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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER(FEE REQUIRED)
For the fiscal year ended December 31, 1994 COMMISSION FILE NUMBER 1-9254
UNUM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 01-0405657
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) 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
SECURITIES REGISTERED1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 12(B)13 OR 15(d) OF THE
ACT:SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-9254
UNUM Corporation
(Exact name of registrant as specified in its charter)
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Delaware 01-0405657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2211 Congress Street, Portland, Maine 04122
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 770-2211
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------------------- -------------------------------------------Title of each class Name of each exchange on which registered
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Common stock, $0.10 par value New York Stock Exchange
Pacific Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Pacific Stock Exchange
Preferred stock purchase rights8.8% Junior Subordinated Deferrable Interest New York Stock Exchange
Pacific Stock ExchangeDebentures, Series A, Due 2025
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONESecurities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_[X] No ___[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ][X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 10, 1995,7, 1997, was approximately $3,044,100,000.$5,384,300,000.
As of March 10, 1995, 72,536,3387, 1997, 70,832,485 shares of the registrant's common stock were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Information from the Registrant's proxy statement dated March 28, 1995,for the Annual Meeting of
Shareholders on May 9, 1997, is incorporated by reference into Part III.
Exhibit Index appears on page 76.
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TABLE OF CONTENTS
PART I
ITEM PAGEItem Page
- ---- ----
PART I
1. Business......................................................................................................Business .............................................................................. 1
A. Description of Business...................................................................................Business ............................................................ 1
B. Employee Benefits Segment.................................................................................Disability Insurance Segment ....................................................... 2
C. Related Businesses Segment................................................................................Special Risk Insurance Segment .................................................... 4
D. Colonial Companies Segment................................................................................Products Segment ......................................................... 5
E. Individual Disability Segment.............................................................................Retirement Products Segment ....................................................... 5
F. Retirement Security Segment...............................................................................Investments ......................................................................... 6
G. Other Operations Segment..................................................................................
H. Investments...............................................................................................
I. Risk Management and Reinsurance...........................................................................Reinsurance ................................................... 7
H. Reserves ........................................................................... 8
I. Employees ......................................................................... 8
J. Reserves..................................................................................................Competition ......................................................................... 8
K. Employees.................................................................................................Regulation ........................................................................ 8
L. Competition...............................................................................................
M. Regulation................................................................................................
N. Participation Fund Account................................................................................Account .......................................................... 9
2. Properties....................................................................................................Properties ........................................................................... 10
3. Legal Proceedings.............................................................................................Proceedings ..................................................................... 10
4. Submission of Matters to a Vote of Security Holders...........................................................Holders .................................... 10
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters.....................................Matters ............ 10
6. Selected Financial Data.......................................................................................Data ............................................................... 11
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................Operations 13
8. Financial Statements and Supplementary Data...................................................................Data .......................................... 33
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................Disclosure ... 66
PART III
10. Directors and Executive Officers of the Registrant............................................................Registrant .................................... 66
A. Directors of the Registrant...............................................................................Registrant ......................................................... 66
B. Executive Officers of the Registrant......................................................................Registrant ................................................ 66
11. Executive Compensation........................................................................................Compensation ............................................................... 67
12. Security Ownership of Certain Beneficial Owners and Management................................................Management ........................ 67
13. Certain Relationships and Related Transactions................................................................Transactions ....................................... 67
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................................
Signatures....................................................................................................
Report of Independent Accountants.............................................................................
Report of Independent Auditors................................................................................8-K ..................... 68
Signatures ........................................................................... 69
Index to Financial Statement Schedules........................................................................
Index to Exhibits.............................................................................................Exhibits ..................................................................... 76
PART I
ITEM 1. BUSINESSItem 1--Business
A. DESCRIPTION OF BUSINESSDescription of Business
UNUM Corporation is a Delaware corporation organized in 1985 as an
insurance holding company. UNUM Corporation and subsidiaries ("UNUM") are the
leading providerproviders of group long term disability insurance ("group LTD") in the
United States and the United Kingdom. UNUM is also a major provider of employee
benefits, individual disability insurance and special risk reinsurance. UNUM
also markets long term care and retirement income products.insurance. The operations of the following subsidiaries, as
described below, account for substantially all of UNUM's consolidated assets and
revenues. UNUM Corporation is based in Portland, Maine, and through its
affiliates has operations in North America, the United Kingdom and the Pacific
Rim.
Effective December 31, 1996, UNUM merged Commercial Life Insurance Company
("Commercial Life") into UNUM Life Insurance Company of America ("UNUM America")
to accelerate growth of its special risk business, increase its commitment to
the Association Group disability business, and to improve operating and capital
efficiencies. Following the merger, UNUM America is a leader in special risk
insurance and professional association insurance marketing.
UNUM conducts its operations in the United States through a number of
wholly-owned subsidiaries:subsidiaries including: UNUM Life Insurance Company of America, ("UNUM
America"), a Maine life insurance
company licensed in 49 states and Canada, the leading provider of group
disability insurance in the nation and a provider of employee benefits and long
term care and retirement products;insurance; First UNUM Life Insurance Company ("First UNUM"), a New
York life insurance company; Commercial
Life Insurance Company, a Wisconsin life insurance company and a leader in
special risk insurance and professional association insurance marketing;
Duncanson & Holt, Inc. ("D&H"), a New York
corporation and a leading accident and health reinsurance underwriting manager;
Colonial Companies, Inc. ("Colonial Companies"), a Delaware holding company; and UNUM Holding Company, a Delaware corporation.company
whose wholly-owned subsidiary, Colonial Life & Accident Insurance Company
a wholly-owned subsidiary of Colonial Companies,
Inc.("Colonial"), is thea leader in payroll-deducted voluntary employee benefits
offered to employees at their worksites.worksites; and UNUM Holding Company, a Delaware
corporation. Through UNUM Holding Company, UNUM Corporation also owns UNUM Sales Corporation, a licensed broker-dealer incorporated in
Delaware, and Claims
Service International, Inc., a Delaware corporation, which provides claims
administration services.services, and UNUM Sales Corporation, a Delaware corporation. As
of December 31, 1996, UNUM Sales Corporation is no longer registered as a
licensed broker-dealer coinciding with the sale of UNUM America and First UNUM's
respective group tax-sheltered annuity ("TSA") businesses as discussed below.
UNUM Corporation also holds all of the outstanding capital stock of UNUM
European Holding Company, which is incorporated in the United Kingdom. UNUM's
United Kingdom operations are conducted by UNUM Limited, which is the United
Kingdom's leader in group disability insurance and a wholly-owned subsidiary of
UNUM European Holding Company, and by Duncanson & Holt Europe Ltd., a
wholly-owned subsidiary of Duncanson & Holt, Inc.D&H.
UNUM's Japanese operations are conducted through a wholly-owned subsidiary,
UNUM Japan Accident Insurance Company Limited, ("UNUM Japan"), a Japanese non-life insurance
company, which was established in 1994.
On December 3, 1992,October 1, 1996, UNUM America and Colonial Companies, Inc.First UNUM closed the sale of their
respective TSA businesses to The Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("Colonial"Lincoln"), signed
a definitive merger agreement.both subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
purchase price (ceding commission) at closing was approximately $71 million. The
contracts have initially been reinsured on an indemnity basis. Upon consent of
the TSA contractholders and/or participants, the contracts will be considered
reinsured on an assumption basis, legally releasing UNUM America and First UNUM
from future contractual obligation to the respective contractholders and/or
participants.
On March 26, 1993, UNUM merged with Colonial Class A common stock
shareholders voted to approve the merger.Companies. Under the merger
agreement, UNUM exchanged 0.731 shares of its common stock for each share of
Colonial Companies Class A and Class B common stock outstanding on March 26,
1993. UNUM issued approximately 11.4 million shares of common stock from
treasury in connection with the merger. In addition, outstanding options to
acquire shares of Colonial Companies Class B common stock were converted into
options to acquire shares of UNUM common stock. The merger was accounted for as
a pooling of interests.
To more clearly reflect UNUM's management of its businesses and to more
appropriately group its product portfolios, UNUM reportsbegan reporting its operations,
effective January 1, 1995, principally in sixfour business segments:
Employee
Benefits, Related Businesses,1
Disability Insurance, Special Risk Insurance, Colonial Companies, Individual Disability,Products and Retirement
Security and Other Operations.Products. Corporate includes transactions whichthat are generally non-insurance
related expenses incurred in connection with UNUM's
long-term strategic investment in Japan, and interest expense on corporate borrowings. For comparative purposes,
1994 information was previously restated to reflect reporting in these segments.
Refer to Item 7 and Item 8 (Note 16) for more information.
B. EMPLOYEE BENEFITS SEGMENTDisability Insurance Segment
The Employee BenefitsDisability Insurance segment, which in 19941996 accounted for 47.3%59.0% of
UNUM's revenues and 129.8%63.0% of its income before income taxes, markets a range ofincludes disability
products offered in North America, the United Kingdom and Japan including: group
LTD, group short term disability ("group lifeSTD"), individual disability,
Association Group disability, disability reinsurance operations and other specialtylong term
care insurance.
UNUM America and First UNUM:
UNUM America and First UNUM market their group and individual insurance
products, which are included in the Disability Insurance and Special Risk
Insurance segments, through a network of 35 offices in the United States and
Canada which utilize brokers to employers.distribute these products. As of December 31,
1996, these branch offices were organized into five regions and were staffed
with approximately 870 management, sales, service and administrative personnel.
Group Long Term Disability
UNUM America and First UNUM's group LTD product is the Employee BenefitsDisability Insurance
segment's principal product. UNUM targetsAmerica and First UNUM target sales of group
LTD to executive, administrative and management personnel, and other
professionals.professionals, such as doctors, attorneys, accountants and engineers. Since
1976, UNUM hasAmerica and First UNUM combined have been the nation'sUnited States' leading
provider of group LTD according to EMPLOYEE BENEFIT PLAN REVIEW, a recognized
industry publication.
Group LTD provides employees with insurance coverage for loss of income in
the event of inability to work due to sickness or injury. Most of these policies begin
providing benefits following 9090- or 180 day180-day waiting periods and continue
providing benefits until the employee reaches age 65-70. Group LTD benefits are
paid monthly and generally are limited to two-thirds of the employee's earned
income up to a specified maximum benefit. Premiums for group LTD insurance are
based upon the expected mortality, morbidity and persistency of the insured
group, as well as assumptions concerning operating expenses and futureinvestment
income.
The group LTD product is sold primarily on a basis that permits annual
repricing. This enables UNUM to adjust the pricing of its products to more
closely match the underlying claim experience and interest rates.
UNUM's group life insurance product provides term insurancerate environment.
Individual Disability
Individual disability products provide coverage for employees.
It is marketed primarily to executive,loss of income for
professionals, corporate executives, business owners and administrative and management personnel.support
personnel in the event of disability. As reported by EMPLOYEE BENEFIT PLAN REVIEW FOR 1993,in the Life Insurance
Marketing Research Association's 1995 INDIVIDUAL HEALTH ISSUES AND INFORCE
SURVEY for the United States and Canada, the most recent available data, UNUM
America and First UNUM combined were the fourth largest provider of individual
disability income policies measured by inforce premium.
On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage
of the active life reserves of UNUM America's existing United States
non-cancellable individual disability ("ID") block of business. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM's announcement in late 1994, as discussed below, that it would no
longer market the non-cancellable form of ID coverage in the United States. The
agreement was effective December 31, 1996. For a detailed discussion of the
third largest writerreinsurance agreement refer to Item 8 (Note 6).
UNUM announced in November 1994 that it would discontinue sales of group lifethe
traditional, fixed price, non-cancellable individual disability product
("non-cancellable product") in the United States upon introduction of a new
disability product in each state. During the second quarter of 1995, UNUM
introduced the Lifelong Disability Protection ("LDP") product, which replaces
the non-cancellable product. LDP policies are issued on a "guaranteed renewable"
basis, which means that UNUM cannot refuse to renew any policy, but it does
reserve the right to
2
increase premiums for inforce policies. This right to change premiums is or may
be subject to various state insurance department rules, regulations, and
approvals.
The LDP product provides benefits and transitional support for moderate
disabilities, while providing richer benefits for severe disabilities. Various
options are available that permit tailoring of insurance coverage to the
specific client's needs. The most common options include up to 60% base income
replacement coverage, an option to purchase up to 40% further coverage in the
event of catastrophic injury or illness involving the loss of two or more
Activities of Daily Living, and an automatic option to convert to a long term
care policy at retirement age. Following the approval of the LDP product, sales
of the non-cancellable product have been discontinued in the United States. UNUM
also markets buy/sell and key person coverage and policies that provide
reimbursement for business overhead expenses incurred during a period of
disability.
Individual disability insurance premium rates are based on numberexpected
mortality, morbidity and persistency, as well as assumptions concerning policy
related expenses, inflation and investment income.
Following the completion of contracts inforce.
Group short termits merger with Commercial Life, UNUM America
is a leading provider of disability insurance ("in the association marketplace,
offering disability income coverage to members of professional associations.
UNUM expects to introduce new conditionally renewable products for sale through
its association channel in the first quarter of 1997, subject to regulatory
approvals. As a result of the merger, UNUM now reports the operations of the
Association Group STD")disability business with the individual disability business.
Group Short Term Disability
Group STD provides employees with insurance coverage for loss of income in
the event of inability to work due to sickness or injury. Most of these policies
begin providing benefits immediately for accidents, or following a one weekone-week
waiting period for sickness, and continue providing benefits for up to 26 weeks.
Group STD benefits are paid weekly and generally are limited to 60% of the
employee's earned income up to a specified maximum benefit. As reported by
EMPLOYEE BENEFIT PLAN REVIEW, UNUM was one ofAmerica and First UNUM combined were the top
five providersprovider of group STD for 1993,1995, based on premium and number of lives
inforce.inforce lives.
Long Term Care
UNUM marketsAmerica and First UNUM market long term care ("LTC") insurance to
employer groups and individuals. The group LTC product is offered on an employer
or employee-paid basis, and employer groups may offer coverage to retirees,
spouses, parents and grandparents, in addition to the employee. LTC provides
insurance coverage for nursing home and home care costs when the insured
sustains the loss of two or more Activities of Daily Living or sustains
cognitive impairment.
LTD Reinsurance
UNUM America assumes certain insurance risks through long term disability
reinsurance operations managed by Duncanson & Holt Services Inc., a leading
manager of group LTD reinsurance in the United States and wholly-owned
subsidiary of D&H.
UNUM Limited:
UNUM Limited was the leading provider for 1995 of group LTD insurance in
the United Kingdom, as reported by EMPLOYERS RE. INTERNATIONAL. UNUM Limited
targets group LTD sales to executive, administrative and management personnel,
and other employee benefitsprofessionals. These products including accidental death and
dismemberment, and dental insurance. UNUM's flexible benefits product providesare marketed through a network of
independent brokers. UNUM Limited's group LTD products provide employees with
insurance coverage for loss of income in the opportunityevent of inability to allocate benefit dollars amongwork due to
sickness or injury. UNUM Limited also markets individual disability insurance
through brokers and agents to self-employed individuals and those not covered
under group policies. Premiums for group LTD and individual disability insurance
are based upon the various
combinationsexpected mortality, morbidity and persistency of the insured
group, as well as assumptions concerning operating expenses and investment
income.
In May 1994, UNUM Limited assumed the management of the group risk
portfolio of Windsor Life Assurance Company Limited ("Windsor Life"), which
included group LTD and group life products. Windsor Life was the third largest
group LTD provider in the United Kingdom in 1993, as reported by EMPLOYERS RE.
INTERNATIONAL.
3
UNUM Japan:
On June 20, 1994, the Japanese Ministry of Finance granted UNUM a
provisional license that allowed UNUM to establish a non-life insurance company,
UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), to market
disability and other accident products in Japan. UNUM Japan has subsequently
received an official license.
UNUM Japan targets sales of group and individual long term disability
products ("LTD products") to executive, administrative and management personnel,
and other professionals. These products are marketed through contracted
independent agents and brokers. The LTD products provide employees with
insurance coverage for loss of income in the event of inability to work due to
sickness or injury. Most of these policies begin providing benefits following
90- or 365-day waiting periods and continue providing benefits until the
employee reaches age 65-70. The benefits of the LTD products are paid monthly
and generally are limited to 60% of the employee's earned income up to a
specified maximum benefit. Premiums for LTD insurance are based upon the
expected mortality, morbidity and persistency of the insured group, as well as
assumptions concerning operating expenses and investment income.
UNUM Japan also acquires premiums as a reinsurer of LTD products in Japan
and Hong Kong. These reinsurance treaty arrangements are mostly quota share
coinsurance. The direct insurer is subject to compliance with UNUM Japan's risk
management standards for pricing, underwriting, and claims management.
Refer to Item 7 and Item 8 (Note 16) under the caption "Disability
Insurance Segment" for more information.
C. Special Risk Insurance Segment
The Special Risk Insurance segment in 1996 accounted for 20.1% of UNUM's
revenues and 23.2% of its income before income taxes. The Special Risk Insurance
segment includes group life, special risk accident insurance, non-disability
reinsurance operations, reinsurance underwriting management operations and other
special risk insurance products.
Employee Benefits'The Special Risk Insurance segment's group insurance isproducts are sold
primarily on a basis that permits annual repricing. This enables UNUM to adjust
the pricing of its products to more closely match the underlying claim
experience and interest rate environment.
UNUM markets its Employee Benefits'America and First UNUM's group life insurance products throughprovide term
insurance to a networkbroad range of 33 officesemployees. As reported by EMPLOYEE BENEFIT PLAN
REVIEW for 1995, UNUM America and First UNUM combined were the seventh largest
writer of group life insurance in the United States, based on number of inforce
contracts. UNUM America and Canada, which distribute these products as
well as the products offered by the Retirement Security segment, through
brokers. As of December 31, 1994, these branch offices were organized into four
regions and were staffed with approximately 590 management, sales, service and
administrative personnel.
Refer to Item 7 and Item 8 (Note 16) under the caption "Employee Benefits
Segment" for more information.
C. RELATED BUSINESSES SEGMENT
The Related Businesses segment in 1994 accounted for 15.6% of UNUM's
revenues and 30.4% of its income before income taxes. The Related Businesses
segment includesFirst UNUM Limited in the United Kingdom, Commercial Life Insurance
Company ("Commercial Life"), and reinsurance operations including Duncanson &
Holt, Inc.
On July 2, 1990, UNUM acquired all of the outstanding shares of National
Employers' Life Assurance Company Limited ("NEL"). On August 1, 1990, UNUM
acquired certain remaining policyholder interests ofalso offer group universal life insurance
on a NEL subsidiary, N.E.L.
Permanent Health Insurances Limited (now known as UNUM Limited). In the third
quarter of 1990, UNUM announced plans to restructure the operations of its
United Kingdom acquisition by continuing to develop the permanent health
insurance (long term disability) business through UNUM Limited and by divesting
the life, pension and mortgage businesses of NEL. On January 6, 1992, the NEL
businesses were sold.
UNUM Limited is the leading provider of group long term disability insurance
in the United Kingdom. UNUM Limited targets group long term disability sales to
management personnel, other professionals and technical and skilled artisans.
These products are marketedpayroll deduction basis through a network of independent brokers. UNUM
Limited's long term disability products provide employees with insurance
coverage for loss of income in the event of inability to work due to sickness or
injury. UNUM Limited also markets individual disability insurance to
self-employed individuals and those not covered under group policies through
brokers and
agents.
In May 1994, UNUM Limited assumed the management of the group risk portfolio
of Windsor Life Assurance Company Limited ("Windsor Life"), which included group
long term disabilityspecialty agents, and group accidental death and dismemberment riders. In
addition, term life products. Windsor Life wasinsurance is sold through the third largestassociation group long term disability provider inchannel.
Following the United Kingdom in 1993, as reported
by Employers Re. International.completion of its merger with Commercial Life, UNUM America
is a leading provider of group special risk accident products, including group
travel and voluntary accident insurance. Commercial
Life also provides group universal life, group term life, and long term
disability, along with payroll deduction programs for employeesUNUM America markets special risk
products, which are offered on an employer or employee-paid basis, through a
network of independent brokers and specialty agents.
Commercial Life is a leader
in the association group marketplace, offering disability income, business
overhead expense, accidental death and dismemberment, hospital indemnity and
term life insurance to members of professional associations.
On July 30, 1992, UNUM purchased Duncanson & Holt, Inc. ("D&H"),&H, a leading accident and health
reinsurance underwriting manager. As a reinsurance underwriting manager, D&H is
authorized to conduct reinsurance business on behalf of the member companies
participating in its reinsurance facilities. D&H provides pool management
as well asservices that may include marketing, underwriting, administration, claims
payment and actuarial services for client companies, but doescompanies. D&H and its subsidiaries do
not bear any insurance risk.risk, with the exception of Duncanson & Holt Underwriters
Ltd., a wholly- owned subsidiary of Duncanson & Holt Europe Ltd. On May 3, 1996,
D&H acquired three associated reinsurance underwriting managers specializing in
accident and health business. D&H has offices throughout the United States and
in London, Toronto, Bermuda and Singapore.
During 1995, Duncanson & Holt Europe Ltd., an affiliate of D&H based in the
United Kingdom, was authorized by Lloyd's of London to establish two new Lloyd's
Managing Agents and to acquire a third existing Lloyd's Managing Agent. Each
manages a syndicate that underwrites primarily personal accident and other
"non-marine" classes of business at Lloyd's of London.
The non-disability reinsurance operations include UNUM America's
participation in reinsurance facilities managed by D&H, facilities managed by
non-related companies and direct reinsurance arrangements primarily for
4
accident and health, long term care and special risks. As a member company in
reinsurance facilities, UNUM America assumes a share of the insurance risk of
the facility.
Refer to Item 7 and Item 8 (Note 16) under the caption "Related Businesses"Special Risk
Insurance Segment" for more information.
D. COLONIAL COMPANIES SEGMENTColonial Products Segment
The Colonial CompaniesProducts segment in 19941996 accounted for 13.1%13.5% of UNUM's
revenues and 31.6%27.0% of its income before income taxes. The Colonial Companies'
principal subsidiary,Products
segment includes Colonial Life & Accident Insurance Company ("and affiliates. Colonial
Life"), markets a broad line of
payroll-deducted, voluntary benefits to employees at their worksites. Colonial Life focusesworksites, while
focusing on personal accident and sickness, cancer and life and cancer insurance plans.products. Colonial Life'smarkets
its products nationwide primarily through a 7,900-member independent contractor
sales force.
Colonial's accident policies generally provide benefit payments for
disability income, death, dismemberment or major injury. Accident policies are
designed to supplement other benefits available through Social Security,
workers' compensation, and other insurance plans. Colonial Life offers a wide range
of life insurance products, with universal life and whole life accounting for
most of the life insurance sold. Colonial Life'sColonial's cancer policies are designed to
provide payments for hospitalization and scheduled medical benefits,
with the amounts of such payments established by the policies.benefits. All of
Colonial
Life'sColonial's insurance policies are issued on a nonparticipating basis.
More than 95%98% of Colonial Life'sColonial's premiums for 19941996 were derived from policies
marketed to employees at their worksites, with premiums in most cases to be
collected through payroll deduction. Such policies are issued on a "guaranteed
renewable for life"renewable" basis, which means that Colonial Life cannot refuse to renew any policy,
but it does reserve the right on a product-by-product basis to increase premiums
for inforce policies. This right to change premiums is or may be subject to
various state insurance department rules, regulations, and approvals.
Since 1985, Colonial Life has marketedmarkets its accident and health products as qualified fringe
benefits that can be purchased with pretax dollars as part of a flexible
benefits program pursuant to Section 125 of the Internal Revenue Code. In 1994,1996,
premiums from sales to employees participating in such programs accounted for
approximately 48%50% of total premiums. A flexible benefits program assists
employers in managing their benefits and compensation packages and provides
policyholders with the ability to choose the benefits that best meet their
needs. Although Congress might change the tax laws to limit or eliminate fringe
benefits available on a pretax basis and such a change could limit or eliminate
Colonial Life'sColonial's ability to continue marketing its products in this way, Colonial Life
believes its products provide policyholders value, which will remain even if the
tax advantages offered by flexible benefit programs are eliminated.
Colonial Life markets its products nationwide primarily through a
5,300-member independent contractor sales force. Approximately 1,150 home office
employees provide corporate administration, sales support, internal services and
systems, claims processing, policyholder services, and employer services.
Colonial Companies' subsidiary, BenefitAmerica, Inc. ("BenefitAmerica"),
offers employers administrative services for their employee benefit programs.
The services offered by BenefitAmerica include claims adjudication and payment
for reimbursement plans,administration of flexible
spending accounts, which are offered under an employer's flexible benefits plan
pursuant to Section 125 of the Internal Revenue Code, as well as other
administrative services to those plans. The services offered by BenefitAmerica
complement the services and products offered to employers by Colonial Life.Colonial.
Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial CompaniesProducts
Segment" for more information.
E. INDIVIDUAL DISABILITY SEGMENTRetirement Products Segment
The Individual DisabilityRetirement Products segment accounted for 12.2%7.0% of UNUM's revenues and
(94.8)%0.4% of its income before income taxes in 1994. This segment's products
provide coverage for loss of income for professionals, corporate executives,
business owners and administrative support personnel in the event of disability.
As reported in the Life Insurance Marketing Research Association's 1993
INDIVIDUAL HEALTH ISSUES AND INFORCE SURVEY for the United States, the most
recent available data, UNUM was the fourth largest provider of individual
disability income policies measured by premium inforce.
UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to state
regulatory approval, UNUM expects to introduce the new disability products to
most states during the second quarter of 1995.
Until the new products are introduced, UNUM will continue to sell individual
disability products on a non-cancellable basis, with a fixed premium for the
duration of the policy. The basic individual disability policy provides the
insured with a portion of the earned income which is lost as a result of
sickness or injury. Monthly benefits available range from 30% to 70% of the
insured's earned income up to a specified maximum benefit. Various options are
available that permit tailoring of an insurance policy to the specific client's
needs. The most common options include the length of period before benefits are
paid, the length of the benefit period, partial disability payments, and
cost-of-living adjustments, college benefits and retirement benefits. UNUM also
markets buy/sell and key person coverage and policies that provide reimbursement
for business overhead expenses incurred during a period of disability.
Individual Disability insurance premium rates are based on expected mortality,
morbidity and persistency as well as assumptions concerning policy related
expenses, inflation and investment income.
UNUM currently distributes this segment's products in the United States and
Canada through a branch office system of Individual Disability sales
consultants, who distribute these products as well as products offered by the
Retirement Security Segment, through brokers and agents. UNUM has a network of
36 Individual Disability offices in the United States that are staffed with
approximately 105 management, sales, service and administrative employees.
Another 11 sales offices, staffed by approximately 39 employees, are located
throughout Canada.
Refer to Item 7 and Item 8 (Note 16) under the caption "Individual
Disability Segment" for more information.
F. RETIREMENT SECURITY SEGMENT
The Retirement Security segment accounted for 8.0% of UNUM's revenues and
12.9% of its income before income taxes in 1994.1996. This segment marketsincludes UNUM
America and servicesFirst UNUM's tax-sheltered annuities ("TSA"), long term careguaranteed investment
contracts, deposit administration accounts, 401(k) plans, individual life and
group medical insurance, all of which are no longer actively marketed.
On October 1, 1996, UNUM America and lifestyle
security protectionFirst UNUM closed the sale of their
respective TSA businesses to The Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("LSP"Lincoln") products.
TSA products (Section 403(b) plans, both subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under the Internal Revenue Code) are
marketed to non-profit hospitals and organizations. Thesemanagement of approximately $3.3 billion. The
purchase price (ceding commission) at closing was approximately $71 million. The
contracts offer a
fixed fund which provides for annual renewable guarantees of principal and
interest. In addition, some TSA contracts offer variable annuity investment
alternatives. These investment alternatives are mutual funds offered as
subaccounts in a UNUM separate account. The mutual funds, managed by nationally
recognized investment managers, include a variety of choices such as growth,
balanced and stock index funds. UNUM also offers recordkeeping and reporting
services to TSA contractholders.
LSP products are marketed to employers to supplement their employees'
retirement planning needs. It provides plan participants with insurance coverage
for retirement savings in the eventhave initially been reinsured on an indemnity basis. Upon consent of
the inability to continue retirement
contributions due to death TSA contractholders and/or disability.
UNUM markets its TSA and LSP products through a network of 13 offices inparticipants, the United States, which distribute these products as well as the products offered
by the Employee Benefits segment, primarily through brokers.
UNUM markets long term care insurance to employer groups, continuing care
retirement communities and individuals. The group product is offeredcontracts will be considered
reinsured on an employer or employee paidassumption basis, legally releasing UNUM America and employer groups may offer coverage to
retirees, spouses, parents and grandparents, in additionFirst UNUM
from future contractual obligation to the employee. UNUM
distributes long term care products in the United States through brokers and
agents from the branch office system as described in the Employee Benefits and
Individual Disability Segments.respective contractholders and/or
participants.
Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement SecurityProducts
Segment" for more information.
G. OTHER OPERATIONS SEGMENT
The Other Operations segment accounted for 3.6% of UNUM's revenues and 4.3%
of its income before income taxes in 1994. This segment includes individual life
insurance business of UNUM America, group medical insurance, guaranteed
investment contracts ("GICs"), deposit administration accounts ("DAs"), and
401(k) plans, all of which are no longer actively marketed by UNUM.
In the fourth quarter of 1991, UNUM announced plans to withdraw from the
401(k) market by the end of 1992. UNUM has transferred 401(k) service
responsibilities to its formerly wholly-owned subsidiary, Preferred Benefits
Corporation, which was sold in the second quarter of 1992.
UNUM discontinued active marketing of GICs and DAs primarily due to the lack
of demand and the level of investment risk. UNUM discontinued new sales of
universal life and other individual life policies as of January 1, 1988. UNUM
began exiting the group medical product line in 1987 with the discontinuance of
new sales on the traditional group medical product. In 1990, management
announced its intention to exit the group medical product entirely. Beginning
with5
the February 1991 renewals, policyholders had the option of transferring their
group medical product to another insurer. UNUM services commitments to inforce
policyholders, which include conversions of group life and group medical
insurance.
Refer to Item 7 and Item 8 (Note 16) under the caption "Other Operations
Segment" for more information.
H. INVESTMENTSF. Investments
Refer to Item 7 under the caption "Investments" for more information.
Additional information about UNUM's mortgage loan portfolio is provided below:
Overall,below.
Effective January 1, 1996, UNUM began using the categories for geographic
region and property type established by the American Council of Life Insurance.
For comparative purposes, 1995 information has been restated in the tables below
to reflect this change.
UNUM management believes that its mortgage loan portfolio is well
diversified geographically and among property types. The mortgage loan portfolio
percentages by geographic region and property type at December 31, 1994,1996, and
1993,1995, were as follows:
GEOGRAPHIC REGION
1994 1993
----------- -----------
New England............................. 10.6% 10.5%
Mid-Atlantic............................ 17.4 16.6
Southeast............................... 15.0 16.4
Southwest............................... 8.4 7.7
Pacific................................. 15.1 16.2
North Central........................... 16.0 15.1
Farm Belt............................... 9.5 9.9
Oil Patch............................... 8.0 7.6
----- -----
Total............................... 100.0% 100.0%
----- -----
----- -----
PROPERTY TYPE
1994 1993
----------- -----------
Office Building......................... 26.2% 28.1%
Retail.................................. 30.9 29.5
Industrial.............................. 19.5 19.1
Residential............................. 7.2 6.4
Medical................................. 6.5 6.5
Nursing Home............................ 2.7 3.6
Hotel/Motel............................. 5.8 5.5
Other................................... 1.2 1.3
----- -----
Total............................... 100.0% 100.0%
----- -----
----- -----
Geographic Region
1996 1995
---- ----
New England ............ 12.4% 12.3%
Mid-Atlantic ............ 12.7 11.3
South Atlantic ......... 16.1 16.6
Mountain ............... 7.5 7.9
Pacific .................. 15.7 14.1
West South Central ...... 6.8 7.8
East South Central ...... 5.4 5.6
West North Central ...... 11.3 10.1
East North Central ...... 12.0 14.2
Other .................. 0.1 0.1
------ ------
Total .................. 100.0% 100.0%
====== ======
Property Type
1996 1995
---- ----
Office Building ......... 26.1% 28.2%
Retail ............... 33.0 33.5
Industrial ............ 27.1 23.3
Apartment ............ 8.2 7.1
Hotel/Motel ............ 3.8 5.6
1-4 Family ............ 0.1 0.1
Other Commercial ...... 1.7 2.2
------ ------
Total ............... 100% 100%
====== ======
Mortgage loans delinquent 60 days or more on a contract delinquency basis
by geographic region and property type were as follows at December 31, 1994,1996, and
1993 (Dollars1995 (dollars in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 15.7 $ 15.7
Mid-Atlantic................................. 3.5 4.6
Southwest.................................... -- 2.7
Pacific...................................... 0.9 3.1
North Central................................ 2.2 --
--------- ---------
Total.................................... $ 22.3 $ 26.1
--------- ---------
--------- ---------
PROPERTY TYPE
1994 1993
--------- ---------
Office Building.............................. $ 22.3 $ 23.4
Retail....................................... -- 2.7
--------- ---------
Total.................................... $ 22.3 $ 26.1
--------- ---------
--------- ---------
Restructured mortgageGeographic Region
1996 1995
---- ----
Mid-Atlantic ............ $3.5 $--
East North Central ...... 2.1 2.8
----- ----
Total .................. $5.6 $2.8
===== ====
Property Type
1996 1995
---- ----
Office Building ...... $-- $2.8
Retail ............... 5.6 --
---- -----
Total ............... $5.6 $2.8
==== =====
Effective January 1, 1995, UNUM adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan," which
defined the principles to measure and record a loan when it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement.
Impaired loans by geographic region and property type were as follows at
December 31, 1994,1996, and 1993 (Dollars1995 (dollars in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 3.3 $ 3.4
Mid-Atlantic................................. 4.4 2.2
Southeast.................................... 9.5 12.2
Pacific...................................... 10.8 5.6
North Central................................ 14.5 13.9
Farm Belt.................................... 8.8 8.8
Oil Patch.................................... 14.4 16.3
Other........................................ 7.9 3.5
--------- ---------
Total.................................... $ 73.6 $ 65.9
--------- ---------
--------- ---------
PROPERTY TYPE
1994 1993
--------- ---------
Office Building.............................. $ 32.2 $ 31.5
Retail....................................... 12.8 8.5
Industrial................................... 8.6 7.6
Residential.................................. 7.1 6.2
Hotel/Motel.................................. 2.4 --
Other........................................ 10.5 12.1
--------- ---------
Total.................................... $ 73.6 $ 65.9
--------- ---------
--------- ---------
Geographic Region
1996 1995
---- ----
New England ............ $14.6 $14.9
Mid-Atlantic ............ 8.4 3.6
South Atlantic ......... 9.1 11.7
Mountain ............... 8.8 12.3
West South Central ...... 4.8 4.8
West North Central ...... 2.6 --
East North Central ...... 2.1 2.8
------ ------
Total .................. $50.4 $50.1
====== ======
Property Type
1996 1995
---- ----
Office Building ...... $22.0 $28.7
Retail ............... 18.2 16.0
Industrial ............ 10.2 5.4
------ ------
Total ............... $50.4 $50.1
====== ======
6
Potential problem mortgageMortgage loans are defined by UNUM as current and
performing loans with which management has some concerns aboutthat were restructured prior to the abilityadoption of the borrower to comply with present loan terms and whose book value exceeds the
market value of the underlying collateral. Potential problem loansFAS 114, by
geographic region and property type were as follows at December 31, 1994,1996, and
1993 (Dollars1995 (dollars in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 3.4 $ 6.2
Mid-Atlantic................................. 9.3 31.3
Southeast.................................... 6.3 3.1
Southwest.................................... 1.5 2.2
Oil Patch.................................... 4.9 3.5
Pacific...................................... 4.1 17.4
North Central................................ 0.8 22.1
Farm Belt.................................... 5.9 6.9
--------- ---------
Total.................................... $ 36.2 $ 92.7
--------- ---------
--------- ---------
PROPERTY TYPE
1994 1993
--------- ---------
Office Building.............................. $ 17.2 $ 25.9
Industrial................................... -- 25.5
Retail....................................... 0.7 20.7
Residential.................................. 2.2 --
Hotel/Motel.................................. 11.5 18.3
Medical...................................... 4.6 2.3
--------- ---------
Total.................................... $ 36.2 $ 92.7
--------- ---------
--------- ---------
I. RISK MANAGEMENT AND REINSURANCEGeographic Region
1996 1995
---- ----
New England ............ $0.7 $3.3
South Atlantic ......... 13.3 13.5
Mountain ............... 7.7 7.8
Pacific .................. 7.9 9.6
West South Central ...... 2.5 2.6
West North Central ...... 8.7 8.7
East North Central ...... 14.0 14.4
----- -----
Total .................. $54.8 $59.9
===== =====
Property Type
1996 1995
---- ----
Office Building ...... $24.3 $25.0
Retail ............... 12.5 12.6
Industrial ............ 5.8 5.8
Apartment ............ 4.4 7.0
Hotel/Motel ............ 7.8 7.9
Other Commercial ...... -- 1.6
------ ------
Total ............... $54.8 $59.9
====== ======
G. Risk Management and Reinsurance
Risk management, which includes product design, pricing, underwriting,
reserving and benefits management, involves a determination of the type and
amount of risk that an insurer is willing to accept, administration and
evaluation of business inforce, and control of claims. UNUM has underwriters
organized within business segments who evaluate policy applications on the basis
of information provided by the applicant and other sources.
UNUM reinsures with other companies portions of the insurance policiesrisk it has
underwritten. Reinsurance allows UNUM to sell policies with greaterhigher benefits than
the entire risk that UNUM is willing to assume. UNUM remains liable to the
insured for the payment of policy benefits if the reinsurers cannot meet their
obligations under the reinsurance agreements.
InWithin the Employee Benefits segment,Disability Insurance and Special Risk Insurance segments, UNUM
hasAmerica and First UNUM have underwriters for each major
product line.group disability, individual
disability, Association Group disability, group life, long term care, and
accidental death and dismemberment products. These underwriting functions are
aligned geographically with UNUM America and First UNUM's five sales regions.
Quotes for prospective customers are based onupon UNUM America and First UNUM's
experience with the profitability and persistency of the respective employer's risk
category. The maximum group LTD, and group STD, Association Group disability and LTC
monthly benefit varies, but the usual maximum monthly amount available is
$35,000, $10,000, $10,000 and $2,500,$6,000, respectively. For group life insurance
products, UNUM retains up to $750,000 per individual life and reinsures the
balance with other insurance carriers. Colonial Life has reinsuranceIn addition, UNUM America reinsures the
risk on its cancer insurance productsaccidental death and dismemberment contracts that provides
coverage for claim payments in excess of $50,000 inexceeds $400,000
on any one year, per claimant,life.
During 1996, UNUM America entered into an agreement for reinsurance
coverage of the active life reserves of UNUM America's existing United States
non-cancellable individual disability block of business. For more information on
the reinsurance agreement refer to Item 1B under the caption "Individual
Disability."
During 1995, UNUM America and First UNUM introduced the guaranteed
renewable Lifelong Disability Protection product ("LDP"), following the decision
in late 1994 to discontinue sales of the traditional fixed price,
non-cancellable individual disability insurance product in the United States. At
the end of 1996, the LDP product has been approved in all 50 states and the
District of Columbia. UNUM requires medical examinations, financial data, and
other information to make a decision on the acceptability of the individual risk
and to appropriately classify an applicant for individual disability insurance
products. On new sales of the LDP product, UNUM retains up to a lifetime maximum of $1 million$8,000 basic
monthly indemnity per claimant.life for personal disability coverages. UNUM also retains
up to $20,000 per life for business overhead expense coverages and $500,000 per
life for buy/sell coverages.
The financial and medical underwriting areas of UNUM Limited handle the
underwriting of group and individual disability policies and group life
policies. The maximum yearly initial benefit for group LTD is 326,000 pounds
sterling. UNUM Limited retains 75,000 pounds sterling of this risk and reinsures
the balance. The maximum yearly initial benefit for individual disability
insurance is 125,000 pounds sterling, and amounts over 40,000 pounds sterling
per annum are reinsured. On group life business, UNUM Limited retains 60% of the
risk up to a maximum of 150,000225,000 pounds sterling per individual life.
Commercial Life reinsures the risk on its accidental death and dismemberment
contracts that exceed $400,000 on any one life. Commercial Life also reinsures
the risk on individual, group, and franchise life contracts that exceed $250,000
on any one life.
UNUM requires medical examinations, financial data, and other information to
make a decision on the acceptability of the individual risk and to appropriately
classify an applicant for individual disability insurance products. On new sales
of the existing non-cancellable product, UNUM retains up to $8,000 plus 25% of
amounts in excess of $8,000 basic monthly indemnity per life for personal
disability coverages, $20,000 plus 25% of amounts in excess of $20,000 per life
for business overhead expenses coverages and $500,000 per life for buy/sell
coverages. UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to regulatory
approval, UNUM expects to introduce new disability products to most states
during the second quarter of 1995.
UNUM (except for Colonial Life)Colonial) reinsures the risk of individual life insurance
contracts that exceed $425,000 on any one life. Colonial Life limits its risk for
death and dismemberment benefits to $100,000 per life. During 1996,
7
Colonial entered into an agreement to reinsure a majority of the mortality risk
on new and inforce universal life business, for which Colonial retains 20% of
the risk under $100,000 per individual life. Colonial also has reinsurance on
its cancer insurance products that provides coverage for claim payments in
excess of $55,000 in any one year, per claimant, up to a lifetime maximum of $1
million per claimant.
In addition to the reinsurance arrangements above, UNUM (except for Colonial
Life, UNUM Limited and Commercial Life) is covered by
catastrophe reinsurance, which provides additional protection against aggregate
losses in excess of $1 million up to a maximum of $100$250 million. This protection
is activated whenever one catastrophic event causes the disability and/or death
of five or more people covered
under UNUM's life or disability contracts. Colonial Life is covered by
catastrophe reinsurance for accidental deaths totaling more than $300,000 from a
single disaster, up to a limit of $5 million. UNUM Limited's group disability
business is partially covered by catastrophe reinsurance of 3 million
pounds sterling for losses from one event involving more than twenty-five
lives. Commercial Life is covered by catastrophe reinsurance, which provides
additional protection against aggregate losses in excess of $1 million up to a
maximum of $54 million for losses involving three or more covered lives.
Also, UNUM purchased excess-of-loss reinsurance totaling $60 million over
three years through a Lloyd's of London syndicate for the non-cancellable
individuallives insured under UNUM's disability, business of UNUM America and First UNUM.life, or personal
accident contracts.
Reinsurance premiums assumed and ceded for the year ended December 31,
1994,1996, were $170.7$252.9 million and $112.5$106.4 million, respectively. No current or
planned reinsurance activity is expected to have a significant impact on the
ability of UNUM to underwrite additional insurance.
J. RESERVESH. Reserves
The reserves reported in the consolidated financial statements of UNUM
Corporation and subsidiaries have been
computed in accordance with generally accepted accounting principles ("GAAP") for stock life insurance companies..
