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UNITED STATES 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 DECEMBERFor 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 REGISTERED1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 12(B)13 OR 15(d) OF THE
ACT:SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9254
UNUM Corporation
(Exact name of registrant as specified in its charter)
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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
- ------------------- -----------------------------------------
Common stock, $0.10 par value New York Stock Exchange
Pacific Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Pacific Exchange
8.8% Junior Subordinated Deferrable Interest New York Stock Exchange
Debentures, Series A, Due 2025
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 10, 1995,February 20, 1998, was approximately $3,044,100,000.$6,947,700,000.
As of March 10, 1995, 72,536,338February 20, 1998, 137,937,518 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 8, 1998, is incorporated by reference into Part III.
Exhibit Index appears on page 70.
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TABLE OF CONTENTS
PART I
ITEM PAGE
Item 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 ............................................................. 4
E. Individual Disability Segment.............................................................................Retirement Products Segment ........................................................... 5
F. Retirement Security Segment...............................................................................Investments ........................................................................... 5
G. Other Operations Segment..................................................................................
H. Investments...............................................................................................
I. Risk Management and Reinsurance...........................................................................Reinsurance ....................................................... 6
H. Reserves .............................................................................. 7
I. Employees ............................................................................. 7
J. Reserves..................................................................................................Competition ........................................................................... 7
K. Employees.................................................................................................Regulation ............................................................................ 7
L. Competition...............................................................................................
M. Regulation................................................................................................
N. Participation Fund Account................................................................................Account ............................................................ 8
2. Properties....................................................................................................Properties ............................................................................... 8
3. Legal Proceedings.............................................................................................Proceedings ........................................................................ 8
4. Submission of Matters to a Vote of Security Holders...........................................................Holders ...................................... 8
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters.....................................Matters ................ 8
6. Selected Financial Data.......................................................................................Data .................................................................. 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................Operations .... 11
7A. Quantitative and Qualitative Information about Market Risk ............................... 28
8. Financial Statements and Supplementary Data...................................................................Data .............................................. 29
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................Disclosure ..... 60
PART III
10. Directors and Executive Officers of the Registrant............................................................Registrant ....................................... 60
A. Directors of the Registrant...............................................................................Registrant ........................................................... 60
B. Executive Officers of the Registrant......................................................................Registrant .................................................. 60
11. Executive Compensation........................................................................................Compensation ................................................................... 61
12. Security Ownership of Certain Beneficial Owners and Management................................................Management ........................... 61
13. Certain Relationships and Related Transactions................................................................Transactions ........................................... 61
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................................
Signatures....................................................................................................
Report of Independent Accountants.............................................................................
Report of Independent Auditors................................................................................8-K .......................... 62
Signatures ............................................................................... 63
Index to Financial Statement Schedules........................................................................
Index to Exhibits.............................................................................................Exhibits ........................................................................ 70
UNUM Corporation and Subsidiaries
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 the leading provider of
group short term disability ("group STD") in the United States, as well as a
major provider of employee
benefits,group life, individual disability insurance and special risk reinsurance. UNUM
also markets("ID"), long term care
("LTC") insurance, special risk reinsurance and retirement income products.payroll-deducted voluntary
employee benefit products offered to employees at their worksites. The
operations of the following subsidiaries, 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.Rim and Latin America.
UNUM conducts its operations in the United StatesNorth America 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, long term care and retirement products;Canada; First UNUM Life Insurance Company ("First UNUM"), a New York life
insurance company; Commercial
Life Insurance Company, a Wisconsin life insurance company and a leader in
special risk insurance and professional association insurance marketing;
Duncanson & Holt, Inc., a New York corporation and a leading accident and health
reinsurance underwriting manager; 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 the leadera South Carolina life insurance company
licensed in payroll-deducted voluntary employee benefits offered to
employees at their worksites. Through UNUM Holding Company, UNUM Corporation
also owns UNUM Sales Corporation, a licensed broker-dealer incorporated in
Delaware,49 states; and Claims Service International,Duncanson & Holt, Inc. ("D&H"), a Delaware corporation, which
provides claims administration services.New York
Corporation. Effective December 31, 1996, UNUM Corporation also holds all of the outstanding capital stock ofmerged Commercial Life Insurance
Company ("Commercial Life") into UNUM European Holding Company, which is incorporated in the United Kingdom.America.
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 European Holding
Company, incorporated in the United Kingdom, is wholly-owned by UNUM
Corporation.
UNUM's JapanesePacific Rim operations are conducted throughled by 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,UNUM's Latin American operations were established on July 31, 1997, with
the purchase of Boston Compania Argentina de Seguros SA ("Boston Seguros"), a
general lines property/casualty, life and workers compensation insurance company
based in Buenos Aires, Argentina.
During 1997, UNUM acquired Options and Colonial Companies,Choices Inc. ("Colonial"OCI"), signedwhich
delivers integrated information and analysis to help organizations manage their
health and disability program costs. OCI is based in Cheyenne, Wyoming, and is
a definitive merger agreement.wholly-owned subsidiary.
Effective June 2, 1997, UNUM completed a two-for-one common stock split as
discussed in Item 8, Note 10 "Stockholders' Equity." Accordingly, all numbers
of common shares and per common share data have been restated to reflect the
stock split.
On October 1, 1996, UNUM America and 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,
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 were initially reinsured on an
indemnity basis. Upon consent of the TSA contractholders and participants, the
contracts are considered reinsured on an assumption basis, legally releasing
UNUM America and First UNUM from future contractual obligation to the
respective contractholders and participants. As of December 31, 1997, consents
for assumption reinsurance have been received relating to approximately 92% of
assets under management.
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 0.7311.462 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 11.422.8 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.
UNUM reports its operations principallyPremiums for insurance products described in six business segments: Employee
Benefits, Related Businesses, Colonial Companies, Individualthe following sections are
based on expected morbidity, mortality and persistency, as well as on
assumptions concerning operating expenses and investment income.
1
B. Disability Retirement Security and Other Operations. Corporate includes transactions which
are generally non-insurance related, expenses incurred in connection with UNUM's
long-term strategic investment in Japan, and interest expense on corporate
borrowings.
Refer to Item 7 and Item 8 (Note 16) for more information.
B. EMPLOYEE BENEFITS SEGMENTInsurance Segment
The Employee BenefitsDisability Insurance segment, which in 19941997 accounted for 47.3%58% of
UNUM's revenues and 129.8% 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 STD, ID, disability reinsurance operations and long term care insurance.
UNUM America and First UNUM:
UNUM America and First UNUM market their group life and other specialtyindividual insurance
products, included in the Disability Insurance and Special Risk Insurance
segments, through a network of 45 offices in the United States and Canada
utilizing brokers to employers.distribute these products. As of December 31, 1997, these
branch offices were organized into five regions and were staffed with
approximately 1,040 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 educators, consultants, health care providers,
accountants and engineers. Since 1976, UNUM hasAmerica and First UNUM combined
have been the nation'sUnited States' leading provider of group LTD based on inforce
cases and premium according to EMPLOYEE BENEFIT PLAN REVIEW,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 a certain age 65-70.between 65 and 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 forThe group LTD insurance are based uponproduct is sold primarily on a basis permitting periodic
repricing. This enables UNUM to adjust the expected mortality,
morbiditypricing of its products to more
closely align with the underlying claims experience and persistency of the insured group as well as assumptions concerning
operating expenses and future interest rates.
UNUM's group life insurance product provides term insurance for employees.
It is marketed primarily to executive, administrative and management personnel.
As reported by EMPLOYEE BENEFIT PLAN REVIEW FOR 1993, the most recent available
data, UNUM was the third largest writer of group life insurance, based on number
of contracts inforce.rate
environment.
Group short term disability insurance ("Short Term Disability
Group STD")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,Employee Benefit Plan Review, UNUM was one ofAmerica and First UNUM combined were the
top five providers of group STD for 1993,1996 based on premium and number of lives
inforce.inforce
lives.
Individual Disability
ID products provide coverage for loss of income in the event of
disability. Sales are targeted to professionals, corporate executives, business
owners and administrative support personnel. As reported in the Life Insurance
Marketing Research Association's 1996 Individual Health Issues and Inforce
Survey for the United States and Canada, UNUM markets other employee benefits products including accidental deathAmerica and dismemberment,First UNUM combined
were the fourth largest providers of individual disability income policies
measured by inforce premium.
Effective December 31, 1996, UNUM America and dental insurance.Centre Life Reinsurance
Limited ("Centre Re"), a Bermuda-based reinsurance specialist, entered into an
agreement for reinsurance coverage of the active life reserves of UNUM
America's existing United States non-cancellable ID block of business. This
agreement does not reinsure any claims incurred prior to January 1, 1996. The
agreement follows UNUM's flexible benefitsannouncement in late 1994 that it would no longer
market the non-cancellable form of ID coverage in the United States. For a
detailed discussion of the reinsurance agreement refer to Item 8 Note 6
"Reinsurance."
UNUM announced in November 1994 that it would discontinue sales of the
traditional, fixed price, non-cancellable ID product ("non-cancellable
product") in the United States upon introduction of a new ID 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
UNUM cannot refuse to renew any policy, but it does reserve the right to
increase premiums for inforce
2
UNUM Corporation and Subsidiaries
policies. This right to change premiums is, or may be, subject to various state
insurance department rules, regulations and approvals.
