.2 $762.3 $768.1......................................... $ 983.9 $ 977.2 $ 962.2 $ 918.4
Investment income ................................. 172.6 207.7 212.2 209.7................................ 168.0 164.9 165.2 163.3
Net realized investment gains (losses) ............ 1.4 1.6 (3.1) 3.5.................... 8.4 7.2 2.3 3.1
Benefits to policyholders ........................... 573.1 605.2 563.5 582.9........................ 779.9 717.2 710.0 679.1
Net income .......................................... 48.0 44.0 73.9 72.1
Net....................................... 66.8 104.4 98.7 93.5
Basic net income per common share ........................................ 0.48 0.75 0.71 0.68
Diluted net income per common share .............. 0.47 0.74 0.70 0.66 0.60 1.01 0.99
1995
--------------------------------------------1997
-----------------------------------------------------
4th 3rd 2nd 1st
--------- --------- --------- ------------------- ----------- ----------- -----------
Premiums ........................... $817.0 $738.0 $729.2 $734.0....................................... $ 860.5 $ 833.8 $ 786.7 $ 782.7
Investment income .................. 207.3 207.8 199.3 191.9.............................. 165.5 164.3 165.7 165.5
Net realized investment gains ...... 3.2 2.9 208.1 10.9(losses) ......... (1.1) 2.7 (3.0) (2.2)
Benefits to policyholders ......... 634.8 568.7 717.7 571.8...................... 635.7 629.6 585.0 588.5
Net income ........................ 62.1 66.7 88.9 63.4
Net..................................... 76.2 91.5 87.6 115.0
Basic net income per common share ......... 0.85 0.92 1.22 0.87.............. 0.55 0.66 0.63 0.81
Diluted net income per common share ............ 0.54 0.64 0.62 0.79
NOTE 18. SUBSEQUENT EVENTS
On March 14, 1997, UNUM's Board of Directors authorized a two-for-one
common stock split. The split is subject to shareholder approval of a proposal
to increase the number of authorized shares of common stock to 240 million from
120 million. UNUM's shareholders will vote on the proposal to increase the
number of authorized shares at the Annual Meeting of Shareholders on May 9,
1997. Under the proposed split, on or about June 2, 1997, one additional share
would be distributed for each share of common stock already issued, to holders
of record on May 19, 1997. The financial information contained in this report
has not been adjusted to reflect the impact of the proposed common stock split.
On March 14, 1997, the Board of Directors also announced its intent to
increase the next regularly scheduled cash dividend, payable in May, to 28.5
cents from 27.5 cents per common share on a pre-split basis.
6564
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles
or practices or financial statement disclosure have been reported on a Form 8-K
during the past two years prior to the date of the most recent financial
statements.
PART III
Item 10--Directors and Executive Officers of the Registrant10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors 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 for the Annual MeetingPennsylvania, 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 Shareholders on May 9, 1997,Mercantile Stores Company, Inc. and Milliken & Company.
Ms. Dickson Rice is incorporated by reference.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 1998. Previously, Mr. Rowe was President and Chief
Executive Officer of New England Electric System from 1989 to February 1998. He
is also a director of Bank of Boston Corporation, First National Bank of Boston
and Wisconsin Central Transportation Corp.
B. Executive Officers of the Registrant
The executive officers of UNUM are as follows:
Age (as of An Officer
Name March 25, 1997)31, 1999) Position held with UNUM Since
- --------------------- ------------------ ------------------------------ ----------------------------------- ----------------- --------------------------- -----------
James F. Orr III 5456 Chairman, President and 1986
Chief Executive Officer
Thomas G. BrownRobert E. Broatch 50 Senior Vice President and 1996
Chief Financial Officer
Robert W. Crispin 52 Executive Vice President 1992
Stephen B. Center 59 Executive Vice President 1972
Robert W. Crispin 50 Executive Vice President 1995
and Chief Financial Officer
Peter J. Moynihan 5355 Senior Vice President 1979
Kevin P. O'Connell 5153 Executive Vice President 1987
Elaine D. Rosen* 44Rosen 46 Executive Vice President UNUM America 1983
Robert E. Staton* 5052 President, Colonial 1993
- --------
*Denotes an officer of a 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 By-Laws, the UNUM Board, or the delegatee may prescribe.