These reserve balances generally differ from those specified by the laws of the
various states and those carried in the statutory financial statements. The
differences between GAAP and statutory reserves arise from the use of different
mortality, morbidity, interest, expense and lapse assumptions.
Pursuant to insurance laws of the states of Maine, New York, and South
Carolina,
and Wisconsin, the United Kingdom and of Japan, UNUM's insurance subsidiaries (UNUM
America, First UNUM, Colonial Life, Commercial Life, UNUM Limited and UNUM Japan, respectively)
set up statutory reserves, carried as liabilities, to meet obligations on their
various policies. These statutory reserves are amounts which,that, together with
premiums to be received and interest on such reserves at assumed rates, are
calculated to be sufficient to meet the policy and contract obligations of
UNUM's insurance subsidiaries. Pursuant to federal insurance laws of Canada,
UNUM America has established regulatory reserves to meet the obligations of
policies written in its Canadian branch.
Statutory, GAAP and regulatory reserves are based uponon UNUM's insurance
subsidiaries' experience as adjusted to provide for possible adverse deviations.
These estimates are periodically reviewed and compared to actual experience. The
assumptions are revised when it is determined that future expected experience
differs from the assumed estimates.
K. EMPLOYEESI. Employees
At December 31, 1994,1996, UNUM had approximately 7,2006,700 full-time employees.
UNUM does not have collective bargaining agreements with employees.
L. COMPETITIONJ. Competition
The principal competitive factors affecting UNUM's business are reputation,
financial strength, quality of service, risk management expertise, distribution,
product design, and price. There is competition among insurance companies for
the types of group and individual and group insurance and retirement products sold by UNUM. At the end of
1994,1996, there were approximately 1,900more than 1,700 legal reserve life insurance companies in the
United States and Canada and life assurance offices in the United Kingdom, whichKingdom. These
companies may offer insurance products similar to those marketed by UNUM. UNUM also competes with banks, investment advisors, mutual funds and other
financial entities to provide products and services. All areas of groupGroup
insurance areis highly competitive because of the large number of insurance
companies and other entities offering these products.
M. REGULATIONK. Regulation
UNUM's insurance subsidiaries are subject to regulation and supervision in
the jurisdictions in which they do business. Although the extent of such
regulation varies, U.S. state, Canadian, United Kingdom and Japanese insurance
laws generally establish supervisory agencies, such as state insurance
departments, the Office of the Superintendent of Financial Institutions
("OSFI"), The Department of Trade and Industry ("DTI") and the Ministry of
Finance ("MOF"), respectively, with broad administrative powers. These powers
relate chiefly to the granting and revocation of the licenses to transact
business, and establishing reserve requirements and the form and content of
required financial statements. Such powers also include the licensing of agents
in the U.S. and the approval of policy forms in the U.S. and Japan. UNUM's
insurance operations and subsidiaries must meet the standards and tests for its
investments promulgated by insurance laws and regulations of Maine, New York,
South Carolina, Wisconsin, Canada, the United Kingdom and Japan, as applicable.
8
UNUM's United States domiciled insurance subsidiaries are required to file
quarterly and annual statements with the various insurance departments in state
jurisdictions in which they do business. These statements comply with the rules
of the National Association of Insurance Commissioners ("NAIC"). UNUM's
insurance subsidiaries are examined periodically by examiners of the states offrom Maine, New
York and South Carolina, and Wisconsin and offrom other states (on an "association" or "zone"
basis) in which they are licensed to do business. UNUM's insurance branch
operation in Canada is periodically examined by Canadian insurance regulatory
authorities and is required to file annual reports that comply with the
insurance laws of Canada and with the rules of the OSFI of the Canadian Federal
government and each of the provinces. UNUM's United Kingdom subsidiary is
required to file financial statements annually with the DTI, in accordance with
United Kingdom lawlaws and regulation.regulations. UNUM Japan is required to file periodic
financial
statements annually with the MOF, in accordance with Japanese laws and
regulations.
UNUM's insurance subsidiaries operate under insurance laws, which require
that they establish and carry, as liabilities, actuarial reserves to meet their
obligations on their disability, life, disability, accident and health policies, and
annuities. These reserves are verified periodically by various regulators.
UNUM's reinsurance underwriting manager, Duncanson & Holt, Inc., ("D&H")&H, is a licensed reinsurance
intermediary in New York. It is subject to regulation in New York and other
states where it does business. Duncanson & Holt Underwriters, Ltd., a subsidiary
of D&H, is a corporate member of LloydsLloyd's of London and is subject to all rules
applicable to such members.
UNUM Sales Corporation, a registered broker-dealer, is regulated by the
National Association of Securities Dealers, Inc. and the Securities and Exchange
Commission. It is the principal underwriter for variable annuity contracts
offered by UNUM America and First UNUM.
The laws of the State of Maine require periodic registration and reporting
by insurance companies domiciled within its jurisdiction, which control or are
controlled by other corporations or persons. This constitutes, by definition, a
holding company system. UNUM America is domiciled in Maine and is subject to
these laws. New York, which is the domiciliary state of First UNUM;UNUM, and South
Carolina, which is the domiciliary state of Colonial, Life; and Wisconsin, which
is the domiciliary state of Commercial Life, have similar laws.
Accordingly, the UNUM insurance subsidiaries are registered as members of the
UNUM holding company system in the states of Maine, New York and South Carolina and Wisconsin.Carolina.
The statutes of these states require periodic disclosure concerning the ultimate
controlling person and intercorporate transactions within the holding company
system, some of which require prior approval.
Effective December 31, 1991, UNUM America merged with two of UNUM
Corporation's wholly-owned Maine life insurance subsidiaries, UNUM Life
Insurance Company ("UNUM Life") and UNUM Pension and Insurance Company ("UPIC"),
with UNUM America remaining as the surviving corporation. In connection with the
merger of UNUM Life and UPIC into UNUM America, UNUM Life ceased to maintain its
licensing status in the State of New York effective December 31, 1991, with all
future New York business being transacted by First UNUM. As a condition of New
York regulatory approval, UNUM America agreed to maintain a security deposit in
the State of New York equal to 102% of outstanding statutory liabilities to New
York policyholders, insureds and claimants of UNUM Life. The security deposit
consists of certain cash and invested assets. An initial deposit was made in
February 1992 and, at December 31, 1994,1996, the required deposit was $819.2$313.5
million. UNUM America has the ability to withdraw assets from this account and
to substitute other assets at its discretion. The balance of the security
deposit will be reviewed and adjusted at least annually based upon the
outstanding liabilities described above.
N. PARTICIPATION FUND ACCOUNTL. Participation Fund Account
Participating policies issued prior to November 14, 1986, by the former
Union Mutual Life Insurance Company ("Union Mutual") will remain participating
as long as they remain in force. A Participation Fund Account ("PFA") has been
established for the sole benefit of all of Union Mutual's individual
participating life and annuity policies and contracts. At December 31, 1994,1996, the
PFA had $347.0$354.0 million in assets, which arewere held by UNUM America. UNUM has agreed
to pay certain expenses associated with the PFA and at December 31, 1994,1996, the
reserve for the present value of such expenses was $15.9$13.9 million.
PFA assets, investment earnings and income from operations are not
available to UNUM America or UNUM during the operation or upon the termination
of the PFA. In the unlikely event that the assets of the PFA are not adequate to
provide for policyholder benefits (exclusive of dividends, which are not
guaranteed), UNUM America would be required to provide for any shortfall, and
such amounts, if any, would reduce earnings of UNUM America and UNUM.
9
All operating data of the individual participating life and annuity
contracts has been excluded from the Consolidated Statements of Income and all
other operating data included in this report unless otherwise noted. The assets
and liabilities associated with the participating business are included in
UNUM's Consolidated Balance Sheets.
ITEM 2. PROPERTIESItem 2--Properties
UNUM owns home office property consisting of fivesix office buildings and four
service buildings located throughout the Portland, Maine, area. UNUM also owns
an office building in the United Kingdom, which is the home office of UNUM
Limited. The home office of the Colonial Companies, is located in Columbia, South
Carolina, and is also owned by UNUM. In addition, UNUM leases, on periods
principally from fivethree to tensix years, office and warehouse space for use by its home office,
affiliates, and sales forces.
ITEM 3. LEGAL PROCEEDINGSItem 3--Legal Proceedings
In the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1994.1996. In some instances, these
proceedings include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position or the consolidated operating results of UNUM.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSOn December 29, 1993, UNUM filed a suit in the United States District Court
for the District of Maine, seeking a federal income tax refund. The suit is
based on a claim for a deduction in certain prior tax years, for $652 million in
cash and stock distributed to policyholders in connection with the 1986
conversion of Union Mutual Life Insurance Company to a stock company. UNUM has
fully paid, and provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure.
UNUM believes its claims are meritorious, and has appealed the decision to the
United States Court of Appeals for the First Circuit. The ultimate recovery, if
any, cannot be determined at this time.
Item 4--Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders, through solicitation of
proxies or otherwise, during the fourth quarter 1994.of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERSItem 5--Market for the Registrant's Common Equity and Related Stockholder
Matters
The principal markets in which UNUM's common stock is traded are the New
York Stock Exchange and the Pacific Stock Exchange. UNUM's ticker symbol is
"UNM." As of December 31, 1994,1996, there were 25,28023,303 shareholders of record of
common stock. Information concerning restrictions on the ability of UNUM's
subsidiaries to transfer funds to UNUM in the form of cash dividends is
described in Item 8 (Note 14)13).
The market price (as quoted by the New York Stock Exchange) and cash
dividends paid, per share of UNUM's common stock, by calendar quarter for the
past two years were as follows:
1994 1993
------------------------------------------ ------------------------------------------1996 1995
--------------------------------------------------- ------------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
--------------------------------------------------------------------------------------------------------------------------------
High....................................High ............... $73.500 $66.000 $63.000 $61.875 $56.500 $54.000 $48.000 $46.000
Low ............... $61.000 $56.750 $55.500 $54.750 $50.625 $45.375 $39.875 $37.750
Close ............... $72.250 $64.125 $62.250 $59.500 $55.000 $52.750 $46.875 $45.250
Dividend Paid ...... $ 46.8750.275 $ 50.0000.275 $ 56.7500.275 $ 58.0000.265 $ 54.7500.265 $ 60.1250.265 $ 57.7500.265 $ 58.375
Low..................................... $ 35.125 $ 43.000 $ 44.500 $ 48.000 $ 47.750 $ 53.250 $ 51.000 $ 49.250
Close................................... $ 37.750 $ 46.000 $ 44.750 $ 52.750 $ 52.500 $ 54.500 $ 54.000 $ 56.500
Dividend Paid........................... $ 0.24 $ 0.24 $ 0.24 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $0.16 1/20.240
10
ITEM 6. SELECTED FINANCIAL DATAItem 6--Selected Financial Data
The following should be read in conjunction with UNUM's Consolidated
Financial Statements and related notes reported in Item 8.
UNUM CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in millions, except per common share data)
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)----------------------------------------------------
1996 1995 1994 1993
1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------------------------------------------------- ----------- ----------- ----------------
INCOME STATEMENT DATAIncome Statement Data
Revenues:
Premiums and other income
(expense):
Employee Benefits $1,451.4 $1,362.6 $1,116.2 $1,000.0Disability Insurance Segment ...... $1,917.7 $1,879.9 $1,716.2 $ 909.8 $ 769.3 $ 723.3 $ 670.5
Related Businesses 477.5 402.5 354.4 324.2 269.2 192.9 -- --1,547.9
Special Risk Insurance Segment ... 755.4 702.3 607.1 559.4
Colonial CompaniesProducts Segment ......... 498.2 475.1 441.3 407.4
371.9 325.4 281.1 241.0 216.6 192.1
Individual Disability 357.5 322.5 292.9 253.4 169.4 147.2 134.7 126.1
Retirement Security 62.5 36.3 32.3 28.0 21.7 22.7 17.1 9.1
Other Operations 16.9 25.9 29.3 41.9 74.4 108.1 162.9 229.3Products Segment ...... 65.8 34.1 31.4 42.5
Corporate ........................ -- 0.1 0.8 --
0.8 -- (0.1) 0.2 0.1 0.9
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ---------
Total premiums and other income 2,807.9... 3,237.1 3,091.5 2,796.8 2,557.2
2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ---------
Net investment income (expense): (a)
Employee Benefits 263.5 234.7 234.4 196.1 176.5 160.8 151.3 133.7
Related Businesses 89.6 85.5 91.6 95.3 63.5 38.3 -- --Disability Insurance Segment ...... 468.5 592.9 400.3 369.8
Special Risk Insurance Segment ... 56.5 48.4 40.7 34.8
Colonial CompaniesProducts Segment ......... 47.3 52.2 32.6 41.4
35.4 38.5 25.2 26.7 22.3 19.0
Individual Disability 84.6 82.5 75.0 67.5 67.3 64.1 54.4 46.2
Retirement Security 226.9 235.5 228.8 227.8 209.6 196.8 172.4 157.6
Other Operations 114.4 154.0 181.6 184.9 218.0 227.8 240.7 260.6Products Segment ...... 217.2 323.7 338.0 387.6
Corporate ........................ 16.1 14.2 4.2 6.2
3.9 1.5 (9.0) 6.0 20.3 19.1
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ---------
Total net investment income ...... 805.6 1,031.4 815.8 839.8
850.7 811.6 751.1 720.5 661.4 636.2
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ---------
Total revenues 3,623.7..................... 4,042.7 4,122.9 3,612.6 3,397.0
3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ---------
Benefits and expenses:
Employee Benefits 1,457.1 1,358.2 1,128.1 1,002.2 915.6 779.7 743.5 703.7
Related Businesses 506.8 430.7 392.6 358.4 298.3 213.4 -- --Disability Insurance Segment ...... 2,170.9 2,255.8 2,060.3 1,603.6
Special Risk Insurance Segment ... 732.7 690.4 581.9 555.3
Colonial CompaniesProducts Segment ......... 453.1 439.6 411.2 378.4
346.8 306.4 259.6 225.5 201.1 178.6
Individual Disability 630.3 336.0 323.3 284.2 210.8 195.0 192.3 169.8
Retirement Security 263.7 250.7 254.4 257.9 230.9 212.9 176.2 151.1
Other Operations 122.8 159.1 194.4 243.3 271.9 326.5 404.5 533.7Products Segment ...... 281.6 312.3 327.4 375.8
Corporate ........................ 62.8 42.9 33.2 23.6
10.4 12.5 10.8 12.4 9.5 15.8
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ---------
Total benefits and expenses 3,425.1...... 3,701.1 3,741.0 3,414.0 2,936.7
2,650.0 2,464.9 2,197.9 1,965.4 1,727.1 1,752.7
--------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1994 1993 1992 1991 1990 1989 1988 1987
--------------------------------------------------------------------------------------------------------------------------------
-------- -------- -------- ---------
Income (loss) before income taxes
and cumulative effects of
accounting changes:
Employee Benefits 257.8 239.1 222.5 193.9 170.7 150.4 131.1 100.5
Related BusinessesDisability Insurance Segment ...... 215.3 217.0 56.2 314.1
Special Risk Insurance Segment ... 79.2 60.3 57.3 53.4 61.1 34.4 17.8 -- --65.9 38.9
Colonial CompaniesProducts Segment ......... 92.4 87.7 62.7 70.4
60.5 57.5 46.7 42.2 37.8 32.5
Individual Disability (188.2) 69.0 44.6 36.7 25.9 16.3 (3.2) 2.5
Retirement Security 25.7 21.1 6.7 (2.1) 0.4 6.6 13.3 15.6
Other Operations 8.5 20.8 16.5 (16.5) 20.5 9.4 (0.9) (43.8)Products Segment ...... 1.4 45.5 42.0 54.3
Corporate ........................ (46.7) (28.6) (28.2) (17.4)
(5.7) (11.0) (19.9) (6.2) 10.9 4.2
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ---------
Total income before income taxes and
cumulative effects of accounting
changes ........................... 341.6 381.9 198.6 460.3
-------- -------- -------- ---------
Income taxes (credit) ............... 103.6 100.8 43.9 148.3
-------- -------- -------- ---------
Cumulative effects of accounting
changes ........................... -- -- -- (12.1)(b)
-------- -------- -------- ---------
Net income ........................ $ 238.0 $ 281.1 $ 154.7 $ 299.9
======== ======== ======== =========
Per common share:
Net income ........................ $ 3.26 $ 3.87 $ 2.09 $ 3.81(b)
Dividends paid ..................... $ 1.09 $ 1.035 $ 0.92 $ 0.765
======== ======== ======== =========
Year Ended December 31,
--------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
----------- ----------- ----------- ---------- --------- -----------
Income Statement Data
Revenues:
Premiums and other income
(expense):
Disability Insurance Segment ...... $1,339.8 $1,214.6 $1,004.7 $ 803.8 $ 681.7 $ 630.8
Special Risk Insurance Segment ... 432.8 368.5 347.0 306.2 176.3 165.7
Colonial Products Segment ......... 371.9 325.4 281.1 241.0 216.7 192.1
Retirement Products Segment ...... 52.5 64.4 92.8 130.2 180.0 238.5
Corporate ........................ 0.8 -- (0.1) 0.2 -- 0.9
-------- -------- -------- ------- -------- -------
Total premiums and other income ... 2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0
-------- -------- -------- ------- -------- -------
Net investment income (expense): (a)
Disability Insurance Segment ...... 370.5 333.8 285.4 239.4 193.1 167.8
Special Risk Insurance Segment ... 32.2 26.5 23.4 24.5 12.5 12.1
Colonial Products Segment ......... 35.4 38.5 25.2 26.7 22.3 19.0
Retirement Products Segment ...... 408.7 411.3 426.1 424.0 413.2 418.2
Corporate ........................ 3.9 1.5 (9.0) 5.9 20.3 19.1
-------- -------- -------- ------- -------- -------
Total net investment income ...... 850.7 811.6 751.1 720.5 661.4 636.2
-------- -------- -------- ------- -------- -------
Total revenues ..................... 3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2
-------- -------- -------- ------- -------- -------
Benefits and expenses:
Disability Insurance Segment ...... 1,446.6 1,306.4 1,093.7 878.8 756.0 701.4
Special Risk Insurance Segment ... 418.7 355.2 342.2 312.9 180.4 172.0
Colonial Products Segment ......... 346.8 306.4 259.6 225.5 201.1 178.6
Retirement Products Segment ...... 427.5 484.4 491.6 535.9 580.1 685.0
Corporate ........................ 10.4 12.5 10.8 12.3 9.5 15.7
-------- -------- -------- ------- -------- -------
Total benefits and expenses ...... 2,650.0 2,464.9 2,197.9 1,965.4 1,727.1 1,752.7
-------- -------- -------- ------- -------- -------
Income (loss) before income taxes
and cumulative effects of
accounting changes:
Disability Insurance Segment ...... 263.7 242.0 196.4 164.4 118.8 97.2
Special Risk Insurance Segment ... 46.3 39.8 28.2 17.8 8.4 5.8
Colonial Products Segment ......... 60.5 57.5 46.7 42.2 37.9 32.5
Retirement Products Segment ...... 33.7 (8.7) 27.3 18.3 13.1 (28.3)
Corporate ........................ (5.7) (11.0) (19.9) (6.2) 10.8 4.3
-------- -------- -------- ------- -------- -------
Total income before income taxes and
cumulative effects of accounting
changes ........................... 398.5 319.6 278.7 236.5 189.0 111.5
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ------- -------- -------
Income taxes (credit) 43.9 148.3............... 107.3 74.3 60.9 51.1 30.1 (4.7)
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ------- -------- -------
Cumulative effects of accounting
changes -- (12.1)(b)........................... -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- ------- -------- -------
Net income $ 154.7 $ 299.9........................ $ 291.2 $ 245.3 $ 217.8 $ 185.4 $ 158.9 $ 116.2
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------======== ======== ======== ======= ======== =======
Per common share:
Net income $2.09 $3.81(b) $3.71 $3.15 $2.73 $2.03 $1.57 $1.06........................ $ 3.71 $ 3.15 $ 2.73 $ 2.03 $ 1.57 $ 1.06
Dividends paid $0.92 $0.76-1/2 $0.62-1/2 $0.49 $0.37-1/2 $0.28-1/2 $0.23 $0.20
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
..................... $ 0.625 $ 0.49 $ 0.375 $ 0.285 $ 0.23 $ 0.20
======== ======== ======== ======= ======== =======
- --------
(a) Includes investment income and net realized investment gains.
(b) Effective January 1, 1993, UNUM adopted Financial Accounting Standard No.
106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," which decreased net income by $32.1 million, or $0.40 per share,
and Financial Accounting Standard No. 109, "Accounting for Income Taxes,"
which increased net income by $20.0 million, or $0.25 per share.
11
UNUM CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars and shares in millions)
December 31,
---------------------------------------------------
Balance Sheet Data 1996 1995 1994 1993
------------ ------------ ------------ ------------
Assets ............... $15,467.5 $14,787.8 $13,127.2 $12,437.3
Long-term debt ......... $ 409.2 $ 457.3 $ 182.1 $ 128.6
Stockholders' equity ... $ 2,263.1 $ 2,302.9 $ 1,915.4 $ 2,102.7
Shares outstanding ... 71.8 73.0 72.4 76.0
Weighted average shares
outstanding during the
year .................. 73.0 72.7 74.2 78.8
December 31,
------------
(DOLLARS AND SHARES IN MILLIONS) 1994 1993----------------------------------------------------------------------------
Balance Sheet Data 1992 1991 1990 1989 1988 1987
1986 1985
----------------------------------------------------------------------------------------------------------------------------------------- ------------ ------------ ------------ ------------ -----------
BALANCE SHEET DATA
Assets $13,127.2 $12,437.3............... $11,959.8 $11,310.9 $10,063.4 $9,045.7 $8,592.3 $7,783.0 $7,333.8 $6,019.0$ 9,045.7 $ 8,592.3 $ 7,783.0
Long-term debt $ 182.1 $ 128.6......... $ 77.2 $ 51.5 $ 77.2 $ 1.5 $ 1.5 $ 1.7
$ 1.4 --
Stockholders' equity $ 1,915.4 $ 2,102.7... $ 2,010.9 $ 1,755.5 $ 1,490.1 $1,445.0 $1,512.3 $1,463.8 $1,471.1 $ 770.0(a)1,445.0 $ 1,512.3 $ 1,463.8
Shares outstanding 72.4 76.0... 79.1 78.2 77.4 82.0 96.8 104.2 111.4 NA(a)
Weighted average shares
outstanding during the
year 74.2 78.8.................. 78.5 77.8 79.9 91.4 101.3 109.1 NA(a) NA(a)
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
(a) In November 1986, UNUM converted to a stock company from a mutual company.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSItem 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations
This management's discussion and analysis reviews the consolidated
financial condition of UNUM at December 31, 1994, and1996, the consolidated results of
operations for the past three years and, where appropriate, factors that may
affect future financial performance are identified and discussed. Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements, Notes to
Consolidated Financial Statements, and Selected Consolidated Financial Data.
To more clearly reflect UNUM's management of its businesses and to more
appropriately group its product portfolios, UNUM began reporting its operations,
effective January 1, 1995, principally in four business segments: Disability
Insurance, Special Risk Insurance, Colonial Products and Retirement Products.
Corporate includes transactions that are generally non-insurance related. For
comparative purposes, 1994 information was previously restated to reflect the
new reporting segments.
CONSOLIDATED OVERVIEW
(Dollars and shares in millions, except per
common share amounts, and percentage
increase (decrease) over prior year) 1996 1995 1994
1993 1992
---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------- ----------------------------- ------------------------- -----------
REVENUESIncome Data
Revenues
Premiums $2,732.4 10.4% $2,474.1 15.5% $2,142.4................................. $3,120.4 3.4% $3,018.2 10.9% $2,721.3
Investment income ........................ 802.2 (0.5) 806.3 4.7 770.2 (2.6) 790.4 (2.3) 809.2
Net realized investment gains ............ 3.4 nm 225.1 nm 45.6 (7.7) 49.4 19.0 41.5
Fees and other income ..................... 116.7 59.2 73.3 (2.9) 75.5
(9.1) 83.1 50.0 55.4
----------------------------------------------------------------------------------------------------------------------------------- --------- -------- ------ --------
Total revenues 3,623.7 6.7 3,397.0 11.4 3,048.5
BENEFITS AND EXPENSE 3,425.1 16.6 2,936.7 10.8 2,650.0
---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECTS OF ACCOUNTING CHANGES 198.6 (56.9) 460.3 15.5 398.5
INCOME TAXES 43.9 (70.4) 148.3 38.2 107.3
---------------------------------------------------------------------------------------------------------------------------........................... 4,042.7 (1.9) 4,122.9 14.1 3,612.6
Benefits and expenses ..................... 3,701.1 (1.1) 3,741.0 9.6 3,414.0
-------- --------- -------- ------ --------
Income before cumulative effects of
accounting changes 154.7 (50.4) 312.0 7.1 291.2
CUMULATIVE EFFECTS OF ACCOUNTING CHANGESincome taxes .................. 341.6 (10.6) 381.9 92.3 198.6
Income taxes --.............................. 103.6 2.8 100.8 nm 20.0 nm --
Postretirement benefits other than pensions, net of tax -- nm (32.1) nm --
---------------------------------------------------------------------------------------------------------------------------
NET INCOME43.9
-------- --------- -------- ------ --------
Net income .............................. $ 238.0 (15.3)% $ 281.1 81.7% $ 154.7
(48.4)======== ========= ======== ====== ========
Net income per common share ............... $ 3.26 $ 3.87 $ 2.09
======== ======== ========
Summary of income (loss)
before income taxes
Disability Insurance Segment ............... $ 215.3 (0.8)% $ 299.9 3.0%217.0 nm% $ 291.2
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before cumulative effects of accounting changes $ 2.09 $ 3.96 $ 3.71
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 0.25 --
Postretirement benefits other than pensions, net of tax -- (0.40) --
---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2.09 $ 3.81 $ 3.71
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF INCOME (LOSS) BEFORE INCOME TAXES
Employee Benefits56.2
Special Risk Insurance Segment $ 257.8 7.8% $ 239.1 7.5% $ 222.5
Related Businesses............ 79.2 31.3 60.3 (8.5) 65.9
Colonial Products Segment 60.3 5.2 57.3 7.3 53.4
Colonial Companies.................. 92.4 5.4 87.7 39.9 62.7
Retirement Products Segment 62.7 (10.9) 70.4 16.4 60.5
Individual Disability Segment (188.2) nm 69.0 54.7 44.6
Retirement Security Segment 25.7 21.8 21.1 nm 6.7
Other Operations Segment 8.5 (59.1) 20.8 26.1 16.5............... 1.4 (96.9) 45.5 8.3 42.0
Corporate ................................. (46.7) 63.3 (28.6) 1.4 (28.2)
62.1 (17.4) nm (5.7)
----------------------------------------------------------------------------------------------------------------------------------- --------- -------- ------ --------
Total income before income taxes ......... $ 341.6 (10.6)% $ 381.9 92.3% $ 198.6
(56.9)%======== ========= ======== ====== ========
Balance Sheet Data
Assets .................................... $15,467.5 $14,787.8 $13,127.2
Notes Payable .............................. $ 460.3 15.5%526.9 $ 398.5
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
1994 1993 1992
BALANCE SHEET DATA
Assets $13,127.2 $12,437.3 $11,959.8
Long-term debt583.8 $ 182.1 $ 128.6 $ 77.2428.7
Stockholders' equity $ 1,915.4 $ 2,102.7 $ 2,010.9........................ $2,263.1 $2,302.9 $1,915.4
Shares outstanding ........................ 71.8 73.0 72.4 76.0 79.1
Weighted average shares outstanding
during the year ........................... 73.0 72.7 74.2 78.8 78.5
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
- --------
nm = not meaningful or in excess of 100%
13
CONSOLIDATED OVERVIEW
DuringIn 1996, net income decreased by $43.1 million to $238.0 million, or $3.26
per share, from $281.1 million, or $3.87 per share, in 1995. Net income was
$154.7 million, or $2.09 per share, for the year ended December 31, 1994. A
comparison of net income is impacted by the inclusion of realized investment
gains, which were significantly higher in 1995, and several special items that
occurred in 1996, 1995 and 1994. This management's discussion and analysis
discusses the results of operations on a pretax operating income basis, which is
defined as income (loss) before income taxes exclusive of realized investment
gains (losses) and certain special items. Special items are excluded from pretax
operating income as management considers them to be unusual, and also believes a
discussion of the results on a pretax operating income basis provides a better
understanding of the results of operations. The following table summarizes
pretax operating income (loss) for the four business segments and Corporate for
the years ended December 31, 1996, 1995 and 1994, and is followed by a
discussion of the special items for those periods and a reconciliation of income
(loss) before income taxes to pretax operating income (loss).
(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
- ---------------------------------------------- ------------------------ -------------------- ---------
Summary of pretax operating
income (loss)
Disability Insurance Segment ............... $278.4 28.2% $217.2 (1.7)% $220.9
Special Risk Insurance Segment ............ 90.2 50.8 59.8 (9.0) 65.7
Colonial Products Segment .................. 92.7 20.7 76.8 25.9 61.0
Retirement Products Segment ............... 13.6 (37.3) 21.7 (45.5) 39.8
Corporate ................................. (37.5) 29.8 (28.9) 4.7 (27.6)
------ ------ ------ ---- ------
Total pretax operating income ............ $437.4 26.2% $346.6 (3.7)% $ 359.8
====== ====== ====== ==== ======
UNUM reported increased pretax operating income for the year ended December
31, 1996, as compared with the same period in 1995. The increase was primarily
attributable to improved claims experience and management's continued focus on
risk management programs, both of which lowered the benefit ratios for certain
product lines. In particular, group long term disability ("group LTD") and UNUM
Limited, reported in the Disability Insurance segment, and the group life
business, reported in the Special Risk Insurance segment, were favorably
affected by lower benefit ratios. Increased investment income also favorably
affected pretax operating income in the Disability Insurance and Special Risk
Insurance segments. Partially offsetting these favorable items were increased
operating expenses in the Disability Insurance segment, in the group life
business reported in the Special Risk Insurance segment and in Corporate. In
addition, certain other disability products were negatively affected by higher
benefit ratios.
The decrease in pretax operating income in 1995 was primarily attributable
to higher benefit ratios at UNUM Limited and in the group LTD and group life
businesses, increased interest expense, and lower interest spread margins on the
tax sheltered annuity business. Partially offsetting these items were increased
investment income, a lower benefit ratio in the individual disability business,
and lower expenses.
Realized Investment Gains
During the second quarter of 1995, UNUM sold virtually all of the common
stock portfolio of its United States subsidiaries, primarily due to
consideration of statutory capital requirements associated with investment in
common stocks and to increase future investment income. The sale of the common
stock portfolio contributed to significantly higher pretax realized investment
gains for the year ended December 31, 1995, as compared with 1996 and 1994. UNUM
reinvested the proceeds from the sale of the common stock portfolio primarily in
investment grade fixed income assets, which decreased the required amount of
statutory capital for regulatory purposes and increased investment income.
Dependent on capital considerations and market conditions, UNUM may invest in
equity securities in the future.
Special Items in 1996
Individual Disability Reinsurance Fees
During the fourth quarter of 1996, UNUM executed a definitive reinsurance
agreement between UNUM Life Insurance Company of America ("UNUM America") and
Centre Life Reinsurance Limited ("Centre Re"), a
14
Bermuda based reinsurance specialist, for reinsurance coverage of the active
life reserves of UNUM America's existing United States non-cancellable
individual disability block of business. As a result, UNUM recognized a pretax
charge of $49.7 million in the Disability Insurance segment, which represents
the present value of the anticipated minimum amount of fees to be paid to Centre
Re under the agreement. For additional information see the Disability Insurance
segment discussion.
Intangible Asset Write-offs and Future Loss Reserves
In connection with the merger of Commercial Life Insurance Company
("Commercial Life") into UNUM America, the sale of UNUM America's tax sheltered
annuity business, as well as UNUM's continued efforts to strengthen its focus on
its core products, the company initiated a review of certain products, which
resulted in the recognition of pretax charges totaling $39.4 million during
third quarter 1996. These charges reduced income before income taxes by $13.1
million in the Disability Insurance segment, $11.3 million in the Special Risk
Insurance segment, and $15.0 million in the Retirement Products segment, for the
year ended December 31, 1996.
The charges include the write-off of certain intangible assets, primarily
deferred acquisition costs, totaling $17.0 million. These intangible assets have
been deemed unrecoverable primarily due to the expectation of continued losses
in the Association Group disability business. Additionally, in conjunction with
the completion of a review of UNUM's discontinued product portfolio, a $22.4
million charge was taken to establish a reserve for the present value of
expected future losses on certain discontinued products. Future losses for these
products will be charged to the reserve at the time the losses are realized. The
products incorporated in the charge consist of certain discontinued special
risk, retirement and medical products. UNUM is pursuing the sale of some of
these discontinued product lines.
Commercial Life Merger and Integration Costs
During the third quarter of 1996, actions related to the merger of
Commercial Life into UNUM America resulted in a $10.1 million increase in
operating expenses for Corporate. The $10.1 million charge consisted of $2.9
million of direct costs incurred and the recording of a $7.2 million
restructuring charge to recognize $2.8 million of future severance costs for 120
employees and $4.4 million of lease exit costs, primarily related to the merger.
Special Items in 1995
Disability Reserve Increase from Portfolio Rate Adjustment
Reserves for certain disability products are discounted using an interest
rate which is a composite yield of assets identified with each product. As a
result of the sale of the common stock portfolio, which had partially supported
these disability reserves, and the subsequent reinvestment of the proceeds
primarily in investment grade fixed income assets at yields below the average
portfolio yield, certain reserve discount rates were lowered during second
quarter 1995. For the year ended December 31, 1995, the effect of lowering these
discount rates was primarily attributablean increase to the reserve liabilities and benefits to
policyholders reported in the Disability Insurance segment of $128.6 million.
Group LTD IBNR Increase
During the second quarter of 1995, UNUM increased the group LTD reserves
for incurred but not reported ("IBNR") claims and benefits to policyholders
reported in the Disability Insurance segment by $38.4 million. IBNR reserves,
which are established to fund anticipated case reserves for claims which have
been incurred but not reported to UNUM, are actuarially established based on
various factors, including incidence levels and claims severity. The increased
IBNR reserves were based on management's judgment that claims incurred but not
yet reported would reflect increased levels of claims incidence and severity.
Association Group Disability Reserve Strengthening
In 1995, the Association Group disability business was negatively affected
by unfavorable claims experience, in twowhich management attributed to certain
geographical and occupational segments, particularly dentists and physicians.
During the fourth quarter of UNUM's largest
product lines, individual1995, UNUM increased reserves for unpaid claims
related to the Association Group disability asbusiness by $15.0 million reported
in the Individual Disability segment, and group long term disability, asInsurance segment. These increased reserves were based on
management's expectations of slower than expected claim recoveries.
15
Other Charges
To strengthen its focus on its core products, UNUM recognized a charge in
the third quarter of 1995 for costs associated with the sale of its dental
business reported in the Employee BenefitsSpecial Risk Insurance segment. As further describedThe charge, which
primarily consisted of the write-off of deferred acquisition costs, reduced
income before income taxes by $2.8 million.
During the second quarter of 1995, UNUM recorded an additional charge for
costs associated with the previously announced decision to discontinue the
individual disability non-cancellable product and organizational changes within
UNUM America, which increased operating expenses by $5.0 million. This charge
reduced income before income taxes by $2.9 million in the Disability Insurance
segment, $1.1 million in the Special Risk Insurance segment, and $1.0 million in
the Retirement Products segment for the year ended December 31, 1995.
Special Items in 1994
Individual Disability segment, throughoutReserve Strengthening
Throughout 1994, UNUM's individual disability business in the United States experienced a higher
incidence of new claims and a disproportionate number of largerlarge claims, thatwhich
management has attributed to certain geographicalgeographic and occupational segments of the
business, particularly physicians. During the third quarter of 1994, management
concluded that the deterioration of claims experience was not a temporary
fluctuation in certain segments of the business, but was indicative of expected
claim trends for the future. As a result, in third quarter 1994, UNUM increased
reserves for existing claims by $83.3 million and established a reservestrengthened reserves for
estimated future estimated
losses ofby $109.1 million. These increased reserves reflect management's current
expectations for morbidity trends for the existing individual disability
business, as reported in the Individual Disability segment. This reserve
strengthening resultedmillion, resulting in an increase to benefits
to policyholders reported in the Consolidated Statement of IncomeDisability Insurance segment of $192.4 million and a decrease to net incomemillion.
These increased reserves reflected management's expectations of $125.1 million, or $1.69 per share,morbidity trends
for the year ended December 31, 1994.existing non-cancellable individual disability business. It is not
possible to predict whether morbidity trends will be consistent with UNUM's
current assumptions.
Duringassumptions; however, as of December 31, 1996, management believes that the
strengthened reserve levels continue to be adequate.
Restructuring Charges
In the fourth quarter of 1994, UNUM's North American group long termUNUM recorded a pretax charge of $14.4
million related to the decision to discontinue the individual disability
results, as
reportednon-cancellable product and the acceleration of organizational changes within
UNUM America, which increased operating expenses in the Employee BenefitsDisability Insurance
segment were adversely affected through a
combinationfor the year ended December 31, 1994. The charge consisted of increased incidence$9.2
million for severance costs for 379 employees and $5.2 million for exit costs of
new claimscertain leased facilities and an increased numberequipment.
16
Reconciliation of large claims. Management continuesIncome (Loss) Before Income Taxes to address these unfavorable claim trendsPretax Operating Income
(Loss)
The following table reconciles income (loss) before income taxes to pretax
operating income (loss) for the four business segments and Corporate for the
years ended December 31, 1996, 1995 and 1994:
Disability Special Risk Colonial Retirement Consolidated
(Dollars in millions) Insurance Insurance Products Products Corporate UNUM
- -------------------------------------------- ------------- --------------- ----------- ---------- --------- ------------
Year Ended December 31, 1996:
Income (loss) before income taxes ......... $ 215.3 $ 79.2 $ 92.4 $ 1.4 $ (46.7) $ 341.6
Exclude realized investment (gains) losses 0.3 (0.3) 0.3 (2.8) (0.9) (3.4)
------- ---- ------ ------ -------- -------
215.6 78.9 92.7 (1.4) (47.6) 338.2
Special items:
ID reinsurance fees ..................... 49.7 -- -- -- -- 49.7
Write-offs and future loss reserves ...... 13.1 11.3 -- 15.0 -- 39.4
Merger and integration costs ............ -- -- -- -- 10.1 10.1
------- ---- ------ ------ -------- -------
Pretax operating income (loss) ............ $ 278.4 $ 90.2 $ 92.7 $ 13.6 $ (37.5) $ 437.4
======= ==== ====== ======= ======== =======
Year Ended December 31, 1995:
Income (loss) before income taxes ......... $ 217.0 $ 60.3 $ 87.7 $ 45.5 $ (28.6) $ 381.9
Exclude realized investment gains ......... (184.7) (4.4) (10.9) (24.8) (0.3) (225.1)
------- ---- ------ ------ -------- -------
32.3 55.9 76.8 20.7 (28.9) 156.8
Special items:
Disability reserve increases ............ 128.6 -- -- -- -- 128.6
Group LTD IBNR increase .................. 38.4 -- -- -- -- 38.4
Association Group reserves ............... 15.0 -- -- -- -- 15.0
Other charges ........................... 2.9 3.9 -- 1.0 -- 7.8
------- ---- ------ ------ -------- -------
Pretax operating income (loss) ............ $ 217.2 $ 59.8 $ 76.8 $ 21.7 $ (28.9) $ 346.6
======= ==== ====== ======= ======== =======
Year Ended December 31, 1994:
Income (loss) before income taxes ......... $ 56.2 $ 65.9 $ 62.7 $ 42.0 $ (28.2) $ 198.6
Exclude realized investment (gains) losses (42.1) (0.2) (1.7) (2.2) 0.6 (45.6)
------- ---- ------ ------ -------- -------
14.1 65.7 61.0 39.8 (27.6) 153.0
Special items:
ID reserve strengthening .................. 192.4 -- -- -- -- 192.4
Restructuring charges ..................... 14.4 -- -- -- -- 14.4
------- ---- ------ ------ -------- -------
Pretax operating income (loss) ............ $ 220.9 $ 65.7 $ 61.0 $ 39.8 $ (27.6) $ 359.8
======= ==== ====== ======= ======== =======
Pretax Operating Income (Loss) by increasing prices on selected new and inforce business, implementing more
stringent underwriting guidelines, and strengthening risk management programs.
Management believes these actions will strengthen UNUM's ability to deal with
these disability claims trends intoSegment
The following sections discuss the future, and that the level of future
earningsresults of the group long term disability product will be a function of the
effectiveness of these continuing actionsfour business segments
and the time required for these
actions to take effect.
During 1994, several of UNUM's businesses were contending with various proposals
to reform the health care delivery system in the United States. While proposed
federal health care legislation was not enacted in 1994, structural reform is
under way, which UNUM believes has and will continue to alter the medical
profession, as well as the social and economic environment of the health care
industry. Management believes the uncertainties as to how the health care
industry will emerge from such structural reform, as well as changes in and
consolidation of the health care delivery system, contributed to a higher
incidence of new and larger claims for physicians.
The interest rate environment changed dramatically during 1994, as long-term
interest rates rose from a more than twenty-year low experienced in 1993, along
with increases in the prime lending rates and short-term rates. However,
average investment yields on new fixed maturity purchasesCorporate for the past two years remain below the existing average portfolio yield, which has decreased the
average rate used to discount disability claim reserve liabilitiesended December 31, 1996, 1995 and decreased
levels of investment income in 1994 and 1993, despite continued growth in
invested assets. Management anticipates that the average investment portfolio
yield will further decline, since UNUM invests its cash flows in high quality
assets that currently have yields below the existing average portfolio yields.
Economic indicators at the end of 1994 and in early 1995 were predicting modest
growth in 1995 for UNUM's major markets: the United States, Canada and the
United Kingdom. In February 1995, the Federal Reserve Board tightened credit
policy, due to continued concerns about inflation, by raising the federal funds
rate to 6%, the highest level in four years. This represents an increase of
three full percentage points since the Federal Reserve Board started raising
rates in February 1994. Also in 1994, the central banks in Canada and the
United Kingdom increased interest rates. During 1994, long-term yields
increased; however, since long-term yieldsThese
business segment discussions are based on market dynamics,
management cannot predictpretax operating income (loss), which
excludes realized investment gains (losses) and the impact of a higher short-term rate on future long-
term yields.
The increase in income before income taxes in 1993 was primarily due to expense
management, favorable claims experience in the Individual Disability segment and
unusually favorable interest spread margins on tax sheltered annuities in the
Retirement Security segment. Expenses of $9.6 million, or $0.12 per share,
incurred in connection with the merger of UNUM and Colonial Companies, Inc.,
included in Corporate, and unfavorable group life claims experience in the
Employee Benefits segment partially offset these results.special items noted above.
17
ACCOUNTING CHANGES
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after January
1, 1994. Upon the adoption of FAS 115, UNUM increased unrealized gains on
available for sale securities included in stockholders' equity on January 1,
1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the
unrealized holding gains on fixed maturities classified as available for sale
which were previously carried at amortized cost. In accordance with FAS 115,
prior year consolidated financial statements have not been restated to reflect
the change in accounting principle. The adoption of FAS 115 did not affect 1994
net income.