The LDP product provides employees withbenefits and transitional support for moderate
disabilities, while providing richer benefits for severe disabilities. Various
options are available that permit tailoring insurance coverage to the opportunityspecific
client's needs. The most common options include up to allocate benefit dollars among60% base income
replacement coverage, an option to purchase up to 40% further coverage in the
various
combinationsevent of employee benefits products.
Employee Benefits' group insurance is sold primarily oncatastrophic injury or illness involving the loss of two or more
Activities of Daily Living, (e.g. bathing, dressing, feeding independently) and
an automatic option to convert to a basislong 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
permits
annual repricing. This enables UNUM to adjustprovide reimbursement for business overhead expenses incurred during a period
of disability.
Following the pricingcompletion of its merger with Commercial Life, UNUM America
is a leading provider of disability insurance in the association marketplace,
offering disability income coverage to members of professional associations.
UNUM introduced new conditionally renewable products to
more closely matchfor sale through its
association channel in the underlying claim experience and interest rate
environment.first quarter of 1997, which were available in 41
states at December 31, 1997.
LTD Reinsurance
UNUM markets its Employee Benefits'America assumes certain insurance productsrisks through long term disability
reinsurance operations managed by Duncanson & Holt Services Inc., a networkleading
manager of 33 officesgroup LTD reinsurance in the United States and Canada, which distribute these productswholly-owned
subsidiary of D&H.
Long Term Care
UNUM America and First UNUM market guaranteed renewable LTC insurance on a
group and individual basis. The group LTC product is offered on an employer or
employee-paid basis to employer groups of at least 15 participants. Under group
policies employers may offer coverage to retirees and employees, as well as
spouses, parents and grandparents of those employees. Individual LTC is
marketed through independent brokers and general agents on a single customer
basis and to smaller employer groups.
LTC insurance pays a benefit when the products offered byinsured suffers the Retirement Security segment, through
brokers. Asloss of December 31, 1994, these branch offices were organized into four
regionstwo or
more Activities of Daily Living and were staffedrequires stand-by assistance of another
person or suffers cognitive impairment. Benefits are paid on an indemnity basis
that provides a daily or monthly payment, regardless of actual expenses
incurred, up to a maximum lifetime benefit. All policies cover costs related to
licensed nursing home care with approximately 590 management, sales, serviceoptions provided to add coverage for
professional and/or informal home care and administrative personnel.
Refer to Item 7 and Item 8 (Note 16) under the caption "Employeeinflation protection. Benefits Segment" for more information.
C. RELATED BUSINESSES SEGMENT
The Related Businesses segment in 1994 accounted for 15.6%start
after an elimination period, generally of UNUM's
revenues and 30.4% of its income before income taxes. The Related Businesses
segment includes90 days or less.
UNUM Limited:
UNUM Limited was the leading provider for 1996 of group LTD insurance 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 of a NEL subsidiary, N.E.L.
Permanent Health Insurances Limited (now known as UNUM Limited). In the third
quarter of 1990, UNUM announced plans to restructure the operations of its
United Kingdom acquisitionreported 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 ofERC Frankona Reassurance Ltd's annual group
long term disability insurance
in the United Kingdom.risk survey, based on premium revenue. UNUM Limited targets group long term disabilityLTD sales to
executive, administrative and management personnel, and other professionals,
and technical and skilled artisans.
These products are marketed through a network of independent brokers. UNUM
Limited's long term disability products provideproviding 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 individualsthrough a network of independent financial
advisors.
UNUM Japan:
UNUM Japan, which began operations in 1994, targets sales of group 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 groupindividual long term disability products ("LTD products") to executive,
administrative and management personnel and other professionals. The contract
terms and insurance coverage of these products are similar to those offered by
UNUM in the U.S. and are marketed through contracted independent agents and
brokers. Beginning in 1997, UNUM Japan received approval to market Credit Long
Term Disability insurance through banks and credit unions. This product
protects salaried workers from inability to make their monthly mortgage/home
lease payments in the event of disability.
UNUM Japan also receives premiums as a reinsurer of LTD products in Japan
and Hong Kong. These reinsurance treaty arrangements are primarily quota share
coinsurance. The direct insurer is subject to compliance with UNUM Japan's risk
management standards for pricing, underwriting and claims management.
3
Refer to Item 7 under the caption "Disability Insurance Segment" and Item
8 Note 16 "Segment Information" for more information.
C. Special Risk Insurance Segment
The Special Risk Insurance segment in 1997 accounted for 23% and 19% of
UNUM's revenues and income before income taxes, respectively. The Special Risk
Insurance segment includes group life, special risk accident insurance,
reinsurance underwriting management operations, non-disability reinsurance
operations and other special risk insurance products.
Windsor Life wasThe Special Risk Insurance segment's group insurance products are sold
primarily on a basis permitting periodic repricing. This enables UNUM to adjust
the thirdpricing of its products to more closely align with the underlying claims
experience and interest rate environment.
UNUM America and First UNUM's group life insurance products provide term
insurance to a broad range of employees. As reported by Employee Benefit Plan
Review for 1996, UNUM America and First UNUM combined were the fifth largest
writer of group long term disability providerlife insurance in the United Kingdom in 1993,States based on number of inforce
contracts. UNUM America and First UNUM also offer group universal life
insurance on a payroll deduction basis through a network of independent brokers
and specialty agents and term life insurance through the association group
channel. Group accidental death and dismemberment coverage is offered as reported
by Employers Re. International.
Commercial Lifea
rider on most group life insurance products.
UNUM America is also 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 employeesThese products 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"), a leading
accident and health reinsurance underwriting manager. As a reinsurance manager,
D&H provides pool management as well as marketing, underwriting, administration,
claims payment and actuarial services for client companies, but does not bear
any insurance risk.
D&H has offices throughout the United States and in London, Toronto,
Bermuda and Singapore. A leading accident and health 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
reinsurance facility management services which may include marketing,
underwriting, administration, claims payment and actuarial services for client
companies. On May 3, 1996, D&H acquired three associated reinsurance
underwriting managers specializing in accident and health business.
D&H and its subsidiaries do not bear any insurance risk, with the
exception of Duncanson & Holt Underwriters Ltd., a wholly-owned subsidiary of
Duncanson & Holt Europe Ltd. During 1995, Duncanson & Holt Europe Ltd., a
subsidiary of D&H based in the United Kingdom, was authorized by Lloyd's of
London to establish two Lloyd's Managing Agents and to acquire a third existing
Lloyd's Managing Agent. These agents manage syndicates that underwrite
primarily personal accident and other non-marine and marine classes of business
at Lloyd's of London.
Non-disability reinsurance operations include UNUM America's participation
in reinsurance facilities managed by D&H and direct reinsurance arrangements
primarily for accident and health, long term care and other special risk
business. As a member company in reinsurance facilities, UNUM America assumes a
share of the insurance risk of the facility.
Refer to Item 7 under the caption "Special Risk Insurance Segment" and
Item 8 (Note 16) under the caption "Related Businesses
Segment"Note 16 "Segment Information" for more information.
D. COLONIAL COMPANIES SEGMENTColonial Products Segment
The Colonial CompaniesProducts segment in 19941997 accounted for 13.1%14% and 18% of UNUM's
revenues and 31.6% of its income before income taxes.taxes, respectively. 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 benefitsemployee benefit products to employees at their
worksites. Colonial Life focuses on personalworksites, which includes accident and sickness, disability, cancer and life
products. Colonial markets its products nationwide through a 9,500-member
independent contractor sales force and cancer insurance plans.through collaborative sales with UNUM
America. All Colonial Life'sproducts are purchased solely with employee funds.
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. All of Colonial
Life's insurance policies are issued on a nonparticipating basis.
More than 95% of Colonial Life'sbenefits.
4
UNUM Corporation and Subsidiaries
Colonial's premiums for 19941997 were primarily 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 "guaranteedguaranteed renewable for life" basis,
which means that Colonial Life cannot refuse to renew any policy, but it does reserve the
right on a product-by-product basis to increase premiums for inforce policies.
This right to change premiums is, or may be, subject to various state insurance
department rules, regulations and approvals.
Since 1985, Colonial Life has marketedmarkets its accident and health products as qualified fringe
benefits that can be purchased with pretax employee dollars as part of a
flexible benefits program pursuant to Section 125 of the Internal Revenue Code.
In 1994,1997, 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 mightcould change the tax laws to limit or eliminate fringe
benefits available on a pretax basis, and such a change could limit or
eliminate Colonial Life'seliminating Colonial's ability to
continue marketing its products in this way,way. However, Colonial Life believes its
products provide policyholders value, which will remain even if the tax
advantages offered by flexible benefit programs are eliminated.
During 1997, Colonial formed a strategic marketing alliance with The
Lincoln National 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 servicesInsurance Company ("Lincoln Life") in order to create
cross-selling opportunities in the worksite market. In addition, Colonial
coinsures and systems, claims processing, policyholder services, and employer services.
Colonial Companies' subsidiary, BenefitAmerica, Inc. ("BenefitAmerica"),
offers employers administrative services for their employee benefit programs.
The services offered by BenefitAmerica include claims adjudication and payment
for reimbursement plans, which are offered under an employer's flexible benefits
plan pursuant to Section 125administers Lincoln Life's existing block 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.worksite-marketed
universal life insurance.
Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial CompaniesProducts Segment" and Item 8
Note 16 "Segment Information" for more information.
