UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9254
UNUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 01-0405657
(State or other jurisdiction
of incorporation or organization) (I.R.S. employer identification no.)
2211 CONGRESS STREET, PORTLAND, MAINE 04122
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 770-2211
NONE
(Former name, former address, and former fiscal year, if changed since last
report)
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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1998MARCH 31, 1999
COMMON STOCK, $0.10 PAR VALUE 138,382,640139,059,749 SHARES
UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income - Three Months Ended
March 31, 1999, and Nine Months Ended September 30, 1998 and 1997 (Unaudited) 3
Consolidated Balance Sheets as of September 30, 1998,March 31, 1999,
(Unaudited) and December 31, 19971998 4
Consolidated Statements of Cash Flows - NineThree Months
Ended September 30,March 31, 1999, and 1998 and 1997 (Unaudited) 5
Consolidated Statements of Comprehensive Income (Loss) -
Three Months Ended March 31, 1999, and Nine Months Ended September 30, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Independent Accountant's Review Report 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
Three Months Ended Nine Months Ended
September 30, September 30,UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
Three Months Ended
March 31,
------------------ -----------------
(Unaudited - Dollars in millions, except
per common share data)
1998 1997 1998 1997
- -------------------------------------------------------------------------------
REVENUES
Premiums $ 977.2 $ 833.8 $2,857.8 $2,403.2
Investment income 164.9 164.3 493.4 495.5
Net realized investment gains (losses) 7.2 2.7 12.6 (2.5)
Fees and other income 30.2 44.4 96.8 200.5
- -------------------------------------------------------------------------------
Total revenues 1,179.5 1,045.2 3,460.6 3,096.7
BENEFITS AND EXPENSES
Benefits to policyholders 717.2 629.6 2,106.3 1,803.1
Interest credited 12.2 16.4 35.6 68.7
Operating expenses 212.0 197.0 646.9 573.8
Commissions 117.9 94.1 384.4 306.1
Increase in deferred policy
acquisition costs (42.5) (33.7) (175.1) (115.7)
Interest expense 12.6 10.4 36.6 31.2
- -------------------------------------------------------------------------------
Total benefits and expenses 1,029.4 913.8 3,034.7 2,667.2
- -------------------------------------------------------------------------------
Income before income taxes 150.1 131.4 425.9 429.5
INCOME TAXES
Current 26.6 29.7 54.1 65.3
Deferred 19.1 10.2 75.2 70.1
- -------------------------------------------------------------------------------
Total income taxes 45.7 39.9 129.3 135.4
- -------------------------------------------------------------------------------
NET INCOME $ 104.4 $ 91.5 $ 296.6 $ 294.1
===============================================================================
NET INCOME PER COMMON SHARE:
Basic $ 0.75 $ 0.66 $ 2.15 $ 2.10
Diluted $ 0.74 $ 0.64 $ 2.10 $ 2.05
===============================================================================
See notes to consolidated financial statements.
UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
C O N S O L I D A T E D B A L A N C E S H E E T S
September 30, 1998 December 31,
(Dollars in millions) (Unaudited) 1997
- -------------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities available for sale-at fair value
(amortized cost: 1998-$7,069.4; 1997-$6,893.0) $ 7,697.1 $ 7,310.9
Equity securities available for sale-at fair value
(cost: 1998-$22.1; 1997-$21.1) 28.5 30.7
Mortgage loans 1,215.5 1,131.0
Real estate, net 248.2 231.5
Policy loans 138.0 128.5
Other long-term investments 1.7 1.8
Short-term investments 295.4 124.5
- -------------------------------------------------------------------------------
Total investments 9,624.4 8,958.9
Cash 56.8 56.8
Accrued investment income 153.0 160.3
Premiums due 584.0 390.9
Deferred policy acquisition costs 1,205.4 1,031.7
Property and equipment, net 225.9 196.2
Reinsurance receivables 1,779.8 1,441.2
Deposit assets 768.4 688.3
Other assets 502.5 486.2
Separate account assets 30.4 29.6
- -------------------------------------------------------------------------------
Total assets $14,930.6 $13,440.1
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits $ 2,436.9 $ 2,108.4
Unpaid claims and claim expenses 6,641.0 5,944.4
Other policyholder funds 895.1 1,004.9
Income taxes
Current 29.3 20.7
Deferred 603.5 496.2
Notes payable 740.1 635.8
Other liabilities 807.2 765.3
Separate account liabilities 30.4 29.6
- -------------------------------------------------------------------------------
Total liabilities 12,183.5 11,005.3
Stockholders' equity
Preferred stock (par value $0.10 per share, authorized
10,000,000 shares, none issued)
Common stock (par value $0.10 per share, authorized
240,000,000 shares, issued 199,975,916 shares) 20.0 20.0
Additional paid-in capital 1,138.9 1,123.0
Unrealized gains, net 312.7 211.4
Unrealized foreign currency translation adjustment (16.3) (16.0)
Retained earnings 2,398.6 2,162.5
- -------------------------------------------------------------------------------
3,853.9 3,500.9
Less:
Treasury stock, at cost (1998-61,593,276 shares;
1997-61,703,924 shares) 1,091.7 1,050.3
Restricted stock deferred compensation 15.1 15.8
- -------------------------------------------------------------------------------
Total stockholders' equity 2,747.1 2,434.8
Total liabilities and stockholders' equity $14,930.6 $13,440.1
===============================================================================
See notes to consolidated financial statements.
UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
Nine Months Ended
September 30,
-----------------
(Unaudited - Dollars in millions) 1998 1997
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $296.6 $294.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in future policy benefits and unpaid
claims and claim expenses 831.3 550.9
Increase in amounts receivable under reinsurance agreements (336.9) (201.4)
Increase in premiums due (192.6) (69.3)
Increase in income tax liability 69.7 45.4
Increase in deferred policy acquisition costs (172.4) (114.1)
Increase in deposit assets (2.7) (56.6)
Recognition of deferred gain on sale of tax-sheltered
annuities (2.7) (69.1)
Other 90.2 (0.7)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 580.5 379.2
INVESTING ACTIVITIES:
Maturities of fixed maturities available for sale 275.1 234.3
Sales of fixed maturities available for sale 439.0 506.7
Sales and maturities of other investments 96.1 162.4
Purchases of fixed maturities available for sale (862.5) (866.4)
Purchases of other investments (228.5) (154.4)
Net increase in short-term investments (170.4) (67.0)
Net additions to property and equipment (31.0) (26.6)
- -------------------------------------------------------------------------------
Net cash used in investing activities (482.2) (211.0)
FINANCING ACTIVITIES:
Deposits and interest credited to investment contracts 76.7 252.1
Maturities and withdrawals from investment contracts (174.0) (273.7)
Dividends to stockholders (60.5) (59.4)
Treasury stock acquired (65.0) (240.8)
Proceeds from notes payable 50.0 --
Repayment of notes payable (38.0) (15.0)
Net increase in short-term debt 92.5 120.0
Other 20.2 22.7
- -------------------------------------------------------------------------------
Net cash used in financing activities (98.1) (194.1)
Effect of exchange rate changes on cash (0.2) (0.8)
- -------------------------------------------------------------------------------
Net decrease in cash -- (26.7)
Cash at beginning of year 56.8 77.9
- -------------------------------------------------------------------------------
Cash at end of period $ 56.8 $ 51.2
===============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 29.4 $ 60.8
Interest $ 40.5 $ 28.0
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
During the nine months ended September 30, 1997, in connection with
contractholdermillions, except per common
share data) 1999 1998
- ----------------------------------------------------------------------------
REVENUES
Premiums $1,085.1 $ 918.4
Investment income 172.8 163.3
Net realized investment gains 3.2 3.1
Fees and participant consents for assumption reinsuranceother income 42.3 36.7
- ----------------------------------------------------------------------------
Total revenues 1,303.4 1,121.5
BENEFITS AND EXPENSES
Benefits to policyholders 881.2 679.1
Interest credited 10.3 12.1
Salaries and related to
the tax-sheltered annuity business UNUM soldexpenses 142.0 134.1
Other operating expenses 138.2 87.3
Commissions 162.0 142.7
Increase in 1996, UNUM reduced its deposit
assets by $2,147.0 million,deferred policy loan assets by $102.1 million, other
policyholder fund liabilities by $2,307.3 million,acquisition costs (95.6) (79.9)
Interest expense 16.8 11.7
- ----------------------------------------------------------------------------
Total benefits and separate account assets
and liabilities by $505.6 million.