Included in 1993 net income were the cumulative and incremental effects of the
adoption of FAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions," and FAS No. 109, "Accounting for Income Taxes."
Effective January 1, 1993, UNUM adopted FAS 106, which changed the method for
recognition of the cost of postretirement benefits other than pensions from a
cash basis to an accrual basis over the years in which employees render the
related services. UNUM elected to recognize the FAS 106 liability at January 1,
1993, of $48.8 million as a cumulative effect of an accounting change which
decreased net income by $32.1 million, or $0.40 per share, in 1993. The
incremental effect of FAS 106 for 1993 was increased operating expenses of
approximately $6.0 million from 1992.
Also effective January 1, 1993, UNUM adopted FAS 109, which changed the method
for calculating and reporting deferred income taxes in the financial statements
from the deferred method to the liability method. The cumulative effect of this
accounting change amounted to a $20.0 million increase, or $0.25 per share, in
1993 net income.
UNUM also adopted FAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," effective January 1, 1993, which
resulted in an increase in other assets of $80.0 million and a corresponding
increase in future policy benefits and unpaid claims and claim expenses, but did
not affect 1993 net income.
INCOME TAXES
Effective tax rates, which reflect income tax expense as a percentage of pretax
income, were 22.1%, 32.2% and 26.9% for 1994, 1993 and 1992, respectively. The
significant reduction in the effective tax rate for 1994 resulted primarily from
reduced pretax earnings. Reported income tax expense was below the federal
statutory tax rate of 35% for 1994 and 1993, and 34% for 1992, primarily due to
tax savings from investments in tax-exempt securities. Although investments in
tax-exempt securities result in increased consolidated net income, these
investments reduce UNUM's business segments' income before income taxes.
In 1993, UNUM's growth in pretax income outpaced the growth of income from tax-
exempt securities, which resulted in an increased effective tax rate. On August
10, 1993, legislation was enacted to increase the federal corporate income tax
rate of 34% to 35%, retroactive to January 1, 1993. The change in tax rates
resulted in a $7.8 million, or $0.10 per share, charge related to the adjustment
of deferred tax liabilities. Excluding the adjustment to deferred income tax
expense of $7.8 million for the enacted tax rate change, the 1993 effective tax
rate would have been 30.5%.
EMPLOYEE BENEFITSDISABILITY INSURANCE SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
1993 1992
--------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------- ------------------------- --------------------------- -----------
REVENUESRevenues
Premiums
Group LTD ................................. $1,094.6 0.6% $ 966.1 3.5%1,088.6 14.0% $ 933.4 20.4% $ 775.2955.0
Group lifeSTD ................................. 158.1 19.0 132.9 23.5 107.6
UNUM Limited .............................. 132.7 6.0 125.2 (11.2) 141.0
Individual disability ..................... 420.8 (0.5) 423.0 3.3 409.5
Other disability insurance 312.3 14.8 272.0 28.2 212.2
Other employee benefits 162.2 10.0 147.4 22.2 120.6
--------------------------------------------------------------------------------------------------------------------------.................. 83.7 (2.2) 85.6 5.9 80.8
-------- ------ --------- -------- -------
Total premiums 1,440.6 6.5 1,352.8 22.1 1,108.0........................... 1,889.9 1.9 1,855.3 9.5 1,693.9
Investment income 229.2 8.2 211.9 5.4 201.0468.8 14.8 408.2 14.0 358.2
Net realized investment gains 34.3 50.4 22.8 (31.7) 33.4(losses) ...... (0.3) nm 184.7 nm 42.1
Fees and other income 10.8 10.2 9.8 19.5 8.2
--------------------------------------------------------------------------------------------------------------------------........................ 27.8 13.0 24.6 10.3 22.3
-------- ------ --------- -------- -------
Total revenues 1,714.9 7.4 1,597.3 18.3 1,350.6
BENEFITS AND EXPENSES........................... 2,386.2 (3.5) 2,472.8 16.8 2,116.5
Benefits and expenses
Benefits to policyholders 1,117.0 9.7 1,018.3 26.0 808.0.................. 1,514.9 (11.5) 1,711.2 8.8 1,572.1
Operating expenses 290.9 2.2 284.6 9.7 259.5........................... 511.0 21.3 421.3 1.5 415.0
Commissions 108.0 10.3 97.9 10.7 88.4................................. 184.2 (4.8) 193.5 (0.9) 195.3
Increase in deferred policy acquisition costs (58.8) 38.0 (42.6) 53.2 (27.8)
--------------------------------------------------------------------------------------------------------------------------(39.2) (44.2) (70.2) (42.5) (122.1)
-------- ------ --------- -------- -------
Total benefits and expenses 1,457.1 7.3 1,358.2 20.4 1,128.1
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES............... 2,170.9 (3.8) 2,255.8 9.5 2,060.3
-------- ------ --------- -------- -------
Income before income taxes .................. 215.3 (0.8) 217.0 nm 56.2
Exclude realized investment (gains) losses 0.3 (184.7) (42.1)
Special items (a) ........................... 62.8 184.9 206.8
-------- --------- -------
Pretax operating income (a) .................. $ 257.8 7.8%278.4 28.2% $ 239.1 7.5%217.2 (1.7)% $ 222.5
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------220.9
======== ====== ========= ======== =======
Sales (annualized new premiums)
Group LTD ................................. $ 218.0218.7 $ 196.2197.9 $ 160.0215.4
Group life insuranceSTD ................................. $ 91.274.0 $ 89.452.4 $ 77.6
Other employee benefits47.8
UNUM Limited .............................. $ 63.614.3 $ 52.914.2 $ 46.715.5
Individual disability ..................... $ 26.4 $ 35.6 $ 74.0
Persistency (premiums)
Group LTD ................................. 83.6% 82.8% 84.0%
88.7% 90.3%
Group life insuranceSTD ................................. 84.5% 84.8% 89.2% 89.2%83.8%
UNUM Limited .............................. 85.6% 89.1% 89.9%
Individual disability ..................... 92.5% 91.8% 92.4%
Benefit ratio (% of premiums) 77.5% 75.3% 72.9%............... 80.2% 92.2% 92.8%
Operating expense ratio
(% of premiums) 20.2% 21.0% 23.4%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------........................... 27.0% 22.7% 24.5%
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income and a detailed description of
special items see the Consolidated Overview.
18
EMPLOYEE BENEFITS SEGMENT
The Employee BenefitsDisability Insurance segment includes group long term disability ("group LTD"),
group life and other employee benefits products including short term disability,
accidental death and dismemberment and dental insurance, which are sold byoffered
through: UNUM Life Insurance Company of America ("UNUM America") and First UNUM
Life Insurance Company ("First UNUM").
Increased sales and selected price increases on new and inforce cases
contributed to the premium growth of 6.5% in North America; UNUM Limited in the
Employee BenefitsUnited Kingdom; and UNUM Japan Accident Insurance Company Limited ("UNUM
Japan"). The products included in this segment are group LTD, group short term
disability ("group STD"), individual disability, Association Group disability,
disability reinsurance operations and long term care insurance.
Summary
The Disability Insurance segment's pretax operating income increased in
1994. Rate increases1996, as compared with 1995. The increase was primarily attributable to
address unfavorable experience on selected segments of
the inforce business contributed to the declineincreased investment income and lower benefit ratios in both the group LTD and groupat UNUM
Limited, partially offset by increased operating expenses for the segment and
higher benefit ratios in certain other disability businesses including
individual disability, disability reinsurance operations and Association Group
disability.
On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage
of the active life premium persistency ratesreserves of UNUM America's existing United States
non-cancellable individual disability ("ID") block of business. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM's announcement in 1994. In general, case terminations resulting
from rate increases have occurredlate 1994 that it would no longer market the
non-cancellable form of ID coverage in less profitable segmentsthe United States.
The agreement is a finite reinsurance arrangement that transfers
liabilities to Centre Re based on the level of these
businesses. Management expectsstatutory reserves. At December
31, 1996, active life reserves of $427 million and reserves established for
claims in 1996 of $137 million were ceded to continueCentre Re. Under the agreement,
Centre Re has an obligation to seek inforce case rate increases,
as appropriate, givenfund a defined risk layer, while UNUM will retain
the earnings risk related to potential adverse claims experience up to improve profitability. However,
such rate actions may increase case terminationsa certain
threshold. This threshold amount represents the existence of an experience layer
with a value of $195 million at December 31, 1996. UNUM has recorded the value
of the experience layer on its Consolidated Balance Sheet as a deposit asset.
UNUM funded its obligation under the agreement by transferring assets totaling
approximately $403 million into a trust account in late December 1996. The
assets transferred were equal to the experience layer plus reserves, determined
under generally accepted accounting principles, net of related deferred
acquisition costs. Future net cash flows of the block will be transferred
to/from the trust account and, decrease persistency rates
for these businesses. In 1994 and 1993, group LTD was activetogether with changes in acquiring
closed blocksreserve levels, will
determine the value of claims which generated one-time premiums totaling $8.6 million
and $58.3 million, respectively. Management intends to pursue additional claim
block acquisitionsUNUM's deposit asset. Changes in the future.deposit asset will
flow through UNUM's results of operations. The 22.1% premium growthagreement generated slightly more
than $200 million of statutory capital, which will be available to repurchase
UNUM common stock.
Increased investment income in 1993 reflected record sales inthe Disability Insurance segment for 1996
and 1995 was primarily a result of the reinvestment of the proceeds from the
sale of the common stock portfolio into investment grade fixed income assets.
During second quarter 1995, UNUM sold virtually all of the Employee
Benefits segment's product lines. Premium growth also reflected selected price
increases, acquisitionscommon stock
portfolio of closed blocksits United States subsidiaries, primarily due to consideration of
claims,statutory capital requirements associated with investment in common stocks and
slight growthto increase future investment income. As a result of the employment and salary levels for group LTD's existing customer base. Renewal
rate actions for group LTD had a minimal impact on the premium persistency rate
for 1993.
During 1994, the group LTD business experienced a higher incidence of new claims
and an increased number of large claims, which were the primary causessale of the increased benefit ratio forcommon
stock portfolio and the Employee Benefits segment from 1993. Management
has identified a number of geographical and occupational segmentssubsequent reinvestment of the group
LTD business which are experiencing higher than expected claims. Management
continues to pursue these segments ofproceeds, certain reserve
discount rates were lowered during the business for underwriting and pricing
actions, and is addressing increased incidence rates, lower recovery rates, and
the more subjective nature of the types of disability claims by implementing
new, and enhancing existing, risk management programs.
Group LTD earnings in 1994 were also adversely affected by a decrease in thesecond quarter 1995. The discount rate
used to determine group LTD reserves from 9.34%was reduced to 8.00% at December 31, 1993, toJune 30, 1995, as
compared with 9.18% at December 31, 1994, which resulted in an increase1994. Since that time the reserve discount
rates for certain disability products have continued to claim reserves.
The discount rate is a composite yield of assets specifically matched with the
group LTD reserves.decline. Management
expects the discount rate will further decline,declines, since current cash flows are invested in high quality
assets at current yields, which are below the composite yieldsyield of the existing
assets purchased in prior years. The group LTD discount rate was 7.88% and 7.94%
at December 31, 1996, and 1995, respectively. The impact of increased investment
income was partially offset by the effects of these lower discount rates for
certain disability products in 1996 and 1995. UNUM has increasedperiodically adjusts prices
on both existing and new business in orderan effort to mitigate the impact of the
current interest rate environment.
Reserves for unpaid claims are estimates based on UNUM's historical
experience and other actuarial assumptions whichthat consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to interest rates and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. ReserveManagement continuously monitors
claim trends and responds by periodically adjusting prices on selected new and
inforce business, refining underwriting guidelines, and strengthening risk
management programs. In addition, reserve estimates and assumptions are
periodically reviewed and updated with any resulting adjustments to reserves
19
reflected in benefits to policyholders of the current operating results.period. Given
the complexity of the reserving process, the ultimate liability may be more or
less than such estimates indicate.
Deferrals of policy acquisition costs decreased in 1996 and 1995 primarily
due to lower sales of the traditional, fixed price, non-cancellable individual
disability product, as it was discontinued in each state during 1996 and 1995
following regulatory approval of the Lifelong Disability Protection product.
Pretax operating income decreased slightly in 1995, as compared with 1994,
primarily attributable to higher benefit ratios at UNUM Limited and in group
LTD, and the inclusion of the results of UNUM Japan's operations in the
Disability Insurance segment effective January 1, 1995. Partially offsetting
these decreases were increased investment income, a lower benefit ratio in the
individual disability business, and decreased operating expenses for the
segment.
Claim block acquisitions, which generated one-time premium in the
Disability Insurance segment in 1996, 1995 and 1994, are summarized in the table
below. Management intends to pursue additional claim block acquisitions in the
future. Additionally, premium for individual disability includes the recapture
of reinsurance premium totaling $10.6 million in 1996.
Year Ended December 31,
-----------------------------
(Dollars in millions) 1996 1995 1994
- ----------------------------------------- -------- -------- -------
Group LTD .............................. $10.0 $63.8 $17.4
UNUM Limited ........................... 1.3 -- 40.2
Long Term Care Insurance ............... -- 4.9 14.7
Disability Reinsurance Operations ...... -- 3.6 --
------ ------ ------
Total ................................. $11.3 $72.3 $72.3
====== ====== ======
Group Long Term Disability
During 1996, pretax operating income for group LTD was favorably affected
by increased investment income and a lower benefit ratio, partially offset by
increased operating expenses primarily from continued investment in benefit
management practices and product distribution. The lower benefit ratio was
primarily the result of lower claims incidence and higher claim recoveries,
which management primarily attributes to the continued success of its risk
management programs.
Excluding the effects of claim block acquisitions, group LTD reported
premium growth of 5.8% in 1996, reflecting increased new sales and selected
price increases. Group LTD experienced improved sales and persistency in 1996,
as compared with 1995, when prices were significantly increased in certain
segments of the business resulting in a high level of case terminations for
1995. In general, case terminations from price increases have occurred in less
profitable segments of the business. Management continues to take actions to
increase premium and sales growth, including a focus on improving premium
persistency and strengthening the product distribution channel.
During 1995 and 1994, management implemented and strengthened various risk
management programs to address the unfavorable claims trends experiencedexperience in group LTD.LTD
during those periods. In addition to the selected price increases on new and
inforce business, more stringent underwriting practices, and reducingthe reduction of
benefit options for certain segments of the business, management has established
special claims units for both its group LTD and individual disability businesses
to address specific aspects of disability claims, including complex and
fraudulent claims. Additionally, management has implemented new group LTD contract
provisions whichthat provide risk management features and claimant rehabilitation
incentives. Also,
managementManagement continually reviews the benefits management process to
identify and strengthen risk management policies and procedures.
Management believes these underwriting, pricingUNUM Limited
For the year ended December 31, 1996, UNUM Limited's pretax operating
income was favorably affected by a lower benefit ratio and increased investment
income, as compared with the corresponding period in 1995. The lower benefit
ratio was primarily the result of a focus on strengthening risk management
actions will
strengthen UNUM's ability to deal with these disabilityprograms and improved new claims trends into the
future, andexperience. Management believes that the level
of future earnings of the group LTD productfor UNUM Limited will be a function of various factors,
including but not limited to, the effectiveness of these continuing risk
management actions over
20
time. Additionally, UNUM Limited incurred increased operating expenses in 1996,
which were primarily the result of increased investments in information systems
technology and risk management programs. Due to the relative size of UNUM
Limited's block of business, operating results can exhibit claims variability.
In general, UNUM Limited's earnings expressed in British pound sterling are
affected by fluctuations in the exchange rates used in the translation of
earnings into U.S. dollars. The weighted average exchange rate was approximately
$1.56, $1.58 and $1.53 for the years ended December 31, 1996, 1995 and 1994,
respectively. At December 31, 1996, the spot rate was approximately $1.71.
Individual Disability
As a result of the merger of Commercial Life into UNUM America, which was
effective December 31, 1996, UNUM now reports the operations of the Association
Group disability business with the individual disability business. Current and
prior period information for individual disability has been restated to reflect
this change.
For the year ended December 31, 1996, pretax operating income for
individual disability was favorably affected by increased investment income,
partially offset by a higher benefit ratio as compared with the same period in
1995. The higher benefit ratio was primarily attributable to a decrease in
premium growth and the time required
for these actions to take effect.
The group life business reported favorable claims experience in 1994.
Management continues to address higher than expected claims in certain portionsinclusion of the Association Group disability business,
which was affected by imposing more stringent underwriting requirements and
increasing prices. Management believes these actions improved overallunfavorable claims experience for group life productsexperience. Premium growth continued to
decline as a result of the transition to the guaranteed renewable Lifelong
Disability Protection ("LDP") product as a result of management's decision in
1994.
The ratiolate 1994 to discontinue sales of the traditional, fixed price, non-
cancellable product in the United States. Following the approval of the LDP
product, sales of the non-cancellable individual disability product have been
discontinued in the United States.
Group Short Term Disability
Group STD's contribution to the Disability Insurance segment's pretax
operating expensesincome continued to premiums was 20.2%, 21.0%, and 23.4%increase in 1994,
1993 and 1992, respectively. The decreases in 1994 and 1993 were attributable
to continued efforts to manage expense growth and increased premium from claim
block purchases in 1993, which do not have proportionally higher expenses.
Deferred policy acquisition costs increased in 1994 and 1993 due primarily to
deferrals of higher marketing costs associated with increased sales and renewal
activity.
In summary, the improvement in income before income taxes for the Employee
Benefits segment in 1994 was1996, primarily due to favorable claims experience instrong premium
growth, reflecting management's continuing efforts to cross-sell the group STD
products with group LTD and group life products. Partially offsetting the
effects of strong premium growth were higher operating expenses primarily
relating to investments in risk management programs and short termthe inclusion of certain
office relocation expenses in 1996.
Disability Reinsurance Operations
Pretax operating income for the disability businesses, a lower operating expense
ratio, and increased realized investment gains, which were partially offsetreinsurance operations was
adversely affected by unfavorable claims experience inand decreased premium, for
the group LTD business. Strong premium growth
and a lower operating expense ratio, which were partially offset by unfavorable
claims experience in the group life business and lower realized investment
gains, resulted in increased income before income taxes for 1993year ended December 31, 1996, as compared with 1992.the same period in 1995.
Management continues to focus on improving risk management programs and
strengthening underwriting standards to address this claims experience.
21
RELATED BUSINESSESSPECIAL RISK INSURANCE SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
1993 1992
--------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------- ------------------------ ------------------------ ---------
REVENUESRevenues
Premiums
Group life insurance ........................ $439.6 14.2% $384.8 12.1% $ 434.0 22.8% $ 353.4 4.9% $ 336.8343.3
Other special risk products ............... 277.5 (0.1) 277.8 26.4 219.8
------ ------ ------ --------- -------
Total premiums ........................... 717.1 8.2 662.6 17.7 563.1
Investment income 88.8 8.2 82.1 (6.2) 87.5........................... 56.2 27.7 44.0 8.6 40.5
Net realized investment gains 0.8 (76.5) 3.4 (17.1) 4.1............... 0.3 (93.2) 4.4 nm 0.2
Fees and other income 43.5 (11.4) 49.1 nm 17.6
--------------------------------------------------------------------------------------------------------------------------........................ 38.3 (3.5) 39.7 (9.8) 44.0
------ ------ ------ --------- -------
Total revenues 567.1 16.2 488.0 9.4 446.0
BENEFITS AND EXPENSES........................... 811.9 8.2 750.7 15.9 647.8
Benefits and expenses
Benefits to policyholders 333.2 24.0 268.7 2.3 262.7.................. 506.5 2.9 492.3 24.8 394.4
Operating expenses 127.3 3.6 122.9 30.1 94.5........................... 184.8 20.7 153.1 4.8 146.1
Commissions 53.1 13.5 46.8 9.1 42.9................................. 67.0 10.0 60.9 11.7 54.5
Increase in deferred policy acquisition costs (6.9) (12.7) (7.9) 3.9 (7.6)(25.6) 61.0 (15.9) 20.5 (13.2)
Interest expense ........................... -- nm -- (100.0) 0.1
(50.0) 0.2 nm 0.1
-------------------------------------------------------------------------------------------------------------------------------- ------ ------ --------- -------
Total benefits and expenses 506.8 17.7 430.7 9.7 392.6
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES............... 732.7 6.1 690.4 18.6 581.9
------ ------ ------ --------- -------
Income before income taxes .................. 79.2 31.3 60.3 (8.5) 65.9
Exclude realized investment gains ............ (0.3) (4.4) (0.2)
Special items (a) ........................... 11.3 3.9 --
------ ------ -------
Pretax operating income (a) .................. $ 60.3 5.2%90.2 50.8% $ 57.3 7.3%59.8 (9.0)% $ 53.4
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------65.7
====== ====== ====== ========= =======
Sales (annualized new premiums)
Group life insurance ........................ $150.0 $106.1 $ 90.8
Persistency (premiums)
Group life insurance ........................ 85.6% 83.0% 84.8%
Benefit ratio (% of premiums) 76.8% 76.0% 78.0%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------............... 70.6% 74.3% 70.0%
Operating expense ratio (% of
premiums) ................................. 25.8% 23.1% 25.9%
- --------
nm = not meaningful or in excess of 100%
RELATED BUSINESSES SEGMENT(a) For the definition of pretax operating income and a detailed description of
special items see the Consolidated Overview.
The Related BusinessesSpecial Risk Insurance segment includes:includes group life products sold by
UNUM Limited, the United Kingdom's
leader in group disability insurance;America and First UNUM, special risk accident insurance previously sold by
Commercial Life, Insurance Company
("Commercial"), a leader inwhich has been merged with UNUM America, and other special risk
insurance products. The segment also includes non-disability reinsurance
operations, which represent UNUM's participation in various reinsurance pools,
and professional association
insurance marketing; and Reinsurance Operations, which includesthe reinsurance underwriting management operations of Duncanson & Holt, Inc.
("D&H"), a leading accident and health reinsurance underwriting
manager, and other special risk reinsurance operations.
UNUM LIMITED
The depressed economic environment that affectedFor the United Kingdom in 1992 and
1993 experienced a modest recovery in 1994, which positively affected UNUM
Limited's ability to sell long term disability insurance. UNUM Limited
experienced strong premium growth in 1994 as sales increased and persistency
rates improved. Also in 1994, claim block acquisitions generated one-time
premium of $25.8 million. A reallocation of capital from UNUM Limited in 1992,
and a decreasing interest rate environment, resulted in decreased investment
income for the Related Businesses segment in 1993.
UNUM Limited experienced favorable claims levels for most of 1994, which
improved the benefit ratio from 1993. However, in late 1994, UNUM Limited
incurred unfavorable claims experience, which management is evaluating to
determine the need for pricing actions, changes in underwriting standards or
risk management programs. If the unfavorable claims experience that developed
in late 1994 were to continue, UNUM Limited's earnings could be negatively
affected. Due to the nature of the risks insured and the relative size of the
U.K. block of business, UNUM Limited's operating results can exhibit claims
variability. Investment in administrative procedures and systems was the
primary reason for increased operating expenses in 1993.
On April 1, 1995, the United Kingdom's new Social Security (Incapacity for Work)
Act of 1994 will be effective, and will shift a greater financial responsibility
for disability benefits from the U.K. government to the private sector.
Management believes this legislation will increase awareness of the need for
disability insurance and expand the U.K. insurance market for long term
disability products, which could favorably affect UNUM Limited's sales.
However, it is unclear when the effects of this legislation will be evidenced.
During 1994, the U.S. dollar weakened slightly against the British pound
sterling, increasing UNUM Limited's earnings as reported in U.S. dollars. This
reversed the trend in 1993 and 1992 when the U.S. dollar strengthened against
the British pound sterling, decreasing earnings as reported in U.S. dollars.
The weighted average exchange rate was approximately $1.53, $1.51 and $1.78 for
the yearsyear ended December 31, 1994, 1993 and 1992. At December 31, 1994,1996, as compared with 1995, the spot rate had increased to $1.56.
COMMERCIAL
Increased sales across all lines of Commercial's businessesSpecial
Risk Insurance segment reported an increase in 1994 benefited
premium growth, which was partially offset by higher than expected case
terminations.pretax operating income. The
1994 benefit ratio was driven by favorable experience in the
special risk product line, offset by unfavorable claims experience in the
association group disability business within certain occupational groups and
geographical areas. Management is implementing rate increases and stronger
underwriting policies to mitigate this unfavorable claims experience. The
decrease in the benefit ratio in 1993increase was primarily due to more favorable claims
experiencean improved benefit ratio in the association group disability business.life
business, increased investment income, and premium growth driven by strong
sales. These favorable factors were partially offset by a higher operating
expense ratio in group life, a higher benefit ratio in certain reinsurance
pools, and increased expenses in the reinsurance underwriting management
operations. Due to the nature of the risks underwritten and the relative size of
the blockblocks of business, Commercial's
special riskbusinesses, several of the Special Risk Insurance segment's
products can exhibit claims variability.
REINSURANCE OPERATIONS
In 1994, Reinsurance Operations had unfavorableThe improved benefit ratio for group life was primarily attributable to
favorable claims experience, coupled with pricing and risk management actions
implemented in certain1995. Solid sales results, improved persistency trends,
22
and continued renewal efforts contributed to the group life premium growth of
14.2%. Claim block acquisitions generated one-time premiums for group life and
reinsurance poolsoperations of $3.6 million and decreased$16.3 million, respectively, for
1996, and $1.3 million and $38.3 million, respectively, for 1995.
The decrease in pretax operating income for 1995, as compared with 1994,
was primarily attributable to increased claims in the group life and special
risk accident insurance businesses, combined with reduced fee income for D&H due to increased competition
and contract terminations. Fee income and operating expenses increased infrom the
Related Businesses segment in 1993 due to the full year inclusion of D&H, which
was acquired in third quarter 1992.
SUMMARY
Income before income taxes increased in 1994 for the Related Businesses segment,
primarily due to strongreinsurance underwriting management operations. Partially offsetting these
decreases were continued premium growth, and favorable claims experience at UNUM
Limited, partially offset by unfavorable claims experience in Commercial's
association group disability business and in
certain reinsurance pools.
The
principal reason for the increase in income before income taxes for the Related
Businesses segment in 1993 was the inclusion of D&H results for a full year,
which was partially offset by less favorable earnings for UNUM Limited due to a
lower weighted average exchange rate.
COLONIAL COMPANIESPRODUCTS SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
1993 1992
--------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------- ----------------------- ----------------------- --------
REVENUESRevenues
Premiums $ 439.1 8.7% $ 403.9 10.8% $ 364.6.................................... $493.7 4.4% $472.7 7.7% $439.1
Investment income ........................... 47.6 15.3 41.3 33.7 30.9 3.7 29.8 (0.3) 29.9
Net realized investment gains 1.7 (85.3) 11.6(losses) ...... (0.3) nm 5.510.9 nm 1.7
Fees and other income ........................ 4.5 87.5 2.4 9.1 2.2
(37.1) 3.5 (52.1) 7.3
-------------------------------------------------------------------------------------------------------------------------------- ----- ------ ----- ------
Total revenues ........................... 545.5 3.5 527.3 11.3 473.9
5.6 448.8 10.2 407.3
BENEFITS AND EXPENSESBenefits and expenses
Benefits to policyholders .................. 239.3 1.8 235.1 6.3 221.1 6.6 207.5 10.4 187.9
Interest credited ........................... 7.5 15.4 6.5 30.0 5.0 19.0 4.2 16.7 3.6
Operating expenses ........................... 122.6 6.9 114.7 7.1 107.1
13.7 94.2 1.0 93.3
Commissions ................................. 107.8 (1.0) 108.9 12.6 96.7 4.3 92.7 8.0 85.8
Increase in deferred policy acquisition costs (24.1) (5.9) (25.6) 36.9 (18.7)
(7.9) (20.3) (15.1) (23.9)
Interest expense -- (100.0) 0.1 -- 0.1
-------------------------------------------------------------------------------------------------------------------------------- ----- ------ ----- ------
Total benefits and expenses ............... 453.1 3.1 439.6 6.9 411.2
8.7 378.4 9.1 346.8
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES------ ----- ------ ----- ------
Income before income taxes .................. 92.4 5.4 87.7 39.9 62.7
Exclude realized investment (gains) losses 0.3 (10.9) (1.7)
------ ------ ------
Pretax operating income (a) .................. $ 62.7 (10.9)%92.7 20.7% $ 70.4 16.4%76.8 25.9% $ 60.5
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------61.0
====== ===== ====== ===== ======
Sales (annualized first month's
premiums) $ 183.1 $ 171.4 $ 179.7................................. $213.6 $200.4 $183.1
Benefit ratio (% of premiums) ............... 48.5% 49.7% 50.4% 51.4% 51.5%
Operating expense ratio (% of
premiums) ................................. 24.8% 24.3% 24.4% 23.3% 25.6%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
- --------
nm = not meaningful or in excess of 100%
COLONIAL COMPANIES SEGMENT(a) For the definition of pretax operating income see the Consolidated Overview.
The Colonial CompaniesProducts segment includes Colonial Life & Accident Insurance
Company ("Colonial") and affiliates, which offeraffiliates. Colonial offers payroll-deducted, voluntary
employee benefits to employees at their worksites. The Colonial Companies segment
("Colonial") markets accidentAccident and sickness, cancer
and life insurance products are marketed by Colonial primarily through
independent sales representatives.
In 1994,The Colonial experienced anProducts segment reported increased pretax operating income
for the year ended December 31, 1996, as compared with 1995. The increase in
sales, whichpretax operating income was attributedprimarily attributable to increased productivity from the sales organization and the offering of a number
of new products. In 1993, Colonial experienced a slight decrease in sales,
which management attributed to uncertaintyfavorable benefit ratios
in the marketplace aslife, and accident and sickness product lines, and increased investment
income, partially offset by an increased operating expense ratio. During 1996,
Colonial entered into an agreement to reinsure a majority of the types of
coverage that would be included in health care reform proposals. Management
does not feel that 1994 sales were asmortality risk
on new and inforce universal life business. The reinsurance agreement negatively
affected by health care reform
fears, as the focus shifted away from legislative health care restructuring
toward private market restructuring. Additionally, management views health care
reform as an opportunity for UNUM by allowing Colonial to leverage its expertise
in worksite marketing, since the workplace is considered to be a primary means
of access to insurance benefits in the developing healthcare environment. Whileaffects reported premium growth slowedand related expense ratios while positively
affecting reported benefit ratios. Colonial's pretax operating income increased
in 1995 as compared to 1994, enhanced customer conservation programs have
partially offset the weaker sales levels in 1993primarily because of increased investment income
and 1992 by improving
persistency.
Realized investment gains for 1993 include approximately $8.5 million of gains
associated with Colonial's sales of higher yielding but callable investments to
realign its investment portfolio with UNUM's investment philosophy. Fees and
other income for 1992 reflect $4.0 million received from the settlement of a
lawsuit against a competitor.an improved benefit ratio.
23
Colonial's benefit ratio improved again in 1996 to 48.5%, as compared with
49.7% in 1995 and 50.4% in 1994, from 51.4% in 1993. The
lower 1994 benefit ratio wasprimarily driven by the effect of the universal
life reinsurance agreement, continued favorable claims experience, and improved
incidence rates in mostthe life, and accident and sickness product lines, particularly in the cancer product line.
Management expects the benefit ratio to increase in the future as Colonial
continues to shift itslines.
Investment income increased during 1996, primarily because of increased
cash flows resulting from a product mix toward products withshift and a change in asset mix to
higher benefit ratios,
loweryielding securities. Investment income increased during 1995, primarily
because of increased cash flows and additional income realized from the
reinvestment of the proceeds from the second quarter 1995 sale of Colonial's
equity portfolio into investment grade fixed income assets.
The expense ratios and better persistency.
During 1994,ratio increased in 1996 primarily due to the impact of the
universal life reinsurance agreement. Excluding the impact of the universal life
reinsurance agreement, the expense ratio increased becausedeclined slightly compared to 1995 as a
result of higher than expected costs
associatedcontinuing expense management efforts.
During 1996, Colonial experienced slower growth in sales and premium as
compared with a1995, reflecting the effects of weaker sales organization realignmentgrowth during the
third and litigation expenses, which
were partially offsetfourth quarters of the year. Management is focusing on increasing
sales and premium at Colonial by continued expense control efforts. The decline in
1993's expense ratio reflected management's efforts to control expendituresenhancing collaborative sales across the UNUM
enterprise, introducing several new products and improve operational efficiencies.
Income before income taxes decreased in 1994 primarily because of reduced
realized investment gains and increased expenses, partially offset by favorable
claims experience. For 1993, Colonial's income before income taxes increased
primarily through continued expense control and a higher level of realized
investment gains attributed to the investment portfolio realignment.
INDIVIDUAL DISABILITYdeveloping alternative
distribution channels.
RETIREMENT PRODUCTS SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
1993 1992
--------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------- --------------------------- --------------------------- ---------
REVENUESRevenues
Premiums .................................... $ 346.8 11.2%19.7 (28.6)% $ 312.0 10.6%27.6 9.5% $ 282.225.2
Investment income 77.0 3.2 74.6 5.5 70.7........................... 214.4 (28.3) 298.9 (11.0) 335.8
Net realized investment gains 7.6 (3.8) 7.9 83.7 4.3............... 2.8 (88.7) 24.8 nm 2.2
Fees and other income 10.7 1.9 10.5 (1.9) 10.7
--------------------------------------------------------------------------------------------------------------------------........................ 46.1 nm 6.5 4.8 6.2
------ ---------- ------- --------- -------
Total revenues 442.1 9.2 405.0 10.1 367.9
BENEFITS AND EXPENSES........................... 283.0 (20.9) 357.8 (3.1) 369.4
Benefits and expenses
Benefits to policyholders 487.2 nm 212.0 3.7 204.4.................. 64.0 17.6 54.4 5.8 51.4
Interest credited ........................... 193.1 (12.6) 220.9 (7.1) 237.7
Operating expenses 122.3 18.2 103.5 3.5 100.0........................... 22.1 (33.8) 33.4 10.6 30.2
Commissions 82.5 9.1 75.6 6.0 71.3................................. 5.2 (21.2) 6.6 (29.8) 9.4
Increase in deferred policy acquisition costs (61.7) 12.0 (55.1) 5.2 (52.4)
--------------------------------------------------------------------------------------------------------------------------(2.8) (6.7) (3.0) nm (1.3)
------ ---------- ------- --------- -------
Total benefits and expenses 630.3 87.6 336.0 3.9 323.3
--------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES............... 281.6 (9.8) 312.3 (4.6) 327.4
------ ---------- ------- --------- -------
Income before income taxes .................. 1.4 (96.9) 45.5 8.3 42.0
Exclude realized investment gains ............ (2.8) (24.8) (2.2)
Special items (a) ........................... 15.0 1.0 --
------ ------- -------
Pretax operating income (a) .................. $ (188.2) nm%13.6 (37.3)% $ 69.0 54.7%21.7 (45.5)% $ 44.6
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized new premiums)39.8
====== ========== ======= ========= =======
Invested assets under management for
tax sheltered annuities, at end of
period .................................... $ 65.8 $ 63.2 $ 60.1
Persistency (premiums) 92.4% 92.1% 91.7%
Benefit ratio (% of premiums) 140.5% 67.9% 72.4%
Operating expense ratio (% of premiums) 35.3% 33.2% 35.4%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------305.3 $3,074.3 $3,065.0
====== ======= =======
- --------
nm = not meaningful or in excess of 100%
INDIVIDUAL DISABILITY SEGMENT
The Individual Disability segment includes disability(a) For the definition of pretax operating income products sold in
the United States and Canada through UNUM America and First UNUM, as well as
private label agreements through these companies.
The loss before income taxes of $(188.2) million for the Individual Disability
segment for 1994 is primarily due to the $192.4 million reserve strengthening
recorded in the third quarter of 1994 and a $12.3 million restructuring charge
incurred indetailed description of
special items see the fourth quarter as a result of the decision to stop selling non-
cancellable disability income policies in the United States. During 1994, the
Individual Disability segment experienced a higher incidence of new claims and a
disproportionate number of large claims that management has attributed to
certain geographic and occupational segments of the business, particularly
physicians. Management believes that changes in and consolidation of the health
care delivery system in the United States and the increased prevalence of
emerging and often subjective types of disabilities have contributed to
increased benefit costs.
During the third quarter of 1994, management concluded that the deterioration of
claims experience was not a temporary fluctuation in certain segments of the
business, but was indicative of expected claim trends for the future. Unlike
the group long term disability product, management has limited ability to manage
the claims risk associated with non-cancellable individual disability business,
since UNUM is contractually unable to reprice or cancel inforce policies that
have become unprofitable because of changes in claims experience that were
unforeseen when the policy was sold. The combination of these factors prompted
UNUM to assess the adequacy of future premiums to provide for future benefits
and expenses and the assumptions used in the existing claim reserves for the
Individual Disability segment. As a result, in third quarter 1994, UNUM
increased reserves for existing claims by $83.3 million and established a
reserve for estimated future losses of $109.1 million. These increased reserves
reflect management's current expectations for morbidity trends and record the
estimated future losses for the existing individual disability business, as
reported in the Individual Disability segment.
It is not possible to predict whether future morbidity trends will be consistent
with UNUM's current assumptions. During the fourth quarter of 1994, excess-of-
loss reinsurance totaling $60 million over three years was purchased through a
Lloyd's of London syndicate to cover UNUM's exposure to claims exceeding levels
assumed in the strengthened reserves. Management continues to evaluate its
financial options for this business, including reinsurance opportunities.
UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to state
regulatory approval, UNUM expects to introduce the new disability products to
most states during the second quarter of 1995. In connection with these product
changes, management expects to incur costs during 1995 to develop and market the
new individual disability products.
UNUM has further tightened underwriting rules and practices, and made other
product design limitations for the interim sales of the existing product. As a
result of the tightened underwriting of the existing product and the time needed
to develop the new products, management expects that sales of the Individual
Disability segment will decrease significantly in 1995 from levels in 1994.
UNUM is in continuing discussions with its private label partners as it develops
the new disability products to determine the future course of its private label
agreements. Private label agreements allow other insurance companies to market
UNUM's individual disability product under their own names.
In the fourth quarter of 1994, UNUM recorded a pretax charge of $12.3 million
related to the restructuring of the individual disability business and resulting
consolidation of home office operations in UNUM America, which was comprised of
$7.1 million for severance costs for 150 field and 150 home office employees and
$5.2 million for exit costs of certain leased facilities and equipment, expiring
through 1998. The severance costs are expected to be paid by the end of 1995.
The increase in income before income taxes for the Individual Disability segment
in 1993 from 1992 was primarily due to more favorable claims experience and
continued expense management.
RETIREMENT SECURITY SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 56.0 75.0% $ 32.0 17.6% $ 27.2
Investment income 225.4 (3.6) 233.8 0.3 233.0
Net realized investment gains (losses) 1.5 (11.8) 1.7 nm (4.2)
Fees and other income 6.5 51.2 4.3 (15.7) 5.1
-----------------------------------------------------------------------------------------------------------------------------
Total revenues 289.4 6.5 271.8 4.1 261.1
BENEFITS AND EXPENSES
Benefits to policyholders 53.7 69.4 31.7 -- 31.7
Interest credited 158.4 (3.9) 164.9 (8.4) 180.0
Operating expenses 47.1 (11.5) 53.2 43.4 37.1
Commissions 14.5 15.1 12.6 41.6 8.9
Increase in deferred policy acquisition costs (10.0) (14.5) (11.7) nm (3.3)
-----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 263.7 5.2 250.7 (1.5) 254.4
-----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 25.7 21.8% $ 21.1 nm% $ 6.7
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Invested assets under management, at end of period $3,065.0 $3,033.0 $2,929.9
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
RETIREMENT SECURITY SEGMENTConsolidated Overview.
The Retirement SecurityProducts segment includes tax sheltered annuities ("TSAs"TSA"), long
term care insurance, and beginning in 1993, lifestyle security protection
products, all of which are marketed by
UNUM America and First UNUM.
During 1994 and 1993, UNUM, offered the holders of certain types of TSA contracts
the opportunity to modify such contracts. The proposed contract amendments
provide for UNUM to increase the minimum guaranteed credited rates in return for
contractholders relinquishing the right to make lump-sum withdrawals without an
associated fee. As expected, certain contractholders elected to withdraw their
funds rather than convert to the modified contract provisions, which affected
the overall growth of invested assets under management. Management expects
these types of withdrawals to continue, which may affect future growth of
invested assets under management for TSAs.
During 1994, UNUM implemented an investment strategy to increase investments in
tax-exempt securities which has reduced income before income taxes for the
segment. Although investments in tax-exempt securities resulted in increased
consolidated net income, this investment strategy reduced the Retirement
Security segment's income before income taxes by approximately $6.7 million in
1994. In addition, the low interest rate environment during the past two years
has reduced the investment yields on TSA assets. As a result of these factors,
investment income decreased by $8.4 million and increased by only $0.8 million,
during 1994 and 1993, respectively.
As interest rates declined in 1993, the rate and level of interest credited to
TSA contractholders declined as well. Despite a rising interest rate
environment in 1994, the level of interest credited to TSA contractholders
continued to decline. As a result, the TSA business experienced unusually
favorable interest spread margins in 1994 and 1993. In 1994, 1993 and 1992, the
amount of interest credited to funds on deposit amounted to 70.3%, 70.5%, and
77.3% of investment income, respectively. Management does not expect interest
spread margins experienced by TSAs in 1994 and 1993 to continue at the same
level, which may reduce future earnings for the Retirement Security segment.
Management believes the failure of the last Congress to pass health care reform
legislation positively affected long term care insurance products, which
experienced premium and sales growth during 1994 after lower than expected
growth in 1993 due to the announcement of President Clinton's health care reform
proposal that included long term care coverage. During 1994, block acquisitions
generated one-time net premiums for long term care insurance products of $15.0
million. Management may pursue additional block acquisitions in the future.
Long term care insurance products experienced an increased incidence of new
claims during 1994, which management has addressed by implementing new
underwriting guidelines.
Income before income taxes increased in 1994 reflecting continued premium growth
and expense reductions in the long term care insurance products partially offset
by unfavorable claims experience. Additionally, during 1994 UNUM continued its
investment in the development of long term care and lifestyle security
protection products, and in a TSA business initiative which management expects
will improve customer acquisition and service functions as well as reduce future
operating expenses. Unusually favorable interest spread margins on tax
sheltered annuities were the primary reason for increased income before income
taxes in 1993.
OTHER OPERATIONS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
REVENUES $131.3 (27.0)% $179.9 (14.7)% $210.9
BENEFITS AND EXPENSES
Benefits to policyholders 35.9 (4.3) 37.5 (1.1) 37.9
Interest credited 79.3 (29.1) 111.9 (22.7) 144.8
Operating expenses 5.7 (5.0) 6.0 (11.8) 6.8
Commissions 1.1 (8.3) 1.2 (25.0) 1.6
Decrease in deferred policy acquisition costs 0.8 (68.0) 2.5 (24.2) 3.3
----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 122.8 (22.8) 159.1 (18.2) 194.4
----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 8.5 (59.1)% $ 20.8 26.1% $ 16.5
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
OTHER OPERATIONS SEGMENT
The Other Operations segment includes individual life insurance business of UNUM
Life Insurance Company of America, group medical insurance, guaranteed investment contracts ("GICs"), deposit
administration accounts ("DAs"), and
401(k) plans, individual life and group medical
insurance, all of which are no longer actively marketed by UNUM.