E. INDIVIDUAL DISABILITY SEGMENTRetirement Products Segment
The Individual DisabilityRetirement Products segment in 1997 accounted for 12.2%5% and 14% of UNUM's
revenues and (94.8)% of its income before income taxes, in 1994. This segment's products
provide coverage for loss of income for professionals, corporate executives,
business owners and administrative support personnel in the event of disability.
As reported in the Life Insurance Marketing Research Association's 1993
INDIVIDUAL HEALTH ISSUES AND INFORCE SURVEY for the United States, the most
recent available data, UNUM was the fourth largest provider of individual
disability income policies measured by premium inforce.
UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to state
regulatory approval, UNUM expects to introduce the new disability products to
most states during the second quarter of 1995.
Until the new products are introduced, UNUM will continue to sell individual
disability products on a non-cancellable basis, with a fixed premium for the
duration of the policy. The basic individual disability policy provides the
insured with a portion of the earned income which is lost as a result of
sickness or injury. Monthly benefits available range from 30% to 70% of the
insured's earned income up to a specified maximum benefit. Various options are
available that permit tailoring of an insurance policy to the specific client's
needs. The most common options include the length of period before benefits are
paid, the length of the benefit period, partial disability payments, and
cost-of-living adjustments, college benefits and retirement benefits. UNUM also
markets buy/sell and key person coverage and policies that provide reimbursement
for business overhead expenses incurred during a period of disability.
Individual Disability insurance premium rates are based on expected mortality,
morbidity and persistency as well as assumptions concerning policy related
expenses, inflation and investment income.
UNUM currently distributes this segment's products in the United States and
Canada through a branch office system of Individual Disability sales
consultants, who distribute these products as well as products offered by the
Retirement Security Segment, through brokers and agents. UNUM has a network of
36 Individual Disability offices in the United States that are staffed with
approximately 105 management, sales, service and administrative employees.
Another 11 sales offices, staffed by approximately 39 employees, are located
throughout Canada.
Refer to Item 7 and Item 8 (Note 16) under the caption "Individual
Disability Segment" for more information.
F. RETIREMENT SECURITY SEGMENT
The Retirement Security segment accounted for 8.0% of UNUM's revenues and
12.9% of its income before income taxes in 1994. This segment markets and
services tax-sheltered annuities ("TSA"), long term care insurance and lifestyle
security protection ("LSP") products.
TSA products (Section 403(b) plans under the Internal Revenue Code) are
marketed to non-profit hospitals and organizations. These contracts offer a
fixed fund which provides for annual renewable guarantees of principal and
interest. In addition, some TSA contracts offer variable annuity investment
alternatives. These investment alternatives are mutual funds offered as
subaccounts in a UNUM separate account. The mutual funds, managed by nationally
recognized investment managers, include a variety of choices such as growth,
balanced and stock index funds. UNUM also offers recordkeeping and reporting
services to TSA contractholders.
LSP products are marketed to employers to supplement their employees'
retirement planning needs. It provides plan participants with insurance coverage
for retirement savings in the event of the inability to continue retirement
contributions due to death or disability.
UNUM markets its TSA and LSP products through a network of 13 offices in the
United States, which distribute these products as well as the products offered
by the Employee Benefits segment, primarily through brokers.
UNUM markets long term care insurance to employer groups, continuing care
retirement communities and individuals. The group product is offered on an
employer or employee paid basis, and employer groups may offer coverage to
retirees, spouses, parents and grandparents, in addition to the employee. UNUM
distributes long term care products in the United States through brokers and
agents from the branch office system as described in the Employee Benefits and
Individual Disability Segments.
Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement Security
Segment" for more information.
G. OTHER OPERATIONS SEGMENT
The Other Operations segment accounted for 3.6% of UNUM's revenues and 4.3%
of its income before income taxes in 1994.respectively. 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 areproducts no longer actively marketed by UNUM.
In the fourth quarter of 1991, UNUM announcedincluding: TSAs, guaranteed
investment contracts, deposit administration accounts, 401(k) plans, to withdraw from the
401(k) market by the end of 1992. UNUM has transferred 401(k) service
responsibilities to its formerly wholly-owned subsidiary, Preferred Benefits
Corporation, which was sold in the second quarter of 1992.
UNUM discontinued active marketing of GICs and DAs primarily due to the lack
of demand and the level of investment risk. UNUM discontinued new sales of
universal life and other individual life policies as of January 1, 1988. UNUM
began exiting the group medical product line in 1987 with the discontinuance of
new sales on the traditional group medical product. In 1990, management
announced its intention to exit the group medical product entirely. Beginning
with
the February 1991 renewals, policyholders had the option of transferring their
group medical product to another insurer. UNUM services commitments to inforce
policyholders, which include conversions of group
life and group medical insurance. On October 1, 1996, UNUM America and First
UNUM closed the sale of their respective TSA businesses to Lincoln, as
discussed in Item 1 A, "Description of Business."
Refer to Item 7 under the caption "Retirement Products Segment" and Item 8
(Note 16) under the caption "Other Operations
Segment"Note 16 "Segment Information" 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.
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,
1994,1997, and 1993,1996, were as follows:
Geographic Region
GEOGRAPHIC REGION
1994 1993
----------- -----------1997 1996
---------- ----------
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 16.2England ................. 12.8% 12.4%
Mid-Atlantic ................ 12.0 12.7
South Atlantic .............. 19.1 16.1
Mountain .................... 6.0 7.5
Pacific ..................... 15.9 15.7
West South Central .......... 5.7 6.8
East South Central .......... 10.7 5.4
West North Central........................... 16.0 15.1
Farm Belt............................... 9.5 9.9
Oil Patch............................... 8.0 7.6Central .......... 13.1 11.3
East North Central .......... 4.6 12.0
Other ....................... 0.1 0.1
----- -----
Total...............................Total ..................... 100.0% 100.0%
----- -----
----- -----===== =====
Property Type
PROPERTY TYPE
1994 1993
----------- -----------1997 1996
---------- ----------
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............................Building ........... 24.6% 26.1%
Retail .................... 28.1 33.0
Industrial ................ 32.2 27.1
Apartment ................. 10.6 8.2
Hotel/Motel ............... 2.7 3.6
Hotel/Motel............................. 5.8 5.5
Other................................... 1.2 1.33.8
1-4 Family ................ -- 0.1
Other Commercial .......... 1.8 1.7
----- -----
Total...............................Total ................... 100.0% 100.0%
----- -----
----- -----===== =====
5
Mortgage loans delinquent 60 days or more on a contract delinquency basis
by geographic region and property type were as follows at December 31, 1994,1997,
and 1993 (Dollars1996 (dollars in millions):
Geographic Region
GEOGRAPHIC REGION
1994 19931997 1996
--------- -----------------
New England..................................England ................. $ 15.72.9 $ 15.7
Mid-Atlantic.................................--
Mid-Atlantic ................ -- 3.5
4.6
Southwest....................................West North Central .......... 5.0 --
2.7
Pacific...................................... 0.9 3.1East North Central................................ 2.2Central .......... -- --------- ---------
Total....................................2.1
------ ----
Total ..................... $ 22.37.9 $ 26.1
--------- ---------
--------- ---------5.6
====== =====
Property Type
PROPERTY TYPE
1994 19931997 1996
--------- -----------------
Office Building..............................Building .......... $ 22.32.9 $ 23.4
Retail....................................... --
2.7
--------- ---------
Total....................................Retail ................... 5.0 5.6
------ ----
Total .................. $ 22.37.9 $ 26.1
--------- ---------
--------- ---------5.6
====== =====
Impaired loans by geographic region and property type were as follows at
December 31, 1997, and 1996 (dollars in millions):
Geographic Region
1997 1996
---------- ----------
New England ................. $ 14.3 $ 14.6
Mid-Atlantic ................ 8.2 8.4
South Atlantic .............. -- 9.1
Mountain .................... 8.6 8.8
West South Central .......... 4.7 4.8
West North Central .......... 7.6 2.6
East North Central .......... -- 2.1
------- -------
$ 43.4 $ 50.4
======= =======
Property Type
1997 1996
---------- ----------
Office Building .......... $ 29.7 $ 22.0
Retail ................... 13.7 18.2
Industrial ............... -- 10.2
------- -------
Total .................. $ 43.4 $ 50.4
======= =======
Restructured mortgage loans by geographic region and property type were as
follows at December 31, 1994,1997, and 1993 (Dollars1996 (dollars in millions):
Geographic Region
GEOGRAPHIC REGION
1994 19931997 1996
--------- ---------
New England..................................England ................. $ 0.7 $ 0.7
South Atlantic .............. 7.6 13.3
Mountain .................... 3.3 7.7
Pacific ..................... 7.8 7.9
West South Central .......... 2.5 2.5
West North Central .......... 3.7 8.7
East North Central .......... 13.7 14.0
------ ------
Total ..................... $ 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....................................39.3 $ 73.6 $ 65.9
--------- ---------
--------- ---------54.8
====== ======
Property Type
PROPERTY TYPE
1994 1993
--------- ---------1997 1996
---------- ----------
Office Building..............................Building .......... $ 32.223.8 $ 31.5
Retail....................................... 12.8 8.5
Industrial................................... 8.6 7.6
Residential.................................. 7.1 6.224.3
Retail ................... 12.3 12.5
Industrial ............... 0.9 5.8
Apartment ................ -- 4.4
Hotel/Motel.................................. 2.4 --
Other........................................ 10.5 12.1
--------- ---------
Total....................................Motel .............. 2.3 7.8
------- -------
Total .................. $ 73.639.3 $ 65.9
--------- ---------
--------- ---------54.8
======= =======
Potential problem mortgage loans are defined by UNUM as currentG. Risk Management and performing loans with which management has some concerns about the ability of
the borrower to comply with present loan terms and whose book value exceeds the
market value of the underlying collateral. Potential problem loans by geographic
region and property type were as follows at December 31, 1994, and 1993 (Dollars
in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 3.4 $ 6.2
Mid-Atlantic................................. 9.3 31.3
Southeast.................................... 6.3 3.1
Southwest.................................... 1.5 2.2
Oil Patch.................................... 4.9 3.5
Pacific...................................... 4.1 17.4
North Central................................ 0.8 22.1
Farm Belt.................................... 5.9 6.9
--------- ---------
Total.................................... $ 36.2 $ 92.7
--------- ---------
--------- ---------
PROPERTY TYPE
1994 1993
--------- ---------
Office Building.............................. $ 17.2 $ 25.9
Industrial................................... -- 25.5
Retail....................................... 0.7 20.7
Residential.................................. 2.2 --
Hotel/Motel.................................. 11.5 18.3
Medical...................................... 4.6 2.3
--------- ---------
Total.................................... $ 36.2 $ 92.7
--------- ---------
--------- ---------
I. RISK MANAGEMENT AND REINSURANCEReinsurance
Risk management, which 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 controldetermination of claims. UNUM hasclaim liability. UNUM's underwriters organized within business
segments who
evaluate policy applications on the basis of information provided by the
applicant and other sources. The underwriters are responsible for specific
products and are further specialized by geographic sales region.