Mr. Orr was elected Chairman of the Board of UNUM in February 1988. In
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 Chairman of the Board and Chief Executive
Officer of Duncanson & Holt, Inc. ("D&H"), a post he has held since 1987.
Additionally, he served as President of D&H from 1987 until May 1996. D&H became
a wholly-owned subsidiary of UNUM in July 1992.
Mr. Center was elected Executive Vice President of UNUM in September 1992.
Additionally, he served as President of UNUM America from September 1992 until
December 1996. Previously, he served as Group Executive Vice President of UNUM
America from May 1990 to August 1992. He joined UNUM America in 1963.
Mr. Crispin was elected Executive Vice President of UNUM in January 1995
and additionally as Chief Financial Officer infrom August 1995.1995 until
September 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.
66
Mr. Moynihan was elected Senior Vice President of UNUM in September 1993
and Senior Vice President of UNUM America in October 1987. He joined UNUM
America in 1973.
Mr. O'Connell was elected Executive Vice President of UNUM in February
1996 and Executive Vice President of UNUM America in May 1995. Previously, he
served as Senior Vice President of UNUM America from November 1988 to May 1995.
He joined UNUM America in 1968.
66
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 from November 1988 to 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 from December 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; General Counsel from August 1985 to November 1993; and Corporate
Secretary from February 1992 to August 1993. Colonial's parent company merged
with UNUM in March 1993.
Item 11--Executive11. EXECUTIVE AND DIRECTOR COMPENSATION
The following 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 informationaggregate 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", "Board
Compensation Reportthe
options became exercisable on Executive Compensation",March 13, 1999. An additional 25 percent
will become exercisable on each of March 13, 2000, 2001 and "Executive Compensation"
included in2002, 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 proxy statementestimate 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" means 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 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 to
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 ShareholdersBoard 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 the 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 May
9, 1997, is incorporatedForm 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 reference.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 person
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 trust 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 Mr. 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 12--Security Ownership of Certain Beneficial Owners13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 11 "Executive and Management
The informationDirector Compensation" under the caption "Security Ownership" included in UNUM's
proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is
incorporated by reference.
Item 13--Certain Relationships and Related Transactions
The information under the captions "Executive Compensation" and "Other
Agreements and Transactions" included in UNUM's proxy statement for the Annual
Meeting of Shareholders on May 9, 1997, is incorporated by reference.
67this information.
73
UNUM Corporation and Subsidiaries
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 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 ..................... 34
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 ..................... 35
Consolidated Balance Sheets as of December 31, 1996,
and 1995 ............................................. 36
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 ......... 38
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 ............... 39
Notes to Consolidated Financial Statements ............ 40
2. Financial Statement Schedules
II Condensed Financial Information of UNUM Corporation
(Registrant) 70
III Supplementary Insurance Information 74
IV Reinsurance 75
Page
-----
Report of Independent Accountants ..................................... 29
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 1996 .................................... 33
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1998, 1997 and 1996 .............................. 35
Notes to Consolidated Financial 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
3. Exhibits. See Index to Exhibits on page 7683 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 1996.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.
6874
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Portland, State of Maine, on March 25, 1997.31, 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 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.