24
On October 1, 1996, UNUM America and First UNUM closed the sale of their
respective TSA businesses to The Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
purchase price (ceding commission) paid upon closing was approximately $71
million, and the transaction generated statutory capital of approximately $160
million. The contracts have initially been reinsured on an indemnity basis. Upon
consent of the TSA contractholders and/or participants, the contracts will be
considered reinsured on an assumption basis, legally releasing UNUM America and
First UNUM from future contractual obligation to the respective contractholders
and/or participants. The sale resulted in a deferred pretax gain of $80.8
million, which will be recognized in income as a special item in proportion to
contractholder and/or participant consents for assumption reinsurance, the
majority of which management believes will occur during 1997. Through March 1,
1997, consent for assumption reinsurance has been provided by TSA
contractholders and/or participants owning approximately 60% of assets under
management.
Fees and other income reported by the TSA business increased in 1996,
reflecting a $38.2 million reimbursement of interest credited from Lincoln under
the reinsurance agreement. UNUM will continue to report the amount of interest
credited to TSA contracts for which the consent to transfer from indemnity
reinsurance to assumption reinsurance has not been received, with an equivalent
amount being reported in fees and other income for the reimbursement from
Lincoln. The group TSA businesses accounted for $13.5 million, $16.4 million and
$31.6 million of the Retirement Products segment's pretax operating income in
1996, 1995 and 1994, respectively.
For the year ended December 31, 1996, the Retirement Products segment
reported decreased pretax operating income as compared with the same period in
1995. The decrease was primarily due to reduced investedearnings from the runoff of
GICs, DAs and 401(k) plans during the year and lower interest spread margins on
tax sheltered annuities through October 1, 1996, the effective date of the TSA
sale. For 1995, the decrease in pretax operating income was primarily
attributable to lower interest spread margins on tax sheltered annuities, as
compared with the unusually favorable levels experienced during 1994.
During 1996, investment income declined reflecting the transfer of $2,690
million of assets to Lincoln on October 1, 1996, to effect the sale of the TSA
business, and the shifting of assets to lower yielding, highly liquid,
instruments during the year in anticipation of the transfer. During 1995,
investment income decreased primarily due to investments in lower yielding
tax-exempt securities and a reduced average investment yield caused by the low
interest rate environment. In addition, the reduced asset base under management
for GICs, DAs and 401(k) plans has resulted in lower revenues from investment income and
reduced amounts of interest credited.credited during 1996 and 1995. Management expects
continued decreases in the amounts of investment income and interest credited as
the related GIC, DAGICs, DAs and 401(k) contracts mature or terminate.
Management expects future earnings in the Other
Operations segment to decline, reflecting the run-off nature of these closed
blocks of businesses.
During 1992, UNUM released the remaining restructuring reserve for the costs of
withdrawal from the 401(k) business since actual costs were less than expected,
resulting in increased pretax income of $5.3 million. The gain associated with
the release of this restructuring reserve reduced operating expenses in the 1992
Consolidated Statement of Income.
CORPORATE
(DOLLARS IN MILLIONS)(Dollars in millions) 1996 1995 1994
1993 1992
------------------------------------------------------------------------------- -------------------------------------------------- ---------------- ---------------- ---------
Loss before income taxes $(28.2) $(17.4) $(5.7)
------------------------------------------------------------------------------
------------------------------------------------------------------------------........................ $ (46.7) $ (28.6) $ (28.2)
Exclude realized investment (gains) losses ...... (0.9) (0.3) 0.6
Special items (a) .............................. 10.1 -- --
----- ----- -------
Pretax operating loss (a) ........................ $ (37.5) $ (28.9) $ (27.6)
===== ===== =======
- --------
(a) For the definition of pretax operating loss and a detailed description of
special items see the Consolidated Overview.
Corporate includes transactions that are generally non-insurance related,
expenses incurredrelated.
The increased pretax operating loss in conjunctionCorporate for the year ended December 31,
1996, as compared with UNUM's long-term strategic investment in
Japan1995, was primarily the result of increased international
development costs and interest expense on corporate borrowings.borrowings, partially offset
by increased investment income.
The increased pretax operating loss in 1995, compared with 1994, was
primarily attributable to increased interest expense, partially offset by
reduced operating expenses. Effective January 1, 1995, the operations of UNUM
Japan are reported in the Disability Insurance segment. Costs related to UNUM's
investment in Japan prior to January 1, 1995, were reported as operating
expenses in Corporate.
25
INCOME TAXES
Effective tax rates, which reflect income tax expense as a percentage of
income before income taxes, were 30.3%, 26.4% and 22.1% for 1996, 1995 and 1994,
respectively. Reported income tax expense was below the federal statutory tax
rate of 35% primarily due to tax savings from investments in 1994tax-exempt
securities. The increase in Corporatethe effective tax rate over the three year period
was primarily due to increased interest
expensereduced tax-exempt income, both in amount and increased costs related to the investment in Japan. The increased
lossas a
percentage of income before income taxestaxes. Beginning in 1993 was primarily duelate 1996, UNUM commenced
a plan to the expenses incurred in
connection with the March 26, 1993, mergerincrease purchases of UNUM Corporationtax-exempt bonds and Colonial
Companies, Inc., decreased interest income and increased investment in Japan.
UNUM JAPAN
On June 20, 1994, the Japanese Ministry of Finance granted UNUM a provisional
operating license which allowed UNUM to establish a non-life insurance company,
UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), to market
disability and other accident products in Japan. UNUM Japan has subsequently
received an official license and began selling groupmortgages.
INVESTMENTS
UNUM's long term disability
products in the fourth quarter of 1994, with the first policies effective
January 1, 1995.
UNUM Japan formed a cooperative relationship with Japan's leading short term
disability insurer, Yasuda Fire & Marine Insurance Co., Ltd.investment strategy is to develop the new
long term disability products and introduce them in Japan. The two companies
continue to work together on market and product development and will also market
their own separate long term disability products. UNUM expects to continue
incurring costs to develop UNUM Japan's distribution network, advertising and
risk management programs.
INVESTMENTS
UNUM has a fairly conservative investment philosophy, with a portfolio that is
concentratedinvest primarily in investment
grade bonds.bonds and commercial mortgages. UNUM evaluates total expected return after
consideration of all associated expenses and losses, within criteria established for
each product line. Product line investment strategies are developed to
complement business risks by meeting the liquidity and solvency requirements of
each product. UNUM purchases assets whosewith maturities, expected cash flows and
prepayment conditions that are consistent with these strategies. The nature and
quality of the types of investments comply with policies established by
management, which are more stringent overall than the statutes and regulations
imposed by the jurisdictions in which UNUM's insurance subsidiaries are
licensed.
UNUM's investments are reported in the consolidated financial statements at
net realizable value or net of anyapplicable allowances for probable losses.
Allowances for real estate held for sale and mortgages are established based on
a review of specific assets as well as the overall portfolio, considering the
carrying value of the underlying assets. If a decline in marketfair value is
considered to be other than temporary or if a long-lived asset is deemed
permanently impaired, the investment is reduced to estimated net realizable
value and the reduction is recorded as a realized investment loss. UNUM
discontinues the accrual of investment income on invested assets when it is
determined that collectability is doubtful. Management monitors the risk
associated with the invested asset portfolio and regularly reviews and adjusts
the allowance for probable losses.
AtUNUM's invested assets were $8.7 billion and $11.7 billion at December 31,
1994,1996, and 1995, respectively. The decrease from 1995 reflects asset transfers
that occurred in the fourth quarter of 1996, as discussed below. The composition
of UNUM's $10,433.8 million of invested assets at December 31, 1996, was 75.4%79.6% fixed maturities,
11.7%13.0% mortgage loans, 6.0% equity securities,
1.8%2.8% real estate and 5.1%4.6% other invested assets.
In late December 1996, UNUM transferred approximately $403 million in cash
into a trust account held for the benefit of Centre Life Reinsurance Limited
("Centre Re"), in accordance with the reinsurance agreement between UNUM America
and Centre Re, which became effective December 31, 1996 (see Note 6 in Item 8).
On October 1, 1996, UNUM transferred approximately $2,690 million of assets into
a trust account held for the benefit of Lincoln to effect the sale of the TSA
business (see Note 5 in Item 8). The assets transferred consisted of
approximately $1,826 million of short-term investments, $589 million of fixed
maturities and $275 million of cash.
During the second quarter of 1995, UNUM sold virtually all of the common
stock portfolio of its United States subsidiaries, primarily due to
consideration of statutory capital requirements associated with investment in
common stocks and to increase future investment income. UNUM reinvested the
proceeds from the sale of the common stock portfolio primarily in investment
grade fixed income assets. Dependent on capital considerations and market
conditions, UNUM may invest in equity securities in the future.
Gross realized investment gains were $117.0$40.2 million, $85.2$287.0 million and
$94.4$117.0 million, and gross realized investment losses were $71.4$36.8 million, $35.8$61.9
million and $52.9$71.4 million for the years ended December 31, 1996, 1995 and 1994,
1993 and 1992, respectively.
FIXED MATURITIES:
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after January
1, 1994, which are classified and accounted for as follows:
- Fixed maturities that UNUM has the positive intent and ability to hold to
maturity are classified as "held to maturity" and are reported at amortized
cost, less an allowance for probable losses. The majority of UNUM's
insurance reserve liabilities are generally long-term in nature and not
subject to withdrawal. Since UNUM purchases assets whose maturities,
expected cash flows, and prepayment conditions complement business risks
by meeting the liquidity and solvency requirements of each product, the
majority ofMaturities
UNUM's fixed maturities have been classified as "held to
maturity" to matchmaturity portfolio is concentrated in high quality
intermediate term bonds, which management believes are well diversified by
company and industry sector. At December 31, 1996, over 80% of the longer term nature of UNUM's products.
-bond
portfolio was rated "A" or better. Fixed maturities and equity securities classified as "available for sale"maturity ratings are reported at fair value. Related unrealized holding gains and losses,
net of deferred taxes, are reported in a separate component of
stockholders' equity. Fair values of fixed maturities are generally obtained from
external quoted market sources, and if not externally quoted,rating agencies or are determined by UNUM internally using similar
methods if external ratings are not available. The bond portfolio is primarily
composed of taxable corporate bonds. In late 1996, UNUM commenced a plan to
increase purchases of tax-exempt bonds and mortgages due to after-tax yield
considerations. Dependent on market conditions and tax considerations, these
tax-exempt securities can provide attractive after-tax yields as compared with
similarly rated taxable securities.
26
The table below summarizes fixed maturity holdings by using discounted cash flow models.
Upon the adoptioncredit quality as of FAS 115, UNUM increased unrealized gains on available for
sale securities included in stockholders' equity on January 1, 1994, by $41.8
million (net of deferred taxes of $22.5 million) to reflect the unrealized
holding gains on fixed maturities classified as available for sale which were
previously carried at amortized cost. In accordance with FAS 115, prior year
consolidated financial statements have not been restated to reflect the change
in accounting principle. UNUM reclassified certain fixed maturities from held
to maturity to available for sale on January 1, 1994, in connection with the
adoption of FAS 115. The increasing interest rate environment during 1994
resulted in depressed fair values for available for sale fixed maturities, which
has decreased the initial $41.8 million increase in stockholders' equity to an
unrealized loss of $42.8 million at
December 31, 1994.1996, and 1995.
Bond Credit Quality Ratings 1996 1995
- ----------------------------- ---------- ----------
AAA ........................ 10.6% 12.0%
AA ........................ 12.2 12.4
A ........................... 57.3 57.1
BAA ........................ 18.4 17.0
Below BAA .................. 1.5 1.5
------ ------
Total ..................... 100.0% 100.0%
====== ======
Bond credit quality ratings are based on the capacity of the borrower to
meet interest and principal payments as they come due. Capacity is considered
extremely strong for AAA rated issues; AA very strong; A strong; and BAA
adequate. Bonds rated below BAA are considered to have a vulnerability to
default.
At December 31, 1994,1996, and 1993,1995, the fixed maturity portfolio included
$193.8$102.0 million and $263.3$139.4 million, respectively, of below investment grade bonds
(below "Baa""BAA"), which
represented 2.5% and 3.5% of the fixed maturity portfolio, respectively. recorded at fair value. These bonds had an associated market valuesamortized
cost of $193.4$101.7 million and $279.1$133.8 million, respectively. Virtually all of the nonconvertible,
below investment grade bonds were purchased at investment grade, but were
subsequently downgraded. UNUM's
investment policy is to invest primarily in fixed maturities of investment grade
quality. Selected purchases of convertible subordinated debentures, which UNUM
considers to be part of its investment strategy for equity securities, have
contributed to the amount of below investment grade bonds. Fixed maturity
ratings are obtained from external rating agencies, and if not externally rated,
are rated by UNUM internally using similar methods. Management does not expect any risks or uncertainties
associated with below investment grade bonds to have a significant affect on
UNUM's consolidated financial position or results of operations. The percentageamount of
fixed maturities delinquent 60 days or more compared to total fixed maturities was 0.25%zero at December 31, 1994,1996, and
0.24% at1995.
In November 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," which provided a one-time opportunity to reassess the
appropriateness of the classifications of securities described in Financial
Accounting Standard ("FAS") No. 115, and to reclassify fixed maturities from the
held to maturity category without calling into question the intent to hold other
debt securities to maturity in the future. On December 31, 1993.
During fourth quarter 1994,1995, UNUM soldreassessed
its fixed maturities of five issuers
classifiedmaturity portfolio, and as held to maturityallowed under the implementation guidance,
reclassified fixed maturities with an amortized cost of $49.8$6,082.8 million dueand a
related unrealized gain of $393.0 million from the held to evidence of significant unexpected deteriorationmaturity category to
available for sale. The unrealized gain on the total available for sale fixed
maturity portfolio was $551.9 million at December 31, 1995. In connection with
the reclassification of the issuers'
creditworthiness. These sales resulted in a net realized loss of $3.0 million.
MORTGAGES:held to maturity fixed maturities to available for
sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to
reflect the changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized. At December 31, 1994,1996, the unrealized gain on available for sale fixed
maturities was $286.0 million and 1993,the related unpaid claims adjustment was
$168.7 million.
Mortgages
At December 31, 1996, and 1995, UNUM's mortgage loans were $1,216.3$1,132.1 million
and $1,432.2$1,163.4 million, respectively. The mortgage loan portfolio, as a percentage of
total invested assets, has decreased to 11.7% as of December 31, 1994, from
14.1% as of December 31, 1993. It is anticipatedUNUM invests new funds in commercial
properties in targeted geographical areas that mortgages as a percentage
of total invested assets will decline further, but at a slower rate, as new
mortgage investments and refinances in selected markets will partially offset
prepayments and scheduled maturities.meet UNUM's underwriting
standards. Management establishes allowances for
mortgage loans based upon a review of individual loans and the overall loan
portfolio, considering the value of the underlying collateral. UNUM uses a comprehensive rating system to evaluate the
investment and credit risk of each mortgage loan and to targetidentify specific
properties for inspection and reevaluation. Overall, managementManagement establishes allowances
for mortgage loans based on a review of individual loans and the overall loan
portfolio, considering the value of the underlying collateral.
Management believes that its mortgage loan portfolio is well diversified
geographically and among property types.types, as summarized in Item 1 F. Investments.
UNUM's incidence of new problem mortgage loans declinedand foreclosure activity has
remained very low in 1994 as1996, reflecting improvements in overall economic activity
improved
modestly, and many of theimproving real estate markets in whichthe geographic areas where UNUM has
mortgage loans
stabilized. Foreclosure activity and new reserve additions remainedloans. Management expects a modest in
1994; however, management continues to expect additionallevel of delinquencies and problem
loans in the future. Management believesThe percentage of mortgage loans delinquent 60 days or more
on a contract delinquency basis was 0.5% and 0.2% at December 31, 1996, and
1995, respectively.
Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors
for Impairment of a Loan," and FAS 118, "Accounting by Creditors for Impairment
of a Loan-- Income Recognition and Disclosures," which defined the principles to
measure and record a loan when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The adoption of FAS 114 and FAS 118 did not have a material affect on
UNUM's results of operations or financial position.
27
At December 31, 1996, and 1995, impaired loans totaled $50.4 million and
$50.1 million, respectively. Included in the $50.4 million of impaired loans at
December 31, 1996, were $38.9 million of loans which had a related allowance providedfor
probable losses of $5.7 million, and a loan of $11.5 million which had no
related allowance for probable losses. Interest lost on impaired loans in 1996,
1995 and 1994, was not material.
Realized investment losses related to impaired mortgage loans amounted to
$1.0 million, $9.2 million and $8.5 million for 1996, 1995 and 1994,
respectively. Impaired mortgage loans as of December 31, 1994, is adequate1996, are not expected
to cover probable losses.
Restructuredhave a significant impact on UNUM's results of operations, liquidity, or
capital resources.
Mortgage loans that were restructured prior to the adoption of FAS 114 are
defined by UNUM as loans whose terms have been modified to interest rates less
than market at the time of restructure and are currently expected to perform
pursuant to such modified terms. UNUM modifies loans to protect its investment
and only when it is anticipated that the borrower will be able to meet the
modified terms. As of December 31, 1994,1996, restructured mortgage loans totaled
$73.6$54.8 million, as compared with $65.9$59.9 million at December 31, 1993.1995. Interest
lost on restructured loans was not material in 1994, 19931996, 1995 or 1992.
Problem loans are defined as mortgage loans that were delinquent 60 days or more
on a contract delinquency basis. Mortgage loans in the amount of $22.3 million
and $26.1 million, both representing 1.8% of the mortgage loan portfolio, were
delinquent 60 days or more on a contract delinquency basis, and were accounted
for on a nonaccrual basis at1994.
Real Estate
At December 31, 1994, and 1993, respectively.
Interest lost on problem loans was not material in 1994, 1993 or 1992.
Potential problem loans are defined by UNUM as current and performing loans with
which management has some concerns about the ability of the borrower to comply
with present loan terms and whose book value exceeds the market value of the
underlying collateral. Loans in this category1996, investment real estate amounted to $36.2$248.1 million,
compared with $222.2 million at December 31, 1994, versus $92.7 million at December 31, 1993. Active asset
management contributed to the decline in this category during 1994.
Realized investment losses related to restructured and problem mortgage loans in
1994 amounted to $8.5 million, compared with $4.8 million and $26.5 million for
1993 and 1992, respectively. Problem and potential problem mortgage loans as of
December 31, 1994, are not expected to have a significant impact on UNUM's
results of operations, liquidity, or capital resources.
REAL ESTATE:
At December 31, 1994,1995. UNUM purchases investment
real estate and real estate held for sale
amounted to $190.8 million and $31.0 million, respectively. This compares with
$193.5 million of investment real estate and $24.7 million of real estate held
for sale at December 31, 1993. UNUM has limited the growth of its real estate
exposure, as a percentage of invested assets, through an active sales program.
UNUM sold $25.4 million and $40.5 million of real estate at 103% and 105% of
carrying value during 1994 and 1993, respectively.
Real estate which meetsin selected markets when certain investment criteria andare met.
Investment real estate is intended to be held long-term and is carried at cost
less accumulated depreciation. RealIf investment real estate that
has been acquired through foreclosure is valued at fair value at the date of
foreclosure. Real estate held for sale is included in other assets in the
Consolidated Balance Sheets and is valued net of an allowance which reducesdetermined to be
permanently impaired, the carrying valueamount of the asset is reduced to the lower of fair value less estimated costs to sell, or cost.value.
Occasionally, investment real estate is reclassified and revalued as real estate
held for sale when it no longer meets UNUM's investment criteria.
At December 31, 1996, and 1995, real estate held for sale amounted to $9.4
million and $35.5 million, respectively. Real estate acquired through
foreclosure is valued at fair value at the date of foreclosure and may be
classified as investment real estate, if it meets UNUM's investment criteria.
Real estate held for sale is included in other assets in the Consolidated
Balance Sheets and is valued net of a valuation allowance which reduces the
carrying value to the lower of fair value less estimated costs to sell, or cost.
This valuation allowance is periodically adjusted based on subsequent changes in
UNUM's estimate of fair value less costs to sell.
Additions to allowancesthe allowance for probable losses related to real estate held
for sale resulted in a realized investment gain of $0.4 million and realized
investment losses of $0.8 million, $18.8$6.3 million and $7.2$0.8 million for the years ended December
31, 1996, 1995 and 1994, 1993 and 1992, respectively. GivenAdditions to the current real estate environment, additional foreclosures are
anticipated, but at a reduced level from the early 1990s.allowance represent
charges to net realized investment gains less recoveries. Current and
anticipated real estate acquired through foreclosure is not expected to have a
significant affect on UNUM's results of operations, liquidity, or capital
resources.
Effective January 1, 1996, UNUM adopted FAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long- lived assets and certain identifiable intangibles to
be disposed of. FAS 121 applies to both real estate held for investment and real
estate held for sale. The adoption of FAS 121 did not have a material affect on
UNUM's results of operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
UNUM's businesses produce positive cash flows whichthat are invested primarily
in intermediate, fixed maturity investments intended to reflect the nature of anticipated
cash obligations of insurance benefit payments and insurance contract maturities
and to optimize investment returns at appropriate risk levels. To meet unexpectedUnexpected cash
requirements and liquidity needs UNUM maintains
part of itscan be met through UNUM's investment portfolio
inof fixed maturities classified as available for sale, equity securities, cash
and short-term investments.
From time to time, dividend payments, which may be subject to approval by
insurance regulatory authorities, are made from UNUM's affiliates and insurance
subsidiaries to UNUM Corporation. These dividends, along with other funds, are
used to service the needs of UNUM Corporation including: debt service, common
stock dividends, stock repurchase, administrative costs and corporate
development. Income determined usingNet statutory accountingoperating income, which excludes realized investment
gains net of tax, is one of the major determinants of an insurance company's
dividend capacity to its parent in the following fiscal year. Statutory
accounting rules and practices, which differ in certain respects
28
from generally accepted accounting principles, are mandated by regulators in an
insurance company's state of domicile.
In 1994, UNUM America's disability businesses were adversely affected by
unfavorable claims experience as discussed in the Employee Benefits and
Individual Disability segments. As described in the Individual Disability
segment, UNUM America strengthened reserves for existing claims related to the
traditional non-cancellable individual disability products. As a result, UNUM
America recognized a1996, UNUM's United States insurance subsidiaries reported net statutory
after-tax chargeoperating income of $69.6approximately $167 million, compared with approximately $143
million in third
quarter 1994. These factors caused the 1994 statutory income of UNUM America to
be significantly reduced to $39.2 million, as compared with $165.2 million in
1993.
As a result of this reduction in UNUM America's statutory earnings, the1995. The amount available under current law for payment of dividends
during 1997 to UNUM Corporation from all U.S. domiciled insurance subsidiaries
during 1995, without state insurance regulatory approval decreased tois approximately $81.3$153 million, as
compared with $176.8approximately $135 million for 1994.1996. UNUM Corporation also has the
ability to draw a dividend of approximately $30 million from its United Kingdom basedKingdom-based affiliate, UNUM
Limited, subject to certain U.S. tax consequences.
Effective December 13, 1994, management expandedIn connection with the closing of the TSA sale on October 1, 1996, as
described in the Retirement Products segment, UNUM Corporation's linesAmerica paid an extraordinary
dividend of $123 million to UNUM Corporation during the fourth quarter of 1996.
As a result of the reinsurance of the individual disability business, discussed
in the Disability Insurance segment, UNUM America and First UNUM intend to pay
extraordinary dividends to UNUM Corporation during 1997, subject to regulatory
approval and certain capital considerations.
Cash flow requirements are also supported by a committed revolving credit
withfacility totaling $500 million. On October 29, 1996, a new committed revolving
credit facility totaling $500 million,became effective, expiring on October 1, 1999,2001, which replaced a
previously existing facilities
totaling $300 million. UNUM Corporation'sfacility of the same amount. UNUM's commercial paper program
is supported by the revolving credit facility and is available for general
liquidity needs, capital expansion, acquisitions and stock repurchase. The
committed revolving credit facility contains certain covenants which,that, among other
provisions, require maintenance of certain levels of stockholders' equity and
limits on level of debt.
In September 1993,debt levels.
On July 16, 1996, UNUM announced the filing offiled an omnibus shelf registration
statement with the
Securities and Exchange Commission, which became effective on
October 8, 1993,August 2, 1996,
relating to $450$500 million of securities (including debt securities, preferred
stock, common stock and other securities). On October 8,
1993,August 15, 1996, UNUM filed a
prospectus supplement to establish a $250 million medium-term note program under
the shelf registration.
The medium-term note program and the
unsold portion of the shelf registration carry ratings of "A1" (Medium Quality)
and "(P)A1" (Medium Quality), respectively, from Moody's Investors Service, and
"A+" (Strong) from Standard & Poor's Corporation. The unsold portion of the
shelf registration relating to subordinated debt and preferred stock carries
ratings of "(P)A2" (Medium Quality) and "(P)"a1"" (Upper-Medium Quality),
respectively, from Moody's Investors Service.
At December 31, 1994,1996, UNUM had short-term and long-term debt totaling
$246.6$117.7 million and $182.1$409.2 million, respectively. At December 31, 1994,1996,
approximately $280$439 million was available for additional financing under the
existing revolving credit facility and approximately $390$500 million of investment grade debt
instruments was available for issuance under the shelf registration. On
February 28, 1995, UNUM borrowed $100 million under the revolving credit
facility, which was infused into UNUM America in exchange for surplus
debentures. Repayment of principal and interest on the surplus debentures is
subject to state insurance regulatory approval. Contingent
upon market conditions and corporate needs, management may refinance short-term
notes payable withfor longer term securities.
In September 1993,the normal course of business, UNUM announced the resumptionenters into letters of a programcredit,
primarily to repurchase its
common stock pursuantsatisfy capital requirements related to an existing Boardcertain subsidiary
transactions. UNUM had outstanding letters of Directors' resolution. On
February 11, 1994,credit of $56.7 million and $12.3
million at December 31, 1996, and 1995, respectively.
Effective October 23, 1996, UNUM's Board of Directors voted to expand UNUM's
authorization to repurchaseapproved an additional 5.0 million shares, bringingexpansion
of the total
number of shares authorized for repurchase to 44.0 million shares. Since the
resumption of theCompany's stock repurchase program UNUM has acquired 7.6to 6.0 million shares throughby authorizing
an additional 3.7 million shares. At December 31, 1994,1996, approximately 4.5
million shares of common stock remained authorized for repurchase. During 1996,
UNUM acquired approximately 1.9 million shares of its common stock in the open
market at an aggregate cost of $375.8
million that was primarily funded through additional borrowings. This share
repurchase contributed to the decrease in the number of shares outstanding at
December 31, 1994, to 72.4 million, from 76.0 million at December 31, 1993.
Prior to the resumption of this repurchase program,$119.1 million. UNUM haddid not acquiredacquire any shares
in the open market since 1990. At December 31, 1994, approximately 2.7
million outstanding shares remained authorized for repurchase.
in 1995. During 1994, and 1993, withdrawals of contracts reportedUNUM repurchased 3.9 million shares in
the Other Operations
segment, including contract terminations, payments to participants and transfers
to other carriers, were approximately $130 million and $309 million,
respectively. Withdrawals during 1994 and 1993 wereopen market at levels expected by
management and reflect the run-off naturean aggregate cost of these closed blocks of businesses.
UNUM manages liquidity objectives by including certain conditions in pension
contracts which prohibit or restrict availability of funds.$183.3 million.
UNUM was committed at December 31, 1994,1996, to purchase fixed maturities and
other invested assets in the amount of $37.5$104.3 million. Independent of the cash
flows of UNUM Corporation, management anticipates that the operating cash flows
of the subsidiaries of UNUM Corporation will be sufficient to meet benefit
obligations, planned investment commitments and operational needs of those
companies.
EFFECT OF INFLATION
Inflation is one of the factors that has increased the need for insurance. Many
policyholders who once had adequate insurance programs at lower coverage levels
have increased their disability insurance coverage to provide the same relative
financial benefits and protection.
Changing interest rates, which are traditionally linked to changes in inflation,
affect UNUM's level of discounted reserves. While rising interest rates are
beneficial when investing current cash flows, they can also reduce the fair
value of existing fixed rate long-term investments. In addition, lower interest
rates can lead to early payoffs and refinancing of some of UNUM's fixed rate
investments. Management generally invests in fixed rate instruments that are
structured to limit the exposure to such reinvestment risk.
RATINGS
A.M. Best CompanyStandard & Poor's Corporation ("Best's"Standard & Poor's"), Moody's Investors
Service ("Moody's") and Standard
& Poor's CorporationA.M. Best Company ("S&P"A.M. Best") are among the third
parties that provide UNUM independent assessments of its overall financial
position. Ratings from these agencies for financial strength and claims-payingclaims paying
ability are available for the individual United States domiciled insurance
company subsidiaries rather than on a consolidated basis, since the financial
information used to develop the ratings is based on statutory accounting
practices in the United States. UNUM's largest affiliate, UNUM Life Insurance Company of America ("UNUM
America"), had its Best's financial strength rating affirmed at "A++"
(Superior), the highest rating assigned by Best's, in May 1994. Best's again
affirmed UNUM America's "A++" rating in November 1994. In January 1995, S&P
completed its review of UNUM America and lowered its claims-paying ability
rating to "AA" (Excellent) from "AA+" (Excellent). According to S&P, the
downgrade was a result of pressures on risk-adjusted capitalization and higher
financial leverage, due in part to lower profitability. In March 1995, Moody's
completed its review of UNUM America and lowered its financial strength
rating to "Aa2" (Excellent) from "Aa1" (Excellent) citing the outlookDebt ratings for UNUM's
group long term disability business as well as UNUM's increasing leverage and
moderately reduced financial flexibility.
First UNUM Life Insurance Company ("First UNUM") also had its financial strength
rating reaffirmed by Best's in May 1994, at "A+" (Superior). In January 1995,
S&P lowered First UNUM's claims-paying ability rating to "AA" (Excellent) from
"AA+" (Excellent). In March 1995, Moody's confirmed First UNUM's "Aa2"
(Excellent) financial strength rating.
Colonial Life & Accident Insurance Company ("Colonial Life") had its Best's
financial strength rating affirmed as "A+" (Superior) in May 1994. In March
1994, S&P assigned an "AA-" (Excellent) claims-paying ability rating to
Colonial. Subsequently, in January 1995, S&P affirmed Colonial's "AA-"
(Excellent) rating. In March 1995, Moody's lowered Colonial's financial
strength rating to "Aa3" (Excellent) from "Aa2" (Excellent).
Commercial Life Insurance Company had its Best's financial strength rating
upgraded to "A" (Excellent) in July 1994. UNUM Corporation has the following debt ratingsare based on
consolidated financial information underprepared using generally accepted accounting
principles.
In January 1995,
S&P lowered29
The table below reflects the senior debt ratings for UNUM Corporation and the
claims paying ability and financial strength ratings for UNUM's United States
domiciled insurance company subsidiaries at March 7, 1997:
Standard &
Poor's Moody's A.M. Best
----------------- ---------------------- ------------
UNUM Corporation Ratings:
Senior Debt (MTN program) A+ A1
(Strong) (Upper Medium Grade)
Commercial Paper A-1 P-1
(Strong) (Superior Ability)
Subordinated Debt (MIDS) A A2
(Strong) (Upper Medium Grade)
Claims Paying
United States Subsidiaries' Ratings: Ability Rating Financial Strength Rating
UNUM America AA Aa2 A++
(Excellent) (Excellent) (Superior)
First UNUM AA Aa2 A+
(Excellent) (Excellent) (Superior)
Colonial AA Aa3 A+
(Excellent) (Excellent) (Superior)
At March 7, 1997, the unsold portion of the shelf registration related to
preferred stock carried a rating of UNUM Corporation to "A+"(P)"a1" " (Strong) from
"AA" (Very Strong), and lowered the commercial paper rating to "A-1" (Strong)
from "A-1+" (Extremely Strong). In March 1995, Moody's lowered UNUM
Corporation's senior debt rating to "A1" (Medium(Upper-Medium Quality) from
"Aa3" (High
Quality) and confirmed the commercial paper rating of "P-1" (Superior Ability).Moody's.
INSURANCE REGULATION
The National Association of Insurance Commissioners adopted a set of Risk-Based
Capital standards for the life and health insurance industry, which became
effective in 1993. These Risk-Based Capital standards are one way to measure
the risk that insurance companies assume in the course of conducting insurance
and investment activities.
The Risk-Based Capital standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, are based on
a formula that establishes capital requirements relating to existing asset
default risk, insurance risk, interest rate (asset/liability mismatch) risk, and
business risk. A company's Total Adjusted Capital (statutory capital, surplus
and Asset Valuation Reserve plus certain other adjustments) is compared to the
Authorized Control Level ("ACL") of Risk-Based Capital produced by the formula.
Subject to certain trend tests to determine the change in the ACL ratio from
year to year, companies with Total Adjusted Capital above 200% of ACL are
assumed to be adequately capitalized. Companies below 200% of ACL are identified
as requiring various levels of regulatory action ranging from increased
information requirements for companies between 150% and 200% of ACL, to
mandatory control by the domiciliary insurance department for companies below
70% of ACL.
At December 31, 1994,1996, the ACL ratios for UNUM America, First UNUM, and
Colonial Lifewere 406%, 467%, and Commercial Life were approximately 305%, 355%, 440% and 380%389%, respectively. This compares with ACL ratios
at December 31, 1993,1995, of approximately 350%382%, 390%382%, 450% and 380%436%, respectively. For 1996, UNUM
America's ACL ratio reflects the merger of Commercial Life into UNUM America as
of December 31, 1996. At December 31, 1995, Commercial Life had an ACL ratio of
329% that is not included in the UNUM America 1995 ACL ratio.
DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments such as
options, futures and forward exchange contracts to hedge certain risks
associated with futureanticipated purchases and sales of investments and certain
payments denominated in foreign currencies, primarily British pound sterling,
Canadian dollar and Japanese yen. These derivative financial instruments are
used to protect UNUM from the effect of market fluctuations in interest and
exchange rates between the contract date and the date on which the hedged
transaction occurs. UNUM does not intend to hold
derivative financial instruments for the purpose of trading.
At December 31, 1994, UNUM had no open derivative financial instruments. At
December 31, 1993, UNUM held interest rate futures contracts with commitments to
purchase government securities with total par values of $207.0 million. In using these instruments, UNUM is subject to the
off-balance-sheet risk that the counterparties toof the transactions will fail to completely
perform as contracted. UNUM manages this risk by only entering into contracts
with highly rated institutions and listed exchanges. NEW ACCOUNTING PRONOUNCEMENT
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 114 "Accounting by Creditors for Impairment of a
Loan," which defines the principles to measure and record a loan when it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement.
In October 1994, the FASB issued FAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which amends FAS 114
to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan. UNUM will adopt FAS 114 and FAS
118 effective January 1, 1995. Adoption of FAS 114 and FAS 118 is not expected
to have a material effect on UNUM's results of operations or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1994 1993 1992
----------------------------------------------------------------------------------------------
REVENUES
Premiums $2,732.4 $2,474.1 $2,142.4
Investment income 770.2 790.4 809.2
Net realized investment gains 45.6 49.4 41.5
Fees and other income 75.5 83.1 55.4
----------------------------------------------------------------------------------------------
Total revenues 3,623.7 3,397.0 3,048.5
BENEFITS AND EXPENSES
Benefits to policyholders 2,248.1 1,775.7 1,532.6
Interest credited 242.7 281.0 328.4
Operating expenses 715.0 675.6 590.9
Commissions 355.9 326.8 298.9
Increase in deferred policy acquisition costs (155.3) (135.1) (111.7)
Interest expense 18.7 12.7 10.9
----------------------------------------------------------------------------------------------
Total benefits and expenses 3,425.1 2,936.7 2,650.0
----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECTS
OF ACCOUNTING CHANGES 198.6 460.3 398.5
INCOME TAXES
Current 30.4 73.4 68.0
Deferred 13.5 74.9 39.3
----------------------------------------------------------------------------------------------
Total income taxes 43.9 148.3 107.3
----------------------------------------------------------------------------------------------
Income before cumulative effects of accounting changes 154.7 312.0 291.2
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 20.0 --
Postretirement benefits other than pensions, net of tax -- (32.1) --
----------------------------------------------------------------------------------------------
NET INCOME $ 154.7 $ 299.9 $ 291.2
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before cumulative effects of accounting changes $ 2.09 $ 3.96 $ 3.71
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 0.25 --
Postretirement benefits other than pensions, net of tax -- (0.40) --
----------------------------------------------------------------------------------------------
NET INCOME $ 2.09 $ 3.81 $ 3.71
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities:
Held to maturity-principally at amortized cost
(fair value: 1994-$6,168.6; 1993-$7,149.9) $ 6,227.2 $ 6,560.7
Available for sale-at fair value (amortized
cost: $1,701.4) 1,640.6 --
Available for sale-principally at amortized
cost (fair value: $929.9) -- 872.0
Equity securities available for sale-at fair value
(cost: 1994-$492.2; 1993-$508.3) 627.9 730.0
Mortgage loans 1,216.3 1,423.2
Real estate, net 190.8 193.5
Policy loans 201.0 187.9
Other long-term investments 38.1 59.0
Short-term investments 291.9 69.6
-------------------------------------------------------------------------------------------------------
Total investments 10,433.8 10,095.9
Cash 36.1 20.8
Accrued investment income 195.9 184.0
Premiums due 189.7 165.5
Deferred policy acquisition costs 1,035.2 879.1
Property and equipment, net 153.4 143.5
Other assets 737.2 681.8
Separate account assets 345.9 266.7
-------------------------------------------------------------------------------------------------------
Total assets $13,127.2 $12,437.3
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
(Continued on next page)
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits $ 1,591.6 $ 1,362.5
Unpaid claims and claim expenses 3,853.9 3,341.5
Other policyholder funds 4,058.8 4,250.7
Income taxes
Current 12.4 31.5
Deferred 348.6 376.7
Notes payable 428.7 238.6
Other liabilities 571.9 466.4
Separate account liabilities 345.9 266.7
-------------------------------------------------------------------------------------------------------
Total liabilities 11,211.8 10,334.6
Stockholders' equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000 shares, issued 99,987,958 shares 10.0 10.0
Additional paid-in capital 1,080.5 1,078.4
Unrealized gains on available for sale securities, net of deferred taxes 49.6 149.1
Unrealized foreign currency translation adjustment (23.7) (24.1)
Retained earnings 1,507.2 1,420.8
-------------------------------------------------------------------------------------------------------
2,623.6 2,634.2
Less:
Treasury stock, at cost (1994-27,575,430 shares;
1993-24,006,816 shares) 706.6 529.8
Restricted stock deferred compensation 1.6 1.7
-------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,915.4 2,102.7
-------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $13,127.2 $12,437.3
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Gains (Losses)
On Available Unrealized
Common for Sale Foreign Restricted
Stock Additional Securities, Net Currency Stock
(DOLLARS IN MILLIONS, $0.10 Par Paid-in Of Deferred Translation Retained Treasury Deferred
EXCEPT PER COMMON SHARE DATA) Value Capital Taxes Adjustment Earnings Stock Compensation Total
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1992 $ 5.0 $ 1,061.1 $ 98.7 $ 7.1 $ 945.9 $ (360.1) $ (2.2) $1,755.5
1992 Transactions:
Net income 291.2 291.2
Unrealized gains on equity
securities, net of deferred taxes 22.4 22.4
Unrealized foreign currency
translation adjustment (28.0) (28.0)
Two-for-one stock split 5.0 (5.0) --
Dividends to stockholders
($0.62 1/2 per common share) (53.1) (53.1)
Employee stock option and
other transactions 10.5 (1.7) 14.6 (0.5) 22.9
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 10.0 1,066.6 121.1 (20.9) 1,182.3 (345.5) (2.7) 2,010.9
1993 Transactions:
Net income 299.9 299.9
Unrealized gains on equity
securities, net of deferred taxes 28.0 28.0
Unrealized foreign currency
translation adjustment (3.2) (3.2)
Dividends to stockholders
($0.76 1/2 per common share) (61.4) (61.4)
Treasury stock acquired (192.5) (192.5)
Employee stock option and
other transactions 11.8 8.2 1.0 21.0
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 10.0 1,078.4 149.1 (24.1) 1,420.8 (529.8) (1.7) 2,102.7
1994 Transactions:
Net income 154.7 154.7
Unrealized losses on available for sale
securities, net of deferred taxes (99.5) (99.5)
Unrealized foreign currency
translation adjustment 0.4 0.4
Dividends to stockholders
($0.92 per common share) (68.3) (68.3)
Treasury stock acquired (183.3) (183.3)
Employee stock option and
other transactions 2.1 6.5 0.1 8.7
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $10.0 $ 1,080.5 $ 49.6 $(23.7) $1,507.2 $ (706.6) $ (1.6) $1,915.4
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- --------------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
--------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 154.7 $ 299.9 $ 291.2
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effects of accounting changes, net of tax -- 12.1 --
Increase in future policy benefits and unpaid
claims and claim expenses 720.1 412.9 335.7
(Increase) decrease in amounts receivable under
reinsurance agreements (18.6) (129.1) 6.1
Increase (decrease) in income tax liability (3.3) 109.8 51.6
Increase in deferred policy acquisition costs (155.4) (125.5) (111.7)
Other 3.3 (22.8) 26.5
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 700.8 557.3 599.4
--------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Maturities of fixed maturities -- 924.6 783.7
Maturities of fixed maturities held to maturity 754.8 -- --
Maturities of fixed maturities available for sale 41.2 -- --
Sales of fixed maturities held to maturity 46.8 45.7 122.4
Sales of fixed maturities available for sale 407.6 218.2 477.2
Sales of equity securities available for sale 314.1 -- --
Sales and maturities of other investments 414.9 550.2 825.0
Purchases of investments -- (1,832.2) (2,700.7)
Purchases of fixed maturities held to maturity (795.2) -- --
Purchases of fixed maturities available for sale (943.9) -- --
Purchases of equity securities available for sale (216.6) -- --
Purchases of other investments (211.5) -- --
Net (increase) decrease in short-term investments (221.7) 38.8 21.8
Net additions to property and equipment (29.9) (18.2) (23.1)
Investments in subsidiaries, net -- 0.9 (49.3)
--------------------------------------------------------------------------------------------------------
Net cash used in investing activities (439.4) (72.0) (543.0)
--------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Deposits and interest credited to investment contracts 608.6 735.2 835.7
Maturities and withdrawals from investment contracts (800.5) (1,022.4) (871.3)
Dividends to stockholders (68.3) (61.4) (53.1)
Treasury stock acquired (183.3) (192.5) --
Proceeds from notes payable 54.7 51.5 74.6
Repayment of notes payable (1.2) (50.1) (34.6)
Net increase (decrease) in short-term debt 136.6 37.3 (42.9)
Other 7.2 15.1 21.2
--------------------------------------------------------------------------------------------------------
Net cash used in financing activities (246.2) (487.3) (70.4)
--------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 0.1 2.4 0.1
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 15.3 0.4 (13.9)
Cash at beginning of year 20.8 20.4 34.3
--------------------------------------------------------------------------------------------------------
Cash at end of year $ 36.1 $ 20.8 $ 20.4
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
(Continued on next page)
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------------------------------
DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 48.8 $ 67.3 $ 41.6
Interest $ 20.4 $ 13.3 $ 11.7
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of UNUM Corporation and
subsidiaries ("UNUM") have been prepared on the basis of generally accepted
accounting principles for stock life insurance companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of UNUM Corporation
and subsidiaries. Significant intercompany accounts and transactions have been
eliminated.