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. In the Employee Benefits segment, UNUM has underwritersdoes not generally reinsure
risk on a product-specific basis for each major
product line. Quotes for prospective customers are based on UNUM's experience
with the profitability and persistency of the respective employer's risk
category. The maximum group LTD, and group STD monthly benefit varies, but the
usual maximum monthly amount available is $35,000 and $2,500, respectively.or association group
disability. For group lifeother insurance products, UNUM retains up to $750,000 per individual life
and reinsures the balance with other insurance carriers.
Colonial Life has reinsurance on its cancer insurance products that provides
coverage for claim payments in excess of $50,000 in any one year, per claimant,
up to a lifetime maximum of $1 million per claimant.
The financial and medical underwriting areas of UNUM Limited handle the
underwriting of group and individual disability policies and group life
policies. The maximum yearly benefit for group LTD is 326,000 pounds
sterling. UNUM Limited retains 75,000 pounds sterling of this risk and
reinsures the balance. The maximum yearly initial benefit for individual
disability insurance is 125,000 pounds sterling andbenefits over various
amounts, over 40,000 pounds
sterling per annum are reinsured. On group life business, UNUM Limited retains
60% of the risk up to a maximum of 150,000 pounds sterling per individual life.
Commercial Life reinsures the risk on its accidental death and dismemberment
contracts that exceed $400,000 on any one life. Commercial Life also reinsures
the risk on individual, group, and franchise life contracts that exceed $250,000
on any one life.
UNUM requires medical examinations, financial data, and other information to
make a decisiondepending on the acceptabilitytype of the individual risk and to appropriately
classify an applicant for individual disability insurance products. On new sales
of the existing non-cancellable product, UNUM retains up to $8,000 plus 25% of
amounts in excess of $8,000 basic monthly indemnity per life for personal
disability coverages, $20,000 plus 25% of amounts in excess of $20,000 per life
for business overhead expenses coverages and $500,000 per life for buy/sell
coverages. UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to regulatory
approval, UNUM expects to introduce new disability products to most states
during the second quarter of 1995.
UNUM (except for Colonial Life) reinsures the risk of individual life
insurance contracts that exceed $425,000 on any one life. Colonial Life limits
its risk for death and dismemberment benefits to $100,000 per life.
coverage.
In addition to theproduct-specific reinsurance arrangements, above, UNUM (except for Colonial
Life, UNUM Limited and Commercial Life) isUNUM's insurance
companies are covered by catastrophe reinsurance, which providesproviding additional
protection against aggregate losses in excess of $1 million up to a
6
UNUM Corporation and Subsidiaries
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 oflife, or personal accident contracts.
During 1996, UNUM America and First UNUM.
Reinsuranceentered into an agreement for reinsurance
coverage of the active life reserves of its existing United States
non-cancellable ID block of business. This agreement does not reinsure any
claims incurred prior to January 1, 1996. For more information on this
reinsurance agreement refer to Item 8 Note 6 "Reinsurance."
Total reinsurance premiums assumed and ceded for the year ended December
31, 1994,1997, were $170.7$281.6 million and $112.5$402.8 million, respectively. No currentCurrent or
planned reinsurance activity is not expected to have a significant impact on
theUNUM's ability of
UNUM to underwrite additional insurance.
J. RESERVESH. Reserves
The 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 specifiedin statutory financial
statements. Statutory reserves are subject to minimum reserves established by
the laws of the various states and those carried in the statutory financial statements.states. The differences between GAAP and statutory
reserves arise from the use of different morbidity, mortality, morbidity, interest,
expense and lapse assumptions.
Pursuant to insurance laws of the states of Maine, New York and South
Carolina, and Wisconsin,as well as the United Kingdom, Japan and of Japan,Argentina, UNUM's insurance
subsidiaries (UNUM America, First UNUM, Colonial, Life, Commercial Life, UNUM Limited, and UNUM Japan and
Boston Seguros, respectively) set up statutory reserves, carried as
liabilities, to meet obligations on their various policies. These statutory
reserves, are amounts
which, together with premiums to be received and interest based on such reserves at
assumed rates,statutory assumptions,
are calculated to be sufficient to meet the policy and contract obligations of UNUM's insurance
subsidiaries.subsidiaries that result from using statutory assumptions. 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 towith actual
experience. The assumptions aremay be revised when it is determined that future
expected experience differs from the assumed estimates.
K. EMPLOYEESI. Employees
At December 31, 1994,1997, UNUM had approximately 7,200 full-time employees.
UNUM
does not have collective bargaining agreements with employees.
L. COMPETITIONSome employees in Argentina, comprising less than 1% of UNUM's total workforce,
are members of a union.
J. Competition
The principal competitive factors affecting all of UNUM's business are
reputation, financial strength, quality of service, risk management expertise,
distribution, product design and price. There is competition among insurance
companies for the types of group and individual and group insurance and retirement products sold by
UNUM. At the end of 1994,1997, there were approximately 1,900more than 1,700 legal reserve life
insurance companies in the United States and Canada, andmore than 200 life
assurance offices in the United Kingdom, whichapproximately 100 life and non-life
insurance companies in Japan, and more than 200 insurance companies in
Argentina. 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 group
insurance are 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, Japanese and JapaneseArgentine
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, content and contentfrequency 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, Japan and Japan,Argentina, as applicable.
UNUM's United States domiciled insurance subsidiaries are required to file
quarterly and annual statements with the various insurance departments in state
jurisdictions in which they do business. These statements comply with the rules
of the National Association of Insurance Commissioners ("NAIC"). UNUM's
insurance subsidiaries are examined periodically by examiners of the states of
Maine, New York, South Carolina and Wisconsin and of other states (on an
"association"
or "zone" basis) in which they are licensed to do business. UNUM's insurance
branch operation in Canada is periodically examined by Canadian insurance
regulatory authorities and is required to file annual reports that comply with
the insurance laws of Canada and with the rules of the OSFI of the Canadian
Federal government and each of the provinces. UNUM's United Kingdom subsidiary
is required to file financial statements annually with the DTI, in accordance
with United Kingdom law and regulation. UNUM Japan is required to file periodic
financial statements with the MOF, in accordance with Japanese laws and
regulations.
UNUM's insurance subsidiaries operate under insurance laws which require that they
establish and carry, as liabilities, actuarialstatutory reserves to meet their
obligations on
their disability, life, disability, accident and health policies and annuities. These
reserves are verified periodically by various regulators. UNUM's reinsurance underwriting manager, Duncanson & Holt, Inc., ("D&H") is
a licensed reinsurance intermediary in New York. It is subject to regulation in
New Yorkdomestic
insurance subsidiaries are examined periodically by examiners from their states
of domicile and by other states where it doesin which they are licensed to conduct business.
Duncanson & Holt Underwriters,
Ltd., a subsidiary of D&H, is a corporate member of Lloyds of London and is
subject to all rules applicable to such members.
UNUM Sales Corporation, a registered broker-dealer, is regulated by the
National Association of Securities Dealers, Inc. and the Securities and Exchange
Commission. It is the principal underwriter for variable annuity contracts
offered by UNUM America and First UNUM.7
The laws of the State of Maine require periodic registration and reporting
by insurance companies domiciled within its jurisdiction whichthat 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
UNUMUNUM's
domestic 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, the required deposit was $819.2 million.
UNUM America has the ability to withdraw assets from this account and to
substitute other assets at its discretion. The balance of the security deposit
will be reviewed and adjusted at least annually based upon the outstanding
liabilities described above.
N. PARTICIPATION FUND ACCOUNTL. Participation Fund Account
Participating policies issued prior to November 14, 1986, by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to November 14, 1986, the date of UNUM's
demutualization, 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, 1994,1997, the PFA had $347.0approximately $367 million in
assets, which are held by UNUM America. UNUM has
agreedAmerica, the successor to pay certain expenses associated with the PFA and at December 31, 1994,
the reserve for the present value of such expenses was $15.9 million.Union Mutual.