===============================================================================expenses 1,254.9 987.1
- ----------------------------------------------------------------------------
Income before income taxes 48.5 134.4
INCOME TAXES
Current (3.5) 12.5
Deferred 36.5 28.4
- ----------------------------------------------------------------------------
Total income taxes 33.0 40.9
- ----------------------------------------------------------------------------
NET INCOME $ 15.5 $ 93.5
============================================================================
NET INCOME PER COMMON SHARE:
Basic $ 0.11 $ 0.68
Diluted $ 0.11 $ 0.66
============================================================================
Dividends declared per share $ 0.295 $ 0.290
============================================================================
See notes to consolidated financial statements.
UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
C O N S O L I D A T E D S T A T E M E N T S O F C O M P R E H E N S I V E
I N C O M E
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Unaudited - Dollars in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Net income $104.4 $ 91.5 $296.6 $294.1
Other comprehensive income:
Unrealized holding gains arising
during the period, net 80.7 78.4 106.5 71.0
Reclassification adjustment for
realized gains included in net
income, net (2.3) (2.4) (5.2) (1.8)
- -------------------------------------------------------------------------------
Changes in unrealized gains, net 78.4 76.0 101.3 69.2
Foreign currency translation
adjustments 0.5 (6.7) (0.3) (15.6)
- -------------------------------------------------------------------------------
Total other comprehensive income 78.9 69.3 101.0 53.6
- -------------------------------------------------------------------------------
Comprehensive income $183.3 $160.8 $397.6 $347.7
===============================================================================
SUPPLEMENTAL DISCLOSURES OF COMPREHENSIVE INCOME INFORMATION:
Tax expense related to unrealized
holding gains $ 33.9 $ 35.0 $ 46.4 $ 32.1
Tax expense related to reclassification
adjustment for realized gains $ (1.3) $ (1.3) $ (2.8) $ (1.0)
===============================================================================UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
C O N S O L I D A T E D B A L A N C E S H E E T S
March 31, 1999 December 31,
(Dollars in millions) (Unaudited) 1998
- -----------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities available for sale-at fair value
(amortized cost: 1999-$7,563.6; 1998-$7,350.0) $ 7,972.0 $ 7,896.9
Equity securities available for sale-at fair value
(cost: 1999-$18.9; 1998-$21.3) 28.8 31.0
Mortgage loans 1,273.3 1,303.4
Real estate, net 140.0 250.6
Policy loans 137.1 137.6
Other long-term investments 2.1 2.0
Short-term investments 271.6 216.2
- -----------------------------------------------------------------------------
Total investments 9,824.9 9,837.7
Cash 77.0 80.5
Accrued investment income 154.4 167.4
Premiums due 636.4 518.1
Deferred policy acquisition costs 1,357.3 1,266.0
Property and equipment, net 238.8 237.9
Reinsurance receivables 1,806.5 1,770.0
Deposit assets 665.7 729.7
Other assets 584.9 540.3
Separate account assets 35.3 35.3
- -----------------------------------------------------------------------------
Total assets $15,381.2 $15,182.9
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits $ 2,491.9 $ 2,360.2
Unpaid claims and claim expenses 6,958.0 6,841.2
Other policyholder funds 871.6 875.4
Income taxes
Current 5.9 47.3
Deferred 612.8 625.8
Notes payable 961.1 881.8
Other liabilities 777.8 778.2
Separate account liabilities 35.3 35.3
- -----------------------------------------------------------------------------
Total liabilities 12,714.4 12,445.2
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
240,000,000 shares, issued 199,975,916 shares) 20.0 20.0
Additional paid-in capital 1,153.5 1,151.2
Retained earnings 2,439.9 2,444.9
Accumulated other comprehensive income:
Unrealized gains, net 176.3 248.4
Unrealized foreign currency translation adjustment (25.7) (19.4)
- -----------------------------------------------------------------------------
Total accumulated other comprehensive income 150.6 229.0
- -----------------------------------------------------------------------------
3,764.0 3,845.1
Less:
Treasury stock, at cost (1999-60,916,167 shares;
1998-61,266,501 shares) 1,080.1 1,085.9
Restricted stock deferred compensation 17.1 21.5
- -----------------------------------------------------------------------------
Total stockholders' equity 2,666.8 2,737.7
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity $15,381.2 $15,182.9
=============================================================================
See notes to consolidated financial statements.
UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
Three Months Ended
March 31,
------------------
(Unaudited - Dollars in millions) 1999 1998
- ----------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 15.5 $ 93.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in future policy benefits and unpaid claims and
claim expenses 374.9 263.9
Increase in amounts receivable under reinsurance agreements (38.2) (51.0)
Increase in premiums due (118.8) (110.3)
Increase (decrease) in income tax liability (10.3) 38.5
Increase in deferred policy acquisition costs (92.4) (80.1)
Other 52.0 25.9
- ----------------------------------------------------------------------------
Net cash provided by operating activities 182.7 180.4
- ----------------------------------------------------------------------------
INVESTING ACTIVITIES:
Maturities of fixed maturities available for sale 192.5 133.5
Sales of fixed maturities available for sale 355.0 118.8
Sales and maturities of other investments 57.7 28.3
Purchases of fixed maturities available for sale (774.0) (383.8)
Purchases of other investments (17.6) (16.8)
Net increase in short-term investments (56.0) (12.5)
Net additions to property and equipment (6.5) (25.7)
- ----------------------------------------------------------------------------
Net cash used in investing activities (248.9) (158.2)
- ----------------------------------------------------------------------------
FINANCING ACTIVITIES:
Deposits and interest credited to investment contracts 35.5 39.4
Maturities and withdrawals from investment contracts (37.5) (72.1)
Dividends to stockholders (20.5) (19.7)
Treasury stock acquired -- (36.7)
Proceeds from notes payable -- 49.7
Net increase in short-term debt 79.0 5.8
Other 6.8 10.7
- ----------------------------------------------------------------------------
Net cash provided by (used in) financing activities 63.3 (22.9)
- ----------------------------------------------------------------------------
Effect of exchange rate changes on cash (0.6) (0.1)
- ----------------------------------------------------------------------------
Net decrease in cash (3.5) (0.8)
Cash at beginning of year 80.5 56.8
- ----------------------------------------------------------------------------
Cash at end of period $ 77.0 $ 56.0
============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Income taxes $ (10.5) $(11.2)
Interest $ 7.5 $ 7.7
============================================================================
See notes to consolidated financial statements.
UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
C O N S O L I D A T E D S T A T E M E N T S O F C O M P R E H E N S I V E
I N C O M E (L O S S)
Three Months Ended
March 31,
----------------
(Unaudited - Dollars in millions) 1999 1998
- -----------------------------------------------------------------------------
Net income $ 15.5 $ 93.5
Other comprehensive loss:
Unrealized holding losses arising during the period, net (69.9) (16.2)
Reclassification adjustment for realized gains included
in net income, net (2.2) (1.8)
- -----------------------------------------------------------------------------
Changes in unrealized losses, net (72.1) (18.0)
Foreign currency translation adjustments (6.3) 3.8
- -----------------------------------------------------------------------------
Total other comprehensive loss (78.4) (14.2)
- -----------------------------------------------------------------------------
Comprehensive income (loss) $ (62.9) $ 79.3
=============================================================================
Supplemental disclosures of comprehensive income (loss) information:
Tax benefit related to unrealized holding losses $ 40.1 $ 8.4
Tax expense related to reclassification adjustment
for realized gains $ (1.2) $ (1.0)
=============================================================================
See notes to consolidated financial statements.