RECLASSIFICATION
Certain December 31, 1993, and 1992 amounts have been reclassified in 1994 for
comparative purposes.
INVESTMENTS
Investments are reported as follows:
- Fixed maturities held to maturity (certain bonds and redeemable preferred
stocks) - principally at amortized cost, less an allowance for probable
losses.
- Fixed maturities available for sale (certain bonds and redeemable
preferred stocks) - commencing January 1, 1994, at fair value. Prior to
January 1, 1994, at lower of aggregate amortized cost less an allowance
for probable losses, or fair value. See Note 3 "Investments" for a
discussion of the adoption of Financial Accounting Standard No. 115.
- Equity securities available for sale (common stocks and non-redeemable
preferred stocks) - at fair value.
- Mortgage loans - at amortized cost less an allowance for probable losses.
- Real estate - at cost less accumulated depreciation.
- Policy loans - at unpaid principal balance.
- Other long-term investments - at cost plus UNUM's equity in undistributed
net earnings since acquisition.
- Short-term investments - at cost.
Fixed maturities that UNUM has the positive intent and ability to hold to
maturity are classified as held to maturity.
Certain fixed maturities and equity securities are classified as available for
sale as they may be sold in response to changes in interest rates, resultant
prepayment risk, liquidity and capital needs, or other similar economic
factors. Related unrealized holding gains and losses, net of deferred taxes,
are reported in a separate component of stockholders' equity.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENTS (Continued)
Real estate held for sale, which is included in other assets in the
Consolidated Balance Sheets, is valued at the lower of fair value less
estimated costs to sell, or cost. UNUM has provided an allowance for probable
losses on real estate held for sale which reduces the carrying value of the
asset to fair value.
If a decline in fair value of an invested asset is considered to be other than
temporary, the investment is reduced to its net realizable value and the
reduction is accounted for as a realized investment loss. Subsequent increases
and decreases in fair value, if not an other than temporary impairment, of
available for sale securities are reported in a separate component of
stockholders' equity, net of deferred taxes.
UNUM discontinues the accrual of investment income on invested assets when it
is determined that collectability is doubtful.
Realized investment gains and losses, which are determined on the basis of
specific identification and include adjustments for allowances for probable
losses, are reported separately in the Consolidated Statements of Income.
Purchases and sales of short-term financial instruments are part of investing
activities and not necessarily a part of the cash management program.
Therefore, short-term financial instruments are classified as investments in
the Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.
DERIVATIVE FINANCIAL INSTRUMENTS
Gains or losses on hedges of existing assets or liabilities are deferred and
included in the carrying amounts of those assets or liabilities. Gains or
losses related to qualifying hedges of firm commitments or anticipated
transactions are also deferred and recognized in the carrying amount of the
underlying asset or liability when the hedged transaction occurs.
RECOGNITION OF PREMIUM REVENUES AND RELATED EXPENSES
Group insurance premiums are recognized as income over the period to which the
premiums relate. Individual disability premiums are recognized as income when
due. Benefits and expenses are associated with earned premiums to result in
recognition of profits over the life of the contracts. This association is
accomplished by recording a provision for future policy benefits and unpaid
claims and claim expenses, and amortizing deferred policy acquisition costs.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECOGNITION OF PREMIUM REVENUES AND RELATED EXPENSES (Continued):
For retirement and universal life products, premium and other policy fee
revenue consists of charges for the cost of insurance, policy administration,
and surrenders assessed during the period. Charges related to services to be
performed in the future are deferred until earned. The amounts received in
excess of premium and fees are recorded as deposits and included in other
policyholder funds in the Consolidated Balance Sheets. Benefits and expenses
include benefit claims in excess of related account balances, interest credited
at various rates and amortization of deferred policy acquisition costs.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business that vary with and are related primarily to
the production of new business, have been deferred to the extent such costs are
deemed recoverable from future profits. Such costs include commissions, certain
costs of policy issue and underwriting, and certain variable field office
expenses.
For individual disability, group disability, and group life and health
business, the costs are amortized in proportion to expected future premiums.
For universal life and certain retirement products, the costs are amortized in
proportion to estimated gross profits from interest margins, mortality and
other elements of performance under the contracts. Amortization is adjusted
periodically to reflect differences between actual experience and original
assumptions, with any resulting changes reflected in current operating
results. The amounts deferred and amortized were as follows:
Year Ended December 31,
----------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
----------------------------------------------------------------------------
Deferred $308.1 $282.8 $237.6
Less amortized (152.8) (147.7) (125.9)
----------------------------------------------------------------------------
Increase in deferred policy acquisition
costs $155.3 $135.1 $111.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR FUTURE POLICY BENEFITS
Reserves for future policy benefits are calculated by the net-level premium
method, and are based on UNUM's expected morbidity, mortality and interest
rate assumptions at the time a policy is issued. These reserves represent the
portion of premiums received, accumulated with interest and held to provide
for claims that have not yet been incurred. Reserves for group insurance
policies consist primarily of unearned premiums.
The interest rates used in the calculation of reserves for future policy
benefits at December 31, 1994, and 1993, principally ranged from:
1994 1993
------------------------------------------------------------------------------
Individual disability 5.5% to 9.5% 7.0% to 9.5%
Individual life 5.0% to 9.0% 5.0% to 9.0%
Individual accident and health 5.0% to 9.0% 6.0% to 11.8%
Individual and group annuities 5.0% to 9.0% 5.0% to 9.0%
-------------------------------------------------------------------------------
Certain reserve calculations are based on interest rates within these ranges
graded down over periods from 15 to 20 years.
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES
Unpaid claims and claim expense reserves represent the amount estimated to
fund claims that have been reported but not settled and claims incurred but
not reported. Reserves for unpaid claims are estimated based on UNUM's
historical experience and other actuarial assumptions which consider the
effects of current developments, anticipated trends, risk management programs
and renewal actions. Many factors affect actuarial calculations of claim
reserves, including but not limited to interest rates, and current and
anticipated incidence rates, recovery rates, and economic and societal
conditions. Reserve estimates and assumptions are periodically reviewed
and updated with any resulting adjustments to reserves reflected in current
operating results. Given the complexity of the reserving process, the
ultimate liability may be more or less than such estimates indicate.
The interest rates used in the calculation of disability product reserves at
December 31, 1994, and 1993, were principally as follows:
1994 1993
----------------------------------------------------------------------------
Group long term disability (North America) 9.18% 9.34%
Group long term disability (United Kingdom) 9.9% 10.5%
Individual disability 6.75% to 9.9% 8.0% to 10.0%
-----------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES (Continued)
The interest rate used to discount the disability reserves is a composite of
the yields on assets specifically matched with each block of business.
For other accident and health business, reserves are based on projections of
historical claims run-out patterns.
Activity in the liability for unpaid claims and claim expenses is summarized
as follows:
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Balance at January 1 $3,341.5 $2,983.6 $2,808.0
Less reinsurance recoverables (68.0) -- --
------------------------------------------------------------------------------
Net Balance at January 1 3,273.5 2,983.6 2,808.0
Incurred related to:
Current year 1,609.3 1,417.8 1,253.6
Prior years 436.0 238.0 126.8
------------------------------------------------------------------------------
Total incurred 2,045.3 1,655.8 1,380.4
Paid related to:
Current year 517.6 471.0 405.3
Prior years 1,030.0 894.9 799.5
-------------------------------------------------------------------------------
Total paid 1,547.6 1,365.9 1,204.8
Net Balance at December 31 3,771.2 3,273.5 2,983.6
Plus reinsurance recoverables 82.7 68.0 --
-------------------------------------------------------------------------------
Balance at December 31 $3,853.9 $3,341.5 $2,983.6
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The increase in incurrals related to prior years was $436.0 million, $238.0
million, and $126.8 million (net of reinsurance), for 1994, 1993 and 1992,
respectively. These increases were primarily the result of interest accrued
on reserves, changes in reserve estimates and assumptions, and changes in
foreign exchange rates. Due to the long-term claims payment pattern of some
of UNUM's businesses, certain reserves, particularly disability, are
discounted for interest.
Interest accrued on reserves increased prior years' incurrals by approximately
$267 million, $237 million and $225 million in 1994, 1993 and 1992,
respectively. Approximately $154 million of the increase in prior years'
incurrals in 1994 was primarily related to changes in reserve estimates and
assumptions of morbidity, mortality and expense costs of the group long term
and individual disability reserves, which were affected by the third quarter
1994 reserve strengthening. Changes in estimates of morbidity, mortality and
expense costs caused an increase in prior years' incurrals of approximately
$6 million in 1993 and a decrease of approximately $46 million in 1992.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES (Continued)
Foreign exchange translations, primarily related to the disability reserves of
UNUM's United Kingdom based affiliate, UNUM Limited, caused prior years'
incurrals to increase by approximately $15 million in 1994, and decrease by
approximately $5 million and $52 million in 1993 and 1992, respectively.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard ("FAS")
No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," which eliminated the practice by insurance
enterprises of reporting assets and liabilities relating to reinsured
contracts net of the effects of reinsurance. Since UNUM did not restate its
financial statements upon adoption of FAS 113, reserve balances prior to
December 31, 1993, are shown net of reinsurance recoverables.
CHANGE IN ACCOUNTING ESTIMATE
During 1994, UNUM increased reserves for existing claims by $83.3 million and
established a reserve for estimated future losses of $109.1 million. These
increased reserves reflect management's current expectations of morbidity
trends for the existing individual disability business, as reported in the
Individual Disability segment. This change in accounting estimate resulted in
an increase to benefits to policyholders in the Consolidated Statement of
Income of $192.4 million, and a decrease to net income of $125.1 million, or
$1.69 per share.
OTHER POLICYHOLDER FUNDS
Other policyholder funds are liabilities for investment-type contracts and
represent customer deposits plus interest credited to those deposits at
various rates.
SEPARATE ACCOUNTS
Certain assets of UNUM's defined benefit plans, 401(k) contracts and tax
sheltered annuity contracts are in separate accounts that are pooled
investment funds of securities. Investment income and realized gains and
losses on these accounts accrue directly to the contractholders. Assets,
carried at market value, and liabilities of the separate accounts are shown
separately in the Consolidated Balance Sheets. The assets of the separate
accounts are legally segregated and are not subject to claims which arise out
of any other business of UNUM.
ACCOUNTING FOR PARTICIPATING INDIVIDUAL LIFE INSURANCE
Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to UNUM's conversion to a stock life insurance
company on November 14, 1986, will remain participating as long as they remain
in force. A Participation Fund Account ("PFA") has been established for the
sole benefit of all of Union Mutual's individual participating life and
annuity policies and contracts.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTING FOR PARTICIPATING INDIVIDUAL LIFE INSURANCE (Continued)
The assets of the PFA are to provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies
and annuity contracts. This line of business participates in the experience of
the PFA and its operations have been excluded from the Consolidated Statements
of Income. The PFA represents approximately 2.5% and 3.0% of total assets and
3.0% and 3.5% of total liabilities at December 31, 1994, and 1993,
respectively.
INCOME TAXES
The provision for income taxes includes amounts currently payable and deferred
income taxes, which result from differences between financial reporting and
tax bases of assets and liabilities, and are measured using enacted tax rates
and laws. Deferred U.S. income taxes have not been provided on accumulated
earnings of UNUM's foreign subsidiaries. These earnings would become subject
to U.S. tax if remitted to UNUM Corporation.
EARNINGS PER SHARE
The weighted average number of shares outstanding used to calculate earnings
per share was approximately 74,158,000, 78,779,000 and 78,542,000 in 1994,
1993 and 1992, respectively. The assumed exercise of outstanding stock
options does not result in a material dilution of earnings per share.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values are based on quoted market prices, when available. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. These valuation techniques
require management to develop a significant number of assumptions, including
discount rates and estimates of future cash flow. Derived fair value
estimates cannot be substantiated by comparison to independent markets or to
disclosures by other companies with similar financial instruments. These fair
value disclosures do not purport to be the amount which could be realized in
immediate settlement of the financial instrument.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The following table summarizes the carrying amounts and fair values of UNUM's
financial instruments at December 31, 1994, and 1993:
1994 1993
----------------------- ---------------------------
Carrying Fair Carrying Fair
(DOLLARS IN MILLIONS) Amount Value Amount Value
---------------------------------------------------------------------------------------------------------
Financial assets:
Fixed maturities:
Held to maturity $6,227.2 $6,168.6 $6,560.7 $7,149.9
Available for sale 1,640.6 1,640.6 872.0 929.9
Equity securities available for sale 627.9 627.9 730.0 730.0
Mortgage loans 1,216.3 1,265.4 1,423.2 1,558.4
Policy loans 201.0 201.0 187.9 187.9
Short-term investments 291.9 291.9 69.6 69.6
Cash 36.1 36.1 20.8 20.8
Accrued investment income 195.9 195.9 184.0 184.0
Financial liabilities:
Other policyholder funds:
Investment-type insurance contracts:
With defined maturities $ 667.0 $ 685.0 $ 847.0 $ 956.0
With no defined maturities 3,013.0 2,948.0 3,044.0 2,952.0
Individual annuities and
supplementary contracts not
involving life contingencies 84.6 84.6 89.0 89.0
Notes payable 428.7 414.5 238.6 241.9
Off-balance sheet financial instruments:
Interest rate futures contracts -- -- -- 0.3
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
FIXED MATURITIES: Fair values for fixed maturities are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are estimated using values obtained from independent pricing services
or, in the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the yield, credit
quality and maturity of the investments.
EQUITY SECURITIES AVAILABLE FOR SALE: Fair values for equity securities
available for sale are based on quoted market prices and are reported in the
Consolidated Balance Sheets at these values.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
MORTGAGE LOANS: Fair values for mortgage loans are estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar mortgage loans to borrowers with similar credit ratings and
maturities. Mortgage loans with similar characteristics are aggregated for
purposes of the calculations.
POLICY LOANS: Fair values for policy loans approximate the carrying amounts
reported in the Consolidated Balance Sheets.
SHORT-TERM INVESTMENTS, CASH AND ACCRUED INVESTMENT INCOME: Fair values for
these instruments approximate the carrying amounts reported in the
Consolidated Balance Sheets.
INVESTMENT-TYPE INSURANCE CONTRACTS: Fair values for liabilities under
investment-type insurance contracts with no defined maturities are the amounts
payable on demand after surrender charges at the balance sheet date. Fair
values for liabilities under investment-type insurance contracts with defined
maturities are estimated using discounted cash flow calculations based on
interest rates that would be offered currently for similar contracts with
maturities consistent with those remaining for the contracts being valued.
The estimated fair values of liabilities under all insurance contracts
(investment-type and other than investment-type) are taken into consideration
in UNUM's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
INDIVIDUAL ANNUITIES AND SUPPLEMENTARY CONTRACTS NOT INVOLVING LIFE
CONTINGENCIES: Fair values approximate the carrying amounts reported in other
policyholder funds in the Consolidated Balance Sheets.
NOTES PAYABLE: Fair values of short-term borrowings approximate the carrying
amount. Fair values of long-term notes are estimated using discounted cash
flow analyses based on UNUM's current incremental borrowing rates for similar
types of borrowing arrangements.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: Fair values for off-balance-sheet
financial instruments are based on current settlement values.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENT
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" which defines the principles to measure and record a
loan when it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
In October 1994, the FASB issued FAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which amends FAS
114 to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan. UNUM will adopt FAS 114 and
FAS 118 effective January 1, 1995. Adoption of FAS 114 and FAS 118 is not
expected to have a material effect on UNUM's results of operations or
financial position.
NOTE 2. COLONIAL MERGER
On December 3, 1992, UNUM and Colonial Companies, Inc. ("Colonial"), signed a
definitive merger agreement. On March 26, 1993, Colonial Class A common stock
shareholders voted to approve the merger. Under the agreement, UNUM exchanged
0.731 shares of its common stock for each share of Colonial Class A and
Class B common stock outstanding on March 26, 1993. UNUM issued approximately
11.4 million shares of common stock from treasury in connection with the
merger. In addition, outstanding options to acquire shares of Colonial
Class B common stock were converted into options to acquire shares of UNUM
common stock. The merger was accounted for as a pooling of interests.
Net income for the year ended December 31, 1993, included a $9.6 million
charge, or $0.12 per share, for expenses incurred to effect the merger.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after
January 1, 1994, which are classified and accounted for as follows:
- Fixed maturities that UNUM has the positive intent and ability to hold to
maturity are classified as "held to maturity" and are reported at
amortized cost, less an allowance for probable losses.
- Fixed maturities and equity securities classified as "available for sale"
are reported at fair value. Related unrealized holding gains and losses,
net of deferred taxes, are reported in a separate component of
stockholders' equity.
Upon the adoption of FAS 115, UNUM increased unrealized gains on available for
sale securities included in stockholders' equity on January 1, 1994, by $41.8
million (net of deferred taxes of $22.5 million) to reflect the unrealized
holding gains on fixed maturities classified as available for sale which were
previously carried at amortized cost. In accordance with FAS 115, prior year
consolidated financial statements and disclosures have not been restated to
reflect the change in accounting principle. UNUM reclassified certain
fixed maturities from held to maturity to available for sale on January 1,
1994, in connection with the adoption of FAS 115.
The following tables summarize the components of investment income, realized
investment gains (losses) and changes in unrealized investment gains (losses):
INVESTMENT INCOME
Year Ended December 31,
--------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Fixed maturities:
Held to maturity $548.1 $570.1 $568.2
Available for sale 87.9 59.5 56.9
Equity securities available for sale 10.4 12.6 14.7
Mortgage loans 137.4 165.2 187.2
Real estate 15.8 12.8 14.1
Policy loans 10.2 10.4 10.6
Other long-term investments 0.9 4.5 2.1
Short-term investments 8.5 7.1 7.1
-------------------------------------------------------------------------------
Gross investment income 819.2 842.2 860.9
Less investment expenses (23.9) (26.6) (25.8)
Less investment income on participating
individual life insurance policies and
annuity contracts (25.1) (25.2) (25.9)
-------------------------------------------------------------------------------
Investment income $770.2 $790.4 $809.2
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
GROSS REALIZED INVESTMENT GAINS (LOSSES)
Year Ended
December 31, 1994
--------------------
(DOLLARS IN MILLIONS) Gains Losses
---------------------------------------------------------------------------
Fixed maturities:
Held to maturity $ 0.2 $ (6.8)
Available for sale 10.2 (28.8)
Equity securities available for sale 93.1 (12.2)
Mortgage loans, real estate and other 13.5 (23.6)
----------------------------------------------------------------------------
Gross realized investment gains (losses) $ 117.0 $ (71.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET REALIZED INVESTMENT GAINS (LOSSES)
Year Ended
December 31,
-------------------
(DOLLARS IN MILLIONS) 1993 1992
-----------------------------------------------------------------------------
Fixed maturities:
Held to maturity $ 9.5 $ 7.6
Available for sale 7.8 9.1
Equity securities available for sale 48.3 38.3
Mortgage loans, real estate and other (16.2) (13.5)
------------------------------------------------------------------------------
Net realized investment gains $49.4 $41.5
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
CHANGE IN UNREALIZED INVESTMENT GAINS (LOSSES)
Year Ended December 31,
----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Fixed maturities available for sale $(60.8) $ -- $ --
Equity securities available for sale (86.0) 43.2 34.0
Deferred taxes 47.3 (15.2) (11.6)
-------------------------------------------------------------------------------
Total change in unrealized
investment gains on available
for sale securities, as included
in stockholders' equity $(99.5) $28.0 $22.4
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The following changes in unrealized investment gains (losses) were not
reflected in the consolidated financial statements as these securities
are carried at amortized cost:
Year Ended December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Fixed maturities:
Held to maturity $(647.8) $154.2 $ 14.2
Available for sale -- 30.9 (1.3)
-------------------------------------------------------------------------------
Total $(647.8) $185.1 $ 12.9
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES
The amortized cost and estimated fair values of fixed maturities at December
31, 1994, were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(DOLLARS IN MILLIONS) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
Held to maturity:
U. S. Government $ 10.9 $ -- $ -- $ 10.9
States and municipalities 631.8 9.1 (31.3) 609.6
Foreign governments 176.1 12.4 (1.4) 187.1
Public utilities 1,375.5 12.8 (46.8) 1,341.5
Corporate bonds 4,014.3 92.7 (106.8) 4,000.2
Mortgage-backed securities 10.8 0.5 -- 11.3
Other debt securities 7.8 0.2 -- 8.0
----------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,227.2 $ 127.7 $ (186.3) $ 6,168.6
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Available for sale:
U. S. Government $ 353.2 $ 0.8 $ (7.5) $ 346.5
States and municipalities 433.2 2.3 (13.9) 421.6
Foreign governments 58.9 0.2 (1.5) 57.6
Public utilities 229.4 3.8 (9.6) 223.6
Corporate bonds 552.1 0.8 (31.8) 521.1
Redeemable preferred stocks 63.2 2.9 (7.0) 59.1
Mortgage-backed securities 11.4 0.1 (0.4) 11.1
----------------------------------------------------------------------------------------------------------
Total available for sale $ 1,701.4 $ 10.9 $ (71.7) $ 1,640.6
----------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
The amortized cost and estimated fair values of fixed maturities at December
31, 1993, were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(DOLLARS IN MILLIONS) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
Held to maturity:
U. S. Government $ 10.0 $ 0.6 $ -- $ 10.6
States and municipalities 718.7 64.5 (0.2) 783.0
Foreign governments 255.3 50.3 (0.2) 305.4
Public utilities 1,333.7 98.6 (1.6) 1,430.7
Corporate bonds 4,186.8 377.7 (5.0) 4,559.5
Certificates of deposit 36.4 1.1 -- 37.5
Mortgage-backed securities 15.2 2.6 -- 17.8
Other debt securities 4.6 0.8 -- 5.4
----------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,560.7 $ 596.2 $ (7.0) $ 7,149.9
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Available for sale:
U. S. Government $ 388.9 $ 27.7 $ (0.3) $ 416.3
States and municipalities 73.5 5.1 -- 78.6
Foreign governments 13.7 1.3 -- 15.0
Public utilities 107.3 6.5 -- 113.8
Corporate bonds 166.0 10.1 (0.6) 175.5
Redeemable preferred stocks 105.8 7.7 (1.0) 112.5
Mortgage-backed securities 16.8 1.4 -- 18.2
----------------------------------------------------------------------------------------------------------
Total available for sale $ 872.0 $ 59.8 $ (1.9) $ 929.9
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
The amortized cost and estimated fair value of fixed maturities at December
31, 1994, by contractual maturity date, are shown below. Expected maturities
will differ from contractual maturities since certain borrowers have the right
to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(DOLLARS IN MILLIONS) Cost Fair Value
-------------------------------------------------------------------------------------------------------
Held to maturity:
Due in one year or less $ 619.6 $ 622.3
Due after one year through five years 2,555.2 2,551.3
Due after five years through ten years 2,465.5 2,387.1
Due after ten years 576.1 596.6
-------------------------------------------------------------------------------------------------------
6,216.4 6,157.3
Mortgage-backed securities (primarily due after 10 years) 10.8 11.3
--------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,227.2 $ 6,168.6
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Available for sale:
Due in one year or less $ 46.8 $ 47.3
Due after one year through five years 845.2 816.3
Due after five years through ten years 500.8 482.0
Due after ten years 297.2 283.9
--------------------------------------------------------------------------------------------------------
1,690.0 1,629.5
Mortgage-backed securities (primarily due after 10 years) 11.4 11.1
--------------------------------------------------------------------------------------------------------
Total available for sale $ 1,701.4 $1,640.6
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Gross gains of $12.4 million and $18.9 million, and gross losses of $1.3
million and $3.5 million, were realized on sales of fixed maturities in 1993
and 1992, respectively.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
During fourth quarter 1994, UNUM sold fixed maturities of five issuers
classified as held to maturity with an amortized cost of $49.8 million
due to evidence of significant unexpected deterioration of the issuers'
creditworthiness. These sales resulted in a net realized loss of $3.0 million.
EQUITY SECURITIES
The fair values, which also represent carrying amounts, and the cost of equity
securities available for sale were as follows at December 31, 1994:
Fair
(DOLLARS IN MILLIONS) Cost Value
-----------------------------------------------------------------------------
Common stocks:
Public utilities $ 57.5 $ 53.1
Industrial, miscellaneous and all other 434.7 574.8
------------------------------------------------------------------------------
Total $ 492.2 $ 627.9
------------------------------------------------------------------------------
------------------------------------------------------------------------------
At December 31, 1994, cumulative gross unrealized investment gains on equity
securities available for sale totaled $158.7 million and losses totaled
$(23.0) million.
MORTGAGE LOANS
Restructured mortgage loans at amortized cost amounted to $73.6 million and
$65.9 million at December 31, 1994, and 1993, respectively. Troubled debt
restructurings represent loans that are refinanced with terms more favorable
to the borrower. Interest foregone on these loans was not material for the
years ended December 31, 1994, 1993 or 1992.
OTHER
Real estate acquired in satisfaction of debt cumulatively amounts to $119.3
million at December 31, 1994. Real estate held for sale amounted to $31.0
million at December 31, 1994, and $24.7 million at December 31, 1993.
At December 31, 1994, bonds with an amortized cost of $16.1 million, real
estate with a depreciated cost of $4.7 million and no mortgage loans were
non-income producing for the twelve months ended December 31, 1994. Interest
lost on these investments was not material in 1994, 1993 or 1992.
UNUM was committed at December 31, 1994, to purchase fixed maturities and
other invested assets in the amount of $37.5 million.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND
REAL ESTATE HELD FOR SALE
Changes in the allowance for probable losses on invested assets and real
estate held for sale were as follows:
Balance at Balance
beginning Addi- Deduc- at end
(DOLLARS IN MILLIONS) of year tions tions of year
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994
Fixed maturities held to maturity and
available for sale $ 0.3 $ 4.1 $ -- $ 4.4
Mortgage loans 48.6 8.5 (13.9) 43.2
Real estate held for sale 20.9 0.8 (8.5) 13.2
---------------------------------------------------------------------------------------------------------
Total $ 69.8 $13.4 $ (22.4) $ 60.8
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1993
Fixed maturities held to maturity and
available for sale $ 4.1 $(3.8) $ -- $ 0.3
Mortgage loans 51.5 4.8 (7.7) 48.6
Real estate held for sale 13.6 18.8 (11.5) 20.9
---------------------------------------------------------------------------------------------------------
Total $ 69.2 $19.8 $ (19.2) $ 69.8
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1992
Fixed maturities held to maturity $ 5.5 $(1.0) $ (0.4) $ 4.1
Mortgage loans 43.1 26.5 (18.1) 51.5
Real estate held for sale 15.9 7.2 (9.5) 13.6
---------------------------------------------------------------------------------------------------------
Total $ 64.5 $32.7 $ (28.0) $ 69.2
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Additions represent charges to net realized investment gains less recoveries,
and deductions represent reserves released upon disposal or restructuring of
the related asset.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments such as options,
futures and forward exchange contracts to hedge certain risks associated with
future investments and certain payments denominated in foreign currencies,
primarily British pound sterling, Canadian dollar and Japanese yen. These
derivative financial instruments are used to protect UNUM from the effect of
market fluctuations in interest and exchange rates between the contract date
and the date on which the hedged transaction occurs. UNUM does not intend
to hold
derivative financial instruments for the purpose of trading.
At December 31, 1994,1996, UNUM had open interest rate futures contracts with
notional amounts of $178.2 million to hedge anticipated sales of investments in
1997. These contracts had a related net unrealized gain of $1.6 million. At
December 31, 1995, UNUM had no open derivative financial instruments.
At
December 31, 1993, UNUM held interest rate futures contracts with commitments
to purchase government securities with total par values of $207.0 million. In
using these instruments, UNUM is subject to the off-balance-sheet risk that the
counterparties to the transactions will fail to completely perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges.
NOTE 6. REINSURANCE
UNUM, through its life insurance subsidiaries, is involved in both the cession
and assumption of reinsurance with other companies. Risks are reinsured with
other companies to reduce UNUM's exposure to large losses and permit recovery
of a portion of direct losses. UNUM remains liable to the insured for the
payment of policy benefits if the reinsurers cannot meet their obligations
under the reinsurance agreements. Deferred policy acquisition costs,
premiums and expenses are stated net of reinsurance ceded to other companies.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," which eliminated the practice by insurance enterprises of reporting
assets and liabilities relating to reinsured contracts net of the effects of
reinsurance. The standard required prepaid reinsurance premiums and
reinsurance receivables, for amounts to be recovered, to be reported as
assets. It also prescribed conditions required for a contract with a
reinsurer to be accounted for as reinsurance and defined accounting standards
for short-duration and long-duration reinsurance contracts. As permitted,
consolidated financial statements prior to adoption have not been restated.
The effect of the adoption on the Consolidated Balance Sheet was an increase
in other assets of $80.0 million and a corresponding increase in future policy
benefits and unpaid claims and claim expenses.30
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. REINSURANCE (continued)
The effect of reinsurance on premiums earned and written for the years ended
December 31, 1994, and 1993, was as follows:
1994 1993
-------------------- --------------------
(DOLLARS IN MILLIONS) Earned Written Earned Written
-------------------------------------------------------------------------------
Direct $2,674.2 $2,702.7 $2,331.5 $2,335.6
Assumed 170.7 170.9 192.6 196.2
Ceded (112.5) (112.6) (50.0) (50.5)
-------------------------------------------------------------------------------
Premiums $2,732.4 $2,761.0 $2,474.1 $2,481.3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
For the years ended December 31, 1994, and 1993, recoveries recognized under
reinsurance agreements reduced benefits to policyholders by $53.3 million and
$28.9 million, respectively.
Reinsurance premiums ceded and assumed were $51.5 million and $136.2 million,
respectively, for 1992.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1994, UNUM recorded pretax charges totaling $14.4
million, or $0.13 per share, which were reflected as operating expenses in the
Consolidated Statement of Income. Of this total, the Individual Disability
segment recorded $12.3 million related to the restructuring of the individual
disability business and resulting consolidation of home office operations in
UNUM America, which was comprised of $7.1 million for severance costs for 150
field and 150 home office employees and $5.2 million for exit costs of certain
leased facilities and equipment, expiring through 1998. The remaining $2.1
million, recorded in the Employee Benefits segment, was for termination
benefits for approximately 100 employees related to the acceleration of
organizational changes within UNUM America. All employee related costs are
expected to be paid by the end of 1995.
During 1992, UNUM released the restructuring reserve remaining for the costs of
withdrawal and reassignment of employees associated with the 401(k) business in
excess of amounts incurred, since actual costs were less than expected, which
resulted in a pretax gain of $5.3 million. The gain associated with the
release of this restructuring reserve reduced operating expenses in the 1992
Consolidated Statement of Income.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS
PENSION PLANS
UNUM has a noncontributory defined benefit pension plan covering substantially
all domestic employees, excluding employees of Colonial Companies, Inc., and
Duncanson & Holt, Inc. The plan provides benefits based on the employee's
years of service and compensation during the highest five consecutive years
out of the last ten years of employment. UNUM funds the plan in accordance
with the requirements of the Employee Retirement Income Security Act of 1974,
as amended. Plan assets consist primarily of group annuity contracts and
include approximately 224,392 shares of UNUM Corporation common stock.
Net pension cost included the following components:
Year Ended December 31,
----------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 9.2 $ 8.6 $ 7.5
Interest cost on projected benefit obligation 11.6 10.9 9.4
Actual return on plan assets 3.3 (16.5) (14.5)
Net amortization and deferral (16.5) 5.2 4.1
-------------------------------------------------------------------------------
Net pension cost $ 7.6 $ 8.2 $ 6.5
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The funded status of the plan and amounts recognized in UNUM's Consolidated
Balance Sheets, as determined by the plan's actuaries, were as follows:
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefit obligation $ 96.2 $ 102.3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Accumulated benefit obligation $ 99.1 $ 104.8
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date $(141.9) $(147.6)
Plan assets at fair value 153.5 156.7
-------------------------------------------------------------------------------
Projected benefit obligation less than plan assets 11.6 9.1
Unrecognized net gain (26.2) (21.6)
Unrecognized prior service cost (3.3) (6.1)
Unamortized net obligation 2.7 3.1
-------------------------------------------------------------------------------
Accrued pension cost $ (15.2) $ (15.5)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
PENSION PLANS (Continued)
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 8.25% and 5.20%, respectively, at December 31, 1994, and 7.25%
and 4.70%, respectively, at December 31, 1993. The expected long-term rate of
return on plan assets was 9.0% in 1994 and 8.25% in 1993 and 1992. Prior year
service costs are being amortized on a straight-line basis over expected
employment periods for active employees.
UNUM also administers certain supplemental retirement plans for eligible
employees and officers and certain other pension plans. The cost of these
plans was not significant for the years ended December 31, 1994, 1993 and 1992.
RETIREMENT SAVINGS PLANS
UNUM has several retirement savings and profit sharing plans for substantially
all full-time and part-time employees who work 1,000 hours a year and have been
employed for at least one year. Dependent upon which plan the employee
participates in, eligible employees may contribute primarily up to 10% of their
annual salary, and UNUM matches a portion of each employee's contribution up to
6% of the employee's bi-weekly compensation. Participants may become 100%
vested immediately upon becoming eligible to participate, or incrementally over
a five year period. In 1994, 1993 and 1992, expense for these plans amounted
to $8.4 million, $8.3 million and $6.5 million, respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
UNUM provides certain health care and life insurance benefits for retired
employees and covered dependents. Substantially all domestic employees of UNUM
may become eligible for these benefits if they meet minimum age and service
requirements, if they are eligible for retirement benefits and if they agree to
contribute a portion of the cost. UNUM has the right to modify or terminate
these benefits. The underlying plans are not currently funded.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard ("FAS")
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," which changed the method for recognition of the cost of these
benefits from a cash basis to an accrual basis over the years in which the
employees render the related services. UNUM elected to immediately recognize
the FAS 106 liability at January 1, 1993, of $48.8 million as a cumulative
effect of an accounting change, which decreased net income by $32.1 million, or
$0.40 per share, during 1993.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (Continued)
Postretirement benefits expense included the following components:
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Service cost $ 3.8 $ 3.4
Interest cost 4.4 4.0
-------------------------------------------------------------------------------
Postretirement benefits expense $ 8.2 $ 7.4
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The following represents the unfunded accumulated postretirement benefits
obligation as determined by the plans' actuaries:
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Retirees $21.3 $19.6
Active employees fully eligible 4.5 6.5
Other active participants 38.9 29.7
-------------------------------------------------------------------------------
Accumulated postretirement benefits obligation 64.7 55.8
Unrecognized other amounts (1.0) 1.2
-------------------------------------------------------------------------------
Accrued postretirement benefits cost $63.7 $57.0
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Under UNUM's plans, the cost of covered health care benefits is assumed to
increase 10.00% and 10.75% for retirees less than 65 years old, and 7.50% and
8.25% for retirees 65 years and older for 1995. These rates are assumed to
decrease incrementally to 5.50% and 6.25% by 2001, and remain at that level
thereafter. The weighted average discount rates used in determining the
accumulated postretirement benefits obligation were 8.00% and 8.25%, at
December 31, 1994, and 7.25% and 7.50%, at December 31, 1993. The rates of
increase in future compensation levels used in determining the accumulated
postretirement benefits obligation were 5.2% and 4.7%, at December 31, 1994
and 1993, respectively.
At December 31, 1994, a 1% increase in the trend rate for health care costs
would increase the accumulated postretirement benefits obligation by $13.4
million and postretirement benefits expense by $1.8 million.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPTION AND INCENTIVE PLANS
LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for
granting of restricted shares of UNUM Corporation common stock to key officers.
The Incentive Plan also provides for granting of options to officers,
non-employee directors of UNUM Corporation and key employees, to purchase UNUM
Corporation common stock over ten years at a price not less than 100% of the
fair market value on the date of grant. The maximum number of shares reserved
for issuance under the Incentive Plan was 6,800,000 in 1994 and 1993, and
3,500,000 in 1992. At December 31, 1994, 1993 and 1992, 2,511,145 shares,
3,316,734 shares, and 1,006,684 shares, respectively, were available for grant
under the Incentive Plan.
The restriction period for each restricted stock award under the Incentive Plan
is in excess of three years, with the restrictions lapsing as a result of the
achievement of prescribed financial performance objectives during each three
year period, with the exception of 10,000 shares of restricted stock granted in
1994 on which restrictions will lapse on January 6, 1998, provided the grantee
remains continuously in the employ of UNUM. Plan participants are entitled to
cash dividends and voting rights on their respective shares. In 1994,
restrictions lapsed on 80,800 shares granted for the 1991 - 1993 performance
period. All other restricted stock shares issued remained subject to
restrictions.
The market value of the restricted shares issued under the Incentive Plan has
been recorded as deferred compensation and is included as a reduction of
stockholders' equity in the Consolidated Balance Sheets.
The 1987 Executive Stock Option Plan ("Option Plan") provided for granting to
officers and key employees options to purchase UNUM Corporation common stock
over ten years at a price not less than 100% of the fair market value on the
date of grant. Options outstanding under the Option Plan are included in the
summary of stock options.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPTION AND INCENTIVE PLANS (Continued)
LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN (Continued)
Beginning in 1991, certain officers were granted limited stock appreciation
rights ("LSARs") in tandem with their outstanding options. LSARs afford the
optionee the right to receive payment upon a change in control as defined in
the plans equal to the higher of the excess of the highest price per share
paid in connection with such change in control or the fair market value per
share, over the option price per share. As an underlying stock option is
exercised, the LSARs are automatically canceled. At December 31, 1994, 1993
and 1992, there were 590,275 LSARs, 556,500 LSARs, and 685,550 LSARs
outstanding, respectively.
The following is a summary of stock options and restricted stock information:
Restricted
Options Stock
-------------------------------------------------------------------------------
Outstanding at January 1, 1992 3,085,014 80,800
1992 Activity:
Granted at $33.17 to $40.70 per share 1,043,969 --
Granted for restricted stock -- 34,600
Exercised at $7.13 to $54.00 per share (860,147) --
Canceled/reissued (141,954) --
-------------------------------------------------------------------------------
Outstanding at December 31, 1992 3,126,882 115,400
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1993 Activity:
Granted at $52.88 to $57.75 per share 1,031,650 --
Granted for restricted stock -- 32,525
Exercised at $9.03 to $36.75 per share (655,300) --
Canceled/reissued (100,278) (1,500)
-------------------------------------------------------------------------------
Outstanding at December 31, 1993 3,402,954 146,425
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1994 Activity:
Granted at $38.00 to $51.31 per share 884,375 --
Granted for restricted stock -- 46,850
Lapse of restrictions on restricted stock -- (80,800)
Exercised at $9.03 to $47.88 per share (282,729) --
Canceled/reissued (151,578) (2,525)
-------------------------------------------------------------------------------
Outstanding at December 31, 1994 3,853,022 109,950
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The number of exercisable shares as of December 31, 1994, 1993 and 1992, were
1,975,219 shares, 1,396,182 shares, and 1,305,720 shares, respectively.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPTION AND INCENTIVE PLANS (Continued)
LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN (Continued)
In connection with the March 26, 1993, merger with Colonial Companies, Inc.
("Colonial"), outstanding options to acquire shares of Colonial Class B common
stock were converted into options to acquire shares of UNUM common stock, and
are included in the preceding summary of stock options. Pursuant to the
merger, no further options will be granted under the Colonial stock option
plans.
THE 1998 GOALS STOCK OPTION PLAN
The 1998 Goals Stock Option Plan ("1998 Option Plan") was introduced in January
1995. The 1998 Option Plan provides for granting to all eligible employees up
to 150 options to purchase UNUM Corporation common stock at a price not less
than 100% of the fair market value on the date of the grant. The options will
vest to the employee in January 2004; however, if UNUM achieves its 1998 goals,
vesting will be accelerated to early 1999.
ANNUAL INCENTIVE PLANS
UNUM has several annual incentive plans for certain employees and executive
officers, which provide additional compensation based on achievement of
predetermined annual corporate and affiliate financial and non-financial
goals. In 1994, 1993 and 1992, expense for these plans was $7.5 million,
$27.9 million and $24.6 million, respectively.
NOTE 10. INCOME TAXES
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 109,
"Accounting for Income Taxes," which changed the method for calculating and
reporting deferred income taxes in the financial statements from the deferred
method to the liability method. The liability method of accounting for income
taxes requires that deferred tax liabilities or assets at the end of each
period be determined using the tax rate expected to be in effect when taxes are
actually paid or recovered. Under this method, income tax will increase or
decrease in the same period in which a change in tax rate is enacted. The
cumulative effect of this accounting change amounted to a $20.0 million
increase in net income, or $0.25 per share, for the year ended December 31,
1993.
On August 10, 1993, legislation was enacted to increase the federal corporate
income tax rate of 34% to 35%, retroactive to January 1, 1993. The tax rate
increase resulted in a charge to net income totaling $11.4 million, or $0.15
per share, which included $3.6 million, or $0.05 per share, related to 1993
pretax income, and a $7.8 million, or $0.10 per share, adjustment to the
deferred income tax liability.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES (Continued)
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Tax at federal statutory rate (35% for 1994 and 1993,
34% for 1992) $ 69.5 $161.1 $135.5
Tax-exempt income (32.0) (29.4) (31.8)
Prior years' taxes -- (2.0) (2.0)
State income tax 2.2 3.9 3.7
Tax on foreign operations -- 0.1 0.1
Adjustment to deferred tax liability due to
tax rate increase -- 7.8 --
Other 4.2 6.8 1.8
-------------------------------------------------------------------------------
Income taxes $ 43.9 $148.3 $107.3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Deferred income tax liabilities and assets were comprised of the following:
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs $298.9 $257.8
Policy reserve adjustments 59.3 69.6
Net unrealized gains 27.1 79.4
Value of business acquired 17.9 19.0
Invested assets 28.9 10.5
Other 10.6 7.4
-------------------------------------------------------------------------------
Total deferred tax liabilities 442.7 443.7
-------------------------------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit carryforwards 45.3 20.2
Net realized losses 15.0 17.3
Postretirement benefits 20.3 19.7
Loss carryforward 5.9 8.0
Other 7.6 1.8
-------------------------------------------------------------------------------
Total deferred tax assets 94.1 67.0
------------------------------------------------------------------------------
Net deferred tax liability $348.6 $376.7
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES (Continued)
Deferred income taxes relating to cumulative net unrealized gains on available
for sale securities were $27.1 million, $79.4 million and $57.4 million at
December 31, 1994, 1993 and 1992, respectively. At December 31, 1994, $5.0
million of the $27.1 million deferred income taxes was reflected in retained
earnings, while the remaining $22.1 million was netted against the unrealized
gains component of stockholders' equity.