PFA assets, investment earnings and income from operations are not
available to UNUM America or UNUM during the operation or upon the termination of the
PFA. In the unlikely event that the assets of the PFA are not adequate to provide
for policyholder benefits (exclusive of dividends, which are not guaranteed),
UNUM America would be required to provide for any shortfall, and such amounts,
if any, would reduce earnings of UNUM America and UNUM.
All operating data of the individual participating life and annuity
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 buildingbuildings in the United Kingdom, South Carolina and Argentina, which
isserve as the home officeoffices of UNUM
Limited. The home office ofLimited, the Colonial Companies is located in Columbia, South
Carolina, and is also owned by UNUM.Boston
Seguros, respectively. In addition, UNUM leases office space, on periods
principally from five to ten years, office and warehouse space for use by its home office, affiliates and
sales forces.
ITEM 3. LEGAL PROCEEDINGS
In the normal courseItem 3--Legal Proceedings
Refer to Item 8 Note 15 "Litigation" for information on legal proceedings.
Item 4--Submission of its business operations, UNUM is involved in
litigation from timeMatters to time with claimants, beneficiaries and others, and a numberVote of lawsuits were pending at December 31, 1994. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position or the consolidated operating results of UNUM.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSecurity Holders
No matter was submitted to a vote of shareholders, through solicitation of
proxies or otherwise, during the fourth quarter 1994.of 1997.
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, 1994,1997, there were 25,28022,548 shareholders of record of common stock.
Information concerning restrictions on the ability of UNUM's subsidiariesaffiliates to
transfer funds to UNUM in the form of cash dividends is described in Item 8
(Note 14).Note 11 "Dividend Restrictions."
The market price (as quoted by the New York Stock Exchange) and cash
dividends paid, per share of UNUM's common stock, by calendar quarter for the
past two years were as follows:
1994 1993
------------------------------------------ ------------------------------------------1997 1996
--------------------------------------------------- ---------------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
--------------------------------------------------------------------------------------------------------------------------------
High....................................High .............. $ 46.87554.438 $ 50.00048.250 $ 56.75046.500 $ 58.00039.813 $ 54.75036.750 $ 60.12533.000 $ 57.75031.500 $ 58.375
Low.....................................30.938
Low ............... $ 35.12545.125 $ 43.00040.688 $ 44.50033.625 $ 48.00035.313 $ 47.75030.500 $ 53.25028.375 $ 51.00027.750 $ 49.250
Close...................................27.375
Close ............. $ 37.75054.375 $ 46.00045.625 $ 44.75042.250 $ 52.75036.500 $ 52.50036.125 $ 54.50032.063 $ 54.00031.125 $ 56.50029.750
Dividend Paid...........................Paid ..... $ 0.240.1425 $ 0.240.1425 $ 0.240.1425 $ 0.200.1375 $ 0.200.1375 $ 0.200.1375 $ 0.20 $0.16 1/0.1375 $ 0.1325
8
UNUM Corporation and Subsidiaries
Item 6--Selected Financial Data
The following should be read in conjunction with UNUM's Consolidated
Financial Statements and related notes reported in Item 8. On June 2,
ITEM 6. SELECTED FINANCIAL DATA1997,
UNUM CORPORATION AND SUBSIDIARIEScompleted a two-for-one common stock split. Accordingly, all numbers of
common shares and per common share data have been restated to reflect the stock
split.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in millions, except per common share data)
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
1992 1991 1990 1989 1988 1987
----------------------------------------------------------------------------------------------------------------------------------------------- --------------- --------------- --------------- ---------------
INCOME STATEMENT DATAIncome Statement Data
Revenues:
Premiums and fees and other income (expense):
Employee Benefits $1,451.4 $1,362.6 $1,116.2 $1,000.0income:
Disability Insurance Segment ...................... $ 909.81,882.6 $ 769.31,917.7 $ 723.31,879.9 $ 670.5
Related Businesses 477.5 402.5 354.4 324.2 269.2 192.9 -- --1,716.2 $ 1,547.9
Special Risk Insurance Segment .................... 878.6 755.4 702.3 607.1 559.4
Colonial CompaniesProducts Segment ......................... 530.8 498.2 475.1 441.3 407.4
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 ....................... 130.3 65.8 34.1 31.4 42.5
Corporate ......................................... 0.1 -- 0.1 0.8 --
0.8 -- (0.1) 0.2 0.1 0.9
------------------------------------------------------------------------------------------------------------------------------------------ ------------ ---------- ---------- -----------
Total premiums and fees and other income 2,807.9........... 3,422.4 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):income: (a)
Employee Benefits 263.5 234.7 234.4 196.1 176.5 160.8 151.3 133.7
Related Businesses 89.6 85.5 91.6 95.3 63.5 38.3 -- --Disability Insurance Segment ...................... 468.0 468.5 592.9 400.3 369.8
Special Risk Insurance Segment .................... 68.4 56.5 48.4 40.7 34.8
Colonial CompaniesProducts Segment ......................... 57.6 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 64.1Retirement Products Segment ....................... 54.4 46.2
Retirement Security 226.9 235.5 228.8 227.8 209.6 196.8 172.4 157.6
Other Operations 114.4 154.0 181.6 184.9 218.0 227.8 240.7 260.6217.2 323.7 338.0 387.6
Corporate ......................................... 5.9 16.1 14.2 4.2 6.2
3.9 1.5 (9.0) 6.0 20.3 19.1
------------------------------------------------------------------------------------------------------------------------------------------ ------------ ---------- ---------- -----------
Total net investment income ........................ 654.3 805.6 1,031.4 815.8 839.8
850.7 811.6 751.1 720.5 661.4 636.2
------------------------------------------------------------------------------------------------------------------------------------------ ------------ ---------- ---------- -----------
Total revenues 3,623.7..................................... 4,076.7 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 ...................... 2,037.9 2,170.9 2,255.8 2,060.3 1,603.6
Special Risk Insurance Segment .................... 845.7 732.7 690.4 581.9 555.3
Colonial CompaniesProducts Segment ......................... 489.6 453.1 439.6 411.2 378.4
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 ....................... 108.5 281.6 312.3 327.4 375.8
Corporate ......................................... 58.6 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........................ 3,540.3 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 ...................... 312.7 215.3 217.0 56.2 314.1
Special Risk Insurance Segment .................... 101.3 79.2 60.3 57.3 53.4 61.1 34.4 17.8 -- --65.9 38.9
Colonial CompaniesProducts Segment ......................... 98.8 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 ....................... 76.2 1.4 45.5 42.0 54.3
Corporate ......................................... (52.6) (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 ..................... 536.4 341.6 381.9 198.6 460.3
398.5 319.6 278.7 236.5 189.0 111.5
--------------------------------------------------------------------------------------------------------------------------------
Income taxes (credit)....................................... 166.1 103.6 100.8 43.9 148.3 107.3 74.3 60.9 51.1 30.1 (4.7)
--------------------------------------------------------------------------------------------------------------------------------
Cumulative effects of accounting changes -- (12.1)(b)........... -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------------------(12.1)(b)
------------ ------------ ------------ ------------ -----------
Net income ......................................... $ 370.3 $ 238.0 $ 281.1 $ 154.7 $ 299.9
$ 291.2 $ 245.3 $ 217.8 $ 185.4 $ 158.9 $ 116.2
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------============ ============ ============ ============ ===========
Per common share:
Net income $2.09 $3.81(b) $3.71 $3.15 $2.73 $2.03 $1.57 $1.06income--basic .................................. $ 2.65 $ 1.63 $ 1.93 $ 1.04 $ 1.90
Net income--diluted ................................ $ 2.59 $ 1.61 $ 1.92 $ 1.04 $ 1.88
Dividends paid $0.92 $0.76-1/2 $0.62-1/2 $0.49 $0.37-1/2 $0.28-1/2 $0.23 $0.20
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
(a) Includes investment income and net realized investment gains.
(b) Effective January 1, 1993, UNUM adopted Financial Accounting Standard No.
106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," which decreased net income by $32.1 million, or $0.40 per share,
and Financial Accounting Standard No. 109, "Accounting for Income Taxes,"
which increased net income by $20.0 million, or $0.25 per share...................................... $ 0.5650 $ 0.5450 $ 0.5175 $ 0.4600 $ 0.3825
============ ============ ============ ============ ============
- --------
(a) Includes investment income and net realized investment gains (losses).
(b) Effective January 1, 1993, UNUM CORPORATION AND SUBSIDIARIESadopted Financial Accounting Standard No.
106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," which decreased net income by $32.1 million and Financial
Accounting Standard No. 109, "Accounting for Income Taxes," which
increased net income by $20.0 million.