UNUM Corporation and Subsidiaries
Form 10-Q
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1998March 31, 1999
NOTE 1. BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the requirements of Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The preparation of financial statements in conformity with
generally accepted accounting principles 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. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation
have been included in the financial statements. Interim results for the
three month and nine month periodsperiod ended September 30, 1998,March 31, 1999, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998.1999.
This report should be read in conjunction with the 19971998 Form 10-K included in the 1997 Annual Report to stockholders of UNUM
Corporation and subsidiaries ("UNUM") and Form 10-Q for the
quarterly periods ended March 31, 1998, and June 30, 1998..
NOTE 2. EARNINGS PER SHARESTOCKHOLDERS' EQUITY
- --------------------------------------------------------
Dividends
UNUM's Board of Directors declared a fourteen and three quarters cents per
share cash dividend on January 5, 1999, which was paid February 19, 1999.
On March 12, 1999, UNUM's Board of Directors declared a fourteen and three
quarters cents per share cash dividend. The approximatedividend is payable on May 21,
1999, to common stockholders of record at the close of business on April
26, 1999.
Earnings Per Share
The number of shares used to calculate earnings per share ("EPS") was as
follows:
Three Months Ended
Nine Months Ended
September 30, September 30,
------------------March 31,
------------------
(Shares in thousands) 1999 1998
1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding for basic EPS 138,330 139,231 138,271 140,328138,900 138,113
Effect of dilutive securities 2,875 3,119 3,185 2,9122,843 3,250
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding for diluted EPS 141,205 142,350 141,456 143,240
================================================================================141,743 141,363
=============================================================================
The following number of outstanding options to purchase shares were
excluded from the diluted weighted average share calculation as the options'
exercise prices were greater than the average market price.
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
------------------ -----------------
(Options in thousands) 1999 1998
1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Antidilutive options outstanding 1,698 6 197 48
================================================================================180 1,649
=============================================================================
NOTE 3. STOCKHOLDERS' EQUITY
- -----------------------------
On October 9, 1998, UNUM's Board of Directors declared a fourteen and three
quarters cents per share cash dividend. The dividend is payable on
November 20, 1998, to common stockholders of record at the close of
business on October 26, 1998. During the first nine months of 1998, a
fourteen and one quarter cents per share cash dividend was paid on February
20, 1998, and fourteen and three quarters cents per share cash dividends
were paid on May 15, 1998, and August 21, 1998.
Effective February 13, 1998, UNUM's Board of Directors approved an
expansion of the Company's stock repurchase program by authorizing an
additional 4.6 million shares. At September 30, 1998, approximately 5.3
million shares of common stock remained authorized for repurchase. Through
the first nine months of 1998, UNUM acquired approximately 1.3 million
shares of its common stock in the open market at an aggregate cost of $65.0
million.
NOTE 4. 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 September 30, 1998.March 31, 1999. 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.
NOTE 4. NOTES PAYABLE
- ----------------------
On December 29, 1993,4, 1997, UNUM filedborrowed [British pound] 100 million ($168.3 million)
through a suitprivate placement with an investor in the United States District CourtKingdom. Under
the terms of the agreement, the investor exercised its right to redeem the
private placement on April 13, 1999, at par value. UNUM issued commercial
paper to meet its immediate needs and is currently evaluating various
financing alternatives to replace this financing.
NOTE 5. REINSURANCE BUSINESSES
- -------------------------------
During first quarter 1999, UNUM recognized a pretax charge relating to its
reinsurance businesses of $101.1 million. The charge includes $45.5 million
related to the Lloyd's of London managed and non-managed syndicates.
Included in the $45.5 million is $44.0 million related to UNUM's risk
participation in various Lloyd's of London syndicates, which primarily
consists of the recognition of estimated losses for all open syndicate years.
The remaining $1.5 million represents a reduction of profit commissions
related to the reinsurance management company operations. The charge also
includes a reserve increase of $28.6 million for expected ultimate losses in
certain reinsurance pools in which UNUM participates and a $27.0 million
write-down to recognize goodwill impairment on UNUM's reinsurance management
company. Based upon the poor results to date and revisions to future expected
earnings from these businesses, UNUM determined that the goodwill associated
with the reinsurance management company was not recoverable when measured
using the estimated future undiscounted cash flows. The impairment
represents the difference between the carrying value of the reinsurance
management company and the estimated fair value using both an earnings
valuation model and a discounted free cash flow valuation model. A portion
of these losses does not receive a tax benefit, which unfavorably impacted
UNUM's effective tax rate in first quarter 1999.
The impact of the charge to UNUM in first quarter 1999 was a $72.6 million
increase in benefits to policyholders, of which $56.1 million was reflected
in the Special Risk Insurance segment and $16.5 million was reflected in
the Disability Insurance segment, a $27.0 million increase in other
operating expenses and a $1.5 million reduction in fee income reflected in
the Special Risk Insurance segment. On an after-tax basis the charge
reduced net income by $88.0 million for first quarter 1999.
NOTE 6. ACCOUNTING PRONOUNCEMENT ADOPTED
- -----------------------------------------
Effective January 1, 1999, UNUM adopted Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," which provided guidance on accounting for the Districtrecognition
and measurement of Maine, seekingliabilities for guaranty funds and other insurance-
related assessments. The adoption of SOP 97-3 did not have a federal income tax refund. The suit
was basedmaterial
effect 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 conversionUNUM's results of Union Mutual Life Insurance Company to a stock
company. UNUM fully paid, and provided for in prior years'operations or 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 5. DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------
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 Financial Accounting Standards ("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.
To hedge the anticipated issuance of long-term debt, UNUM had interest rate
forward contracts with notional amounts of $150 million open at September
30, 1998. Accordingly, any gain or loss associated with these contracts
will be deferred and recognized as an adjustment to the carrying amount of
the underlying liability when the hedged transaction occurs.position.
NOTE 6.7. SEGMENT INFORMATION
- ----------------------------
Summarized financial information for the four business segments and Corporate is
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
(Dollars in millions) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
REVENUES
Disability Insurance $ 677.8 $ 609.3 $1,985.2 $1,743.4
Special Risk Insurance 327.6 262.0 955.7 746.9
Colonial Products 157.3 147.3 466.4 437.9
Retirement Products 15.9 24.9 50.8 163.4
Corporate 0.9 1.7 2.5 5.1
- ------------------------------------------------------------------------------
Total revenues $1,179.5 $1,045.2 $3,460.6 $3,096.7
==============================================================================
INCOME (LOSS) BEFORE INCOME TAXES
Disability Insurance $ 91.4 $ 81.7 $ 269.3 $ 232.8
Special Risk Insurance 43.8 31.4 120.2 87.2
Colonial Products 28.0 26.3 78.9 73.0
Retirement Products 1.1 3.6 1.3 73.5
Corporate (14.2) (11.6) (43.8) (37.0)
- ------------------------------------------------------------------------------
Total income before income taxes 150.1 131.4 425.9 429.5
Income taxes 45.7 39.9 129.3 135.4
- ------------------------------------------------------------------------------
Net income $ 104.4 $ 91.5 $ 296.6 $ 294.1
==============================================================================
September 30, December 31,
(Dollars in millions) 1998 1997
- ------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Disability Insurance $ 9,348.4 $ 8,546.6
Special Risk Insurance 2,348.5 1,821.6
Colonial Products 1,513.6 1,334.7
Retirement Products 986.8 1,115.9
Corporate 356.0 254.0
Individual Participating Life and Annuity 377.3 367.3
- ------------------------------------------------------------------------------
Total assets $14,930.6 $13,440.1
==============================================================================
Summarized financial information for the four reportable operating segments
and Corporate is as follows:
Three Months Ended
March 31,
------------------
(Dollars in millions) 1999 1998
- ----------------------------------------------------------------------------
PREMIUMS
Disability Insurance $ 603.2 $ 506.7
Special Risk Insurance 340.5 273.2
Colonial Products 140.7 137.5
Retirement Products 0.7 1.0
- ----------------------------------------------------------------------------
Total premiums $ 1,085.1 $ 918.4
============================================================================
PRETAX OPERATING INCOME (LOSS)
Disability Insurance $ 97.8 $ 84.9
Special Risk Insurance 39.5 36.1
Colonial Products 26.2 24.0
Retirement Products 0.3 0.5
Corporate (17.4) (14.2)
- ----------------------------------------------------------------------------
Total pretax operating income 146.4 131.3
Taxes on pretax operating income 45.0 39.9
- ----------------------------------------------------------------------------
Operating income $ 101.4 $ 91.4
============================================================================
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:
Three Months Ended
March 31,
------------------
(Dollars in millions) 1999 1998
- ----------------------------------------------------------------------------
Income before income taxes:
Total pretax operating income for reportable
segments and Corporate $146.4 $131.3
Realized investment gains (a) 3.2 3.1
Special item:
Charge for reinsurance businesses (a) (101.1) --
- ----------------------------------------------------------------------------
Total consolidated income before income taxes $ 48.5 $134.4
============================================================================
(a) Management's evaluation of segment performance excludes realized investment
gains (losses) and special items. See Note 5 "Reinsurance Businesses" for a
description of the first quarter 1999 special item.