As of December 31, 1994, deferred U.S. income taxes have not been provided on
the accumulated earnings of UNUM's foreign subsidiaries. These earnings would
become subject to U.S. tax if remitted to UNUM Corporation.
Prior to the Tax Reform Act of 1984 ("1984 Act"), half the excess of the tax
basis gain from operations of a life insurance company over its taxable
investment income was currently taxable. The other half was set aside in a
Policyholders Surplus Account, together with certain special life insurance
company deductions. The cumulative amount in the Policyholders Surplus Account
as of December 31, 1983, was frozen by the 1984 Act and amounted to $31.8
million at December 31, 1994. Any direct or indirect distributions from this
account would be taxed at current tax rates; however, no provision has been
made for related taxes. If the amount set aside in this account were taxed at
the current rate at December 31, 1994, for all life insurance subsidiaries,
the tax would have amounted to $11.1 million.
UNUM's Consolidated Statements of Income for 1994, 1993 and 1992, included the
following amounts of foreign income and related income tax expense:
Year Ended December 31,
------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Foreign income $24.2 $ 20.9 $32.7
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Income tax expense (credit):
Current $ 0.7 $(12.5) $ 1.6
Deferred 9.7 20.2 10.4
-------------------------------------------------------------------------------
Total $10.4 $ 7.7 $12.0
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM subsidiaries had operating loss carryforwards totaling $16.5 million and
alternative minimum tax ("AMT") credit carryforwards totaling $45.3 million as
of December 31, 1994. Substantially all of the operating loss carryforwards
relate to foreign operations and can be carried forward indefinitely. The AMT
credits can also be carried forward indefinitely.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1994, and 1993:
December 31,
-----------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Short-term debt:
Commercial paper $216.5 $109.9
Other notes payable, with weighted average interest
rate of 2.7% 30.1 0.1
-------------------------------------------------------------------------------
Total short-term debt 246.6 110.0
-------------------------------------------------------------------------------
Long-term debt:
Medium-term notes payable due 1996 to 2024
with interest rates ranging from 5.1% to 7.5% 180.8 126.1
Other notes payable 1.3 2.5
-------------------------------------------------------------------------------
Total long-term debt 182.1 128.6
-------------------------------------------------------------------------------
Total notes payable $428.7 $238.6
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
At December 31, 1994, UNUM Corporation had a $500 million committed revolving
credit facility which expires on October 1, 1999. UNUM's commercial paper
program is supported by the revolving credit facility and is available for
general liquidity needs, capital expansion, acquisitions or stock repurchase.
The committed revolving credit facility contains certain covenants which, among
other provisions, require maintenance of certain levels of stockholders' equity
and limits on level of debt. The commercial paper outstanding at December 31,
1994, and 1993, had a weighted average interest rate of approximately 6.34% and
3.41%, respectively.
Aggregate maturities of long-term debt are as follows: 1995-$0; 1996-$16.2
million; 1997-$48.2 million; 1998-$29.8 million; 1999-$21.4 million;
thereafter-$66.5 million.
On February 28, 1995, UNUM borrowed $100 million under the revolving credit
facility, which was infused into UNUM America in exchange for surplus
debentures. Repayment of principal and interest on the surplus debentures is
subject to state insurance regulatory approval.
NOTE 12. CAPITAL STOCK
In September 1993, UNUM announced the resumption of a program to repurchase its
common stock pursuant to an existing Board of Directors' resolution. On
February 11, 1994, UNUM's Board of Directors voted to expand UNUM's
authorization to repurchase an additional 5.0 million shares, bringing the
total number of shares authorized for repurchase to 44.0 million shares. Since
the resumption of the stock repurchase program, UNUM has acquired approximately
7.6 million shares of its common stock through December 31, 1994, in the open
market at an aggregate cost of $375.8 million. No shares were acquired in the
open market during 1992 or 1991. At December 31, 1994, approximately 2.7
million shares remained authorized for repurchase.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. CAPITAL STOCK (Continued)
Under the Long-Term Stock Incentive Plan and Executive Stock Option Plan and
the plans of Colonial Companies, Inc. (see Note 9 "Option and Incentive
Plans"), 329,579 shares, 687,825 shares, and 894,747 shares were issued in
1994, 1993 and 1992, respectively.
NOTE 13. PREFERRED STOCK PURCHASE RIGHTS
On March 13, 1992, UNUM's Board of Directors ordered redemption of the 1988
Rights Agreement and adopted a new Shareholder Rights Plan. Shareholders of
record on March 23, 1992, received $0.05 for every two shares of common stock
held, which was distributed April 2, 1992. The total amount of the redemption
was $1.7 million.
As a result of the adoption of a new Shareholder Rights Plan, a dividend
distribution was declared of one Right for each share of outstanding Common
Stock to stockholders of record at the close of business on March 23, 1992.
Each Right under certain specific circumstances entitles the holder to purchase
one one-hundredth of a share of Series A Junior Participating Preferred Stock
at a purchase price of $150.
The Rights become exercisable at a specified time after (1) a person or group
acquires 10% or more of UNUM's Common Stock or (2) a tender or exchange offer
for 10% or more of UNUM's Common Stock.
The Rights expire at the close of business on March 13, 2002, unless earlier
redeemed by the Company under certain circumstances at a price of $0.01 per
Right.
NOTE 14. DIVIDEND RESTRICTIONS
UNUM is subject to various state insurance regulatory restrictions that limit
the maximum amount of dividends available from its United States domiciled
insurance subsidiaries without prior approval. Under current law, during 1995
approximately $81.3 million will be available for payment of dividends to UNUM
Corporation without state insurance regulatory approval. Dividends in excess
of this amount may only be paid with state insurance regulatory approval. The
aggregate statutory capital and surplus of the United States domiciled
insurance subsidiaries of UNUM Corporation was approximately $840.1 million
and $953.9 million, at December 31, 1994, and 1993, respectively. The
aggregate statutory net income of UNUM Corporation's United States domiciled
insurance subsidiaries was approximately $70.4 million, $216.0 million and
$154.1 million for 1994, 1993 and 1992, respectively. State insurance
regulatory authorities prescribe statutory accounting practices that differ in
certain respects from generally accepted accounting principles. The
significant differences relate to deferred acquisition costs, deferred income
taxes, non-admitted asset balances, required investment risk reserves and
reserve calculation assumptions.
UNUM Corporation also has the ability to draw a dividend of approximately $30
million from its United Kingdom based affiliate, UNUM Limited, subject to
certain U.S. tax consequences.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15.
LITIGATION
In the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1994.1996. In some instances, these
proceedings include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position or the consolidated operating results of UNUM.
NOTE 16. SEGMENT INFORMATIONOn December 29, 1993, UNUM reports its operations principally in six business segments: Employee
Benefits, Related Businesses, Colonial Companies, Individual Disability,
Retirement Security and Other Operations.
Investment income and net realized investment gains are allocated to the
segments based on designation of ownership of assets identified to the
segments. Operating expenses are allocated to the segments based on direct
association with a product whenever possible. If, however, the expense cannot
be readily associated with a particular product, the costs are allocated based
on ratios of the relative time spent, extent of usage or varying volume of
work performed for each segment.
The Employee Benefits segment includes group long term disability, group life
and other employee benefits products, including short term disability,
accidental death and dismemberment and dental insurance. The Related
Businesses segment includes UNUM Limitedfiled suit in the United Kingdom, CommercialStates District Court
for the District of Maine, seeking a federal income tax refund. The suit is
based on a claim for a deduction in certain prior tax years, for $652 million in
cash and stock distributed to policyholders in connection with the 1986
conversion of Union Mutual Life Insurance Company to a stock company. UNUM has
fully paid, and reinsurance operations including Duncanson & Holt,
Inc.provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure.
UNUM believes its claims are meritorious, and has appealed the decision to the
United States Court of Appeals for the First Circuit. The Colonial Companies segment includes Colonial Companies, Inc.ultimate recovery, if
any, cannot be determined at this time.
EFFECT OF INFLATION
Inflation is one of the factors that has increased the need for insurance.
Many policyholders who once had adequate insurance programs at lower coverage
levels have increased their disability insurance coverage to provide the same
relative financial benefits and subsidiaries, which offer payroll-deducted, voluntary employee benefits to
employees at their worksites. The Individual Disability segment includes
disability income products. The Retirement Security segment includes tax
sheltered annuities, long term care insurance and lifestyle security protection
products. The Other Operations segment includes individual life insurance
business of UNUM Life Insurance Company of America, group medical operations,
guaranteed investment contracts, deposit administration accounts, and 401(k)
plans, all ofprotection.
Changing interest rates, which are no longer actively marketed by UNUM. Corporate
includes transactions whichtraditionally linked to changes in
inflation, affect UNUM's level of discounted reserves. While rising interest
rates are beneficial when the company is investing current cash flows, they can
also reduce the fair value of existing fixed rate long-term investments. In
addition, lower interest rates can lead to early payoffs and refinancing of some
of UNUM's fixed rate investments. Management generally non-insurance related and expenses
incurredinvests in fixed rate
instruments that are structured to effectlimit the March 26, 1993, merger ofexposure to such reinvestment risk.
ACCOUNTING CHANGES
Effective January 1, 1996, UNUM and Colonial.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. SEGMENT INFORMATION (Continued)
Summarized financial informationadopted Financial Accounting Standard
("FAS") No. 121, "Accounting for the six business segmentsImpairment of Long-Lived Assets and Corporate is
as follows:
Year Ended December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Revenues:
Employee Benefits $ 1,714.9 $ 1,597.3 $ 1,350.6
Related Businesses 567.1 488.0 446.0
Colonial Companies 473.9 448.8 407.3
Individual Disability 442.1 405.0 367.9
Retirement Security 289.4 271.8 261.1
Other Operations 131.3 179.9 210.9
Corporate 5.0 6.2 4.7
-------------------------------------------------------------------------------
Total revenues $ 3,623.7 $ 3,397.0 $ 3,048.5
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effects of accounting changes:
Employee Benefits $ 257.8 $ 239.1 $ 222.5
Related Businesses 60.3 57.3 53.4
Colonial Companies 62.7 70.4 60.5
Individual Disability (188.2) 69.0 44.6
Retirement Security 25.7 21.1 6.7
Other Operations 8.5 20.8 16.5
Corporate (28.2) (17.4) (5.7)
-------------------------------------------------------------------------------
Income before income taxes and cumulative
effects of accounting changes 198.6 460.3 398.5
Income taxes 43.9 148.3 107.3
-------------------------------------------------------------------------------
Income before cumulative effects of accounting
changes 154.7 312.0 291.2
Cumulative effects of accounting changes -- (12.1) --
-------------------------------------------------------------------------------
Net income $ 154.7 $ 299.9 $ 291.2
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Identifiable Assets:
Employee Benefits $ 3,660.6 $ 3,294.5 $ 2,936.4
Related Businesses 1,467.2 1,269.0 1,113.2
Colonial Companies 846.2 819.2 745.9
Individual Disability 1,756.5 1,516.3 1,349.1
Retirement Security 3,384.8 3,249.3 3,051.7
Other Operations 1,213.6 1,493.9 1,982.7
Corporate 451.3 452.3 442.8
Individual Participating
Life and Annuity 347.0 342.8 338.0
-------------------------------------------------------------------------------
Total assets $13,127.2 $12,437.3 $11,959.8
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)for
Long-Lived Assets to be Disposed Of," which established accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. The following isadoption of FAS 121
did not have a summary of unaudited quarterlymaterial effect on UNUM's results of operations or financial
position.
Effective January 1, 1996, UNUM adopted FAS 123, "Accounting for
Stock-Based Compensation." FAS 123 established financial accounting and
reporting standards for stock-based employee compensation plans. The statement
defines a new method of accounting for employee stock compensation plans using a
fair value based method, under which compensation cost is measured and
recognized in results of operations. Alternatively, FAS 123 allows an entity to
retain the accounting for employee stock compensation plans defined under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." UNUM retained the accounting defined under APB No. 25, and as
required, will disclose in a footnote the pro forma effects of stock-
based compensation using the fair value based method defined under FAS 123.
Refer to Note 9 in Item 8 for the related disclosures.
Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors
for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures," which defined the
principles to measure and record a loan when it is probable that a creditor will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. The adoption of FAS 114 and FAS 118 did not have a material
effect on UNUM's results of operations or financial position.
Effective January 1, 1994, UNUM adopted FAS 115, "Accounting for Certain
Investments in Debt and 1993:
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
-------------------------------------------------------------------------------
1994
-------------------------------------------------------------------------------
4th 3rd 2nd 1st
-------------------------------------------------------------------------------
Premiums $705.7 $670.3 $701.4 $655.0
Investment income 194.4 192.3 192.4 191.1
Net realized investment gains 9.6 11.6 12.5 11.9
Benefits to policyholders 539.8 708.2 518.7 481.4
Net income (loss) $ 54.0 $(61.7) $ 85.3 $ 77.1
-------------------------------------------------------------------------------
Net income (loss) per common share $ 0.75 $(0.84) $ 1.14 $ 1.02
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1993
-------------------------------------------------------------------------------
4th 3rd 2nd 1st
-------------------------------------------------------------------------------
Premiums $647.7 $622.9 $624.6 $578.9
Investment income 193.2 196.4 200.3 200.5
Net realized investment gains 8.5 10.6 9.8 20.5
Benefits to policyholders 460.5 446.9 449.8 418.5
Net income $ 83.1 $ 72.1 $ 80.8 $ 63.9
-------------------------------------------------------------------------------
Net income per common share $ 1.08 $ 0.91 $ 1.02 $ 0.81
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Equity Securities," which specified the accounting and
reporting for certain investments in equity securities and for all investments
in debt securities. In November 1995, the Financial Accounting Standards Board
("FASB") issued "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," which provided a one-time
opportunity to reassess the appropriateness of the classifications of securities
described in FAS 115, and to reclassify fixed maturities from the held to
maturity category without calling into question the
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSUREintent to hold other debt securities to maturity in the future. On August 2, 1993,December 31,
1995, UNUM reassessed its fixed maturity portfolio and, as allowed under the
Registrant determined notimplementation guidance, reclassified fixed maturities with an amortized cost of
$6,082.8 million and a related unrealized gain of $393.0 million from the held
to reappoint Ernst & Young
L.L.P. as the Registrant's independent auditorsmaturity category to available for 1993. Also on August 2,
1993, the Registrant engaged Coopers & Lybrand L.L.P. as the Registrant's
independent auditors.sale. In connection with the
auditreclassification of the fiscal year endedheld to maturity fixed maturities to available for sale,
on December 31, 1992,1995, UNUM adjusted its unpaid claims by $261.2 million to
reflect the changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the interim period dating fromFASB issued FAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The statement provides
guidance for recognition or derecognition of assets and liabilities, focusing on
the concepts of control and extinguishment. UNUM is required to adopt FAS 125
effective January 1, 1993, until
August 2, 1993, there were no disagreements between Ernst & Young L.L.P.1997. The adoption of FAS 125 is not expected to have a
material effect on UNUM's results of operations or financial position.
In March 1997, the FASB issued FAS No. 128, "Earnings Per Share," which is
intended to simplify the computation and presentation of earnings per share
("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." FAS 128 will eliminate the Registrant on any matterconcept of accounting principles or practices, financial
statements disclosure, or auditing scope or procedure, which, if not resolved"primary" EPS and
require dual presentation of "basic" and "diluted" EPS. Diluted EPS under FAS
128 is similar to the satisfaction of Ernst & Young L.L.P., would have resulted in reference or
disclosure in Ernst & Young L.L.P.'s reports.
Ernst & Young L.L.P.'s report for the fiscal year ended"fully diluted" EPS as defined by APB 15. UNUM is required to
adopt FAS 128 effective December 31, 1992,
contained no adverse opinion, no disclaimer of opinion and no qualification or
modification of opinion as to uncertainty, audit scope, or accounting
principles.
The change of independent auditors was recommended by the Audit Committee of
the Registrant's Board of Directors and approved by the Board of Directors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS OF THE REGISTRANT
The information1997. As stated in Note 1 in Item 8, under
the caption "Election"Earnings Per Share," the assumed exercise of Directors" includedUNUM's outstanding
stock options does not result in UNUM's
proxy statement dateda material dilution of earnings per share.
In March 28, 1995,1997, the FASB issued FAS No. 129, "Disclosures of Information
About Capital Structure," which clarifies disclosure requirements related to the
type, and nature, of securities contained in an entity's capital structure. UNUM
is incorporated by reference.
B. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of UNUM are as follows:required to adopt FAS 129 effective December 31, 1997.
32
Item 8--Financial Statements and Supplementary Data
AGE (AS OF AN OFFICER
NAME MARCH 24, 1995) POSITION HELD WITH UNUM SINCE
----------------------- ------------------- ------------------------------------------------------------------ ----------INDEX Page
- ------------------------------------------------------------------------------------------ ------
James F. Orr III 52 Chairman, President and Chief Executive Officer 1986
Thomas G. Brown 50 Executive Vice President 1992
Stephen B. Center 57 Executive Vice President 1972
Robert W. Crispin 48 Executive Vice President 1995
Rodney N. Hook 48 Senior Vice President and ChiefReport of Independent Accountants ...................................................... 34
Consolidated Financial Officer 1989
Peter J. Moynihan 51 Senior Vice President 1979
Kevin P. O'Connell* 49 Senior Vice President, UNUM America 1987
Elaine D. Rosen* 42 Senior Vice President, UNUM America 1983
Robert E. Staton* 48 Chairman, Colonial Life 1984
------------
*Denotes an executive of UNUM America or Colonial Life who is not an officer of
the Corporation but who is considered an "executive officer" under regulations
of the Securities and Exchange Commission.
The officers are elected annually and hold office until their respective
successors have been chosen and qualified, or until death, resignation or
removal. The UNUM Board may also appoint or delegate the appointment of
officers, assistant officers and agents as it may deem necessary for such
periods as the President, the By-Laws or the UNUM Board may prescribe.
Mr. Orr was elected Chairman of the Board of UNUM in February 1988. He has
served as President and Chief Executive Officer since September 1987. He joined
UNUM in 1986.
Mr. Brown was elected Executive Vice President of UNUM in January 1995. In
addition, he continues to serve as President and Chief Executive Officer of
Duncanson & Holt, Inc. ("D&H"), a post he has held since 1987. D&H became a
wholly-owned subsidiary of UNUM in July 1992.
Mr. Center was elected President of UNUM America and Executive Vice
President of UNUM in September 1992. Previously, he served as Group Executive
Vice President of UNUM America from May 1990 to August 1992, Executive Vice
President for the Employee Benefits Division from September 1989 to May 1990,
and Senior Vice President for the Employee Benefits Division from October 1985
to September 1989. He joined UNUM America in 1963.
Mr. Crispin was elected Executive Vice President of UNUM in January 1995.
Prior to joining UNUM, Mr. Crispin served as Vice Chairman and Chief Investment
Officer of The Travelers Insurance Companies, from July 1991 to January 1995 and
as Executive Vice President of Lincoln National Corporation from 1986 to 1991.
Mr. Hook was elected Senior Vice President and Chief Financial Officer in
April 1989. He served additionally as Treasurer from May 1989 to September 1992.
Prior to joining UNUM in April 1989, Mr. Hook served as a consultant to The
Equitable Life Assurance Society of New York from September 1988 to April 1989.
Mr. Moynihan was elected Senior Vice President of UNUM in September 1993 and
Senior Vice President for Investments of UNUM America in October 1987. He joined
UNUM America in 1973.
Mr. O'Connell was elected Senior Vice President of UNUM America in January
1992. Previously, he served as Senior Vice President for Group Life and Health
from November 1988 to January 1992 and additionally for Group Retirement
Products from May 1990 to January 1992. He joined UNUM America in 1968.
Ms. Rosen was elected Senior Vice President of UNUM America in January 1991.
Previously, she served as Senior Vice President for Long Term Disability from
November 1988 to January 1991. She joined UNUM America in 1975.
Mr. Staton was elected Chairman of Colonial Life in December 1993.
Previously, he served as Senior Vice President from February 1990 to December
1993 and Vice President from August 1985 to February 1990; and additionally as
General Counsel from August 1985 to November 1993, and Corporate Secretary from
February 1992 to August 1993. He joined Colonial Life in 1984.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Compensation of Directors" and
"Executive Compensation" included in UNUM's proxy statement dated March 28,
1995, is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership" included in UNUM's
proxy statement dated March 28, 1995, is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Executive Compensation" included in
UNUM's proxy statement dated March 28, 1995, is incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)Documents filed:
1.The following Consolidated Financial Statements of UNUM Corporation
and subsidiaries are included in Item 8.
Statements:
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 1993 and 1992............................35
Consolidated Balance Sheets as of December 31, 1994,1996, and 1993.....................................................1995 ........................ 36
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996,
1995 and 1994 1993 and 1992...................................................................................... 38
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 19931996, 1995 and 1992........................39
1994
Notes to Consolidated Financial Statements........................................................................Statements ............................................. 40
2.Financial Statement Schedules. See Index to Financial Statement
Schedules on page of this report.
3. Exhibits. See Index to Exhibits on page of this report.
(b)Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 1994.
Schedules and exhibits required by Article 7 of Regulation S-X other than
those listed are omitted because they are not required, are not applicable, or
equivalent information has been included in the financial statements, and notes
thereto, or elsewhere herein.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
PORTLAND, STATE OF MAINE, ON MARCH 24, 1995.
UNUM Corporation
By /s/ JAMES F. ORR III
------------------------------------
James F. Orr III (Chairman, President
and Chief Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
--------------------------------------------------------- --------------------------------------------------------- --------------
/s/ JAMES F. ORR III Chairman, President and Chief Executive Officer March 24, 1995
-------------------------------------------
(James F. Orr III)
/s/ RODNEY N. HOOK Senior Vice President and Chief Financial Officer March 24, 1995
-------------------------------------------
(Rodney N. Hook)
/s/ STEPHEN D. ROBERTS Vice President and Corporate Controller March 24, 1995
-------------------------------------------
(Stephen D. Roberts)
* Director March 24, 1995
-------------------------------------------
(Gayle O. Averyt)
* Director March 24, 1995
-------------------------------------------
(Kenneth S. Axelson)
* Director March 24, 1995
-------------------------------------------
(Robert E. Dillon, Jr.)
* Director March 24, 1995
-------------------------------------------
(Gwain H. Gillespie)
* Director March 24, 1995
-------------------------------------------
(Ronald E. Goldsberry)
* Director March 24, 1995
-------------------------------------------
(Donald W. Harward)
* Director March 24, 1995
-------------------------------------------
(George J. Mitchell)
* Director March 24, 1995
-------------------------------------------
(Cynthia A. Montgomery)
Director March 24, 1995
-------------------------------------------
(James L. Moody, Jr.)
* Director March 24, 1995
-------------------------------------------
(Lawrence R. Pugh)
* Director March 24, 1995
-------------------------------------------
(Lois Dickson Rice)
* Director March 24, 1995
-------------------------------------------
(John W. Rowe)
*/s/ JOHN-PAUL DEROSA
-------------------------------------------
(John-Paul DeRosa, as Attorney-in-fact
for each of the persons indicated)
(Assistant Secretary)
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
UNUM Corporation
We have audited the consolidated financial statements of UNUM Corporation and
subsidiaries as listed in Item 8 and the financial statement schedules of UNUM Corporation and subsidiariesas listed
in Item 14(a) of this Form 10-K as of and for the years ended December 31, 1994 and 1993.10-K. These consolidated financial statements and
financial statement schedules are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 1994 and 1993 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of UNUM
Corporation and subsidiaries as of December 31, 19941996 and 1993,1995, and the
consolidated results of their operations and their cash flows for each of the
twothree years in the period ended December 31, 1994,1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the 1994 and 1993 financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
As discussed in Notes 3, 8 and 10 of the consolidated financial statements,
the Corporation changed its method of accounting for certain investments in debt
securities in 1994 and its method of accounting for postretirement benefits
other than pensions, and accounting for income taxes in 1993.
/s/COOPERS & LYBRAND L.L.P.
Portland, Maine
February 7, 1995,5, 1997,
except for Note 115 for which the date is February 28, 1995March 1, 1997,
and Note 18 for which the date is March 14, 1997
34
REPORTUNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INDEPENDENT AUDITORS
To the Directors and Stockholders
UNUM Corporation
Portland, Maine
We have audited theINCOME
Year Ended December 31,
--------------------------------------
(Dollars in millions, except per common share data) 1996 1995 1994
- ----------------------------------------------------- ----------- ----------- ----------
Revenues
Premiums $3,120.4 $3,018.2 $2,721.3
Investment income ................................. 802.2 806.3 770.2
Net realized investment gains ..................... 3.4 225.1 45.6
Fees and other income .............................. 116.7 73.3 75.5
-------- -------- --------
Total revenues .................................... 4,042.7 4,122.9 3,612.6
Benefits and expenses
Benefits to policyholders ........................... 2,324.7 2,493.0 2,239.0
Interest credited ................................. 200.6 227.4 242.7
Operating expenses ................................. 862.6 728.2 713.0
Commissions ....................................... 364.2 369.9 355.9
Increase in deferred policy acquisition costs ...... (91.7) (114.7) (155.3)
Interest expense .................................... 40.7 37.2 18.7
-------- -------- --------
Total benefits and expenses ..................... 3,701.1 3,741.0 3,414.0
-------- -------- --------
Income before income taxes ........................ 341.6 381.9 198.6
Income taxes
Current ............................................. 122.3 98.6 30.4
Deferred .......................................... (18.7) 2.2 13.5
-------- -------- --------
Total income taxes .............................. 103.6 100.8 43.9
-------- -------- --------
Net income .......................................... $ 238.0 $ 281.1 $ 154.7
======== ======== ========
Net income per common share ........................ $ 3.26 $ 3.87 $ 2.09
======== ======== ========
See notes to consolidated statements of income, stockholders' equity,
and cash flows of UNUM Corporation and Subsidiaries for the year ended December
31, 1992. Our audit also included the financial statement schedules for 1992
listed in the Index at Item 14(a). These financial statements and schedules are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the35
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------- ------------ -----------
ASSETS
Investments
Fixed maturities available for sale--at fair value
(amortized cost: 1996--$6,656.7; 1995--$8,583.5) ...... $6,942.7 $9,135.4
Equity securities available for sale--at fair value
(cost: 1996--$23.8; 1995--$21.1) ..................... 31.3 25.2
Mortgage loans ....................................... 1,132.1 1,163.4
Real estate, net ....................................... 248.1 222.2
Policy loans .......................................... 232.9 219.2
Other long-term investments ........................... 14.2 30.4
Short-term investments ................................. 123.4 896.7
--------- ---------
Total investments .................................... 8,724.7 11,692.5
Cash ................................................... 77.0 42.5
Accrued investment income .............................. 166.1 208.5
Premiums due .......................................... 252.4 224.3
Deferred policy acquisition costs ..................... 844.2 1,142.3
Property and equipment, net ........................... 181.0 153.7
Reinsurance receivables ................................. 1,113.8 420.9
Deposit assets .......................................... 2,846.6 --
Other assets .......................................... 518.0 370.9
Separate account assets ................................. 743.7 532.2
--------- ---------
Total assets .......................................... $15,467.5 $14,787.8
========= =========
See notes to consolidated financial statements referredstatements.
36
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------------- ------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits ....................................... $1,881.1 $1,718.7
Unpaid claims and claim expenses ........................... 5,289.3 4,856.4
Other policyholder funds .................................... 3,533.6 3,840.3
Income taxes
Current ................................................... 61.3 20.7
Deferred ................................................... 341.8 392.0
Notes payable ................................................ 526.9 583.8
Other liabilities .......................................... 826.7 540.8
Separate account liabilities ................................. 743.7 532.2
-------- --------
Total liabilities .......................................... 13,204.4 12,484.9
Stockholders' equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000 shares, issued 99,987,958 shares ............... 10.0 10.0
Additional paid-in capital ................................. 1,103.4 1,088.2
Unrealized gains on available for sale securities, net ...... 82.3 213.1
Unrealized foreign currency translation adjustment ......... (1.2) (23.1)
Retained earnings .......................................... 1,871.4 1,713.2
-------- --------
3,065.9 3,001.4
Less:
Treasury stock, at cost (1996--28,165,594 shares;
1995--26,980,331 shares) .................................... 792.2 691.6
Restricted stock deferred compensation ..................... 10.6 6.9
-------- --------
Total stockholders' equity ................................. 2,263.1 2,302.9
-------- --------
Total liabilities and stockholders' equity .................. $15,467.5 $14,787.8
======== ========
See notes to above
present fairly,consolidated financial statements.
37
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Gains (Losses) Unrealized
Common On Available Foreign Restricted
Stock Additional for Sale Currency Stock
(Dollars in millions, $0.10 Par Paid-in Securities, Translation Retained Treasury Deferred
except per common share data) Value Capital Net Adjustment Earnings Stock Compensation Total
- -------------------------------- --------- ----------- ------------- ----------- -------- -------- ------------ -----
Balance at January 1, 1994 .... $10.0 $1,078.4 $ 149.1 $ (24.1) $1,420.8 $ (529.8) $ (1.7) $2,102.7
1994 Transactions:
Net income ................... 154.7 154.7
Unrealized losses on available
for sale securities, net .... (99.5) (99.5)
Unrealized foreign currency
translation adjustment ....... 0.4 0.4
Dividends to stockholders
($0.92 per common share) ..... (68.3) (68.3)
Treasury stock acquired ....... (183.3) (183.3)
Employee stock option and
other transactions .......... 2.1 6.5 0.1 8.7
----- --------- ------- -------- -------- -------- ------ --------
Balance at December 31, 1994 .. 10.0 1,080.5 49.6 (23.7) 1,507.2 (706.6) (1.6) 1,915.4
1995 Transactions:
Net income ................... 281.1 281.1
Unrealized gains on available
for sale securities, net .... 163.5 163.5
Unrealized foreign currency
translation adjustment ....... 0.6 0.6
Dividends to stockholders
($1.035 per common share) .... (75.1) (75.1)
Employee stock option and
other transactions .......... 7.7 15.0 (5.3) 17.4
----- --------- ------- -------- -------- -------- ------ --------
Balance at December 31, 1995 .. 10.0 1,088.2 213.1 (23.1) 1,713.2 (691.6) (6.9) 2,302.9
1996 Transactions:
Net income ................... 238.0 238.0
Unrealized losses on available
for sale securities, net .... (130.8) (130.8)
Unrealized foreign currency
translation adjustment ....... 21.9 21.9
Dividends to stockholders
($1.09 per common share) ..... (79.8) (79.8)
Treasury stock acquired ....... (119.1) (119.1)
Employee stock option and other
transactions ................ 15.2 18.5 (3.7) 30.0
----- --------- ------- -------- -------- -------- ------ --------
Balance at December 31, 1996 .. $10.0 $1,103.4 $ 82.3 $ (1.2) $1,871.4 $ (792.2) $(10.6) $2,263.1
====== ========= ======= ======= ======== ======== ====== ========
See notes to consolidated financial statements.
38
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
(Dollars in millions) 1996 1995 1994
- ----------------------------------------------------------------- ------------- ------------- ---------
Operating activities:
Net income ...................................................... $ 238.0 $ 281.1 $ 154.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in future policy benefits and unpaid claims and
claim expenses ................................................ 630.1 905.3 720.1
Increase in amounts receivable under reinsurance agreements . (686.7) (61.0) (18.6)
Increase (decrease) in income tax liability .................. 20.4 (3.5) (3.3)
(Increase) decrease in deferred policy acquisition costs ...... 299.2 (114.9) (155.4)
Increase in deposit assets .................................... (432.1) -- --
Deferred gain on sale of tax sheltered annuities ............... 80.8 -- --
Charge for individual disability reinsurance fees ............ 49.7 -- --
Realized investment (gains) losses ........................... 4.0 (242.0) (59.0)
Other ......................................................... 76.4 (8.9) 62.3
--------- --------- -------
Net cash provided by operating activities .................. 279.8 756.1 700.8
--------- --------- -------
Investing activities:
Maturities of fixed maturities held to maturity ............... -- 835.7 754.8
Maturities of fixed maturities available for sale ............... 775.2 99.3 41.2
Sales of fixed maturities held to maturity ..................... -- 2.8 46.8
Sales of fixed maturities available for sale .................. 2,514.4 577.3 407.6
Sales of equity securities available for sale .................. -- 836.7 314.1
Sales and maturities of other investments ..................... 269.5 312.0 414.9
Purchases of fixed maturities held to maturity .................. -- (230.2) (795.2)
Purchases of fixed maturities available for sale ............... (1,890.9) (1,971.9) (943.9)
Purchases of equity securities available for sale ............... -- (131.3) (216.6)
Purchases of other investments ................................. (263.0) (322.4) (211.5)
Net increase in short-term investments ........................ (1,051.9) (604.8) (221.7)
Net additions to property and equipment ........................ (54.3) (28.9) (29.9)
--------- --------- -------
Net cash provided by (used in) investing activities ......... 299.0 (625.7) (439.4)
--------- --------- -------
Financing activities:
Deposits and interest credited to investment contracts ......... 597.1 669.6 608.6
Maturities and withdrawals from investment contracts ............ (903.8) (888.1) (800.5)
Dividends to stockholders ....................................... (79.8) (75.1) (68.3)
Treasury stock acquired ....................................... (119.1) -- (183.3)
Proceeds from notes payable .................................... -- 291.5 54.7
Repayment of notes payable .................................... (15.0) (1.3) (1.2)
Net increase (decrease) in short-term debt ..................... (42.3) (135.1) 136.6
Other ......................................................... 18.9 13.8 7.2
--------- --------- -------
Net cash used in financing activities ........................ (544.0) (124.7) (246.2)
--------- --------- -------
Effect of exchange rate changes on cash ........................ (0.3) 0.7 0.1
--------- --------- -------
Net increase in cash .......................................... 34.5 6.4 15.3
Cash at beginning of year ....................................... 42.5 36.1 20.8
--------- --------- -------
Cash at end of year ............................................. $ 77.0 $ 42.5 $ 36.1
========= ========= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes ................................................... $ 76.4 $ 82.6 $ 48.8
Interest ...................................................... $ 40.8 $ 44.7 $ 20.4
Supplemental disclosure of noncash operating and investing activities:
In conjunction with the sale of UNUM's tax sheltered annuity business, as
discussed in all material respects,Note 5, fixed maturities available for sale of $588.6 million and
short-term investments of $1,825.9 million were transferred to the buyer on
October 1, 1996. Upon transfer, there was a corresponding increase in UNUM's
deposit assets.
See notes to consolidated resultsfinancial statements.
39
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of operations
and cash flowsPresentation
The accompanying consolidated financial statements of UNUM Corporation and
subsidiaries for("UNUM") have been prepared on the year ended December
31, 1992,basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles. Also, in
our opinion,principles requires management to make
estimates and assumptions that affect the related financial statement schedules, when considered in
relation toreported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the basicdate of
the financial statements takenand the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of UNUM
Corporation and subsidiaries. Significant intercompany accounts and transactions
have been eliminated.
Reclassification
Certain 1995 and 1994 amounts have been reclassified in 1996 for
comparative purposes.
Investments
Investments are reported as follows:
[bullet] Fixed maturities available for sale (certain bonds and redeemable
preferred stocks)--at fair value.
[bullet] Equity securities available for sale (common stocks and
non-redeemable preferred stocks)--at fair value.
[bullet] Mortgage loans--at amortized cost less an allowance for probable
losses.
[bullet] Real estate--at cost less accumulated depreciation.
[bullet] Policy loans--at unpaid principal balance.
[bullet] Other long-term investments--at cost plus UNUM's equity in
undistributed net earnings since acquisition.
[bullet] Short-term investments--are considered available for sale and are
carried at cost which approximates fair value.
Fixed maturities and equity securities are classified as available for sale
as they may be sold in response to changes in interest rates, resultant
prepayment risk, liquidity and capital needs, or other similar economic factors.
Unrealized gains and losses related to securities classified as available for
sale are excluded from net income and reported in a separate component of
stockholders' equity, net of applicable deferred taxes and related adjustments
to unpaid claims and claim expenses. The unrealized gains and losses are
determined based on estimated market values at the balance sheet date and are
not necessarily the amounts which would be realized upon sale of the securities
or representative of future market values. Changing interest rates affect the
level of unrealized gains and losses related to securities classified as
available for sale. While rising interest rates are beneficial when investing
current cash flows, they can also reduce the fair value of existing fixed rate
long-term investments. In addition, lower interest rates can lead to early
payoffs and refinancing of some of UNUM's fixed rate investments. Management
generally invests in fixed rate instruments that are structured to limit the
exposure to such reinvestment risk.
Realized investment gains and losses, which are determined on the basis of
specific identification and include adjustments for allowances for probable
losses, are reported separately in the Consolidated Statements of Income.
If a decline in fair value of an invested asset is considered to be other
than temporary or if a long-lived asset is deemed to be permanently impaired,
the investment is reduced to its net realizable value and the reduction is
accounted for as a whole, present fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG L.L.P.
Boston, Massachusetts
March 26, 1993realized investment loss.
40
UNUM CORPORATION AND SUBSIDIARIES
INDEXNOTES TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
SCHEDULESSTATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
UNUM discontinues the accrual of investment income on invested assets when
it is determined that collectability is doubtful. UNUM recognizes investment
income on impaired loans when the income is received.
Real estate held for sale is included in other assets in the Consolidated
Balance Sheets and is valued net of a valuation allowance which reduces the
carrying value to the lower of fair value less estimated costs to sell, or cost.
This valuation allowance is periodically adjusted based on subsequent changes in
UNUM's estimate of fair value less costs to sell.
Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management program.
Therefore, short-term financial instruments are classified as investments in the
Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.
Derivative Financial Instruments
Gains or losses on hedges of existing assets or liabilities are deferred
and included in the carrying amounts of those assets or liabilities. Gains or
losses related to qualifying hedges of firm commitments or anticipated
transactions are also deferred and recognized in the carrying amount of the
underlying asset or liability when the hedged transaction occurs.
Recognition of Premium Revenues and Related Expenses
Group insurance premiums are recognized as income over the period to which
the premiums relate. Individual disability premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums to result in
recognition of profits over the life of the contracts. This association is
accomplished by recording a provision for future policy benefits and unpaid
claims and claim expenses, and by amortizing deferred policy acquisition costs.
For retirement and universal life products, premium and other policy fee
revenue consist of charges for the cost of insurance, policy administration and
surrenders assessed during the period. Charges related to services to be
performed in the future are deferred until earned. The amounts received in
excess of premium and fees are recorded as deposits and included in other
policyholder funds in the Consolidated Balance Sheets. Benefits and expenses
include benefit claims in excess of related account balances, interest credited
at various rates, and amortization of deferred policy acquisition costs.
Deferred Policy Acquisition Costs
The costs of acquiring new business that vary with and are related
primarily to the production of new business have been deferred to the extent
such costs are deemed recoverable from future profits. Such costs include
commissions, certain costs of policy issue and underwriting, and certain
variable field office expenses.
For individual disability, group disability, and group life and health
business, the costs are amortized in proportion to expected future premiums. For
universal life products, the costs are amortized in proportion to estimated
gross profits from interest margins, mortality and other elements of performance
under the contracts. Amortization is adjusted periodically to reflect
differences between actual experience and original assumptions, with any
resulting changes reflected in current operating results. The amounts deferred
and amortized were as follows:
Year Ended December 31,
-------------------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------- ---------- ---------- -----------
Deferred ............................................. $ 305.6 $ 308.3 $ 308.1
Less amortized ....................................... (213.9) (193.6) (152.8)
------- ------- -------
Increase in deferred policy acquisition costs ...... $ 91.7 $ 114.7 $ 155.3
======= ======= =======
41
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reserves for Future Policy Benefits
Reserves for future policy benefits are calculated by the net-level premium
method, and are based on UNUM's expected morbidity, mortality and interest rate
assumptions at the time a policy is issued. These reserves represent the portion
of premiums received, accumulated with interest and held to provide for claims
that have not yet been incurred. The reserve assumptions are periodically
reviewed and compared to actual experience and are revised if it is determined
that future expected experience is different from the reserve assumptions.
Reserves for group insurance policies consist primarily of unearned premiums.
The interest rates used in the calculation of reserves for future policy
benefits at December 31, 1996, and 1995, principally ranged from:
1996 1995
--------------- --------------
Individual disability ............... 6.0% to 9.5% 5.5% to 9.5%
Individual life ..................... 5.0% to 9.0% 5.0% to 9.0%
Individual accident and health ...... 5.0% to 9.0% 5.0% to 9.0%
Individual and group annuities ...... 5.0% to 9.0% 5.0% to 9.0%
Certain reserve calculations are based on interest rates within these
ranges graded down over periods from 15 to 20 years.
Reserves for Unpaid Claims and Claim Expenses
Unpaid claims and claim expense reserves represent the amount estimated to
fund claims that have been reported but not settled and claims incurred but not
reported. Reserves for unpaid claims are estimated based on UNUM's historical
experience and other actuarial assumptions that consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to interest rates and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. Reserve estimates and assumptions
are periodically reviewed and updated with any resulting adjustments to reserves
reflected in current operating results. Given the complexity of the reserving
process, the ultimate liability may be more or less than such estimates
indicate.
The interest rates used in the calculation of disability claims reserves at
December 31, 1996, and 1995, were principally as follows:
1996 1995
----------------- ----------------
Group long term disability (North America) ......... 7.88% 7.94%
Group long term disability (United Kingdom) ...... 9.46% 9.67%
Individual disability .............................. 6.75% to 9.46% 6.75% to 9.67%
The interest rate used to discount the disability reserves is a composite
of the yields on assets specifically identified with each block of business.
Management expects the reserve discount rate for certain disability products
will further decline, since current cash flows are invested in high quality
assets at current yields, which are below the composite yield of the existing
assets purchased in prior years. UNUM periodically adjusts prices on both
existing and new business in an effort to mitigate the impact of the current
interest rate environment.
For other accident and health business, reserves are based on projections
of historical claims run-out patterns.
42
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Activity in the liability for unpaid claims and claim expenses is
summarized as follows:
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------- ------------------- ------------------ ------------------
Balance at January 1 ................................. $4,856.4 $3,853.9 $3,341.5
Less reinsurance recoverables ..................... (115.4) (82.7) (68.0)
Effect of unrealized gains on fixed maturities ...... (261.2) -- --
---- ----- -----
Net Balance at January 1 ........................... 4,479.8 3,771.2 3,273.5
Incurred related to:
Current year ....................................... 1,673.9 1,825.0 1,609.3
Prior years ....................................... 366.0 507.0 436.0
---- ----- -----
Total incurred ....................................... 2,039.9 2,332.0 2,045.3
Paid related to:
Current year ....................................... 532.8 523.9 517.6
Prior years ....................................... 1,214.5 1,099.5 1,030.0
---- ----- -----
Total paid .......................................... 1,747.3 1,623.4 1,547.6
Net Balance at December 31 ........................... 4,772.4 4,479.8 3,771.2
Plus reinsurance recoverables ..................... 346.8 115.4 82.7
Effect of unrealized gains on fixed maturities ...... 170.1 261.2 --
---- ----- -----
Balance at December 31 .............................. $5,289.3 $4,856.4 $3,853.9
==== ===== =====
The components of the increase in unpaid claims and claims expenses
incurred and related to prior years were as follows:
(Dollars in millions) 1996 1995 1994
- ----------------------------------------------------- --------- --------- --------
Interest accrued on reserves ..................... $292.9 $270.0 $267.0
Changes in reserve estimates and assumptions ...... 36.2 239.0 154.0
Changes in foreign exchange rates .................. 36.9 (2.0) 15.0
------- ------ -------
Increase in incurrals related to prior years ...... $366.0 $507.0 $436.0
======= ====== =======
The increases in incurrals related to prior years were primarily the result
of interest accrued on reserves, changes in reserve estimates and assumptions of
interest rates, morbidity, mortality and expense costs, and changes in foreign
exchange rates, primarily related to the disability reserves of UNUM's United
Kingdom-based affiliate, UNUM Limited. Due to the long-term claims payment
pattern of some of UNUM's businesses, certain reserves, particularly disability,
are discounted for interest.