9
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars and shares in millions)
December 31,
------------
(DOLLARS AND SHARES IN MILLIONS)--------------------------------------------------------------------------
1997 1996 1995 1994 1993
1992 1991 1990 1989 1988 1987 1986 1985
-----------------------------------------------------------------------------------------------------------------------------Balance Sheet Data -------------- -------------- -------------- -------------- --------------
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............................................. $ 13,200.3 $ 15,467.5 $ 14,787.8 $ 13,127.2 $ 12,437.3
Long-term debt ..................................... $ 509.2 $ 409.2 $ 457.3 $ 182.1 $ 128.6
$ 77.2 $ 51.5 $ 77.2 $ 1.5 $ 1.5 $ 1.7 $ 1.4 --
Stockholders' equity ............................... $ 2,434.8 $ 2,263.1 $ 2,302.9 $ 1,915.4 $ 2,102.7
$ 2,010.9 $ 1,755.5 $ 1,490.1 $1,445.0 $1,512.3 $1,463.8 $1,471.1 $ 770.0(a)
Shares outstanding 72.4 76.0 79.1 78.2 77.4 82.0 96.8 104.2 111.4 NA(a)................................. 138.3 143.6 146.0 144.8 152.0
Weighted average shares outstanding during the year 74.2 78.8 78.5 77.8 79.9 91.4 101.3 109.1 NA(a) NA(a)
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
(a) In November 1986, UNUM converted to a stock company from a mutual company.year:
Basic ............................................. 139.9 145.9 145.4 148.3 157.6
Diluted ........................................... 142.9 148.0 146.6 149.5 159.3
10
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
OPERATIONS
This management'sUNUM Corporation and Subsidiaries
Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis reviews the consolidated financial
condition of UNUM at December 31, 1994,1997 and 1996, 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 Operationsperformance. This discussion should be read in
conjunction with the Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Selected Consolidated Financial Data.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information contained in this
discussion, or in any other written or oral statements made by UNUM, are or may
be considered as forward-looking. Forward-looking statements relate to future
operations, strategies, financial results or other developments, and contain
words or phrases such as "may," "expects," "should" or similar expressions.
Forward- looking statements are based upon estimates and assumptions that are
subject to significant business, economic and competitive uncertainties, many
of which are beyond UNUM's control or are subject to change.
Inherent in UNUM's business are certain risks and uncertainties.
Therefore, UNUM cautions the reader that revenues and income could differ
materially from those expected to occur depending on factors such as general
economic conditions including changes in interest rates and the performance of
financial markets, changes in domestic and foreign laws, regulations and taxes,
competition, industry consolidation, competitor demutualization, credit risks
and other factors. Insurance reserve liabilities can fluctuate as a result of
changes in numerous factors, and such fluctuations can have material positive
or negative effects on net income. The factors include, but are not limited to,
interest rates, incidence rates and recovery rates. Incidence and recovery
rates may be influenced by many factors, including but not limited to, the
emergence of new diseases, new trends and developments in medical treatments,
general economic and societal conditions of the markets where UNUM has
operations, and the effectiveness of risk management programs. UNUM disclaims
any obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future developments or otherwise.
CONSOLIDATED OVERVIEW
(Dollars and shares in millions,
except per common share amounts, and
percentage increase (decrease) over prior year) 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------data) 1997 % Change 1996 % Change 1995
- --------------------------------------------- ------------- ----------- ------------- ------------ -------------
REVENUESIncome Data
Revenues
Premiums $2,732.4 10.4% $2,474.1 15.5% $2,142.4................................... $ 3,188.7 2.2% $ 3,120.4 3.4% $ 3,018.2
Investment income 770.2 (2.6) 790.4 (2.3) 809.2.......................... 657.9 (18.0) 802.2 (0.5) 806.3
Net realized investment gains 45.6 (7.7) 49.4 19.0 41.5(losses) ..... (3.6) nm 3.4 (98.5) 225.1
Fees and other income 75.5 (9.1) 83.1 50.0 55.4
---------------------------------------------------------------------------------------------------------------------------...................... 233.7 nm 116.7 59.2 73.3
---------- ----- --------- ----- ---------
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
---------------------------------------------------------------------------------------------------------------------------............................ 4,076.7 0.8 4,042.7 (1.9) 4,122.9
Benefits and expenses ....................... 3,540.3 (4.3) 3,701.1 (1.1) 3,741.0
---------- ----- --------- ----- ---------
Income before cumulative effects of
accounting changes 154.7 (50.4) 312.0 7.1 291.2
CUMULATIVE EFFECTS OF ACCOUNTING CHANGESincome taxes .................. 536.4 57.0 341.6 (10.6) 381.9
Income taxes -- nm 20.0 nm --
Postretirement benefits other than pensions, net of tax -- nm (32.1) nm --
---------------------------------------------------------------------------------------------------------------------------
NET INCOME................................ 166.1 60.3 103.6 2.8 100.8
---------- ----- --------- ----- ---------
Net income ................................ $ 154.7 (48.4)370.3 55.6% $ 238.0 (15.3)% $ 299.9 3.0%281.1
========== ===== ========= ===== =========
Net income per common share:
Basic ...................................... $ 291.2
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income2.65 62.6% $ 1.63 (15.5)% $ 1.93
Diluted .................................... $ 2.59 60.9% $ 1.61 (16.1)% $ 1.92
========== ===== ========== ===== ==========
Summary of income (loss) before
cumulative effects of accounting changesincome taxes
Disability Insurance Segment ............... $ 2.09312.7 45.2% $ 3.96215.3 (0.8)% $ 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 Benefits217.0
Special Risk Insurance Segment $ 257.8 7.8% $ 239.1 7.5% $ 222.5
Related Businesses............. 101.3 27.9 79.2 31.3 60.3
Colonial Products Segment 60.3 5.2 57.3 7.3 53.4
Colonial Companies.................. 98.8 6.9 92.4 5.4 87.7
Retirement Products Segment 62.7 (10.9) 70.4 16.4 60.5
Individual Disability Segment (188.2)................ 76.2 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 16.51.4 (96.9) 45.5
Corporate (28.2) 62.1 (17.4) nm (5.7)
---------------------------------------------------------------------------------------------------------------------------.................................. (52.6) 12.6 (46.7) 63.3 (28.6)
---------- ----- ---------- ----- ----------
Total income before income taxes .......... $ 198.6 (56.9)536.4 57.0% $ 341.6 (10.6)% $ 460.3 15.5%381.9
========== ===== ========== ===== ==========
- --------
nm = not meaningful or in excess of 100%
11
(Dollars and shares in millions) 1997 1996 1995
- ------------------------------------------------------ -------------- -------------- --------------
Balance Sheet Data
Assets ............................................... $ 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 debt13,200.3 $ 182.115,467.5 $ 128.614,787.8
Notes Payable ........................................ $ 77.2635.8 $ 526.9 $ 583.8
Stockholders' equity ................................. $ 1,915.42,434.8 $ 2,102.72,263.1 $ 2,010.92,302.9
Shares outstanding 72.4 76.0 79.1................................... 138.3 143.6 146.0
Weighted average shares outstanding
during the year 74.2 78.8 78.5
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------outstanding--basic ........... 139.9 145.9 145.4
Weighted average shares outstanding--diluted ......... 142.9 148.0 146.6
CONSOLIDATED OVERVIEW
During 1994, UNUM reported decreased income before income taxes, which was
primarily attributable to unfavorable claims experience in two of UNUM's largest
product lines, individual disability as reported in the Individual Disability
segment, and group long term disability, as reported in the Employee Benefits
segment.
As further described in the Individual Disability segment, throughout 1994
UNUM's individual disability business in the United States experienced a higher
incidence of new claims and a disproportionate number of larger claims that
management has attributed to certain geographical and occupational segments,
particularly physicians. As a result, in 1994 UNUM increased reserves for
existing claims by $83.3 million and established a reserve for future estimated
losses of $109.1 million. These increased reserves reflect management's current
expectations for morbidity trends for the existing individual disability
business, as reported in the Individual Disability segment. This reserve
strengthening resulted in an increase to benefits to policyholders in the
Consolidated Statement of Income of $192.4 million and a decrease to net income
of $125.1 million, or $1.69 per share, for the year ended December 31, 1994. It
is not possible to predict whether morbidity trends will be consistent with
UNUM's current assumptions.
During 1994, UNUM's North American group long term disability results, as
reported in the Employee Benefits segment, were adversely affected through a
combination of increased incidence of new claims and an increased number of
large claims. Management continues to address these unfavorable claim trends by
increasing prices on selected new and inforce business, implementing more
stringent underwriting guidelines, and strengthening risk management programs.
Management believes these actions will strengthen UNUM's ability to deal with
these disability claims trends into the future, and that the level of future
earnings of the group long term disability product will be a function of the
effectiveness of these continuing actions 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 purchases for the past two years
remain below the existing average portfolio yield, which has decreased the
average rate used to discount disability claim reserve liabilities and decreased
levels of investment income in 1994 and 1993, despite continued growth in
invested assets. Management anticipates that the average investment portfolio
yield will further decline, since UNUM invests its cash flows in high quality
assets that currently have yields below the existing average portfolio yields.
Economic indicators at the end of 1994 and in early 1995 were predicting modest
growth in 1995 for UNUM's major markets: the United States, Canada and the
United Kingdom. In February 1995, the Federal Reserve Board tightened credit
policy, due to continued concerns about inflation, by raising the federal funds
rate to 6%, the highest level in four years. This represents an increase of
three full percentage points since the Federal Reserve Board started raising
rates in February 1994. Also in 1994, the central banks in Canada and the
United Kingdom increased interest rates. During 1994, long-term yields
increased; however, since long-term yields are based on market dynamics,
management cannot predict the impact of a higher short-term rate on future long-
term yields.
The increase in income before income taxes in 1993 was primarily due to expense
management, favorable claims experience in the Individual Disability segment and
unusually favorable interest spread margins on tax sheltered annuities in the
Retirement Security segment. Expenses of $9.6 million, or $0.12 per share,
incurred in connection with the merger of UNUM and Colonial Companies, Inc.,
included in Corporate, and unfavorable group life claims experience in the
Employee Benefits segment partially offset these results.