NOTE 8. PROPOSED MERGER WITH PROVIDENT AND PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
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. The merger is subject to regulatory and UNUM stockholder and
Provident stockholder approval.
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 March 31, 1999, and for the three-month
periods ended March 31, 1999 and March 31, 1998, respectively. 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 March 31, 1999.
The unaudited pro forma combined condensed financial statements as of March 31,
1999, and for the three-month periods ended March 31, 1999 and March 31, 1998,
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 or on an earlier date if required by
generally accepted accounting principles, it is expected that UNUMProvident
will record an expense for merger related costs of approximately $139 million
($109 million net of income taxes) and an expense related to the early
retirement offer to employees of approximately $94 million ($66 million net of
income taxes). The estimated expenses related to the merger include amounts
for severance and related costs, exit costs for duplicate facilities and asset
abandonments, and investment banking, legal and accounting fees. The estimated
expenses related to the merger and to the early retirement offer to employees
have not been reflected in the pro forma balance sheet, statements of income,
and related per share calculations. The estimated expenses related to the
merger and the early retirement offer represent management's best estimates
based on available information at this time. Actual charges may differ from
these estimates.
The unaudited pro forma combined condensed 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 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)
Three Months Ended
March 31,
------------------
(Dollars in millions, except per common share data) 1999 1998
- -----------------------------------------------------------------------------
REVENUES
Premium income $1,704.2 $1,505.6
Net investment income 499.6 525.1
Net realized investment gains 7.2 9.3
Other income 80.8 75.1
- -----------------------------------------------------------------------------
Total revenues 2,291.8 2,115.1
BENEFITS AND EXPENSES
Policyholder benefits 1,524.8 1,326.8
Commissions 242.5 233.4
Operating expenses 403.7 364.2
Increase in deferred policy acquisition costs (118.0) (100.8)
Amortization of value of business acquired and goodwill 42.7 16.9
Interest and debt expense 32.9 27.3
- -----------------------------------------------------------------------------
Total benefits and expenses 2,128.6 1,867.8
- -----------------------------------------------------------------------------
Income before income taxes 163.2 247.3
Income taxes 73.9 82.7
- -----------------------------------------------------------------------------
Net income 89.3 164.6
Preferred stock dividends -- 1.9
- -----------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 89.3 $ 162.7
=============================================================================
NET INCOME PER COMMON SHARE:
Basic $ 0.38 $ 0.69
Diluted $ 0.37 $ 0.67
=============================================================================
Average shares outstanding - basic (a) 237.8 236.6
Average shares outstanding - diluted (a) 242.3 242.6
=============================================================================
(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.
UNUM CORPORATION AND PROVIDENT COMPANIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1999
UNUM/Provident
Historical Pro Forma Pro Forma
UNUM Provident Adjustments Combined
---- --------- ----------- --------
(Dollars in millions)
- --------------------------------------------------------------------------------
ASSETS
Invested assets $ 9,824.9 $16,901.2 $ -- $26,726.1
Reinsurance receivables 1,806.5 3,057.4 -- 4,863.9
All other assets 3,714.5 2,413.2 -- 6,127.7
Separate account assets 35.3 388.2 -- 423.5
- --------------------------------------------------------------------------------
Total assets $15,381.2 $22,760.0 $ -- $38,141.2
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities, accruals
and unearned premiums $ 9,449.9 $14,456.7 $ 230.0 (b) $24,136.6
Other policyholders' funds 871.6 2,980.1 -- 3,851.7
All other liabilities 2,357.6 1,411.5 (80.0) (b) 3,689.1
Separate account liabilities 35.3 388.2 -- 423.5
- --------------------------------------------------------------------------------
Total liabilities 12,714.4 19,236.5 150.0 32,100.9
Company Obligated Mandatorily
Redeemable
Preferred Securities of
Subsidiary Trust Holding
Soley Junior Subordinated Debt
Securities of the Company -- 300.0 -- 300.0
Common stock 20.0 135.9 (132.1) (c) 23.8
Additional paid-in capital 1,153.5 764.0 (948.0) (c) 969.5
Accumulated other
comprehensive income 150.6 438.2 -- 588.8
Retained earnings 2,439.9 1,894.6 (150.0) (b) 4,184.5
Treasury stock (1,080.1) (9.2) 1,080.1 (c) (9.2)
Restricted stock deferred
compensation (17.1) -- -- (17.1)
- --------------------------------------------------------------------------------
Total stockholders' equity 2,666.8 3,223.5 (150.0) 5,740.3
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $15,381.2 $22,760.0 $ -- $38,141.2
================================================================================
(b) UNUM and Provident are in the process of reviewing their accounting policies
and financial statement classifications. 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. It has been determined that
Provident's process and assumptions are more appropriate in the context of a
combined entity. Upon completion of the merger, UNUM will reduce the rates
used to discount unpaid claims reserves for group long term disability,
individual disability and the disability businesses of UNUM Limited. The
preliminary estimates of discount rate reductions will result in an
estimated increase to UNUM's unpaid claims reserves upon consummation of the
merger of approximately $230 million ($150 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.
(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 98.8 million shares issued to replace the
135.4 million shares of Provident common stock held by Provident
stockholders on March 31, 1999, and the issuance to UNUM stockholders of
139.1 million shares of UNUMProvident common stock pursuant to the merger
(calculated by multiplying the number of shares of UNUM common stock
outstanding at March 31, 1999, of 139.1 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.
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
--------------------------------------
To the Board of Directors and Stockholders
UNUM Corporation
We have reviewed the accompanying consolidated balance sheet of UNUM Corporation
and subsidiaries as of September 30, 1998,March 31, 1999, and the related consolidated statements
of income, and comprehensive income for the three month and nine month
periods ended September 30, 1998, and 1997, and consolidated statements of cash flows for the nine monththree-month periods then ended.ended
March 31, 1999 and 1998. These financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
/s//S/ PRICEWATERHOUSECOOPERS LLP
Portland, Maine
October 21, 1998April 27, 1999
UNUM Corporation and Subsidiaries
Form 10-Q
September 30, 1998March 31, 1999
ITEM 2.7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Financial
Statements (Unaudited) and Notes to Consolidated Financial Statements
(Unaudited) included elsewhere in the Form 10-Q and the 1997 Form 10-K
included in the 1997 Annual Report to stockholders of UNUM Corporation and
subsidiaries ("UNUM").
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
are 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, areis or may be considered as forward-looking; for example, disclosures
regarding "Quantitative and Qualitative Information
About Market Risk," the "Year 2000 Issue"Date Conversion" and claims experiencereserves 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-lookingforward-
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 which are beyond UNUM's control or,
with respect to future business decisions, are subject to change.
InherentCertain risks and uncertainties are inherent in UNUM's business are certain risks and uncertainties.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 financial 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 net income. Theearnings. 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.