The effects of changes in reserve estimates and assumptions were more
significant in 1995 and 1994, primarily as a result of increased reserves from
lower discount rates for certain disability products following the sale of the
common stock portfolio in 1995, and adjustments to strengthen certain disability
reserves in 1995 and 1994.
Beginning in 1995, as explained in Note 2, unpaid claims are adjusted to
reflect changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized. Where applicable, UNUM has reflected those adjustments in the
liability balances with corresponding credits or charges, net of related
deferred taxes, reported as a component of unrealized gains on available for
sale securities in stockholders' equity.
43
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Changes in Accounting Estimates
During 1995, UNUM sold virtually all of the common stock portfolio of its
United States subsidiaries. The sale of the common stock portfolio, which
partially supported certain disability reserves, and the reinvestment of the
proceeds primarily in investment grade fixed income assets at yields below the
average portfolio yield, resulted in lower reserve discount rates for certain
disability products reported in the Disability Insurance segment. This change in
accounting estimate to lower certain discount rates resulted in an increase of
$128.6 million to benefits to policyholders in the Consolidated Statement of
Income, and a decrease to net income of $83.6 million, or $1.15 per share.
During 1995, UNUM increased the group long term disability reserves for
incurred but not reported ("IBNR") claims, as reported in the Disability
Insurance segment. The increased IBNR reserves were based on management's
judgment that claims incurred but not yet reported would reflect increased
levels of claims incidence and severity. This change in accounting estimate
resulted in an increase to benefits to policyholders in the Consolidated
Statement of Income of $38.4 million, and a decrease to net income of $25.0
million, or $0.34 per share.
During 1995, UNUM increased reserves for unpaid claims related to the
Association Group disability business by $15.0 million to reflect management's
expectations of slower than expected claim recoveries. This change in accounting
estimate, which was reflected in the Disability Insurance segment, decreased net
income by $9.8 million, or $0.14 per share.
During 1994, UNUM increased reserves for existing claims by $83.3 million
and strengthened reserves for estimated future losses by $109.1 million. These
increased reserves reflected management's expectations of morbidity trends for
the existing non-cancellable individual disability business, reported in the
Disability Insurance segment. This change in accounting estimate resulted in an
increase to benefits to policyholders in the Consolidated Statement of Income of
$192.4 million, and a decrease to net income of $125.1 million, or $1.69 per
share.
Other Policyholder Funds
Other policyholder funds are liabilities for investment-type contracts and
represent customer deposits plus interest credited to those deposits at various
rates.
Liabilities for Restructuring Activities
Liabilities for restructuring activities are recorded when management,
prior to the balance sheet date, commits to execute an exit plan that will
result in the incurral of costs that have no future economic benefit, or
approves a plan of termination and communicates sufficient detail of the plan to
employees. Liabilities for restructuring activities are included in other
liabilities in the Consolidated Balance Sheets.
Separate Accounts
Certain assets from tax sheltered annuity ("TSA") contracts and UNUM's
defined benefit plans are in separate accounts that are pooled investment funds
of securities. Investment income and realized gains and losses on these accounts
accrue directly to the contractholders. Assets, carried at market value, and
liabilities of the separate accounts are shown separately in the Consolidated
Balance Sheets. The assets of the separate accounts are legally segregated and
are not subject to claims that arise out of any other business of UNUM.
On October 1, 1996, UNUM America and First UNUM closed the sale of their
respective TSA businesses to The Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of
Lincoln National Corporation (see Note 5). For legal considerations, the
separate account's TSA-related assets were not transferred on October 1, 1996.
TSA-related assets will be transferred only upon receipt of a contractholder
and/or participant's consent for assumption reinsurance. Beginning in 1997, the
assets of UNUM's defined benefit plan are no longer held in the separate
accounts (see Note 8).
44
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Participating Individual Life Insurance
Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to UNUM's conversion to a stock life insurance
company on November 14, 1986, will remain participating as long as they remain
in force. A Participation Fund Account ("PFA") was established for the sole
benefit of all of Union Mutual's individual participating life and annuity
policies and contracts.
The assets of the PFA are to provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies and
annuity contracts. This line of business participates in the experience of the
PFA and its operations have been excluded from the Consolidated Statements of
Income. The PFA represented approximately 2.3% and 2.5% of consolidated assets
and 2.7% and 2.8% of consolidated liabilities at December 31, 1996, and 1995,
respectively.
Income Taxes
The provision for income taxes includes amounts currently payable and
deferred income taxes, which result from differences between financial reporting
and tax bases of assets and liabilities, and are measured using enacted tax
rates and laws. Deferred U.S. income taxes have not been provided on accumulated
earnings of UNUM's foreign subsidiaries. These earnings could generate
additional U.S. tax if remitted to UNUM Corporation. A valuation allowance is
established for deferred tax assets when it is more likely than not that an
amount will not be realized.
Foreign Currency Translation
Foreign subsidiaries' balance sheet and income statement accounts expressed
in local functional currencies are translated into U.S. dollars using ending and
quarterly average exchange rates, respectively. The resulting translation
adjustments are reported in a separate component of stockholders' equity.
Earnings Per Share
The weighted average number of shares outstanding used to calculate
earnings per share was approximately 72,969,000, 72,677,000 and 74,158,000 in
1996, 1995 and 1994, respectively. The assumed exercise of outstanding stock
options does not result in a material dilution of earnings per share.
Reinsurance
UNUM, through its life insurance subsidiaries, is involved in both the
cession and assumption of reinsurance with other companies. Risks are reinsured
with other companies to reduce UNUM's exposure to large losses and permit
recovery of a portion of direct losses. UNUM remains liable to the insured for
the payment of policy benefits if the reinsurers cannot meet their obligations
under the reinsurance agreements. Deferred policy acquisition costs, premiums,
benefits and expenses are stated net of reinsurance ceded to other companies.
UNUM evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk to minimize exposure to significant losses from
reinsurer insolvencies.
Letters of Credit
In the normal course of business, UNUM enters into letters of credit,
primarily to satisfy capital requirements related to certain subsidiary
transactions. UNUM had outstanding letters of credit of $56.7 million and $12.3
million at December 31, 1996, and 1995, respectively.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The statement provides
guidance for recognition or derecognition of assets and
45
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
liabilities, focusing on the concepts of control and extinguishment. UNUM is
required to adopt FAS 125 effective January 1, 1997. The adoption of FAS 125 is
not expected to have a material effect on UNUM's results of operations or
financial position.
In March 1997, the FASB issued FAS No. 128, "Earnings Per Share," which is
intended to simplify the computation and presentation of earnings per share
("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." FAS 128 will eliminate the concept of "primary" EPS and
require dual presentation of "basic" and "diluted" EPS. Diluted EPS under FAS
128 is similar to "fully diluted" EPS as defined by APB 15. UNUM is required to
adopt FAS 128 effective December 31, 1997. As stated in Note 1, under the
caption "Earnings Per Share," the assumed exercise of UNUM's outstanding stock
options does not result in a material dilution of earnings per share.
In March 1997, the FASB issued FAS No. 129, "Disclosures of Information
About Capital Structure," which clarifies disclosure requirements related to the
type, and nature, of securities contained in an entity's capital structure. UNUM
is required to adopt FAS 129 effective December 31, 1997.
NOTE 2. INVESTMENTS
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities," which
provided a one-time opportunity to reassess the appropriateness of the
classifications of securities described in FAS 115, and to reclassify fixed
maturities from the held to maturity category without calling into question the
intent to hold other debt securities to maturity in the future. On December 31,
1995, UNUM reassessed its fixed maturity portfolio and as allowed under the
implementation guidance, reclassified fixed maturities with an amortized cost of
$6,082.8 million and a related unrealized gain of $393.0 million from the held
to maturity category to available for sale. The unrealized gain on the total
available for sale fixed maturity portfolio was $551.9 million at December 31,
1995. In connection with the reclassification of the held to maturity fixed
maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid
claims by $261.2 million to reflect the changes that would have been necessary
if the unrealized gains and losses related to fixed maturities classified as
available for sale had been realized. At December 31, 1996, the unrealized gain
on available for sale fixed maturities was $286.0 million and the related unpaid
claims adjustment was $168.7 million.
The following tables summarize the components of investment income, net
realized investment gains, and changes in unrealized investment gains on
available for sale securities:
46
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
Investment Income
Year Ended December 31,
----------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------ --------- --------- ----------
Fixed maturities:
Available for sale ................................. $642.2 $182.2 $ 87.9
Held to maturity ................................. -- 488.0 548.1
Equity securities available for sale ............... -- 5.3 10.4
Mortgage loans .................................... 112.1 119.9 137.4
Real estate ....................................... 20.0 15.2 15.8
Policy loans ....................................... 10.2 8.6 10.2
Other long-term investments ........................ 7.3 1.6 0.9
Short-term investments .............................. 51.2 27.1 8.5
------ ------ ------
Gross investment income ........................... 843.0 847.9 819.2
Less investment expenses ........................... (16.3) (17.0) (23.9)
Less investment income on participating individual
life insurance policies and annuity contracts ...... (24.5) (24.6) (25.1)
------ ------ ------
Investment income ................................. $802.2 $806.3 $770.2
====== ====== ======
Net Realized Investment Gains
Year Ended December 31,
----------------------------------
(Dollars in millions) 1996 1995 1994
- ---------------------------------------------- --------- --------- ----------
Gross realized investment gains:
Fixed maturities:
Available for sale ........................ $ 22.0 $ 14.2 $ 10.2
Held to maturity ........................... -- 0.1 0.2
Equity securities available for sale ...... -- 253.3 93.1
Mortgage loans, real estate and other ...... 18.2 19.4 13.5
------ ------ ------
Gross realized investment gains ............ 40.2 287.0 117.0
------ ------ ------
Gross realized investment losses:
Fixed maturities:
Available for sale ........................ (29.2) (12.8) (28.8)
Held to maturity ........................... -- (0.7) (6.8)
Equity securities available for sale ...... -- (18.7) (12.2)
Mortgage loans, real estate and other ...... (7.6) (29.7) (23.6)
------ ------ ------
Gross realized investment losses ......... (36.8) (61.9) (71.4)
------ ------ ------
Net realized investment gains ............ $ 3.4 $225.1 $ 45.6
====== ====== ======
47
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
Change in Unrealized Gains on Available For Sale Securities
Year Ended December 31,
--------------------------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------- ----------- ---------- -----------------
Fixed maturities available for sale .................. $ (265.9) $ 612.7 $ (60.8)
Equity securities available for sale .................. 3.4 (131.6) (86.0)
Unpaid claims adjustment .............................. 92.5 (261.2) --
Deferred taxes ....................................... 39.2 (56.4) 47.3
-------- ------- -------
Total change in unrealized gains on available for sale
securities, as included in stockholders' equity ...... $ (130.8) $ 163.5 $ (99.5)
======== ======= =======
Fixed Maturities
The amortized cost and fair values of fixed maturities available for sale
at December 31, 1996, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------ ------------ ------------- ------------- ----------
U.S. Government .................. $ 57.0 $ 3.6 $ -- $ 60.6
States and municipalities ......... 550.2 14.9 (0.8) 564.3
Foreign governments ............... 379.9 32.6 (0.7) 411.8
Public utilities .................. 1,354.7 60.4 (4.2) 1,410.9
Corporate bonds .................. 4,299.7 197.5 (17.1) 4,480.1
Redeemable preferred stocks ...... 3.6 -- (0.7) 2.9
Mortgage-backed securities ...... 11.6 0.5 -- 12.1
-------- ------ ------ --------
Total ........................... $6,656.7 $309.5 $(23.5) $6,942.7
======== ====== ====== ========
The amortized cost and fair values of fixed maturities available for sale
at December 31, 1995, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------ ------------ ------------- ------------- ----------
U.S. Government .................. $ 402.6 $10.3 $ -- $ 412.9
States and municipalities ......... 670.5 23.7 (0.7) 693.5
Foreign governments ............... 229.4 26.1 (0.5) 255.0
Public utilities .................. 1,617.8 117.6 (0.6) 1,734.8
Corporate bonds .................. 5,617.9 377.3 (2.7) 5,992.5
Redeemable preferred stocks ...... 27.8 1.5 (1.2) 28.1
Mortgage-backed securities ...... 17.5 1.1 -- 18.6
-------- ------ ----- --------
Total ........................... $8,583.5 $557.6 $(5.7) $9,135.4
======== ====== ===== ========
48
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
The amortized cost and fair value of fixed maturities available for sale at
December 31, 1996, by contractual maturity date, are shown below. Expected
maturities will differ from contractual maturities since certain borrowers have
the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Fair
(Dollars in millions) Cost Value
- ------------------------------------------------------------------- ------------ ----------
Due in one year or less .......................................... $ 279.4 $ 288.9
Due after one year through five years ........................... 2,181.8 2,292.6
Due after five years through ten years ........................... 3,551.3 3,674.9
Due after ten years ............................................. 632.6 674.2
-------- --------
6,645.1 6,930.6
Mortgage-backed securities (primarily due after 10 years) ...... 11.6 12.1
-------- --------
Total ......................................................... $6,656.7 $6,942.7
======== ========
During 1995, UNUM sold fixed maturities of two issuers classified as held
to maturity with an amortized cost of $4.0 million due to evidence of
significant deterioration of the issuers' creditworthiness, as evidenced by
bankruptcy filings. These sales resulted in a net realized loss of $1.2 million
in 1995. During 1994, UNUM sold fixed maturities of five issuers classified as
held to maturity with an amortized cost of $49.8 million due to evidence of
significant deterioration of the issuers' creditworthiness. These sales resulted
in a net realized loss of $3.0 million in 1994.
Equity Securities
The fair values, which also represent carrying amounts, and the cost of
equity securities available for sale were as follows at December 31, 1996:
Fair
(Dollars in millions) Cost Value
- ------------------------------------------------- -------- -------
Common stocks:
Industrial, miscellaneous and all other ...... $23.8 $31.3
====== ======
Gross unrealized investment gains on equity securities available for sale
totaled $7.5 million and $5.5 million, at December 31, 1996, and 1995,
respectively. There were no gross unrealized investment losses at December 31,
1996, and gross unrealized investment losses totaled $1.4 million, at December
31, 1995.
Mortgages
Effective January 1, 1995, UNUM adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and FAS No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," which defined the principles to measure and record an impaired
loan. When it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of a loan agreement, the loan is deemed
impaired. Once a loan is determined to be impaired, an allowance for probable
losses is established for the difference between the carrying amount of the loan
and its estimated value. The estimated value is based on either the present
value of expected future cash flows discounted using the loan's effective
interest rate, the loan's observable market price, or the fair value of the
collateral. The adoption of FAS 114 and FAS 118 did not have a material effect
on UNUM's results of operations or financial position.
At December 31, 1996, and 1995, impaired loans totaled $50.4 million and
$50.1 million, respectively. Included in the $50.4 million were $38.9 million of
loans which had a related allowance for probable losses of $5.7 million, and a
loan of $11.5 million which had no related allowance for probable losses.
Included in the $50.1 million of impaired loans at December 31, 1995, were $38.4
million of loans which had a related allowance for probable losses of $7.1
million, and a loan of $11.7 million which had no related allowance for probable
losses.
Mortgage loans that were restructured prior to the adoption of FAS 114
amounted to $54.8 million and $59.9 million at December 31, 1996, and 1995,
respectively. Troubled debt restructurings represent loans that are
49
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
refinanced with terms more favorable to the borrower. Interest lost on
restructured loans was not material for the years ended December 31, 1996, 1995
or 1994.
Real Estate and Other
Effective January 1, 1996, UNUM adopted FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. FAS 121 applies to both real estate held for investment and real
estate held for sale. The adoption of FAS 121 did not have a material effect on
UNUM's results of operations or financial position.
Real estate acquired in satisfaction of debt cumulatively amounts to $86.4
million at December 31, 1996. Real estate held for sale amounted to $9.4 million
at December 31, 1996, and $35.5 million at December 31, 1995.
Real estate with a depreciated cost of $7.7 million and no bonds or
mortages were non-income producing for the twelve months ended December 31,
1996. Interest lost on these investments was not material in 1996, 1995 or 1994.
UNUM was committed at December 31, 1996, to purchase fixed maturities and
other invested assets in the amount of $104.3 million.
NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE HELD
FOR SALE
Changes in the allowance for probable losses on invested assets and real estate
held for sale were as follows:
Balance at Balance
beginning at end
(Dollars in millions) of year Additions Deductions of year
- ------------------------------------ ------------- ------------ ------------- ---------
Year Ended December 31, 1996
Mortgage loans .................. $39.2 $ 1.0 $ (2.5) $37.7
Real estate held for sale ...... 19.1 (0.4) (3.9) 14.8
------ ----- ------ ------
Total ........................... $58.3 $ 0.6 $ (6.4) $52.5
====== ===== ====== ======
Year Ended December 31, 1995
Mortgage loans .................. $43.2 $ 9.2 $(13.2) $39.2
Real estate held for sale ...... 13.2 6.3 (0.4) 19.1
------ ----- ------ ------
Total ........................... $56.4 $15.5 $(13.6) $58.3
====== ===== ====== ======
Year Ended December 31, 1994
Fixed maturities held to maturity
and available for sale ......... $ 0.3 $ -- $ (0.3) $ --
Mortgage loans .................. 48.6 8.5 (13.9) 43.2
Real estate held for sale ...... 20.9 0.8 (8.5) 13.2
------ ----- ------ ------
Total ........................... $69.8 $ 9.3 $(22.7) $56.4
====== ===== ====== ======
Additions represent charges to net realized investment gains less
recoveries, and deductions represent reserves released upon disposal or
restructuring of the related asset.
50
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments such as
options, futures and forward exchange contracts to hedge certain risks
associated with anticipated purchases and sales of investments and certain
payments denominated in foreign currencies, primarily British pound sterling,
Canadian dollar and Japanese yen. These derivative financial instruments are
used to protect UNUM from the effect of market fluctuations in interest and
exchange rates between the contract date and the date on which the hedged
transaction occurs. In using these instruments, UNUM is subject to the
off-balance-sheet risk that the counterparties of the transactions will fail to
perform as contracted. UNUM manages this risk by only entering into contracts
with highly rated institutions and listed exchanges. UNUM does not hold
derivative financial instruments for the purpose of trading.
At December 31, 1996, UNUM had open interest rate futures contracts with
notional amounts of $178.2 million to hedge anticipated sales of investments in
1997. These contracts had a related net unrealized gain of $1.6 million. At
December 31, 1995, UNUM had no open derivative financial instruments.
NOTE 5. SALE OF TAX SHELTERED ANNUITY BUSINESS
On October 1, 1996, UNUM Life Insurance Company of America ("UNUM America")
and First UNUM Life Insurance Company ("First UNUM") closed the sale of their
respective group tax-sheltered annuity ("TSA") businesses to The Lincoln
National Life Insurance Company and Lincoln Life & Annuity Company of New York
("Lincoln"), both subsidiaries of Lincoln National Corporation. The sale
involved approximately 1,700 group contractholders and assets under management
of approximately $3.3 billion. The contracts have initially been reinsured on an
indemnity basis. Upon consent of the TSA contractholders and/or participants,
the contracts will be considered reinsured on an assumption basis, legally
releasing UNUM America and First UNUM from future contractual obligation to the
respective contractholders and/or participants.
To effect the sale of the TSA business, UNUM transferred into a trust
account held for the benefit of Lincoln approximately $2,690 million of assets.
The assets transferred consisted of approximately $1,826 million of short-
term investments, $589 million of fixed maturities, and $275 million of cash.
The amount of assets in the trust will increase or decrease in conjunction with
the on-going activity in participant accounts, and assets will be released from
the trust to Lincoln upon consents for assumption reinsurance. UNUM has recorded
a deposit asset in its Consolidated Balance Sheet representing the assets
remaining in the trust, which supports the TSA contracts of those
contractholders and/or participants that have not given consent for assumption
reinsurance. At December 31, 1996, the deposit asset related to the TSA
transaction was approximately $2,651 million.
The sale resulted in a deferred pretax gain of $80.8 million, which will be
recognized in income in proportion to contractholder and/or participant consents
for assumption reinsurance, the majority of which management believes will occur
during 1997. The purchase price (ceding commission) paid upon closing was
approximately $71 million, and the transaction generated statutory capital of
approximately $160 million. As of March 1, 1997, consent for assumption
reinsurance has been provided by TSA contractholders and/or participants owning
approximately 60% of assets under management.
Historical results of the TSA business included in UNUM's Consolidated
Statements of Income were as follows:
Year Ended December 31,
--------------------------------
(Dollars in millions, except per common share data) 1996 1995 1994
- ------------------------------------------------------ --------- --------- --------
Revenues .......................................... $206.7 $247.6 $238.1
Net income .......................................... $ 12.8 $ 31.1 $ 29.9
Net income per common share ........................ $ 0.18 $ 0.43 $ 0.40
51
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. REINSURANCE
UNUM, through its life insurance subsidiaries, is involved in both the
cession and assumption of reinsurance with other companies.
On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage
of the active life reserves of UNUM America's existing United States
non-cancellable individual disability ("ID") block of business. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM's announcement in late 1994 that it would no longer market the
non-cancellable form of ID coverage in the United States.
The agreement is a finite reinsurance arrangement that transfers
liabilities to Centre Re based on the level of statutory reserves. At December
31, 1996, active life reserves of $427 million and reserves established for
claims in 1996 of $137 million were ceded to Centre Re. Under the agreement,
Centre Re has an obligation to fund a defined risk layer, while UNUM will retain
the earnings risk related to potential adverse claims experience up to a certain
threshold. This threshold amount represents the existence of an experience layer
with a value of $195 million at December 31, 1996. UNUM has recorded the value
of the experience layer on its Consolidated Balance Sheet as a deposit asset.
UNUM funded its obligation under the agreement by transferring assets totaling
approximately $403 million into a trust account in late December 1996. The
assets transferred were equal to the experience layer plus reserves, determined
under generally accepted accounting principles, net of related deferred
acquisition costs. Future net cash flows of the block will be transferred
to/from the trust account and, together with changes in reserve levels, will
determine the value of UNUM's deposit asset. Changes in the deposit asset will
flow through UNUM's results of operations. The agreement generated slightly more
than $200 million of statutory capital.
In fourth quarter 1996, UNUM recognized a pretax charge of $49.7 million,
which represents the present value of the anticipated minimum amount of fees to
be paid to Centre Re under the agreement. UNUM has the right, but no obligation,
to recapture the business after five years, with certain penalties.
The effect of reinsurance on premiums earned and written for the years
ended December 31, 1996, 1995 and 1994 was as follows:
Year Ended December 31,
--------------------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------- ----------- ----------- ----------
Premiums earned:
Direct .................. $2,973.9 $2,842.9 $2,663.1
Assumed ............... 252.9 241.5 170.7
Ceded .................. (106.4) (66.2) (112.5)
-------- -------- --------
Premiums earned ...... $3,120.4 $3,018.2 $2,721.3
======== ======== ========
Premiums written:
Direct .................. $3,008.1 $2,877.2 $2,702.7
Assumed ............... 289.3 250.4 170.9
Ceded .................. (131.0) (64.4) (112.6)
-------- -------- --------
Premiums written ...... $3,166.4 $3,063.2 $2,761.0
======== ======== ========
For the years ended December 31, 1996, 1995 and 1994, recoveries recognized
under reinsurance agreements reduced benefits to policyholders by $90.8 million,
$58.9 million and $53.3 million, respectively.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
Business Restructuring
Charges of $7.2 million, $8.4 million and $14.4 million were recorded in
1996, 1995 and 1994, respectively. The charge in 1996 was related to the merger
of Commercial Life Insurance Company ("Commercial Life") into
52
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES (Continued)
UNUM America, and consisted of $2.8 million of severance costs for 120 employees
and $4.4 million of lease exit costs. The charges in 1995 and 1994 relate to the
acceleration of organizational changes within UNUM America and the decision to
discontinue the individual disability non-cancellable product. Partially
offsetting the charge recorded in 1995 was a $3.4 million curtailment gain,
related to workforce reductions in UNUM Corporation's noncontributory defined
benefit pension plan. As of December 31, 1996, the liability carried in the
Consolidated Balance Sheet for all three charges was $5.3 million.
Intangible Asset Write-offs and Future Loss Reserves
In connection with the merger of Commercial Life into UNUM America, the
sale of the tax-sheltered annuity business (see Note 5), as well as UNUM's
continued efforts to strengthen its focus on its core products, the company
initiated a review of certain products, which resulted in the recognition of
pretax charges totaling $39.4 million during 1996. These charges reduced income
before income taxes by $13.1 million in the Disability Insurance segment, $11.3
million in the Special Risk Insurance segment, and $15.0 million in the
Retirement Products segment. On an after-tax basis the charges reduced net
income by $26.3 million, or $0.36 per share for 1996.
The charges include the write-off of certain intangible assets, primarily
deferred acquisition costs, totaling $17.0 million. These intangible assets have
been deemed unrecoverable primarily due to the expectation of continued losses
in the Association Group disability business. Additionally, in conjunction with
the completion of a review of UNUM's discontinued product portfolio, a $22.4
million charge was taken to establish a reserve for the present value of
expected future losses on certain discontinued products. Future losses for these
products will be charged to the reserve at the time the losses are realized. The
products incorporated in the charge consist of certain discontinued special
risk, retirement and medical products. UNUM is pursuing the sale of some of
these discontinued product lines.
NOTE 8. EMPLOYEE BENEFIT PLANS
Pension Plans
At December 31, 1996, UNUM had a noncontributory defined benefit pension
plan covering substantially all domestic employees, excluding employees of
Colonial Companies, Inc. ("Colonial Companies") and Duncanson & Holt, Inc.
("D&H"), who were covered under separate plans through 1996. The plan provided
benefits based on the employee's years of service and compensation during the
highest five consecutive years out of the last ten years of employment. Plan
assets, which were held in UNUM's separate accounts, consisted primarily of
group annuity contracts and 224,392 shares of UNUM Corporation common stock.
UNUM funds its pension plan in accordance with the requirements of the Employee
Retirement Income Security Act of 1974, as amended.
Effective January 1, 1997, UNUM replaced its existing pension plans with a
new noncontributory defined benefit pension plan ("Lifecycle Plan") covering
substantially all domestic employees, including employees of Colonial Companies
and D&H. Under the Lifecycle Plan, a new benefit formula is used, resulting in
benefits being earned more consistently over an employee's career, and is based
on the employee's age at retirement, years of service, and earnings during the
highest five of the last ten years of employment. Beginning in 1997, plan assets
were transferred from UNUM's separate accounts into a trust for the exclusive
benefit of plan participants.
The calculation of the December 31, 1996, benefit obligations shown below
is based on the Lifecycle Plan, reflecting the impacts of adding Colonial
Companies and D&H employees to the plan, merging Colonial Companies' previous
defined benefit plan, and changes in certain actuarial assumptions related to
the new benefit formula.
53
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
Net pension cost included the following components:
Year Ended December 31,
-----------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------ --------- ---------- ----------
Service cost--benefits earned during the year ...... $ 13.5 $ 7.7 $ 9.2
Interest cost on projected benefit obligation ...... 15.1 12.3 11.6
Actual return on plan assets ........................ (57.1) (42.5) 3.3
Net amortization and deferral ..................... 36.9 28.2 (16.5)
Curtailment gain .................................... -- (3.4) --
------ ------ ------
Net pension cost ................................. $ 8.4 $ 2.3 $ 7.6
====== ====== ======
The funded status of the plan and amounts recognized in UNUM's Consolidated
Balance Sheets, as determined by the plan's actuaries, were as follows:
December 31,
------------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------------------ ---------- -----------
Actuarial present value of benefit obligation:
Vested benefit obligation .................................... $ 166.9 $ 174.4
======= =======
Accumulated benefit obligation ................................. $ 189.3 $ 178.7
======= =======
Projected benefit obligation for service rendered to date ...... $(203.2) $(183.9)
Plan assets at fair value ....................................... 267.7 192.7
------- -------
Projected benefit obligation less than plan assets ............ 64.5 8.8
Unrecognized net gain .......................................... (54.7) (0.7)
Unrecognized prior service cost ................................. (28.4) (17.0)
Unamortized net obligation .................................... 1.8 2.1
------- -------
Accrued pension cost .......................................... $ (16.8) $ (6.8)
======= =======
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.50% and 5.00%, respectively, at December 31,
1996, and 7.25% and 4.70%, respectively, at December 31, 1995. The expected
long-term rate of return on plan assets was 9.0% in 1996, 1995 and 1994. Prior
year service costs are being amortized on a straight-line basis over expected
employment periods for active employees.
UNUM also administers certain supplemental retirement plans for eligible
employees and officers and certain other pension plans. The cost of these plans
was not significant for the years ended December 31, 1996, 1995 and 1994.
Postretirement Health Care and Life Insurance Benefits
UNUM provides certain health care and life insurance benefits for retired
employees and covered dependents. Substantially all domestic employees of UNUM
may become eligible for these benefits if they meet minimum age and service
requirements, if they are eligible for retirement benefits and if they agree to
contribute a portion of the cost. UNUM has the right to modify or terminate
these benefits. The underlying plans are not currently funded. The cost of these
plans was $10.3 million, $10.0 million and $8.2 million for the years ended
December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, and 1995
the liability associated with these plans was $80.9 million and $72.4 million,
respectively.
Retirement Savings Plans
UNUM has several retirement savings and profit sharing plans for
substantially all full-time and part-time employees who work 1,000 hours a year
and have been employed for at least one year. Dependent upon which
54
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
plan the employee participates in, eligible employees may contribute primarily
up to 10% of their annual base salary, and UNUM matches a portion of each
employee's contribution up to 6% of the employee's compensation. Employees may
become 100% vested immediately upon becoming eligible to participate, or
incrementally over a five year period. Expense for these plans amounted to $8.4
million in 1996, 1995 and 1994, respectively.
Effective January 1, 1997, UNUM introduced a single retirement savings plan
for all domestic employees who meet the eligibility requirement of one year of
service, including all employees eligible under the former plans. Dependent upon
the employee's annual earnings, eligible employees may contribute up to 15% of
their annual compensation, including incentive payouts. UNUM will match 100% of
the employee's contribution up to 3% of the employee's compensation, plus 50% of
the employee's contribution on the next 2% of the employee's compensation, to a
maximum of 4%. Employees become 100% vested immediately upon becoming eligible
to participate.
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS
Stock-Based Compensation Plans
Effective January 1, 1996, UNUM adopted FAS No. 123, "Accounting for
Stock-Based Compensation." FAS 123 established financial accounting and
reporting standards for stock-based employee compensation plans. The statement
defines a new method of accounting for employee stock compensation plans using a
fair value based method, under which compensation cost is measured and
recognized in results of operations. Alternatively, FAS 123 allows an entity to
retain the accounting for employee stock compensation plans defined under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." UNUM retained the accounting defined in APB No. 25, under which
no compensation expense is recognized for fixed stock option grants. As
required, UNUM will disclose the pro forma effects of stock-based compensation
using the fair value based method defined under FAS 123.
At December 31, 1996, UNUM had four stock-based compensation plans, which
are described below. Had compensation cost for options issued under UNUM's four
stock-based compensation plans been determined based on the fair value at the
grant dates consistent with the methods defined under FAS 123, UNUM's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
(Dollars in millions, except per common share data) 1996 1995
- ------------------------------------------------------ --------- --------
Net income:
As reported ....................................... $238.0 $281.1
Pro forma .......................................... $231.9 $277.2
Earnings per common share:
As reported ....................................... $ 3.26 $ 3.87
Pro forma .......................................... $ 3.18 $ 3.81
The fair value of each option granted is estimated on the date of grant
using a modified Black-Scholes option-
pricing model with the following assumptions:
1996 1995
----------------- ----------------
Dividend yield ........................ 1.5% 1.9%
Expected stock price volatility ...... 23.1% to 24.8% 24.8% to 25.9%
Risk-free interest rate ............... 5.2% to 6.5% 5.4% to 7.9%
Expected option lives ............... 4 to 8 years 4 to 8 years
55
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)
Because some options vest over several years and additional awards
generally are made each year, the pro forma amounts above may not be
representative of the effects on net income for future years.
The 1987 Executive Stock Option Plan ("Option Plan") provided for granting
to officers and key employees options to purchase UNUM Corporation common stock
over ten years. Options were granted at the discretion of the Compensation
Committee of the Board of Directors ("the Committee") and had vesting schedules
of one to four years. The number of shares subject to options under the Option
Plan could not exceed 2.5 million. Grants are no longer made under this plan.
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for
granting of options to officers, non-
employee directors of UNUM Corporation and key employees, to purchase UNUM
Corporation common stock over ten years. Options may be granted annually at the
discretion of the Committee and vest in one to five years.
The Incentive Plan also provides for granting to key officers restricted
stock awards whose vesting is contingent upon UNUM's achieving prescribed
financial performance objectives, with the exception of 5,800 shares granted in
1996, 20,200 shares granted in 1995 and 10,000 shares granted in 1994, which
will vest upon the grantee remaining in UNUM's employ for a specified period of
time. Plan participants are entitled to voting rights on their respective shares
at grant. The compensation cost related to restricted stock grants was not
material in 1996, 1995 and 1994.
The market value of the restricted shares issued under the Incentive Plan
has been recorded as deferred compensation and is included as a reduction of
stockholders' equity in the Consolidated Balance Sheets.
The number of shares subject to issuance under the Incentive Plan cannot
exceed 6.8 million, including both options and shares of restricted stock. At
December 31, 1996, 1995 and 1994, 692,518 shares, 1,680,235 shares and 2,511,145
shares, respectively, were available for grant under the Incentive Plan.
The 1996 Long-Term Stock Incentive Plan ("1996 Incentive Plan") provides
for granting of options to officers, non-employee directors of UNUM Corporation,
and key employees, to purchase UNUM Corporation common stock over ten years. The
1996 Incentive Plan also provides for granting to key officers restricted stock
awards whose vesting is contingent upon achieving prescribed financial
performance objectives or upon the grantee remaining in UNUM's employ for a
specified period of time. Options and restricted stock may be granted annually
at the discretion of the Committee. The number of shares subject to issuance
cannot exceed 3.5 million. At December 31, 1996, 3,495,000 shares were available
for grant under the 1996 Incentive Plan.
The 1998 Goals Stock Option Plan ("1998 Option Plan") provides for granting
to all eligible employees up to 150 options to purchase UNUM Corporation common
stock. The options will vest to the employee nine years from the date of grant.
Vesting may be accelerated to an earlier date if it is determined that UNUM has
attained the 1998 Goals. Grants of 102,500 shares and 1,105,350 shares were made
in 1996 and 1995, respectively. Additional grants will be made in 1997. The
number of shares subject to options under this plan cannot exceed 1.5 million.
For all of UNUM's stock based compensation plans, the exercise price of
each option is not less than 100% of the fair market value of UNUM's stock on
the date of grant.
56
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)
A summary of the status of UNUM's four stock-based compensation plans as of
December 31, 1996, 1995 and 1994, and changes during the years then ended is
presented below:
Restricted
(Per share amounts are weighted-average) Options Stock
- -------------------------------------------------------- ------------ ------------
Outstanding at January 1, 1994 ........................ 3,402,954 146,425
1994 Activity:
Granted at $50.92 per share ........................... 884,375 --
Granted for restricted stock at $50.05 per share ...... -- 46,850
Lapse of restrictions on restricted stock ............ -- (80,800)
Exercised at $24.99 per share ........................ (282,729) --
Forfeited at $46.08 per share for options ............ (151,578) (2,525)
---------- --------
Outstanding at December 31, 1994 ..................... 3,853,022 109,950
---------- --------
1995 Activity
Granted at $41.06 per share ........................... 2,200,000 --
Granted for restricted stock at $42.99 per share ...... -- 70,950
Lapse of restrictions on restricted stock ............ -- (33,100)
Exercised at $25.75 per share ........................ (541,188) --
Forfeited at $46.85 per share for options ............ (314,200) (5,600)
---------- --------
Outstanding at December 31, 1995 ..................... 5,197,634 142,200
---------- --------
1996 Activity
Granted at $60.75 per share ........................... 1,080,690 --
Granted for restricted stock at $59.36 per share ...... -- 93,300
Exercised at $37.72 per share ........................ (637,261) --
Forfeited at $46.78 per share for options ............ (271,741) (32,600)
---------- --------
Outstanding at December 31, 1996 ..................... 5,369,322 202,900
========== ========
The weighted-average exercise price of options outstanding at December 31,
1996, 1995 and 1994, was $45.85, $41.81 and $40.32 per share, respectively.
The number and weighted-average exercise price of exercisable shares as of
December 31, 1996, 1995 and 1994 was 2,381,592 shares at $41.45 per share,
2,108,060 shares at $39.13 per share, and 1,975,219 shares at $32.54 per share,
respectively.
The weighted-average fair value of options granted during the years ended
December 31, 1996, and 1995 was $13.83 and $10.20, respectively.
57
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ----------------------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ------------ -------------- ------------------- ------------------- -------------- ------------------
$10 to 30 487,086 3.49 $23.38 487,086 $23.38
31 to 48 2,414,512 7.35 39.43 970,009 38.78
49 to 72 2,467,724 7.81 56.57 924,497 53.76
---------- ---------- ------ ------- ---------- -------
$10 to 72 5,369,322 7.21 $45.85 2,381,592 $41.45
========== ==========
Between 1991 and 1994, certain officers were granted limited stock
appreciation rights ("LSARs") in conjunction with their options for those years.
If a change in control of UNUM Corporation, as defined in the plans, should
occur, the option holder can exercise the LSAR. An LSAR is meant to compensate
an officer if the associated options lose value due to a change in control by
allowing the officer to receive payment for the difference between the option
exercise price and the highest price paid per share in connection with the
change in control. As an underlying stock option is exercised, the LSARs are
automatically canceled. At December 31, 1996, 1995 and 1994, there were 398,300
LSARs, 480,825 LSARs and 590,275 LSARs outstanding, respectively.
Annual Incentive Plans
UNUM has several annual incentive plans for certain employees and executive
officers that provide additional compensation based on achievement of
predetermined annual corporate and affiliate financial and non-financial goals.
In 1996, 1995 and 1994, expense for these plans was $41.7 million, $19.9 million
and $7.5 million, respectively.
NOTE 10. INCOME TAXES
A reconciliation of income taxes computed by applying the federal income
tax rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
Year Ended December 31,
-------------------------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------------------------- ---------- ----------------- ----------
Tax at federal statutory rate of 35% ...... $119.6 $ 133.7 $ 69.5
Tax-exempt income ........................ (18.8) (30.0) (32.0)
Prior years' taxes ........................ (1.2) (6.6) --
State income tax ........................... 2.5 3.8 2.2
Realized investment gains .................. -- (5.0) (1.3)
Other .................................... 1.5 4.9 5.5
------ ---- ------
Income taxes .............................. $103.6 $ 100.8 $ 43.9
====== ==== ======
58
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. INCOME TAXES (Continued)
Deferred income tax liabilities and assets consist of the following:
December 31,
--------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------ --------- --------
Deferred tax liabilities:
Deferred policy acquisition costs .................. $210.7 $321.6
Policy reserve adjustments ........................ 106.5 --
Net unrealized gains .............................. 101.7 174.0
Value of business acquired ........................ 19.8 17.7
Invested assets .................................... 9.6 10.9
Other ............................................. 11.0 16.0
------- -------
Gross deferred tax liabilities .................. 459.3 540.2
------- -------
Deferred tax assets:
Alternative minimum tax credit carryforwards ...... 1.1 29.0
Policy reserve adjustments ........................ -- 65.9
Net realized losses .............................. 17.4 25.1
Postretirement benefits ........................... 26.7 22.1
Deferred gains .................................... 28.5 --
Accrued liabilities .............................. 27.0 --
Other ............................................. 26.8 12.1
------- -------
Gross deferred tax assets ........................ 127.5 154.2
Less valuation allowance ........................... 10.0 6.0
------- -------
Net deferred tax assets ........................... 117.5 148.2
------- -------
Net deferred tax liability ........................ $341.8 $392.0
======= =======
Deferred income taxes relating to cumulative net unrealized gains on
available for sale fixed maturity and equity securities were $101.7 million,
$174.0 million and $27.1 million at December 31, 1996, 1995 and 1994,
respectively.
Prior to the Tax Reform Act of 1984 ("1984 Act"), half the excess of the
tax basis gain from operations of a life insurance company over its taxable
investment income was currently taxable. The other half was set aside in a
Policyholders Surplus Account, together with certain special life insurance
company deductions. The cumulative amount in the Policyholders Surplus Account
as of December 31, 1983, was frozen by the 1984 Act and amounted to $31.8
million at December 31, 1996. Any direct or indirect distributions from this
account would be taxed at current tax rates; however, no provision has been made
for related taxes. If the amount set aside in this account were taxed at the
current rate at December 31, 1996, for all life insurance subsidiaries, the tax
would have amounted to $11.1 million.
UNUM's Consolidated Statements of Income for 1996, 1995 and 1994, included
the following amounts of foreign income and related income tax expense:
Year Ended December 31,
------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------ -------- --------- -------
Foreign income ............ $27.4 $ (1.2) $24.2
====== ====== ======
Income tax expense (credit):
Current .................. $10.4 $ 1.4 $ 0.7
Deferred .................. 1.8 (0.2) 9.7
------ ------ ------
Total ..................... $12.2 $ 1.2 $10.4
====== ====== ======
59
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. INCOME TAXES (Continued)
UNUM subsidiaries had operating loss carryforwards totaling $3.6 million as
of December 31, 1996. The operating loss carryforward will expire, if not
utilized, in 1999 through 2002.
NOTE 11. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1996, and 1995:
December 31,
--------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------------- --------- --------
Short-term debt:
Commercial paper, with weighted average interest rates of
5.5% in 1996 and 5.9% in 1995 .............................. $60.6 $82.4
Other notes payable, with weighted average interest rates of
0.7% in 1996 and 1.0% in 1995 .............................. 8.6 29.1
Medium-term notes payable, due 1997, with interest rates
ranging from 6.0% to 6.7% ................................. 48.5 15.0
------ ------
Total short-term debt .................................... 117.7 126.5
------ ------
Long-term debt:
Medium-term notes payable, due 1998 to 2024, with interest
rates ranging from 5.1% to 7.5% ........................... 242.1 290.4
Monthly income debt securities, due 2025, with interest rate
of 8.8%, $172.5 million issued net of unamortized offering
costs of $5.4 million in 1996 and $5.6 million in 1995 ...... 167.1 166.9
------ ------
Total long-term debt .................................... 409.2 457.3
------ ------
Total notes payable ....................................... $526.9 $583.8
====== ======
At December 31, 1996, UNUM Corporation had a $500 million committed
revolving credit facility that expires on October 1, 2001. UNUM's commercial
paper program is supported by the revolving credit facility and is available for
general liquidity needs, capital expansion, acquisitions or stock repurchase.