ACCOUNTING CHANGES
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after January
1, 1994. Upon the adoption of FAS 115, UNUM increased unrealized gains on
available for sale securities included in stockholders' equity on January 1,
1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the
unrealized holding gains on fixed maturities classified as available for sale
which were previously carried at amortized cost. In accordance with FAS 115,
prior year consolidated financial statements have not been restated to reflect
the change in accounting principle. The adoption of FAS 115 did not affect 1994
net income.
Included in 1993 net income were the cumulative and incremental effects of the
adoption of FAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions," and FAS No. 109, "Accounting for Income Taxes."
Effective January 1, 1993, UNUM adopted FAS 106, which changed the method for
recognition of the cost of postretirement benefits other than pensions from a
cash basis to an accrual basis over the years in which employees render the
related services. UNUM elected to recognize the FAS 106 liability at January 1,
1993, of $48.8 million as a cumulative effect of an accounting change which
decreased net income by $32.1 million, or $0.40 per share, in 1993. The
incremental effect of FAS 106 for 1993 was increased operating expenses of
approximately $6.0 million from 1992.
Also effective January 1, 1993, UNUM adopted FAS 109, which changed the method
for calculating and reporting deferred income taxes in the financial statements
from the deferred method to the liability method. The cumulative effect of this
accounting change amounted to a $20.0 million increase, or $0.25 per share, in
1993 net income.
UNUM also adopted FAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," effective January 1, 1993, which
resulted in an increase in other assets of $80.0 million and a corresponding
increase in future policy benefits and unpaid claims and claim expenses, but did
not affect 1993 net income.
INCOME TAXES
Effective tax rates, which reflect income tax expense as a percentage of
pretax
income before income taxes, were 22.1%31.0%, 32.2%30.3% and 26.9%26.4% for 1994, 19931997, 1996 and
1992,1995, 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 investmentsbonds and mortgages. The increase in the effective tax rate over the three year
period was primarily due to reduced tax-exempt securities result in increased consolidated net income these
investments reduce UNUM's business segments'as a percentage of income
before income taxes.
In 1993, UNUM's growthA comparison of net income is impacted by the inclusion of realized
investment gains (losses), and special items that occurred in pretax1997, 1996 and
1995. Operating income outpacedin 1997, 1996 and 1995, which excludes realized
investment gains (losses) and the growth of income from tax-
exempt securities, which resulted in an increased effective tax rate. On August
10, 1993, legislationspecial items, was enacted to increase the federal corporate income tax
rate of 34% to 35%, retroactive to January 1, 1993. The change in tax rates
resulted in a $7.8 million, or $0.10 per share, charge related to the adjustment
of deferred tax liabilities. Excluding the adjustment to deferred income tax
expense of $7.8 million for the enacted tax rate change, the 1993 effective tax
rate would have been 30.5%.
EMPLOYEE BENEFITS SEGMENTas follows:
(Dollars in millions,
and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------except per common share amounts) 1997 % Change 1996 % Change 1995
- ---------------------------------- ----------- ---------- ----------- ---------- -----------
REVENUES
Premiums
Group LTDOperating income ................. $ 966.1 3.5%341.7 13.3% $ 933.4 20.4%301.7 18.2% $ 775.2
Group life insurance 312.3 14.8 272.0 28.2 212.2
Other employee benefits 162.2 10.0 147.4 22.2 120.6
--------------------------------------------------------------------------------------------------------------------------255.2
Operating income per common share:
Basic ........................... $ 2.44 17.9% $ 2.07 17.6% $ 1.76
Diluted ......................... $ 2.39 17.2% $ 2.04 17.2% $ 1.74
This management's discussion and analysis focuses on results on a pretax
operating income basis, which is defined as income (loss) before income taxes
exclusive of realized investment gains (losses) and special items. Special
items are excluded from this discussion as management considers them to be
unusual and believes a discussion of the results on a pretax operating income
basis provides a better understanding of the results of ongoing operations. The
following table summarizes pretax operating income (loss) for the four business
segments and Corporate for the years ended December 31, 1997, 1996 and 1995,
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) 1997 % Change 1996 % Change 1995
- ----------------------------------------- ----------- ---------- ----------- ---------- -----------
Summary of pretax operating income (loss)
Disability Insurance Segment ........... $ 315.8 13.4% $ 278.4 28.2% $ 217.2
Special Risk Insurance Segment ......... 124.8 38.4 90.2 50.8 59.8
Colonial Products Segment .............. 98.8 6.6 92.7 20.7 76.8
Retirement Products Segment ............ 4.7 (65.4) 13.6 (37.3) 21.7
Corporate .............................. (51.8) 38.1 (37.5) 29.8 (28.9)
-------- ----- -------- ----- --------
Total premiums 1,440.6 6.5 1,352.8 22.1 1,108.0
Investmentpretax operating income 229.2 8.2 211.9 5.4 201.0
Net realized investment gains 34.3 50.4 22.8 (31.7) 33.4
Fees......... $ 492.3 12.6% $ 437.4 26.2% $ 346.6
======== ===== ======== ===== ========
UNUM reported increased pretax operating income for the year ended
December 31, 1997, as compared with the same period in 1996. The increase was
primarily attributable to improvements in pretax operating income for the
Disability Insurance and Special Risk Insurance segments. Both segments have
experienced strong sales and premium growth during 1997, leading to the
improvement in operating earnings. These favorable results were partially
offset by the increased pretax operating loss in Corporate, which was driven by
a reduction in investment income as UNUM utilized excess capital to repurchase
shares of its common stock. See the segment discussions that follow for a more
detailed analysis of operating results.
For the year ended December 31, 1996, as compared with the same period in
1995, UNUM reported increased pretax operating income, driven by improved
results in the Disability Insurance and Special Risk Insurance segments. These
increases were primarily the result of improved claims experience in UNUM's
core disability lines and other income 10.8 10.2 9.8 19.5 8.2
--------------------------------------------------------------------------------------------------------------------------
Total revenues 1,714.9 7.4 1,597.3 18.3 1,350.6
BENEFITS AND EXPENSES
Benefits to policyholders 1,117.0 9.7 1,018.3 26.0 808.0
Operating expenses 290.9 2.2 284.6 9.7 259.5
Commissions 108.0 10.3 97.9 10.7 88.4
Increase in deferred policy
acquisition costs (58.8) 38.0 (42.6) 53.2 (27.8)
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,457.1 7.3 1,358.2 20.4 1,128.1
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 257.8 7.8% $ 239.1 7.5% $ 222.5
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized new premiums)
Group LTD $ 218.0 $ 196.2 $ 160.0
Group life insurance $ 91.2 $ 89.4 $ 77.6
Other employee benefits $ 63.6 $ 52.9 $ 46.7
Persistency (premiums)
Group LTD 84.0% 88.7% 90.3%
Group life insurance 84.8% 89.2% 89.2%
Benefit ratio (% of premiums) 77.5% 75.3% 72.9%
Operating expense ratio (% of premiums) 20.2% 21.0% 23.4%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
EMPLOYEE BENEFITS SEGMENT
The Employee Benefits segment includes group long term disability ("group LTD"), group life, along with an increase in investment
income.
12
UNUM Corporation and other employee benefits products including short term disability,
accidental death and dismemberment and dental insurance, which are sold bySubsidiaries
Special Items in 1997
TSA Deferred Gain Recognition
On October 1, 1996, UNUM Life Insurance Company of America ("UNUM
America") and First UNUM Life Insurance Company ("First UNUM").
Increased sales closed the sale
of their respective tax-sheltered annuity ("TSA") businesses to The Lincoln
National Life Insurance Company and selected priceLincoln Life & Annuity Company of New York,
both subsidiaries of Lincoln National Corporation. The sale involved
approximately 1,700 group contractholders, assets under management of
approximately $3.3 billion and resulted in a deferred pretax gain which is
recognized in income in proportion to contractholder and participant consents
for assumption reinsurance. Refer to the caption "Retirement Products Segment"
for further information. For the year ended December 31, 1997, consent for
assumption reinsurance was provided by TSA contractholders and participants
owning approximately 92% of assets under management. During 1997, these
consents resulted in the recognition of $72.6 million of the total deferred
pretax gain of $80.8 million. The recognized gains are reflected as fees and
other income in the Retirement Products segment.
Reorganization Costs
During fourth quarter 1997, UNUM recognized $6.5 million of operating
expenses related to a management and field office reorganization within its
North American reinsurance operations, reducing income before income taxes in
the Special Risk Insurance segment. Included in the $6.5 million of costs is a
$6.0 million restructuring charge and $0.5 million of direct costs, primarily
relocation expenses. The restructuring charge of $6.0 million was comprised of
$4.0 million of lease exit costs, $1.4 million of severance related costs and
$0.6 million of abandoned assets.
Reinsurance Pool Results
During fourth quarter 1997, certain reinsurance pools managed by UNUM's
wholly-owned subsidiary, Duncanson & Holt Inc. ("D&H"), received new claim
information from ceding insurance enterprises about certain older pool years
and completed an analysis of recent claims experience deterioration. As a
result of these factors, certain pools have strengthened claim reserves. The
impact to UNUM in fourth quarter 1997 from these pool claim reserve increases
was an $11.7 million reduction in fee income and a $6.7 million increase in
benefits to policyholders in the Special Risk Insurance segment, reducing
income before income taxes by $18.4 million. The $11.7 million reduction in fee
income reflects lower profit commission levels in certain older pool years
after the pool claim reserve strengthening. The $6.7 million increase in
benefits to policyholders represents the amount of additional claim reserves
UNUM recognized as a result of its participation in the pools that strengthened
claim reserves.