CONSOLIDATED OVERVIEW
Net income for the quarter ended September 30, 1998,March 31, 1999, was $104.4$15.5 million, or
$0.74 per diluted share, as compared
with net income of $91.5$93.5 million or
$0.64 per diluted share, for the same quarter in 1997. For the nine months
ended September 30, 1998, net income was $296.6 million, or $2.101998. Diluted earnings
per diluted share as compared with $294.1 million, or $2.05 per diluted share,were $0.11 for the same periodfirst quarter 1999 versus $0.66 in 1997. Total revenuefirst quarter 1998.
Revenues for third quarter 1998 and 1997
was $1,179.5 million and $1,045.2 million, respectively. For the nine
months ended September 30, 1998, total revenue was $3,460.6 million
compared with $3,096.7UNUM were $1,303.4 million for the same period in 1997.first quarter 1999 and $1,121.5
million for first quarter 1998.
A comparison of net income is impacted by the inclusion of realized investment
gains or losses(losses) and a special item that occurred in the first second and third quarter of 1997.1999. 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 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 (Unaudited) and Notes to Consolidated Financial Statements
(Unaudited) included elsewhere in the Form 10-Q and the 1998 Form 10-K of UNUM
Corporation and subsidiaries ("UNUM").
The following table summarizes pretax operating income (loss) for the four
businessoperating segments and Corporate for the three months ended March 31, 1999, and
nine
months ended September 30, 1998, and 1997, and is followed by a discussion of the 1997first quarter 1999 special item and
a reconciliation of income (loss) before income taxes to pretax operating income
(loss).
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
(Dollars in millions) 1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------
SUMMARY OF PRETAX OPERATING
INCOME (LOSS)
Disability Insurance Segment $ 86.2 $ 80.1 7.6% $259.1 $234.7 10.4%
Special Risk Insurance Segment 43.0 30.8 39.6 118.8 86.3 37.7
Colonial Products Segment 27.7 26.1 6.1 78.2 73.4 6.5
Retirement Products Segment 0.2 1.5 (86.7) 1.0 4.7 (78.7)
Corporate (14.2) (11.5) 23.5 (43.8) (36.2) 21.0
- --------------------------------------------------------------------------------
Total pretax operating
income $142.9 $127.0 12.5% $413.3 $362.9 13.9%Three Months Ended
March 31,
-------------------------
(Dollars in millions) 1999 1998 Change
- --------------------------------------------------------------------------------
SUMMARY OF PRETAX OPERATING INCOME (LOSS)
Disability Insurance Segment $ 97.8 $ 84.9 15.2%
Special Risk Insurance Segment 39.5 36.1 9.4
Colonial Products Segment 26.2 24.0 9.2
Retirement Products Segment 0.3 0.5 (0.4)
Corporate (17.4) (14.2) 22.5
- --------------------------------------------------------------------------------
Total pretax operating income $146.4 $131.3 11.5%
================================================================================
UNUM reported increased pretax operating income for the three months and
nine months ended September 30, 1998,March
31, 1999, as compared with the same periodsperiod in 1997.1998. The increase was primarily
attributable to improvedimprovements in pretax operating income for the Disability
Insurance and Special Risk Insurance and Disability Insurance segments,
primarily attributable to solid premiumsegments. Premium growth in each segment.driven by strong
sales, was the primary contributor for both segments' improved first quarter
operating results, as compared with one year ago. See the segment discussions
that follow for a more detailed analysis of operating results.
SPECIAL ITEM IN FIRST SECOND AND THIRD QUARTER 19971999
- --------------------------------------------------------------------------------------
During first quarter 1999, UNUM Life Insurance Companyrecognized a pretax charge relating to its
reinsurance businesses of America$101.1 million. The charge includes $45.5 million
related to the Lloyd's of London managed and Firstnon-managed syndicates.
Included in the $45.5 million is $44.0 million related to UNUM's risk
participation in various Lloyd's of London syndicates, which primarily
consists of the recognition of estimated losses for all open syndicate years.
The remaining $1.5 million represents a reduction of profit commissions related
to the reinsurance management company operations. The charge also includes a
reserve increase of $28.6 million for expected ultimate losses in certain
reinsurance pools in which UNUM Life Insurance
Company closedparticipates and a $27.0 million write-down
to recognize goodwill impairment on UNUM's reinsurance management company.
Based upon the salepoor results to date and revisions to future expected earnings
from these businesses, UNUM determined that the goodwill associated with the
reinsurance management company was not recoverable when measured using the
estimated future undiscounted cash flows. The impairment represents the
difference between the carrying value of their respective tax-sheltered annuity ("TSA")
businessesthe reinsurance management company
and the estimated fair value using both an earnings valuation model and a
discounted free cash flow valuation model. A portion of these losses does
not receive a tax benefit, which unfavorably impacted UNUM's effective tax
rate in first quarter 1999.
The impact of the charge 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 resultedUNUM in first quarter 1999 was a deferred pretax
gain,$72.6 million
increase in benefits to policyholders, of which $1.7$56.1 million and $69.1 million were recognized in income, as
fees and other incomewas reflected in
the Retirement ProductsSpecial Risk Insurance segment duringand $16.5 million was reflected in the
three
monthsDisability Insurance segment, a $27.0 million increase in other operating
expenses and nine months ended September 30, 1997, respectively.
a $1.5 million reduction in fee income reflected in the Special
Risk Insurance segment.
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 businessoperating segments and Corporate for the
three months ended March 31, 1999, and nine months ended September 30, 1998, and 1997:1998:
Disability Special Risk Colonial Retirement Consolidated
(Dollars in millions) Insurance Insurance Products Products Corporate UNUM
(Dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1998:March 31, 1999:
- ------------------------------------------------------------------------
Income (loss) before
income taxes $81.2 $(45.0) $26.9 $ 91.42.8 $(17.4) $ 43.8 $28.0 $ 1.1 $(14.2) $150.148.5
Exclude realized
investment gains (5.2) (0.8) (0.3) (0.9)(gains) losses 0.1 (0.1) (0.7) (2.5) -- (7.2)(3.2)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
81.3 (45.1) 26.2 0.3 (17.4) 45.3
Special item:
Charge for reinsurance
businesses 16.5 84.6 -- -- -- 101.1
- ---------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
(LOSS) $97.8 $ 86.239.5 $26.2 $ 43.0 $27.7 $ 0.2 $(14.2) $142.9
==================================================================================================0.3 $(17.4) $146.4
===================================================================================================
Three Months Ended September 30, 1997:March 31, 1998:
- ------------------------------------------------------------------------
Income (loss) before
income taxes $88.1 $ 81.7 $ 31.4 $26.3 $ 3.6 $(11.6) $131.436.2 $24.4 $(0.1) $(14.2) $134.4
Exclude realized investment
(gains) losses (1.6) (0.6) (0.2)(3.2) (0.1) (0.4) 0.1 (2.7)0.6 -- (3.1)
- --------------------------------------------------------------------------------------------------
80.1 30.8 26.1 3.2 (11.5) 128.7
Special item:
TSA deferred gain
recognition -- -- -- (1.7) -- (1.7)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
(LOSS) $84.9 $ 80.136.1 $24.0 $ 30.8 $26.1 $ 1.5 $(11.5) $127.0
==================================================================================================
Nine Months Ended September 30, 1998:
- -------------------------------------
Income (loss) before
income taxes $269.3 $120.2 $78.9 $ 1.3 $(43.8) $425.9
Exclude realized investment
gains (10.2) (1.4) (0.7) (0.3) -- (12.6)
- --------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
(LOSS) $259.1 $118.8 $78.2 $ 1.0 $(43.8) $413.3
==================================================================================================
Nine Months Ended September 30, 1997:
- -------------------------------------
Income (loss) before
income taxes $232.8 $ 87.2 $73.0 $73.5 $(37.0) $429.5
Exclude realized investment
(gains) losses 1.9 (0.9) 0.4 0.3 0.8 2.5
- --------------------------------------------------------------------------------------------------
234.7 86.3 73.4 73.8 (36.2) 432.0
Special item:
TSA deferred gain
recognition -- -- -- (69.1) -- (69.1)
- --------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
(LOSS) $234.7 $ 86.3 $73.4 $ 4.7 $(36.2) $362.9
==================================================================================================0.5 $(14.2) $131.3
===================================================================================================
PREMIUMS:
- ---------
Premiums for the three months and nine months ended September 30, 1998, and
1997, are summarized by segment in the following table.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------------
(Dollars in millions) 1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------
Disability Insurance
Group Long Term
Disability $355.6 $314.3 13.1% $1,032.5 $ 900.9 14.6%
Group Short Term
Disability 71.0 52.5 35.2 200.8 149.3 34.5
UNUM Limited 43.7 35.8 22.1 122.1 109.4 11.6
Individual Products 33.4 24.6 35.8 93.6 69.7 34.3
Other Disability
Insurance 37.8 41.1 (8.0) 133.5 112.6 18.6
- --------------------------------------------------------------------------------
Total 541.5 468.3 15.6 1,582.5 1,341.9 17.9
Special Risk Insurance
Group Life 163.4 134.1 21.8 477.0 386.2 23.5
Other Special Risk
Products 132.8 99.9 32.9 381.3 277.5 37.4
- --------------------------------------------------------------------------------
Total 296.2 234.0 26.6 858.3 663.7 29.3
Colonial Products 138.6 130.8 6.0 414.1 392.2 5.6
Retirement Products 0.9 0.7 28.6 2.9 5.4 (46.3)
- --------------------------------------------------------------------------------
Total premiums $977.2 $833.8 17.2% $2,857.8 $2,403.2 18.9%
================================================================================
A new product grouping, Individual Products, as shown in the above 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. Additionally, the
traditional, fixed price, non-cancellable individual disability ("non-
cancellable ID") business is now reported in the Other Disability
Insurance line.