Name Title Date
- ----------------------------------------- ----------------------------- ------------------------------------------------------------------------- ---------------------------- ---------------
/s/ JAMES F. ORR III Chairman, President and
- ------------------------------------- Chief Executive Officer March 25, 199731, 1999
(James F. Orr III)
/s/ ROBERT W. CRISPIN ExecutiveE. BROATCH Senior Vice President
- ------------------------------------- and Chief Financial Officer March 25, 199731, 1999
(Robert W. Crispin)E. Broatch)
/s/ STEPHEN D. ROBERTSJOHN M. LANG, JR. Vice President and
- ------------------------------------- Corporate Controller March 25, 1997
(Stephen D. Roberts)31, 1999
(John M. Lang, Jr.)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(Gayle O. Averyt)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(Robert E. Dillon, Jr.)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(Gwain H. Gillespie)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(Ronald E. Goldsberry)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(Donald W. Harward)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(George J. Mitchell)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(Cynthia A. Montgomery)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(James L. Moody, Jr.)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(Lawrence R. Pugh)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(Lois Dickson Rice)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------31, 1999
(John W. Rowe)
*/s/ JOHN-PAUL DEROSA/s/ KEVIN J. TIERNEY
- -------------------------------------
(John-Paul DeRosa,*(Kevin J. Tierney, as Attorney-in-fact
for each of the persons indicated)
(Assistant(Senior Vice President, General Counsel & Secretary)
6975
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
1995 1994
- ------------------------------------------------------------ --------- --------- ------------------------------------------------------------------ ---------- ----------- -----------
Revenues
Dividends from subsidiaries* ........................... $259.7......................... $ 23.6 $102.044.2 $ 462.4 $ 259.7
Investment income ........................................................................... 0.2 0.1 0.3 0.4 0.1
Interest income on loans to subsidiaries* ........................... 3.3 2.6 2.5 5.5 --
Fees and other income .................................................................... -- 0.3 0.80.1 --
------- ------ --------------- --------
Total revenues ................................................................................ 47.7 465.2 262.5 29.8 102.9
Expenses
Operating expenses .......................................................................... 7.5 8.3 4.7 2.3 8.7
Interest expense ............................................................................ 40.9 41.7 40.7 37.2 18.6
Interest expense on loans from subsidiaries* ..................... 17.4 2.5 0.1
3.9 2.3
------- ------ --------------- --------
Total expenses ................................................................................ 65.8 52.5 45.5
43.4 29.6
------- ------ --------------- --------
Income (loss) before income taxes ............................................. (18.1) 412.7 217.0 (13.6) 73.3
Income tax benefit ........................................................................... 29.6 17.3 15.1
13.1 6.2
------- ------ --------------- --------
Income (loss) before equity in undistributed net income
(loss) of subsidiaries ................................................................... 11.5 430.0 232.1 (0.5) 79.5
Equity in undistributed net income (loss) of
subsidiaries* .............................................. 351.9 (59.7) 5.9
281.6 75.2
------- ------ --------------- --------
Net income ................................................ $238.0 $281.1 $154.7............................................ $ 363.4 $ 370.3 $ 238.0
======= ====== =============== ========
- --------
*Eliminated in consolidation
See note to condensed financial statements.
7076
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31,
-----------------------------------------------------
(Dollars in millions) 1996 19951998 1997
- ------------------------------------------------------------ ----------- -------------------------------------------------------------------------- ------------- -------------
Assets
Investments
Investment in subsidiaries* ........................... $2,749.8 $2,836.1............................... $ 3,661.5 $ 3,085.2
Short-term investments ................................. 0.6 0.6
-------- --------.................................... 4.5 2.1
---------- ----------
Total investments .................................... 2,750.4 2,836.7........................................ 3,666.0 3,087.3
Cash ....................................................... 0.1 --
Amounts receivable from subsidiaries, net* ............... 15.0 6.6................. -- 16.2
Notes receivable from subsidiary* ........................ 32.5 50.0.......................... 51.3 35.7
Income taxes receivable .................................... 9.0 --
Other assets ............................................... 5.1 --
Property and equipment, net .............................. 22.3 18.1
-------- --------................................ 31.5 28.8
---------- ----------
Total assets .......................................... $2,820.2 $2,911.4
======== ========............................................. $ 3,763.0 $ 3,168.0
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Notes payable ...................................................................................... $ 526.9713.5 $ 583.8467.5
Notes payable to subsidiary* ........................................................ 257.1 245.8