The committed revolving credit facility contains certain covenants which, among
other provisions, require maintenance of certain levels of stockholders' equity
and limits on debt levels.
Aggregate maturities of notes payable are as follows: 1997-$117.7 million;
1998-$68.0 million; 1999-$21.5 million; 2000-$60.0 million; thereafter-$259.7
million.
NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS
Effective October 23, 1996, UNUM's Board of Directors approved an expansion
of the Company's stock repurchase program to 6.0 million shares by authorizing
an additional 3.7 million shares. At December 31, 1996, approximately 4.5
million shares of common stock remained authorized for stock repurchase. During
1996, UNUM acquired approximately 1.9 million shares of its common stock in the
open market at an aggregate cost of $119.1 million. UNUM did not acquire any
shares in the open market in 1995. During 1994, UNUM repurchased 3.9 million
shares in the open market at an aggregate cost of $183.3 million.
Under UNUM's stock-based compensation plans and the plans of Colonial
Companies (see Note 9), 730,561 shares, 612,138 shares and 329,579 shares were
issued in 1996, 1995 and 1994, respectively.
UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan,
each Right, under certain specific circumstances, entitles the holder to
purchase one one-hundredth of a share of Series A Junior Participating
60
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS (Continued)
Preferred Stock at a purchase price of $150. The Rights become exercisable at a
specified time after (1) a person or group acquires 10% or more of UNUM
Corporation common stock or (2) a tender or exchange offer for 10% or more of
UNUM Corporation common stock. The Rights expire at the close of business on
March 13, 2002, unless earlier redeemed by the Company under certain
circumstances at a price of $0.01 per Right.
NOTE 13. DIVIDEND RESTRICTIONS
UNUM is subject to various state insurance regulatory restrictions that
limit the maximum amount of dividends available from its United States domiciled
insurance subsidiaries without prior approval. The amount available under
current law for payment of dividends during 1997 to UNUM Corporation from all
U.S. domiciled insurance subsidiaries without state insurance regulatory
approval is approximately $153 million. Dividends in excess of this amount may
only be paid with state insurance regulatory approval. The aggregate statutory
capital and surplus of the United States domiciled insurance subsidiaries of
UNUM Corporation was approximately $1,205 million and $1,149 million, at
December 31, 1996, and 1995, respectively. The aggregate statutory net operating
income, which excludes realized investment gains net of tax, of UNUM
Corporation's United States domiciled insurance subsidiaries was approximately
$167 million, $143 million and $33 million for 1996, 1995 and 1994,
respectively. State insurance regulatory authorities prescribe statutory
accounting practices that differ in certain respects from generally accepted
accounting principles. The significant differences relate to deferred
acquisition costs, deferred income taxes, non-admitted asset balances, required
investment risk reserves and reserve calculation assumptions.
UNUM Corporation also has the ability to draw a dividend from its United
Kingdom based affiliate, UNUM Limited, subject to certain U.S. tax consequences.
NOTE 14. LITIGATION
In the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1996. In some instances, these
proceedings include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position or the consolidated operating results of UNUM.
On December 29, 1993, UNUM filed a suit in the United States District Court
for the District of Maine, seeking a federal income tax refund. The suit is
based on a claim for a deduction in certain prior tax years, for $652 million in
cash and stock distributed to policyholders in connection with the 1986
conversion of Union Mutual Life Insurance Company to a stock company. UNUM has
fully paid, and provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure.
UNUM believes its claims are meritorious, and has appealed the decision to the
United States Court of Appeals for the First Circuit. The ultimate recovery, if
any, cannot be determined at this time.
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values are based on quoted market prices, when available. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. These valuation techniques
require management to develop a significant number of assumptions, including
discount rates and estimates of future cash flow. Derived fair value estimates
cannot be substantiated by comparison to independent markets or to disclosures
by other companies with similar financial instruments. These fair value
disclosures do not purport to be the amount that could be realized in immediate
settlement of the financial instrument.
61
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The following table summarizes the carrying amounts and fair values of
UNUM's financial instruments at December 31, 1996, and 1995:
1996 1995
--------------------------- ------------------------
Carrying Fair Carrying Fair
(Dollars in millions) Amount Value Amount Value
- ----------------------------------------- ----------- ----------- ----------- ----------
Financial assets:
Fixed maturities available for sale ... $6,942.7 $6,942.7 $9,135.4 $9,135.4
Equity securities available for sale .. 31.3 31.3 25.2 25.2
Mortgage loans ........................ 1,132.1 1,213.4 1,163.4 1,274.9
Policy loans ........................ 232.9 232.9 219.2 219.2
Short-term investments ............... 123.4 123.4 896.7 896.7
Cash ................................. 77.0 77.0 42.5 42.5
Accrued investment income ............ 166.1 166.1 208.5 208.5
Deposit assets ..................... 2,846.6 2,846.6 -- --
Financial liabilities:
Other policyholder funds:
Investment-type insurance
contracts:
With defined maturities ............ $ 191.0 $ 216.0 $ 400.0 $ 440.0
With no defined maturities ......... 2,901.0 2,839.0 3,031.0 2,967.0
Individual annuities and
supplementary contracts not
involving life contingencies ........ 76.2 76.2 81.4 81.4
Notes payable ........................ 526.9 542.5 583.8 610.8
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Fixed Maturities Available for Sale: Fair values for fixed maturities are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using values obtained from independent
pricing services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate applicable
to the yield, credit quality and maturity of the investments.
Equity Securities Available for Sale: Fair values for equity securities
available for sale are based on quoted market prices and are reported in the
Consolidated Balance Sheets at these values.
Mortgage Loans: Fair values for mortgage loans are estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar mortgage loans to borrowers with similar credit ratings and maturities.
Mortgage loans with similar characteristics are aggregated for purposes of the
calculations.
Policy Loans, Short-term Investments, Cash, Accrued Investment Income and
Deposit Assets: Fair values for these instruments approximate the carrying
amounts reported in the Consolidated Balance Sheets.
Investment-type Insurance Contracts: Fair values for liabilities under
investment-type insurance contracts with defined maturities are estimated using
discounted cash flow calculations based on interest rates that would be offered
currently for similar contracts with maturities consistent with those remaining
for the contracts being valued. Fair values for liabilities under
investment-type insurance contracts with no defined maturities are the amounts
payable on demand after surrender charges at the balance sheet date.
62
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of liabilities under all insurance contracts
(investment-type and other than investment-type) are taken into consideration
in UNUM's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
Individual Annuities and Supplementary Contracts not Involving Life
Contingencies: Fair values approximate the carrying amounts reported in other
policyholder funds in the Consolidated Balance Sheets.
Notes Payable: Fair values of short-term borrowings approximate the carrying
amount. Fair values of long-term notes are estimated using discounted cash flow
analyses based on UNUM's current incremental borrowing rates for similar types
of borrowing arrangements.
NOTE 16. SEGMENT INFORMATION
UNUM's markets for its insurance products are the United States, its
principal market, Canada, the United Kingdom and the Pacific Rim. Through its
affiliates, UNUM is the leading provider of group long term disability
insurance, its principal product, in the United States and the United Kingdom.
Products are marketed through sales personnel, independent contractors and
brokers, and specialty agents. UNUM targets sales of its disability products to
executive, administrative and management personnel, and other professionals such
as doctors, attorneys, accountants and engineers.
To more clearly reflect UNUM's management of its businesses and to more
appropriately group its product portfolios, UNUM began reporting its operations,
effective January 1, 1995, principally in four business segments: Disability
Insurance, Special Risk Insurance, Colonial Products and Retirement Products.
For comparative purposes, 1994 information was previously restated to reflect
reporting in these segments.
The Disability Insurance segment includes disability products offered in
North America, the United Kingdom and Japan including: group long term
disability, group short term disability, individual disability, Association
Group disability, disability reinsurance operations and long term care
insurance. The Special Risk Insurance segment includes group life, special risk
accident insurance, non-disability reinsurance operations, reinsurance
underwriting management operations and other special risk insurance products.
The Colonial Products segment includes Colonial Companies, Inc. and
subsidiaries, which offer payroll-deducted, voluntary employee benefits
including accident and sickness, cancer and life insurance products to employees
at their worksites. The Retirement Products segment includes tax sheltered
annuities, guaranteed investment contracts, deposit administration accounts,
401(k) plans, individual life and group medical products, all of which are no
longer actively marketed by UNUM. Corporate includes transactions that are
generally non-insurance related.
Investment income and net realized investment gains are allocated to the
segments based on designation of ownership of assets identified to the products
in each segment. Operating expenses are allocated to the segments based on
direct association with a product whenever possible. If the expense cannot be
readily associated with a particular product, the costs are allocated based on
ratios of the relative time spent, extent of usage or varying volume of work
performed for each segment.
63
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. SEGMENT INFORMATION (Continued)
Summarized financial information for the four business segments and
Corporate is as follows:
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------ ----------- ----------- -----------
Revenues:
Disability Insurance ............ $2,386.2 $2,472.8 $2,116.5
Special Risk Insurance ......... 811.9 750.7 647.8
Colonial Products ............... 545.5 527.3 473.9
Retirement Products ............ 283.0 357.8 369.4
Corporate ........................ 16.1 14.3 5.0
-------- -------- --------
Total revenues .................. $4,042.7 $4,122.9 $3,612.6
======== ======== ========
Income (loss) before income taxes:
Disability Insurance ............ $ 215.3 $ 217.0 $ 56.2
Special Risk Insurance ......... 79.2 60.3 65.9
Colonial Products ............... 92.4 87.7 62.7
Retirement Products ............ 1.4 45.5 42.0
Corporate ........................ (46.7) (28.6) (28.2)
-------- -------- --------
Income before income taxes ...... 341.6 381.9 198.6
Income taxes ..................... 103.6 100.8 43.9
-------- -------- --------
Net income ..................... $ 238.0 $ 281.1 $ 154.7
======== ======== ========
December 31,
-----------------------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------------------------------- ------------ ------------ -----------
Identifiable Assets:
Disability Insurance ........................... $7,846.8 $7,280.3 $6,131.9
Special Risk Insurance ........................ 1,297.1 1,056.5 846.8
Colonial Products .............................. 1,094.1 996.5 846.2
Retirement Products ........................... 4,478.8 4,717.4 4,504.0
Corporate ....................................... 396.7 372.9 451.3
Individual Participating Life and Annuity ...... 354.0 364.2 347.0
--------- --------- ---------
Total assets ................................. $15,467.5 $14,787.8 $13,127.2
========= ========= =========
64
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
1996 and 1995:
1996
--------------------------------------------
(Dollars in millions, except per common share data) 4th 3rd 2nd 1st
- ------------------------------------------------------ --------- --------- --------- --------
Premiums .......................................... $793.8 $796.2 $762.3 $768.1
Investment income ................................. 172.6 207.7 212.2 209.7
Net realized investment gains (losses) ............ 1.4 1.6 (3.1) 3.5
Benefits to policyholders ........................... 573.1 605.2 563.5 582.9
Net income .......................................... 48.0 44.0 73.9 72.1
Net income per common share ........................ 0.66 0.60 1.01 0.99
1995
--------------------------------------------
4th 3rd 2nd 1st
--------- --------- --------- --------
Premiums ........................... $817.0 $738.0 $729.2 $734.0
Investment income .................. 207.3 207.8 199.3 191.9
Net realized investment gains ...... 3.2 2.9 208.1 10.9
Benefits to policyholders ......... 634.8 568.7 717.7 571.8
Net income ........................ 62.1 66.7 88.9 63.4
Net income per common share ......... 0.85 0.92 1.22 0.87
NOTE 18. SUBSEQUENT EVENTS
On March 14, 1997, UNUM's Board of Directors authorized a two-for-one
common stock split. The split is subject to shareholder approval of a proposal
to increase the number of authorized shares of common stock to 240 million from
120 million. UNUM's shareholders will vote on the proposal to increase the
number of authorized shares at the Annual Meeting of Shareholders on May 9,
1997. Under the proposed split, on or about June 2, 1997, one additional share
would be distributed for each share of common stock already issued, to holders
of record on May 19, 1997. The financial information contained in this report
has not been adjusted to reflect the impact of the proposed common stock split.
On March 14, 1997, the Board of Directors also announced its intent to
increase the next regularly scheduled cash dividend, payable in May, to 28.5
cents from 27.5 cents per common share on a pre-split basis.
65
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No disagreements with accountants on any matter of accounting principles or
practices or financial statement schedulesdisclosure have been reported on a Form 8-K
during the past two years prior to the date of the most recent financial
statements.
PART III
Item 10--Directors and Executive Officers of the Registrant
A. Directors of the Registrant
The information under the caption "Election of Directors" included in
UNUM's proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is
incorporated by reference.
B. Executive Officers of the Registrant
The executive officers of UNUM are as follows:
Age (as of An Officer
Name March 25, 1997) Position held with UNUM Since
- --------------------- ------------------ ------------------------------ ------------
James F. Orr III 54 Chairman, President and 1986
Chief Executive Officer
Thomas G. Brown 52 Executive Vice President 1992
Stephen B. Center 59 Executive Vice President 1972
Robert W. Crispin 50 Executive Vice President 1995
and Chief Financial Officer
Peter J. Moynihan 53 Senior Vice President 1979
Kevin P. O'Connell 51 Executive Vice President 1987
Elaine D. Rosen* 44 President, UNUM America 1983
Robert E. Staton* 50 President, Colonial 1993
- --------
*Denotes an officer of a subsidiary who is not an officer of the Corporation but
who is considered an "executive officer" under regulations of the Securities and
Exchange Commission.
The officers are elected annually and hold office until their respective
successors have been chosen and qualified, or until death, resignation or
removal. The UNUM Board may also appoint or delegate the appointment of
officers, assistant officers and agents as it may deem necessary for such
periods as the By-Laws, the UNUM Board, or the delegatee may prescribe.
Mr. Orr was elected Chairman of the Board of UNUM in February 1988. In
addition, he has served as President and Chief Executive Officer since September
1987. He joined UNUM in 1986.
Mr. Brown was elected Executive Vice President of UNUM in January 1995. In
addition, he continues to serve as Chairman of the Board and Chief Executive
Officer of Duncanson & Holt, Inc. ("D&H"), a post he has held since 1987.
Additionally, he served as President of D&H from 1987 until May 1996. D&H became
a wholly-owned subsidiary of UNUM in July 1992.
Mr. Center was elected Executive Vice President of UNUM in September 1992.
Additionally, he served as President of UNUM America from September 1992 until
December 1996. Previously, he served as Group Executive Vice President of UNUM
America from May 1990 to August 1992. He joined UNUM America in 1963.
Mr. Crispin was elected Executive Vice President of UNUM in January 1995
and additionally as Chief Financial Officer in August 1995. Prior to joining
UNUM, Mr. Crispin served as Vice Chairman and Chief Investment Officer of The
Travelers Insurance Companies from July 1991 to January 1995.
Mr. Moynihan was elected Senior Vice President of UNUM in September 1993
and Senior Vice President of UNUM America in October 1987. He joined UNUM
America in 1973.
Mr. O'Connell was elected Executive Vice President of UNUM in February 1996
and Executive Vice President of UNUM America in May 1995. Previously, he served
as Senior Vice President of UNUM America from November 1988 to May 1995. He
joined UNUM America in 1968.
66
Ms. Rosen was elected President of UNUM America in January 1997.
Previously, she served as Executive Vice President of UNUM America from May 1995
to December 1996 and as Senior Vice President of UNUM America from November 1988
to May 1995. She joined UNUM America in 1975.
Mr. Staton was elected President of Colonial in January 1997. Previously he
served as Chairman of Colonial from December 1993 to December 1996, and
additionally as Chief Executive Officer from July 1995 to December 1996.
Previously, he served as Senior Vice President from February 1990 to December
1993; General Counsel from August 1985 to November 1993; and Corporate Secretary
from February 1992 to August 1993. Colonial's parent company merged with UNUM in
March 1993.
Item 11--Executive Compensation
The information under the captions "Compensation of Directors", "Board
Compensation Report on Executive Compensation", and "Executive Compensation"
included in UNUM's proxy statement for the Annual Meeting of Shareholders on May
9, 1997, is incorporated by reference.
Item 12--Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Security Ownership" included in UNUM's
proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is
incorporated by reference.
Item 13--Certain Relationships and Related Transactions
The information under the captions "Executive Compensation" and "Other
Agreements and Transactions" included in UNUM's proxy statement for the Annual
Meeting of Shareholders on May 9, 1997, is incorporated by reference.
67
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index of documents filed as part of this report:
1. The following Consolidated Financial Statements of UNUM Corporation and
subsidiaries are included in Item 14(a):8.
Page
------
Report of Independent Accountants ..................... 34
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 ..................... 35
Consolidated Balance Sheets as of December 31, 1996,
and 1995 ............................................. 36
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 ......... 38
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 ............... 39
Notes to Consolidated Financial Statements ............ 40
2. Financial Statement Schedules
II Condensed Financial Information of UNUM Corporation
(Registrant) 70
III Supplementary Insurance Information 74
IV Reinsurance 75
3. Exhibits. See Index to Exhibits on page 76 of this report.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1996.
Schedules and exhibits required by Article 7 of Regulation S-X other than
those listed are omitted because they are not required, are not applicable, or
equivalent information has been included in the financial statements, and notes
thereto, or elsewhere herein.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Portland, State of Maine, on March 25, 1997.
UNUM Corporation
By /s/ JAMES F. ORR III
-------------------------------------
James F. Orr III (Chairman, President
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
PAGE(S)
-------
Name Title Date
- ----------------------------------------- ----------------------------- ----------------
II Condensed
/s/ JAMES F. ORR III Chairman, President and
- ------------------------------------- Chief Executive Officer March 25, 1997
(James F. Orr III)
/s/ ROBERT W. CRISPIN Executive Vice President
- ------------------------------------- and Chief Financial InformationOfficer March 25, 1997
(Robert W. Crispin)
/s/ STEPHEN D. ROBERTS Vice President and
- ------------------------------------- Corporate Controller March 25, 1997
(Stephen D. Roberts)
* Director March 25, 1997
- -------------------------------------
(Gayle O. Averyt)
* Director March 25, 1997
- -------------------------------------
(Robert E. Dillon, Jr.)
* Director March 25, 1997
- -------------------------------------
(Gwain H. Gillespie)
* Director March 25, 1997
- -------------------------------------
(Ronald E. Goldsberry)
* Director March 25, 1997
- -------------------------------------
(Donald W. Harward)
* Director March 25, 1997
- -------------------------------------
(George J. Mitchell)
* Director March 25, 1997
- -------------------------------------
(Cynthia A. Montgomery)
* Director March 25, 1997
- -------------------------------------
(James L. Moody, Jr.)
* Director March 25, 1997
- -------------------------------------
(Lawrence R. Pugh)
* Director March 25, 1997
- -------------------------------------
(Lois Dickson Rice)
* Director March 25, 1997
- -------------------------------------
(John W. Rowe)
*/s/ JOHN-PAUL DEROSA
- -------------------------------------
(John-Paul DeRosa, as Attorney-in-fact
for each of UNUM Corporation (Registrant)..
III Supplementary Insurance Information...............................
IV Reinsurance.......................................................the persons indicated)
(Assistant Secretary)
69
UNUM CORPORATION (PARENT COMPANY)(Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBERYear Ended December 31,
-------------------------------------------------------------
(Dollars in millions) 1996 1995 1994
1993 1992- ------------------------------------------------------------ --------- --------- --------
------------------------------------------------------------------------------------------------------
Revenues
Dividends from subsidiaries*........................................ ........................... $259.7 $ 23.6 $102.0
$131.8 $110.8
Investment income...................................................income ....................................... 0.3 0.4 0.1
0.2 0.8
Net realized investment gains.......................................Interest income on loans to subsidiaries* ............... 2.5 5.5 -- -- 1.9
Fees and other income...............................................income .................................... -- 0.3 0.8
-- --
------- ------------- -------
Total revenues..................................................revenues .......................................... 262.5 29.8 102.9 132.0 113.5
Expenses
Operating expenses..................................................expenses ....................................... 4.7 2.3 8.7
11.6 9.2
Interest expense....................................................expense ....................................... 40.7 37.2 18.6 12.4 10.7
Interest expense on loans from subsidiaries*........................ ............ 0.1 3.9 2.3
0.1 --
------- ------------- -------
Total expenses..................................................expenses .......................................... 45.5 43.4 29.6
24.1 19.9
------- ------------- -------
Income (loss) before income taxes............................................taxes ........................ 217.0 (13.6) 73.3 107.9 93.6
Income tax expense (benefit).......................................... (6.2) (5.7) 3.5benefit ....................................... 15.1 13.1 6.2
------- ------------- -------
Income (loss) before equity in undistributed net
income of subsidiaries......subsidiaries .................................... 232.1 (0.5) 79.5 113.6 90.1
Equity in undistributed net income of subsidiaries*................... ...... 5.9 281.6 75.2
186.3 201.1
------- ------------- -------
Net income............................................................income ................................................ $238.0 $281.1 $154.7
$299.9 $291.2
------- ------- -------
------- ------- -------
------------======= ====== =======
- --------
*Eliminated in consolidation
See note to condensed financial statements.
70
UNUM CORPORATION (PARENT COMPANY)(Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(DOLLARS IN MILLIONS)
DECEMBERDecember 31,
1994 1993------------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------------ ----------- ----------
----------------------------------------------------------------------------------------------------
Assets
Investments
Investment in subsidiaries*................................................. $2,386.0 $2,376.9 ........................... $2,749.8 $2,836.1
Short-term investments...................................................... 0.5 4.4investments ................................. 0.6 0.6
-------- --------
Total investments......................................................... 2,386.5 2,381.3
Cash.......................................................................... 2.0 1.3investments .................................... 2,750.4 2,836.7
Amounts receivable from subsidiaries, net*.................................... 18.4 12.4 ............... 15.0 6.6
Notes receivable from subsidiary* ........................ 32.5 50.0
Property and equipment, net................................................... 16.7 17.3net .............................. 22.3 18.1
-------- --------
Total assets.............................................................. $2,423.6 $2,412.3
-------- --------
-------- --------assets .......................................... $2,820.2 $2,911.4
======== ========
Liabilities and Stockholders' Equity
Liabilities
Notes payable...............................................................payable .......................................... $ 427.4526.9 $ 236.0583.8
Notes payable to subsidiary*................................................ 60.0 60.0 ........................... -- 10.0
Income taxes................................................................ 2.7 2.3taxes .......................................... 16.5 4.8
Other liabilities........................................................... 18.1 11.3liabilities ....................................... 13.7 9.9
-------- --------
Total liabilities......................................................... 508.2 309.6liabilities .................................... 557.1 608.5
Stockholders' Equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000 shares, issued 99,987,958 shares...................................................shares ............ 10.0 10.0
Additional paid-in capital.................................................. 1,062.4 1,062.3capital .............................. 1,077.2 1,065.7
Unrealized gains on available for sale securities of
subsidiaries, net of
deferred taxes............................................................. 67.7 165.2....................................... 108.5 235.6
Unrealized foreign currency translation adjustment.......................... (23.7) (24.1)adjustment ...... (1.2) (23.1)
Retained earnings (including undistributed earnings of
subsidiaries of $1,114.3$1,401.8 million and $1,039.1$1,395.9 million in
19941996 and 1993,1995, respectively)...... 1,507.2 1,420.8 .............................. 1,871.4 1,713.2
-------- --------
2,623.6 2,634.23,065.9 3,001.4
Less:
Treasury stock, at cost (1994-27,575,430(1996--28,165,594 shares;
1993-24,006,8161995--26,980,331 shares).... 706.6 529.8 ................................. 792.2 691.6
Restricted stock deferred compensation...................................... 1.6 1.7compensation .................. 10.6 6.9
-------- --------
Total stockholders' equity................................................ 1,915.4 2,102.7equity .............................. 2,263.1 2,302.9
-------- --------
Total liabilities and stockholders' equity................................ $2,423.6 $2,412.3equity ............ $2,820.2 $2,911.4
======== ========
- -------- --------
-------- --------
*Eliminated in consolidation
See note to condensed financial statements.
71
UNUM CORPORATION (Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBERYear Ended December 31,
------------------------------------------------------------
(Dollars in millions) 1996 1995 1994
1993 1992- ------------------------------------------------------------- ---------- ---------- ---------
-----------------------------------------------------------------------------------------------------------
Operating activities:
Net income....................................................................income ................................................ $ 154.7238.0 $ 299.9281.1 $ 291.2154.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in income tax liability............................................liability ........................ 11.7 2.1 0.4 2.3 3.2
(Increase) decrease in amounts due to/from
subsidiaries.....................subsidiaries* ............................................. (8.4) 11.8 (6.0)
7.5 (1.2)
Other.......................................................................Other ................................................... 16.1 (3.1) 11.1 4.6 (5.4)
Equity in undistributed net income of subsidiaries*........................... ...... (5.9) (281.6) (75.2) (186.3) (201.1)
------- ------- -------
Net cash provided by operating activities.................................activities ............... 251.5 10.3 85.0 128.0 86.7
------- ------- -------
Investing activities:
Sales of investments.......................................................... -- -- 86.2
Purchases of investments...................................................... -- 0.3 (89.9)
Investment in subsidiaries, net*.............................................. ........................ (13.1) (1.1) (30.6)
0.9 (43.8)Issuance of notes receivable from subsidiaries* ......... (32.5) (100.0) --
Repayment of notes receivable from subsidiaries* ......... 50.0 50.0 --
Net (increase) decrease in short-term investments.............................investments ......... -- (0.1) 3.9 (2.3) 1.4
Net additions to property and equipment.......................................equipment .................. (8.6) (5.4) (3.3) (2.4) (1.7)
------- ------- -------
Net cash used in investing activities.....................................activities .................. (4.2) (56.6) (30.0) (3.5) (47.8)
------- ------- -------
Financing activities:
Dividends to stockholders.....................................................stockholders ................................. (79.8) (75.1) (68.3) (61.4) (41.9)
Treasury stock acquired.......................................................acquired ................................. (119.1) -- (183.3) (192.5) --
Proceeds from notes payable...................................................payable .............................. -- 291.5 54.7 51.5 74.6
Repayment of notes payable....................................................payable .............................. (15.0) -- (50.0) (25.0)
Increase--
Net increase (decrease) in short-term debt........................................debt ............... (42.3) (135.1) 136.7
58.1 (58.1)
Net proceeds fromRepayment of notes payable to subsidiaries*.............................. ............... (10.0) (50.0) --
60.0 1.3
Other.........................................................................Other ................................................... 18.9 13.0 5.9 10.4 10.7
------- ------- -------
Net cash used inprovided by (used in) financing
activities.....................................activities ............................................. (247.3) 44.3 (54.3) (123.9) (38.4)
------- ------- -------
Net increase (decrease) in cash............................................................cash ........................... -- (2.0) 0.7 0.6 0.5
Cash at beginning of year.......................................................year ................................. -- 2.0 1.3 0.7 0.2
------- ------- -------
Cash at end of year.............................................................year ....................................... $ -- $ -- $ 2.0
$ 1.3 $ 0.7
------- ------- -------
------- ------- -------======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Income taxes................................................................taxes ............................................. $ (25.8) $ (15.1) $ (6.6)
Interest ................................................ $ (8.1)40.8 $ (4.7)
Interest....................................................................36.2 $ 18.1
$ 12.1 $ 11.0
Interest to subsidiaries*................................................... .............................. $ 2.20.2 $ --4.0 $ --2.2
- --------
*Eliminated in consolidation
See note to condensed financial statements.
72
UNUM CORPORATION (PARENT COMPANY)(Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS
NOTENote 1. BASIS OF PRESENTATIONBasis of Presentation
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes of UNUM
Corporation and subsidiaries, which are included in Item 8.
Certain December 31, 1993, and 1992 amounts have been reclassified in 1994
for comparative purposes.73
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARYIII--SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN MILLIONS)(Dollars in millions)
(1)(2)
Future policy
Deferred benefits, and
policy unpaid claims (3)
acquisition and claim Premium
Segment costs expenses revenue
- ------------------------------ -------------- --------------- -----------
Year Ended December 31, 1996
Disability Insurance ...... $ 443.1 $5,526.0 $1,917.7
Special Risk Insurance ...... 125.6 615.0 755.4
Colonial Products ......... 274.6 410.8 498.2
Retirement Products ......... 0.9 618.6 65.8
Corporate .................. -- -- --
-------- ------- ---------
Total ..................... $ 844.2 $7,170.4 $3,237.1
======== ======= =========
Year Ended December 31, 1995
Disability Insurance ...... $ 758.3 $5,130.6 $1,879.9
Special Risk Insurance ...... 99.8 476.5 702.3
Colonial Products ......... 250.5 372.0 475.1
Retirement Products ......... 33.7 596.0 34.1
Corporate .................. -- -- 0.1
-------- ------- ---------
Total ..................... $1,142.3 $6,575.1 $3,091.5
======== ======= =========
Year Ended December 31, 1994
Disability Insurance ...... $ 695.6 $4,175.9 $1,716.2
Special Risk Insurance ...... 84.1 357.7 607.1
Colonial Products ......... 224.8 330.5 441.3
Retirement Products ......... 30.7 581.9 31.4
Corporate .................. -- (0.5) 0.8
-------- ------- ---------
Total ..................... $1,035.2 $5,445.5 $2,796.8
======== ======= =========
(1)(2)
FUTURE
POLICY AMORTIZATION
BENEFITS, BENEFITS TO OF
DEFERRED AND UNPAIDAmortization
(4)(5) POLICYHOLDERS DEFERREDBenefits to of deferred (5)
POLICY CLAIMS AND (3) NET AND POLICY OTHERNet policyholders policy Other (6)
ACQUISITION CLAIM PREMIUM INVESTMENT INTEREST ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES REVENUE INCOME CREDITED COSTS EXPENSES WRITTENinvestment and interest acquisition operating Premiums
Segment income credited costs expenses written
- ------------------------------ ---------- ------------ ----------- --------- --------
----------------------------------------------------------------------------------------------------------------------------------Year Ended December 31, 1996
Disability Insurance ...... $ 468.5 $1,514.9 $99.0 $557.0 $1,893.0
Special Risk Insurance ...... 56.5 506.5 42.4 183.8 220.1
Colonial Products ......... 47.3 246.8 72.5 133.8 446.5
Retirement Products ......... 217.2 257.1 -- 24.5 15.0
Corporate .................. 16.1 -- -- 62.8 --
-------- --------- ------ ------- ---------
Total ..................... $ 805.6 $2,525.3 $213.9 $961.9 $2,574.6
======== ========= ====== ======= =========
Year Ended December 31, 1995
Disability Insurance ...... $ 592.9 $1,711.2 $90.6 $454.0 $1,853.2
Special Risk Insurance ...... 48.4 492.3 35.5 162.6 223.6
Colonial Products ......... 52.2 241.6 66.7 131.3 417.5
Retirement Products ......... 323.7 275.3 0.8 36.2 23.3
Corporate .................. 14.2 -- -- 42.9 --
-------- --------- ------ ------- ---------
Total ..................... $1,031.4 $2,720.4 $193.6 $827.0 $2,517.6
======== ========= ====== ======= =========
Year Ended December 31, 1994
Employee Benefits......Disability Insurance ...... $ 308.2 $2,301.1 $1,451.4 $263.5 $1,117.0 $ 39.6 $300.5 $1,108.8
Related Businesses..... 33.3 887.8 477.5 89.6 333.2 8.0 165.6 358.4400.3 $1,572.1 $70.7 $417.5 $1,705.5
Special Risk Insurance ...... 40.7 394.4 19.2 168.3 156.8
Colonial Companies..... 224.8 330.5 441.3Products ......... 32.6 226.1 60.7 124.460.6 124.5 388.1
Individual Disability.. 409.9 1,289.1 357.5 84.6 487.2 39.5 103.6 346.6
Retirement Security.... 57.5 137.0 62.5 226.9 212.1 4.2 47.4 57.8
Other Operations....... 1.5 500.5 16.9 114.4 115.2 0.8 6.8 12.3
Corporate.............. -- (0.5) 0.8Products ......... 338.0 289.1 2.3 36.0 21.6
Corporate .................. 4.2 -- -- 33.2 --
----------- ------------ ------------------ --------- ----------- ---------------- ------- ---------
----------
Total................ $1,035.2 $5,445.5 $2,807.9 $815.8 $2,490.8Total ..................... $ 815.8 $2,481.7 $152.8 $781.5$779.5 $2,272.0
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
Year Ended December 31, 1993
Employee Benefits...... $ 249.4 $2,080.8 $1,362.6 $234.7 $1,018.3 $ 42.1 $297.8 $1,060.6
Related Businesses..... 25.6 795.4 402.5 85.5 268.7 1.1 160.9 282.2
Colonial Companies..... 206.0 282.2 407.4 41.4 211.7 56.1 110.6 365.4
Individual Disability.. 348.2 949.1 322.5 82.5 212.0 35.3 88.7 313.1
Retirement Security.... 47.5 106.4 36.3 235.5 196.6 10.6 43.5 34.4
Other Operations....... 2.4 490.6 25.9 154.0 149.4 2.5 7.2 14.0
Corporate.............. -- (0.5) -- 6.2 -- -- 23.6 --
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
Total................ $ 879.1 $4,704.0 $2,557.2 $839.8 $2,056.7 $147.7 $732.3 $2,069.7
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
Year Ended December 31, 1992
Employee Benefits...... $ 206.8 $1,865.6 $1,116.2 $234.4 $ 808.0 $ 34.4 $285.7 $ 895.1
Related Businesses..... 18.0 696.5 354.4 91.6 262.7 (2.9) 132.8 287.1
Colonial Companies..... 185.7 243.0 371.9 35.4 191.5 50.5 104.8 330.8
Individual Disability.. 293.1 827.7 292.9 75.0 204.4 31.2 87.7 283.5
Retirement Security.... 35.8 90.0 32.3 228.8 211.7 9.4 33.3 11.9
Other Operations....... 14.4 475.0 29.3 181.6 182.7 3.3 8.4 0.9
Corporate.............. -- -- 0.8 3.9 -- -- 10.4 --
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
Total................ $ 753.8 $4,197.8 $2,197.8 $850.7 $1,861.0 $125.9 $663.1 $1,809.3
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------======== ========= ====== ======= =========
(1) Excludes other policyholder funds, as follows:
DECEMBER 31,
------------------------------------
SEGMENT 1994 1993 1992
--------------------------------------------------------------------
Employee Benefits............. $ 6.3 $ 6.8 $ 5.8
Related Businesses............ 4.2 4.0 8.9
Colonial Companies............ 100.1 76.0 57.0
Individual Disability......... -- -- --
Retirement Security........... 3,192.0 3,204.1 3,229.9
Other Operations.............. 756.2 959.8 1,236.3
---------- ---------- ----------
Total..................... $ 4,058.8 $ 4,250.7 $ 4,537.9
---------- ---------- ----------
---------- ---------- ----------
December 31,
--------------------------------------
Segment 1996 1995 1994
- ------------------------------- ----------- ----------- ----------
Disability Insurance ......... $ 5.9 $ 3.1 $ 2.1
Special Risk Insurance ...... 12.7 14.6 8.4
Colonial Products ............ 156.6 128.0 100.1
Retirement Products ......... 3,358.4 3,694.6 3,948.2
-------- -------- --------
Total ........................ $3,533.6 $3,840.3 $4,058.8
======== ======== ========
(2) Includes unearned premiums, other policy claims and benefits payable.
(3) Includes fees and other income (expense).
(4) Includes investment income (expense) and net realized investment gains.
(5) Investment income and net realized investment gains are allocated to the
segments based on designation of ownership of assets identified to the
segments. Operating expenses are allocated to the segments based on
direct association with a product whenever possible. If, however, the
expense cannot be readily associated with a particular product, the costs
are allocated based on ratios of the relative time spent, extent of usage
or varying volume of work performed for each segment.
(6) Premiums written for health and disability income policies.
Certain December 31, 1993, and 19921994 amounts have been reclassified in 1994
for comparative purposes.
74
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(DOLLARS IN MILLIONS)IV--REINSURANCE
-------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------------------------------------------------------------------------------------------------------------------Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
(Dollars in millions) Amount companies companies Amount to net
- ------------------------------------------------ ------------- ------------ ------------- ------------- ------------
---------------------------------------------------------------------------------------------------------------------Year Ended December 31, 1996
Life insurance in force ..................... $199,019.2 $11,476.5 $ -- $187,542.7 --
=========== ========== ====== ===========
Premiums
Life insurance and individual annuities . $ 552.0 $ 28.6 $ -- $ 523.4 --
Accident and health insurance ............ 2,406.9 77.8 252.9 2,582.0 9.8%
Group annuities ........................... 15.0 -- -- 15.0 --
----------- ---------- ------ -----------
Total premiums ........................... $ 2,973.9 $ 106.4 $252.9 $ 3,120.4
=========== ========== ====== ===========
Year Ended December 31, 1995
Life insurance in force ..................... $164,478.4 $ 4,119.5 $ -- $160,358.9 --
=========== ========== ====== ===========
Premiums
Life insurance and individual annuities . $ 571.4 $ 19.3 $ 2.0 $ 554.1 0.4%
Accident and health insurance ............ 2,248.4 46.9 239.5 2,441.0 9.8%
Group annuities ........................... 23.1 -- -- 23.1 --
----------- ---------- ------ -----------
Total premiums ........................... $ 2,842.9 $ 66.2 $241.5 $ 3,018.2
=========== ========== ====== ===========
Year Ended December 31, 1994
Life insurance in force.....................force ..................... $145,425.9 $4,425.3$ 4,425.3 $ -- $141,000.6 --
---------- --------- ------ ----------
---------- --------- ------ ----------=========== ========== ====== ===========
Premiums
Life insurance and individual annuities...annuities ... $ 517.9 $ 15.7 $ 1.6 $ 503.8 0.3%
Accident and health insurance............. 2,135.0insurance ............... 2,123.9 96.8 169.1 2,207.32,196.2 7.7%
Group annuities...........................annuities ........................... 21.3 -- -- 21.3 --
----------- ---------- --------- ------ ---------------------
Total premiums........................premiums ........................... $ 2,674.22,663.1 $ 112.5 $170.7 $ 2,732.4
---------- --------- ------ ----------
---------- --------- ------ ----------
Year Ended December 31, 1993
Life insurance in force................... $130,323.4 $2,247.9 $ -- $128,075.5 --
---------- --------- ------ ----------
---------- --------- ------ ----------
Premiums
Life insurance and individual annuities... $ 487.2 $ 11.9 $ 1.6 $ 476.9 0.3%
Accident and health insurance............. 1,818.6 38.1 191.0 1,971.5 9.7%
Group annuities........................... 25.7 -- -- 25.7 --
---------- --------- ------ ----------
Total premiums........................ $ 2,331.5 $ 50.0 $192.6 $ 2,474.1
---------- --------- ------ ----------
---------- --------- ------ ----------
Year Ended December 31, 1992
Life insurance in force..................... $105,361.0 $ 586.8 $ -- $104,774.2 --
---------- --------- ------ ----------
---------- --------- ------ ----------
Premiums
Life insurance and individual annuities... $ 409.9 $ 6.2 $ 0.5 $ 404.2 0.1%
Accident and health insurance............. 1,615.7 45.3 135.7 1,706.1 8.0%
Group annuities........................... 32.1 -- -- 32.1 --
---------- --------- ------ ----------
Total premiums........................ $ 2,057.7 $ 51.5 $136.2 $ 2,142.4
---------- --------- ------ ----------
---------- --------- ------ ----------2,721.3
=========== ========== ====== ===========
Certain 1994 amounts have been reclassified for comparative purposes.
75
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
NUMBER DESCRIPTION METHOD OF FILING PAGE NO.
--------- -------------------------------------------------- --------------------------------------------------Number Description Method of Filing
- -------- ------------------------------- ---------------------------------------------------------------------
3.1 Certificate of Incorporation Filed herewith.
of UNUM Corporation, Filed as Exhibit 3.1 to the Registrant's Annual
as
amended Report on Form 10-K dated March 25, 1992, and
incorporated herein by reference.
3.2 By-Laws of UNUM Corporation Filed as Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K dated March 25, 1992, and
incorporated herein by reference.herewith.
Corporation
4 Rights Agreement Filed as Exhibit 1 to the Registrant's Current Report on Form 8-K
dated March 18, 1992, and incorporated herein by reference.
10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual Report on Form
10-K dated March 26, 1991,27, 1996, and incorporated herein by reference.
10.2 Annual Incentive Compensation Plan Filed as Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K dated March 29, 1993, and
incorporated herein by reference.
10.2.1 Annual Incentive Plan-Summary of Significant Filed herewith.
Changesfor Designated Executive
Officers
10.3 1987 Executive Stock Option Plan Filed as Exhibit 10.3 to the Registrant's Annual Report on Form
Option Plan 10-K dated March 29, 1993,27, 1996, and incorporated herein by reference.
10.4 1990 Long-Term Stock Incentive Plan Filed as Exhibit 10.4 to the Registrant's Annual Report on Form
Incentive Plan 10-K dated March 29, 1993,27, 1996, and incorporated herein by reference.
10.5 Supplemental1996 Long-Term Stock Filed as Exhibit 10.5 to the Registrant's Annual Report on Form
Incentive Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.6 Supplementary Retirement Plan Filed as Exhibit 10.4 to the Registrant's Registration Statement on
Plan Form S-1 (Registration No. 33-6571) dated June 18, 1986, and
incorporated herein by reference.
10.610.7 Supplemental Executive Retirement Plan Filed as Exhibit 10.6 to the Registrant's Annual Report on Form
Retirement Plan 10-K dated March 26, 1991, and incorporated herein by reference.
10.710.8 Form of Executive Severance Agreement Filed as Exhibit 10.7 to the Registrant's Annual Report on Form
Severance Agreement 10-K dated March 25, 1992, and incorporated herein by reference.
10.8 Colonial Life & Accident Insurance Co.10.9 Employment Agreement Filed as Exhibit 10.9 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.10 Employment Letter Filed herewith.
Incentive Plan
10.9as Exhibit 10.10 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.11 $500 Million Revolving Filed as Exhibit 10.9 to the Registrant's Annual Report on Form
Credit Agreement 10-K dated March 24, 1995, and incorporated herein by reference.
10.12 Asset Transfer and Filed herewithas Exhibit 10.12 to the Registrant's Annual Report on Form
Acquisition Agreement 10-K dated March 27, 1996, and incorporated herein by reference.
10.13 Non-Qualified 401(k) Plan Filed herewith.
12 Computation of Ratio of Filed herewith.
Earnings to Fixed Charges
Filed herewith.
16 Letter Regarding Change in Certifying Accountant Filed as Exhibit 16 to the Registrant's Current
Report on Form 8-K dated August 9, 1993, and
incorporated herein by reference.
21 Subsidiaries of UNUM Corporation Filed herewith.
23.1Corporation
23 Consent of Independent Accountants Filed herewith.
23.2 Consent of Independent Auditors Filed herewith.Accountants
24 Power of Attorney Filed herewith.
27 Financial Data Schedule Filed herewith.
76
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