Claim block acquisitions, which generated one-time premium in the
Disability Insurance and Special Risk Insurance segments for the periods
presented, are summarized in the table below. Management intends to pursue
additional claim block acquisitions in the future.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in millions) 1998 1997 1998 1997
----------------------------------------------------------------------
Disability Insurance
Group Long Term Disability $ 9.8 $10.0 $23.2 $13.8
UNUM Limited 0.1 1.4 0.3 2.6
Other Disability Insurance -- 2.1 29.8 2.1
Special Risk Insurance
Group Life -- 0.1 -- 0.1
Other Special Risk Products -- -- 5.1 --
- -----------------------------------------------------------------------
Total $ 9.9 $13.6 $58.4 $18.6
=======================================================================
PRETAX OPERATING INCOME (LOSS) BY SEGMENT:SEGMENT
- -----------------------------------------------------------------------------------
The following sections discuss the results of the four businessoperating segments and
Corporate for the three months ended March 31, 1999, and nine months ended September 30,
1998, and 1997.1998. Within these
businessoperating segment discussions, reference is made to pretax operating income
(loss), which excludes realized investment gains (losses) and the special item
previously defined. The summary financial information provided prior to each
segment discussion has been adjusted to exclude the impact of the special item
from the related income statement line items, consistent with the discussion of
results on a pretax operating income basis.
UNUM Corporation and Subsidiaries
Form 10-Q
March 31, 1999
DISABILITY INSURANCE SEGMENT
ForThree Months Ended
March 31,
------------------
(Dollars in millions) 1999 1998
- ------------------------------------------------------------------------------
REVENUES
Premiums
Group LTD $392.7 $342.4
Group STD 82.0 63.0
UNUM Limited 46.7 38.9
Individual Products 41.2 29.4
Other Disability Insurance 40.6 33.0
- ------------------------------------------------------------------------------
Total premiums (a) 603.2 506.7
Investment income 125.2 117.0
Fees and other income 16.6 12.9
- ------------------------------------------------------------------------------
Total operating revenues 745.0 636.6
BENEFITS AND EXPENSES
Benefits to policyholders 494.4 413.0
Operating expenses 137.3 119.2
Commissions 58.6 49.2
Increase in deferred
policy acquisition costs (43.1) (29.7)
- ------------------------------------------------------------------------------
Total operating benefits and expenses 647.2 551.7
- ------------------------------------------------------------------------------
PRETAX OPERATING INCOME (b) $ 97.8 $ 84.9
==============================================================================
SUPPLEMENTAL INFORMATION (c):
Sales (annualized new premiums)
Group LTD $ 65.2 $ 57.6
Group STD $ 27.6 $ 23.7
UNUM Limited $ 11.5 $ 3.8
Long Term Care $ 11.5 $ 4.7
Lifelong Disability Protection $ 3.7 $ 2.3
Benefit ratio (% of premiums) 82.0% 81.5%
Operating expense ratio
(% of premiums) 22.8% 23.5%
==============================================================================
(a) One-time premiums, which are generated by claim block acquisitions, for the
three months ended March 31, 1999, and nine months ended September 30, 1998, were $21.0 million and $12.8
million, respectively, for group long term disability ("group LTD").
Management intends to pursue additional claim block acquisitions in the
future.
(b) For the definition of pretax operating income see the Consolidated Overview.
(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 Disability Insurance segment reported increased pretax operating income for
the three months ended March 31, 1999, as compared with the same periodsperiod in
1997.1998. The increase was primarily attributable to solid premium growth across the segmentin group
LTD and favorable expense
growth for group longshort term disability ("group LTD"STD") and UNUM Limited
businesses. Partially offsetting these improvements were higherincreased investment
income for the segment. Higher benefit ratios in the major productmost lines and unfavorable expense growth in several
other product lines.
During 1998, market interest rates have fallen to historical 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, 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.
Group LTD's pretax operating income increased for the three months and nine
months ended September 30, 1998, as compared with the same periods in 1997,
primarily driven by solid premium growth and a favorable expense ratio.
The premium growth improvement was primarily the result of strong
persistency, reflecting positive results from customer service actions and
the impact from continuing sales growth during recent quarters. Partially
offsettingpartially offset these favorable factors was a higher benefit ratio, largely the
result of increased levels of claims incidence, an increase in the
average size of claims and a longer duration of claims compared with the same
periods in 1997.factors.
As discussed in the section titled Forward-Looking Information, certain risks
and uncertainties are inherent in UNUM's business. Components of claims
experience, including but not limited to, incidence levels and claims duration,
may continue for some period of time at or above the higher levels experienced
in 1998. Therefore, management continues to monitor claims experience in group LTD and
responds to changes by periodically adjusting prices, refining underwriting
guidelines, changing product features and strengthening risk management policies
and procedures. In addition, management will continue to evaluate the impacts
of the proposed merger with Provident on disability claims experience and the
assumptions around expected disability claims duration. The $59.4 million
reserve increase in fourth quarter 1998 assumed that claim durations would
increase for a relatively short period of time due to the planning for and
implementation of the integration of the UNUM and Provident claims operations.
The reserve increase assumed, and management expects, that the increase in
claims duration due to the integration activities will cease at the end of
1999. During the first quarter of 1999 the claims integration planning
activities progressed as anticipated, and management expects that second
quarter progress will be consistent with the assumptions made in connection
with the reserve increase. If these integration activities take longer than
expected to implement or if they result in unforeseen difficulties, claims
durations could continue to increase and income could be adversely affected.
During 1998, market interest rates fell to historically low levels negatively
affecting investment returns. Management expects the reserve discount rate for
certain disability lines will continue to decline due primarily to the impact of
the declining interest rate environment resulting in higher claim liabilities.
Management expects to price new business and reprice existing business, at
contract renewal dates, in an attempt to mitigate the effect on new claim
liabilities from declining interest rates. However, given the competitive
market conditions for UNUM's disability products, it is uncertain whether
pricing actions can mitigate the entire effect of interest rate declines. In
addition, as previously disclosed in Note 8 "Proposed Merger with Provident and
Pro Forma Combined Condensed Financial Statements," management expects to
lower the discount rate used to calculate certain disability claim reserves, to
conform with Provident's process and assumptions, which are considered more
appropriate in the context of the combined entity resulting from the proposed
merger with Provident.