Amounts payable to subsidiaries, net* .................... 54.7 -- 10.0
Income taxes .......................................... 16.5 4.8............................................. -- 8.3
Other liabilities ....................................... 13.7 9.9
-------- --------......................................... -- 11.6
---------- ----------
Total liabilities .................................... 557.1 608.5....................................... 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 99,987,958199,975,916 shares ............ 10.0 10.020.0 20.0
Additional paid-in capital .............................. 1,077.2 1,065.7................................. 1,098.7 1,086.0
Unrealized gains, on available for sale securities of
subsidiaries, net ....................................... 108.5 235.6...................................... 300.9 248.4
Unrealized foreign currency translation adjustment ...... (1.2) (23.1)......... (19.4) (16.0)
Retained earnings (including undistributed earnings of
subsidiaries of $1,401.8$1,694.0 million and $1,395.9$1,342.1 million in
19961998 and 1995,1997, respectively) .............................. 1,871.4 1,713.2
-------- --------
3,065.9 3,001.4............................. 2,444.9 2,162.5
---------- ----------
3,845.1 3,500.9
Less:
Treasury stock, at cost (1996--28,165,594(1998--61,266,501 shares; 1995--26,980,3311997--
61,703,924 shares) ................................. 792.2 691.6....................................... 1,085.9 1,050.3
Restricted stock deferred compensation .................. 10.6 6.9
-------- --------..................... 21.5 15.8
---------- ----------
Total stockholders' equity .............................. 2,263.1 2,302.9
-------- --------................................ 2,737.7 2,434.8
---------- ----------
Total liabilities and stockholders' equity ............ $2,820.2 $2,911.4
======== ========................ $ 3,763.0 $ 3,168.0
========== ==========
- --------
*Eliminated in consolidation
See note to condensed financial statements.
7177
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
1995 1994
- ------------------------------------------------------------- ---------- ---------- ----------------------------------------------------------------------- ----------- ----------- -----------
Operating activities:
Net income ............................................................................................... $ 238.0363.4 $ 281.1370.3 $ 154.7238.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase (decrease) in income tax liability ..................................... (17.3) (8.2) 11.7 2.1 0.4
(Increase) decrease in amounts due to/from
subsidiaries* ....................................................................................... 70.9 (1.2) (8.4) 11.8 (6.0)
Other ................................................... (6.6) 11.3 16.1 (3.1) 11.1
Equity in undistributed net income of
subsidiaries* ................................................ (351.9) (104.1) (5.9)
(281.6) (75.2)
------- ------- --------------- -------- --------
Net cash provided by operating activities ............................. 58.5 268.1 251.5
10.3 85.0
------- ------- --------------- -------- --------
Investing activities:
Investment in subsidiaries, net* ................................................. (174.9) (107.8) (13.1) (1.1) (30.6)
Issuance of notes receivable from subsidiaries* ................... (15.6) (3.2) (32.5) (100.0) --
Repayment of notes receivable from subsidiaries* ......... -- -- 50.0
50.0 --
Net (increase) decreaseincrease in short-term investments ............................ (2.4) (1.5) -- (0.1) 3.9
Net additions to property and equipment .................. (4.1) (10.7) (8.6)
(5.4) (3.3)
------- ------- --------------- -------- --------
Net cash used in investing activities .................. (197.0) (123.2) (4.2)
(56.6) (30.0)
------- ------- --------------- -------- --------
Financing activities:
Dividends to stockholders ................................................................. (81.0) (79.2) (79.8) (75.1) (68.3)
Treasury stock acquired ................................................................... (65.0) (285.2) (119.1) -- (183.3)
Proceeds from notes payable .............................. 278.1 -- 291.5 54.7--
Repayment of notes payable ............................................................. (68.0) (48.5) (15.0) -- --
Net increase (decrease) in short-term debt ............... 36.0 (10.6) (42.3)
(135.1) 136.7Proceeds from notes payable to subsidiaries* ............. 11.3 245.8 --
Repayment of notes payable to subsidiaries* ............................. -- -- (10.0)
(50.0) --
Other ....................................................................................................... 27.2 32.8 18.9
13.0 5.9
------- ------- --------------- -------- --------
Net cash provided by (used in) financing
activities ............................................. 138.6 (144.9) (247.3)
44.3 (54.3)
------- ------- --------------- -------- --------
Net increase (decrease) in cash ................................................................. 0.1 -- (2.0) 0.7--
Cash at beginning of year ................................. -- 2.0 1.3
------- ------- --------- --
-------- -------- --------
Cash at end of year ....................................... $ 0.1 $ -- $ --
$ 2.0
======= ======= =============== ======== ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Income taxes ........................................................................................ $ (13.2) $ (10.6) $ (25.8)
Interest ............................................... $ (15.1)40.3 $ (6.6)
Interest ................................................43.3 $ 40.8 $ 36.2 $ 18.1
Interest to subsidiaries* .............................. $ 0.217.5 $ 4.0-- $ 2.20.2
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.