Pretax operating income for group short term disability ("group STD")LTD increased for the three months ended March
31, 1999, as compared with the same period in 1998, primarily resulting from
improved premium growth driven by strong sales, and nineincreased investment income.
Partially offsetting the increase was a higher benefit ratio as compared with
first quarter 1998, largely due to increased levels of claims incidence and a
longer duration of claims. If the impact of merger related claim operations
integration activities on claim durations had not been anticipated at
December 31, 1998, first quarter 1999 pretax operating earnings would have been
negatively impacted by approximately $14 million. Actual claim resolutions in
first quarter 1999 were generally as expected when the fourth quarter 1998
disability claims reserve increase was determined.
For the three months ended September 30, 1998,March 31, 1999, group STD's pretax operating income
increased as compared with the same periodsperiod in 1997. Additional1998. The increase was primarily
attributable to significant premium growth resultingof 30.2% and a favorable operating
expense ratio. Premium growth resulted largely from recordthe impact of strong sales
and strong persistency continuedresults, which reflect management's continuing efforts to be the
major contributor of the improved pretax operating income, reflecting
UNUM's continuing emphasis on cross-sellingcross-sell group STD
products with other UNUM group products as well as increasing large case sales. Partially
offsetting the increase was ansold by UNUM. An unfavorable change in the
benefit ratio, primarily resulting from an increase inlarger size cases, higher claims incidence levels
and larger size
cases.
UNUM Limited's pretax operating income declined for the three months and
nine months ended September 30, 1998, as compared with the same periods in
1997. The decline was primarily due to an increased benefit ratio
generally resulting from aslightly longer duration of claims. Favorable expense
growthclaims, partially offset this decline.
Individual Products showed improvedthe increase.
UNUM Limited experienced increased pretax operating income for the three month and nine month periodsmonths
ended September 30, 1998, in comparisonMarch 31, 1999, as compared with first quarter 1998. A favorable benefit
ratio, largely resulting from higher claim recoveries, was the same periods in the prior year. Favorable results were largely a
resultprimary driver of
the significant increase in pretax operating income.
UNUM Corporation and Subsidiaries
Form 10-Q
March 31, 1999
SPECIAL RISK INSURANCE SEGMENT
Three Months Ended
March 31,
------------------
(Dollars in millions) 1999 1998
- ------------------------------------------------------------------------------
REVENUES
Premiums
Group life $189.6 $154.4
Other special risk products 150.9 118.8
- ------------------------------------------------------------------------------
Total premiums driven by strong340.5 273.2
Investment income 21.3 19.0
Fees and other income 20.1 15.9
- ------------------------------------------------------------------------------
Total operating revenues 381.9 308.1
BENEFITS AND EXPENSES
Benefits to policyholders 239.5 191.9
Operating expenses 74.3 59.5
Commissions 74.9 61.3
Increase in deferred
policy acquisition costs (46.3) (40.7)
- ------------------------------------------------------------------------------
Total operating benefits and expenses 342.4 272.0
- ------------------------------------------------------------------------------
PRETAX OPERATING INCOME (a) $ 39.5 $ 36.1
==============================================================================
SUPPLEMENTAL INFORMATION (b):
Group life sales
growth in recent quarters, partially offset by an unfavorable benefit(annualized new premiums) $ 43.9 $ 31.3
Benefit ratio change.
The non-cancellable ID business contributed to(% of premiums) 70.3% 70.2%
Operating expense ratio
(% of premiums) 21.8% 21.8%
==============================================================================
(a) For the segment's increaseddefinition of pretax operating income forsee the nine months ended September 30, 1998,
primarily from a favorable benefit ratio.
SPECIAL RISK INSURANCE SEGMENTConsolidated Overview.
(b) 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 Special Risk Insurance segment reported increased pretax operating income
for the third quarter of 1998,ended March 31, 1999, as compared with the same quarterperiod in 1997. Continuing1998.
The increase was primarily due to premium growth across most major product lines, resulting
fromdriven by strong sales and favorable persistency, coupled with lower benefit
ratios in several product lines were the primary reasons for the
improvement. In addition, the increase was attributable to improved
investment income for the segment, additional fee income primarily from the
reinsurance underwriting management operations and lower expense ratios for
certain product lines. Favorable factors were partially offset by
increased benefit ratios in certain other product lines.
During the nine months ended September 30, 1998, pretax operating income
for the segment was favorably affected by premium growth for the segment,
improved benefit ratios in the
group life product lines and increased feeinvestment income fromfor the segment. The
increase was partially offset by unfavorable results in the reinsurance
underwriting management operations. Also
contributingbusinesses. Due to the favorable results were additional investment income
across most product linesnature of the risks underwritten and a lower expense ratiothe relative size
of the blocks of businesses, several of the products in the group life
product line, as comparedSpecial Risk
Insurance segment can exhibit claims variability.
During first quarter 1999, UNUM conducted a comprehensive strategic review of
its reinsurance businesses to determine the appropriateness of their fit
within the context of the UNUMProvident merged entity. These businesses
include the reinsurance management operations and the risk assumption
(reinsurance pool participation, direct reinsurance and Lloyd's of London
syndicate participation). In April 1999, UNUM completed the comprehensive
strategic review of its reinsurance businesses. UNUM concluded that these
businesses are not solidly aligned with UNUM's strength in the same perioddisability
insurance market and decided to exit these businesses. The exit from these
businesses may be accomplished through a combination of a sale, reinsurance
and placing certain components of the business in 1997. Partially
offsetting these factors were increased benefitrun-off.
UNUM Corporation and expense ratios in
certain other product lines.Subsidiaries
Form 10-Q
March 31, 1999
COLONIAL PRODUCTS SEGMENT
DuringThree Months Ended
March 31,
------------------
(Dollars in millions) 1999 1998
- ------------------------------------------------------------------------------
REVENUES
Premiums $ 140.7 $ 137.5
Investment income 17.3 15.3
Fees and other income 0.2 1.6
- ------------------------------------------------------------------------------
Total operating revenues 158.2 154.4
BENEFITS AND EXPENSES
Benefits to policyholders 68.9 68.7
Interest credited 4.3 3.6
Operating expenses 36.5 35.4
Commissions 28.5 32.2
Increase in deferred
policy acquisition costs (6.2) (9.5)
- ------------------------------------------------------------------------------
Total operating benefits and expenses 132.0 130.4
- ------------------------------------------------------------------------------
PRETAX OPERATING INCOME (a) $ 26.2 $ 24.0
==============================================================================
SUPPLEMENTAL INFORMATION (b):
Sales (annualized
first month's premiums) $ 48.1 $ 41.2
Benefit ratio (% of premiums) 49.0% 50.0%
Operating expense ratio
(% of premiums) 25.9% 25.7%
==============================================================================
(a) For the third quarterdefinition of 1998, pretax operating income see the Consolidated Overview.
(b) 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.
Pretax operating income increased in the Colonial Products segment in first
quarter 1999, as compared with the thirdfirst quarter of 1997.1998. The primary contributorsincrease was due
primarily to the increase werelower benefit ratios in certain product lines and an increase in
investment income across all products and a lower benefit ratio infor the accident, sickness and
disability product line. These favorable factors weresegment, partially offset by aslightly higher
benefit ratiooperating expense ratios across most product lines and increased interest credited in the life product
line, and a higher expense ratio for the segment. Thean increase in interest
income and interest credited is largely due tocredited. In the assumption of an
existing block of worksite-marketed universal life insurance under a
reinsurance agreement Colonial entered intofirst quarter 1999, sales increased in the third quarter of 1998.
For the nine months ended September 30, 1998, the Colonial Products
segment's pretax operating income was favorably affected by increased
investment income across all products and a lower benefit ratio in the
accident, sickness and disability product line as comparedcomparison with the
same period in 1997. A higher benefit ratio1998, however, these sales are not necessarily indicative of the
levels that may be attained in the cancer and life product
lines in addition to an increase in interest credited and higher expense
ratios for the segment partially offset these favorable items. In addition
to the reinsurance agreement described above, Colonial entered into a
similar transaction during the second quarter of 1997 that has contributed
to the increase in investment income and interest credited for the nine
months ended September 30, 1998.