7278
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis 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.
7379
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in millions)
(1)(2)
Future policy
Deferred benefits, and
policy unpaid claims (3)
acquisition and claim Premium
Segment costs expenses revenue
- ------------------------------ -------------- --------------- -----------
Year Ended December 31, 1996
Disability Insurance ...... $ 443.1 $5,526.0 $1,917.7
Special Risk Insurance ...... 125.6 615.0 755.4
Colonial Products ......... 274.6 410.8 498.2
Retirement Products ......... 0.9 618.6 65.8
Corporate .................. -- -- --
-------- ------- ---------
Total ..................... $ 844.2 $7,170.4 $3,237.1
======== ======= =========
Year Ended December 31, 1995
Disability Insurance ...... $ 758.3 $5,130.6 $1,879.9
Special Risk Insurance ...... 99.8 476.5 702.3
Colonial Products ......... 250.5 372.0 475.1
Retirement Products ......... 33.7 596.0 34.1
Corporate .................. -- -- 0.1
-------- ------- ---------
Total ..................... $1,142.3 $6,575.1 $3,091.5
======== ======= =========
Year Ended December 31, 1994
Disability Insurance ...... $ 695.6 $4,175.9 $1,716.2
Special Risk Insurance ...... 84.1 357.7 607.1
Colonial Products ......... 224.8 330.5 441.3
Retirement Products ......... 30.7 581.9 31.4
Corporate .................. -- (0.5) 0.8
-------- ------- ---------
Total ..................... $1,035.2 $5,445.5 $2,796.8
======== ======= =========
Amortization(1)(2)
Future policy
Deferred benefits, and (4)(5)
Benefits to of deferred (5)policy unpaid claims (3) Net
policyholders policy Other (6)acquisition and claim Premium investment
and interest acquisition operating Premiums
Segment income credited costs expenses writtenrevenue 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 $1,514.9 $99.0 $557.0 $1,893.0
Special Risk Insurance ...... 56.5 506.5 42.4 183.8 220.1................... 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, 1998
Disability Insurance ..................... $ 1,794.7 $ 64.8 $ 492.9 $ 2,114.8
Special Risk Insurance ................... 803.3 143.3 181.1 414.5
Colonial Products ........................ 285.3 89.5 142.4 484.0
Retirement Products ...................... 49.3 -- 15.3 0.8
Corporate ................................ -- -- 62.1 --
---------- -------- -------- ----------
Total ................................... $ 2,932.6 $ 297.6 $ 893.8 $ 3,014.1
========== ======== ======== ==========
Year Ended December 31, 1997
Disability Insurance ..................... $ 1,503.9 $ 52.1 $ 481.9 $ 1,828.5
Special Risk Insurance ................... 643.9 94.0 179.5 311.2
Colonial Products ........................ 271.8 80.7 137.1 467.2
Retirement Products ...................... 102.7 0.1 5.7 2.5
Corporate ................................ -- -- 58.6 --
---------- -------- -------- ----------
Total ................................... $ 2,522.3 $ 226.9 $ 862.8 $ 2,609.4
========== ======== ======== ==========
Year Ended December 31, 1996
Disability Insurance ..................... $ 1,514.9 $ 99.0 $ 557.0 $ 1,893.0
Special Risk Insurance ................... 524.0 53.9 183.8 251.2
Colonial Products ........................ 246.8 72.5 133.8 446.5
Retirement Products ......... 217.2...................... 257.1 -- 24.5 15.0
Corporate .................. 16.1................................ -- -- 62.8 --
---------- -------- --------- ------ ------- ----------------- ----------
Total ........................................................ $ 805.6 $2,525.3 $213.9 $961.9 $2,574.62,542.8 $ 225.4 $ 961.9 $ 2,605.7
========== ======== ========= ====== ======= =========
Year Ended December 31, 1995
Disability Insurance ...... $ 592.9 $1,711.2 $90.6 $454.0 $1,853.2
Special Risk Insurance ...... 48.4 492.3 35.5 162.6 223.6
Colonial Products ......... 52.2 241.6 66.7 131.3 417.5
Retirement Products ......... 323.7 275.3 0.8 36.2 23.3
Corporate .................. 14.2 -- -- 42.9 --