During the three month and nine month periods ended September 30, 1998,
sales in this segment declined in comparison with 1997, which may
negatively affect future premium growth. Infuture. Therefore, management continues its
efforts to improveincrease sales and premium Colonial's management continues to focus on rebuilding its
distribution system through recruiting, trainingthe realignment of the sales
organization and strengtheningthe enhancement of collaborative sales management.across UNUM.
UNUM Corporation and Subsidiaries
Form 10-Q
March 31, 1999
RETIREMENT PRODUCTS SEGMENT
The Retirement Products segment includes products no longer actively marketed by
UNUM. For the three months and nine months ended September 30,
1998, the segment reported decreasedMarch 31, 1999, pretax operating income for
the Retirement Products segment decreased slightly as compared with the same
periodsperiod in 1997.1998. UNUM expects these blocks of business to continue to decline in
size over several years and experience earnings volatility, reflecting their
run-off nature.
CORPORATE
For the three month and nine month periodsmonths ended September 30, 1998,March 31, 1999, as compared with the same periodsperiod in
1997,1998, the increased pretax operating loss in Corporate was due primarily to higherincreased
interest expense and decreased
investment income.due to a higher average debt balance, partially offset by lower
operating expenses.
LITIGATION
Refer to Note 3 "Litigation" for information.
LIQUIDITY AND CAPITAL RESOURCES
UNUM's businesses produce positive cash flows which are invested primarily in
intermediate term, fixed maturity investments intended to reflect the
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.
At September 30, 1998,March 31, 1999, UNUM had $196.1 million and $544.0 million of short-
termshort-term and long-term debt totaling $362.6
million and $598.5 million, respectively. Approximately $356At March 31, 1999, approximately $334
million was available for additional financing under the existing revolving
credit facility and $450$200 million of investment grade debt instruments was
available for issuance under the shelf registration. Relative to the shelf
registration, and as discussed in Footnote 5 "Derivative Financial
Instruments," management anticipates issuing long-term debt. Contingent upon market
conditions and corporate needs, management may issue additional debt or 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.
At September 30, 1998, UNUM had outstanding letters of credit of $150.9 million.$160.6 million at March 31, 1999.
Effective February 13,November 23, 1998, UNUM's Board of Directors approved an
expansion ofrescinded the Company'scompany's
stock repurchase program by authorizing an
additional 4.6 million shares. At September 30, 1998, approximately 5.3
millionas a result of the pending merger agreement with
Provident Companies Inc. As a result, no shares of UNUM common stock remained authorized for repurchase. Throughwere
repurchased during the first ninethree months of 1999. During the first quarter of
1998, UNUM acquired approximately 1.30.7 million shares of its common stock in the
open market at an aggregate cost of $65.0$36.7 million.
RATINGS
Standard & Poor's Corporation ("S&P") has changedOn December 4, 1997, UNUM borrowed [British pound] 100 million ($168.3 million)
through a private placement with an investor in the nameUnited Kingdom. Under the
terms of the agreement, the investor exercised its insurance ratings from "claims-paying ability"right to "financial strength"
ratings. Coincident withredeem the private
placement on April 13, 1999, at par value. UNUM issued commercial paper to meet
its immediate needs and is currently evaluating various financing alternatives
to replace this change, S&P has also changed the keyword
definitions associated with each category. UNUM America, First UNUM and
Colonial retain their "AA" ratings, which are now described as "very
strong" for financial strength versus the previous description of
"excellent" for claims-paying ability.
DERIVATIVES
Refer to Note 5 "Derivative Financial Instruments" for information.
LITIGATION
Refer to Note 4 "Litigation" for information.financing.
YEAR 2000 ISSUEDATE CONVERSION
The following discussion regarding the Year 2000 IssueDate Conversion contains
forward-
lookingforward-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 issue relates to whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. This
inability to recognize the year 2000 may cause systems to process critical
financial and operational information incorrectly. This, in turn, could
cause disruptions of normal business operations, including the inability to
process claims, bill and collect premium, and manage investment activities.
UNUM has a corporate-wide program underway to address the year 2000 issue
relating to its internal computer systems and critical dependencies of our
business including suppliers, business partners, customers, facilities and
telecommunications.
UNUM has determined that it is required to modify or replace significant
portions of its software so its computer systems will properly function
using dates beyond December 31, 1999. Management is utilizing both
internal and external resources to reprogram, or replace, and test the
software for year 2000 compliance. UNUM's program for the year 2000 is
organized into a number of phases for rectifying its internal computer
systems, including assessment, code remediation, testing, and deployment.
As of September 30, 1998,March 31, 1999, UNUM has completed the assessment phase and
essentially completed the code remediation phase for
virtually all its critical and
non-critical systems and for more than 85% of its non-
critical systems. Code remediation of UNUM's critical systems is more than
90% complete with the majority of those remediatedapproximately 95% completing the testing phase.
Greater than 70% of the non-critical systems have been remediated,
with testing currently in progress. Deployment is underway for certainmost critical and non-critical systems. Management expects tosystems as of
March 31, 1999. As previously discussed in UNUM's 1998 Form 10-K,
management has substantially complete the program for its critical systems by December 31, 1998, and
completecompleted all phases for its non-criticalcritical and non-
critical systems, and remaining critical
systemsas of March 31, 1999, continues to expect completion
of all phases by June 30, 1999.
In addition, UNUM is assessing critical external dependencies, including
suppliers, business partners and customers, and non-systems aspectsthe end of the
business such as facilities and telecommunication. As part of this due
diligence program, UNUM has sent year 2000 compliance questionnaires to
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 these plans to
be finalized and ready for implementation in second quarter 1999.
UNUM estimates that total internal (opportunity costs) and external (out-
of-pocket)(out-of-
pocket) costs for addressing the year 2000 issueconversion will range from $70
million to $80 million, which are expensed as incurred. As the majority of costs are internal reallocation of resources, only the external costs are
incremental to UNUM's financial results. As of September 30, 1998,March 31, 1999,
UNUM has incurred approximately $44$62 million in connection with rectifying its internal computer systems.year 2000
program. The costs of the project and the date on which UNUM plans to complete
year 2000 modifications are based on management's best estimates, derived using
numerous assumptions about future events. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those plans.
Failure by UNUM to make the required modifications to existing systems and
conversions to new systems in a timely manner, or failure by third parties
to successfully address year 2000 issues could have a material adverse
effect on UNUM's results of operations, liquidity or capital resources;
however, the potential impact and related costs, if any, are not known at
this time. While management does not anticipate a material adverse effect,
UNUM is developing contingency plans that would allow UNUM to devote its
financial and personnel resources to correct the problem as soon as
possible if UNUM's systems were to be non-compliant. With regard to non-
compliance resulting from third party failure, contingency plans are being
developed, as previously discussed, to attempt to mitigate the extent of
this potential impact.
UNUM Corporation and Subsidiaries
Form 10-Q
September 30, 1998
PART II. OTHER INFORMATIONMarch 31, 1999
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Page
(a) Exhibit Index
12. Statement re: Computation of ratio of earnings to fixed charges. 26
15. Letter re: Unaudited interim financial information. 27
27. Financial Data Schedules
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant with the United States
Securities and
Exchange Commission during the quarter ended September 30, 1998.March 31, 1999.
UNUM Corporation and Subsidiaries
Form 10-Q
September 30, 1998March 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 4, 1998 /S/May 17, 1999 /s/ ROBERT E. BROATCH
-------------------- -----------------------------
Robert E. Broatch
Senior Vice President and
Chief Financial Officer
Date November 4, 1998 /S/May 17, 1999 /s/ JOHN M. LANG, JR.JR
-------------------- -----------------------------------------------------------
John M. Lang, Jr.
Vice President and
Corporate Controller