-------- --------- ------ ------- ---------
Total ..................... $1,031.4 $2,720.4 $193.6 $827.0 $2,517.6
======== ========= ====== ======= =========
Year Ended December 31, 1994
Disability Insurance ...... $ 400.3 $1,572.1 $70.7 $417.5 $1,705.5
Special Risk Insurance ...... 40.7 394.4 19.2 168.3 156.8
Colonial Products ......... 32.6 226.1 60.6 124.5 388.1
Retirement Products ......... 338.0 289.1 2.3 36.0 21.6
Corporate .................. 4.2 -- -- 33.2 --
-------- --------- ------ ------- ---------
Total ..................... $ 815.8 $2,481.7 $152.8 $779.5 $2,272.0
======== ========= ====== ======= ===================
(1) Excludes other policyholder funds, as follows:
December 31,
--------------------------------------
Segment 1996 1995 1994
- ------------------------------- ----------- ----------- ----------
Disability Insurance ......... $ 5.9 $ 3.1 $ 2.1
Special Risk Insurance ...... 12.7 14.6 8.4
Colonial Products ............ 156.6 128.0 100.1
Retirement Products ......... 3,358.4 3,694.6 3,948.2
-------- -------- --------
Total ........................ $3,533.6 $3,840.3 $4,058.8
======== ======== ========
December 31,
--------------------------------------
Segment 1998 1997 1996
- ------------------------------------- --------- ------------ -----------
Disability Insurance ........... $ 5.9 $ 2.4 $ 5.9
Special Risk Insurance ......... 13.3 15.4 12.7
Colonial Products .............. 287.5 258.1 156.6
Retirement Products ............ 568.7 729.0 3,358.4
------- --------- ---------
Total .......................... $ 875.4 $ 1,004.9 $ 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 1994 amounts have been reclassified for comparative purposes.
7480
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
(Dollars in millions)
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
(Dollars in millions) Amount companies companies Amount to net
- ------------------------------------------------ ---------------------------- -------------- ------------ ------------- ------------- --------------------------- -----------
Year Ended December 31, 19961998
Life insurance in forceinforce ..................... $199,019.2 $11,476.5 $ -- $187,542.7 --314,783.7 $ 15,755.0 $ 670.6 $ 299,699.3 0.2%
============ =========== ========== ====== ==================== ============ ====
Premiums
Life insurance and individual annuities ..... $ 788.9 $ 38.3 $ 16.3 $ 766.9 2.1%
Accident and health insurance .............. 3,145.5 376.0 304.5 3,074.0 9.9%
Group annuities ............................ 0.8 -- -- 0.8 --
------------ ----------- --------- ------------ ----
Total premiums ........................... $ 3,935.2 $ 414.3 $ 320.8 $ 3,841.7
============ =========== ========= ============
Year Ended December 31, 1997
Life insurance inforce ..................... $ 260,014.8 $ 16,036.5 $ 2,069.7 $ 246,048.0 0.8%
============ =========== ========= ============ ====
Premiums
Life insurance and individual annuities ... $ 650.7 $ 33.9 $ 9.0 $ 625.8 1.4%
Accident and health insurance ............. 2,656.7 368.9 272.6 2,560.4 10.6%
Group annuities ........................... 2.5 -- -- 2.5 --
------------ ----------- --------- ------------ ----
Total premiums ........................... $ 3,309.9 $ 402.8 $ 281.6 $ 3,188.7
============ =========== ========= ============
Year Ended December 31, 1996
Life insurance inforce ..................... $ 199,019.2 $ 11,476.5 $ -- $ 187,542.7 --
============ =========== ========= ============ ====
Premiums
Life insurance and individual annuities ... $ 552.0 $ 28.6 $ -- $ 523.4 --
Accident and health insurance ......................... 2,406.9 77.8 252.9 2,582.0 9.8%
Group annuities ........................... 15.0 -- -- 15.0 --
------------ ----------- ---------- ------ -------------------- ------------ ----
Total premiums ........................... $ 2,973.9 $ 106.4 $252.9$ 252.9 $ 3,120.4
============ =========== ========== ====== ===========
Year Ended December 31, 1995
Life insurance in force ..................... $164,478.4========= ============
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 .................... $ 4,119.533.9 $ 2.3 $-- $ (3.4) $ 32.8
Real estate held for sale ......... $ 17.8 $ (1.0) $-- $ -- $160,358.9 --
=========== ========== ====== ===========
Premiums
Life insurance and individual annuities . $ 571.4 $ 19.3 $ 2.0 $ 554.1 0.4%
Accident and health insurance ............ 2,248.4 46.9 239.5 2,441.0 9.8%
Group annuities ........................... 23.1 -- -- 23.1 --
----------- ---------- ------ -----------
Total premiums ........................... $ 2,842.9 $ 66.2 $241.5 $ 3,018.2
=========== ========== ====== ===========
Year Ended December 31, 1994
Life insurance in force ..................... $145,425.9 $ 4,425.3 $ -- $141,000.6 --
=========== ========== ====== ===========
Premiums
Life insurance and individual annuities ... $ 517.9 $ 15.7 $ 1.6 $ 503.8 0.3%
Accident and health insurance ............... 2,123.9 96.8 169.1 2,196.2 7.7%
Group annuities ........................... 21.3 -- -- 21.3 --
----------- ---------- ------ -----------
Total premiums ........................... $ 2,663.1 $ 112.5 $170.7 $ 2,721.3
=========== ========== ====== ===========16.8
Certain 1994 amounts have been reclassified for comparative purposes.
7582
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Number Description Method of Filing
- -------- ------------------------------------------------------------- ---------------------------------------------------------------------
3.1 Certificate of Incorporation Filed herewith.as Exhibit 3.1 to the Registrant's Annual Report on Form
of UNUM Corporation, as 10-K dated March 10, 1998, and incorporated herein by reference.
amended
3.2 By-Laws of UNUM Filed herewith.as Exhibit 3.2 to the Registrant's Annual Report on Form
Corporation 10-K dated March 25, 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 27, 1996, and incorporated herein by reference.
10.2 Incentive Compensation Plan Filed herewith.as Exhibit 3.2 to the Registrant's Annual Report on Form
for Designated Executive 10-K dated March 25, 1997, and incorporated herein by reference.
Officers
10.3 1987 Executive Stock Filed as Exhibit 10.3 to the Registrant's Annual Report on Form
Option Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.4 1990 Long-Term Stock Filed as Exhibit 10.4 to the Registrant's Annual Report on Formherewith.
Incentive Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.5 1996 Long-Term Stock Filed as Exhibit 10.5 to the Registrant's Annual Report on Formherewith.
Incentive Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.6 Supplementary Retirement 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.
10.7 Supplemental Executive 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.
10.8 Form of Executive 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.
10.9 Employment AgreementNon-Qualified 401(k) Plan Filed as Exhibit 10.93.2 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 as Exhibit 10.10 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.10(b) Employment Letter Filed as Exhibit 10.1010.9(b) to the Registrant's Annual Report on
Form 10-K dated March 27, 1996,10, 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 10-K dated March 24, 1995, and incorporated herein by reference.
10.12 Asset Transfer and Filed as Exhibit 10.12 to the Registrant's Annual Report on Form
Acquisition Agreement 10-K dated March 27, 1996, and incorporated herein by reference.
10.13 Non-Qualified 401(k) Plan Filed herewith.
12 Computation of Ratio of Filed herewith.
Earnings to Fixed Charges
83
Number Description Method of Filing
- -------- ------------------------- -----------------
21 Subsidiaries of UNUM Filed herewith.
Corporation
23 Consent of Independent Filed herewith.
Accountants
24 Power of Attorney Filed herewith.
27 Financial Data Schedule Filed herewith.
76
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