Special Items in 1996
Individual Disability Reinsurance Fees
During the fourth quarter of 1996, UNUM executed a definitive reinsurance
agreement between UNUM America and Centre 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. As a result, UNUM recognized a
pretax charge of $49.7 million, reflected as operating expenses in the
Disability Insurance segment, which represents the present value of the
anticipated minimum amount of fees to be paid to Centre Re under the agreement.
For additional information regarding the reinsurance agreement see 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 TSA business,
as well as UNUM's continued efforts to strengthen its focus on newits core
products, the company initiated a review of certain products, which resulted in
the recognition of pretax charges totaling $39.4 million during third quarter
1996.
The total charges of $39.4 million included the write-off of certain
intangible assets, primarily deferred acquisition costs, totaling $17.0
million. These intangible assets were deemed unrecoverable primarily due to the
expectation of continued losses in the association group disability business.
Additionally, in conjunction with the
13
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. Losses for these
products are charged to the reserve at the time realized. The products
incorporated in the charge consist of certain discontinued special risk,
retirement and inforce casesmedical products.
For the year ended December 31, 1996, these charges reduced income before
income taxes by $13.1 million in the Disability Insurance segment, reflected as
$0.5 million of benefits to policyholders, $0.9 million of operating expenses,
and $11.7 million as a change in deferred policy acquisition costs; $11.3
million in the Special Risk Insurance segment, reflected as $6.9 million of
benefits to policyholders and $4.4 million of operating expenses; and $15.0
million in the Retirement Products segment, reflected as benefits to
policyholders.
Commercial Life Merger and Integration Costs
During the third quarter of 1996, actions related to the merger of
Commercial Life into UNUM America resulted in a $10.1 million increase in
operating expenses for Corporate. The $10.1 million charge consisted of $2.9
million of direct costs incurred and the recording of a $7.2 million
restructuring charge to recognize $2.8 million of severance costs and $4.4
million of lease exit costs, primarily related to the merger.
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, discussed under the caption
"Realized Investment Gains," which had partially supported these disability
reserves, and the subsequent reinvestment of the proceeds primarily in
investment grade fixed income assets at yields below the average portfolio
yield, certain reserve discount rates were lowered during second quarter 1995.
For the year ended December 31, 1995, the effect of lowering these discount
rates was an increase to the reserve liabilities and benefits to policyholders
reported in the Disability Insurance segment of $128.6 million.
Group LTD IBNR Increase
During the second quarter of 1995, UNUM increased the group long term
disability ("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
reserves for claims which have been incurred but not yet reported to UNUM, are
actuarially established based on various factors, including incidence levels
and claims severity. The increased IBNR reserves were based on management's
judgment that claims incurred but not yet reported would reflect increased
levels of claims incidence and severity.
Association Group Disability Reserve Strengthening
In 1995, the association group disability business was negatively affected
by unfavorable claims experience, which management attributed to certain
geographical and occupational segments, particularly dentists and physicians.
During the fourth quarter of 1995, UNUM increased reserves for unpaid claims
related to association group disability, reported in the Disability Insurance
segment, by $15.0 million. These increased reserves were based on management's
expectations of slower than expected claim recoveries.
Other Charges
To strengthen its focus on its core products, UNUM recognized a charge in
the third quarter of 1995 for costs associated with the sale of its dental
business reported in the Special Risk Insurance segment. The charge, which
primarily consisted of the write-off of deferred acquisition costs, reduced
income before income taxes by $2.8 million.
During the second quarter of 1995, UNUM recorded an additional charge for
costs associated with the previously announced decision to discontinue the
individual disability non-cancellable product and organizational changes within
UNUM America, which increased operating expenses by $5.0 million. This charge
reduced income before income taxes by $2.9 million in the Disability Insurance
segment, $1.1 million in the Special Risk Insurance segment, and $1.0 million
in the Retirement Products segment for the year ended December 31, 1995.
14
UNUM Corporation and Subsidiaries
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 1997 and 1996.
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.
Reconciliation of Income (Loss) Before Income Taxes to Pretax Operating Income
(Loss)
The following table reconciles income (loss) before income taxes to pretax
operating income (loss) for the four business segments and Corporate for the
years ended December 31, 1997, 1996 and 1995:
Disability Special Risk Colonial Retirement Consolidated
(Dollars in millions) Insurance Insurance Products Products Corporate UNUM
- ------------------------------------------ ------------ -------------- ---------- ------------ ----------- -------------
Year Ended December 31, 1997:
Income (loss) before income taxes ........ $ 312.7 $ 101.3 $ 98.8 $ 76.2 $ (52.6) $ 536.4
Exclude realized investment (gains)
losses .................................. 3.1 (1.4) -- 1.1 0.8 3.6
-------- -------- ------- ------- ------- --------
315.8 99.9 98.8 77.3 (51.8) 540.0
Special items:
TSA deferred gain recognition ........... -- -- -- (72.6) -- (72.6)
Reorganization costs .................... -- 6.5 -- -- -- 6.5
Reinsurance pool results ................ -- 18.4 -- -- -- 18.4
-------- -------- ------- ------- ------- --------
Pretax operating income (loss) ........... $ 315.8 $ 124.8 $ 98.8 $ 4.7 $ (51.8) $ 492.3
======== ======== ======= ======= ======= ========
Year Ended December 31, 1996:
Income (loss) before income taxes ........ $ 215.3 $ 79.2 $ 92.4 $ 1.4 $ (46.7) $ 341.6
Exclude realized investment (gains)
losses .................................. 0.3 (0.3) 0.3 (2.8) (0.9) (3.4)
-------- -------- ------- ------- ------- --------
215.6 78.9 92.7 (1.4) (47.6) 338.2
Special items:
ID reinsurance fees ..................... 49.7 -- -- -- -- 49.7
Write-offs and future loss reserves ..... 13.1 11.3 -- 15.0 -- 39.4
Merger and integration costs ............ -- -- -- -- 10.1 10.1
-------- -------- ------- ------- ------- --------
Pretax operating income (loss) ........... $ 278.4 $ 90.2 $ 92.7 $ 13.6 $ (37.5) $ 437.4
======== ======== ======= ======= ======= ========
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
======== ======== ======= ======= ======= ========
Pretax Operating Income (Loss) by Segment
The following sections discuss the results of the four business segments
and Corporate for the years ended December 31, 1997, 1996 and 1995. These
discussions are based on pretax operating income (loss), which excludes
realized investment gains (losses) and the special items previously described.
The summary financial information provided prior to each segment discussion has
been adjusted to exclude the impact of special items from all income statement
line items, consistent with the discussion of results on a pretax operating
income basis.
15
DISABILITY INSURANCE SEGMENT
(Dollars in millions) 1997 % Change 1996 % Change 1995
- --------------------------------------- ------------- ----------- ------------- ---------- -------------
Revenues
Premiums
Group LTD ............................ $ 1,219.1 11.4% $ 1,094.6 0.6% $ 1,088.6
Group STD ............................ 205.3 29.9 158.1 19.0 132.9
UNUM Limited ......................... 147.0 10.8 132.7 6.0 125.2
Individual disability ................ 143.5 (65.9) 420.8 (0.5) 423.0
Other disability insurance ........... 101.6 21.4 83.7 (2.2) 85.6
--------- ----- --------- ----- ---------
Total premiums ...................... 1,816.5 (3.9) 1,889.9 1.9 1,855.3
Investment income ..................... 471.1 0.5 468.8 14.8 408.2
Fees and other income ................. 66.1 nm 27.8 13.0 24.6
--------- ----- --------- ----- ---------
Total operating revenues ............ 2,353.7 (1.4) 2,386.5 4.3 2,288.1
Benefits and expenses
Benefits to policyholders ............. 1,503.9 (0.7) 1,514.4 (1.0) 1,529.2
Operating expenses .................... 452.0 (1.8) 460.4 10.0 418.4
Commissions ........................... 167.9 (8.8) 184.2 (4.8) 193.5
Increase in deferred policy acquisition
costs ................................ (85.9) 68.8 (50.9) (27.5) (70.2)
---------- ----- ---------- ----- ----------
Total benefits and expenses ......... 2,037.9 (3.3) 2,108.1 1.8 2,070.9
---------- ----- ---------- ----- ----------
Pretax operating income (a) ........... $ 315.8 13.4% $ 278.4 28.2% $ 217.2
========== ===== ========== ===== ==========
Sales (annualized new premiums)
Group LTD ............................ $ 294.4 $ 218.7 $ 197.9
Group STD ............................ $ 94.8 $ 74.0 $ 52.4
UNUM Limited ......................... $ 20.0 $ 14.3 $ 14.2
Individual disability ................ $ 26.7 $ 26.4 $ 35.6
Persistency (premiums)
Group LTD ............................ 87.7% 83.6% 82.8%
Group STD ............................ 86.7% 84.5% 84.8%
UNUM Limited ......................... 91.3% 85.6% 89.1%
Individual disability ................ 93.6% 92.5% 91.8%
Benefit ratio (% of premiums) ......... 82.8% 80.1% 82.4%
Operating expense ratio
(% of premiums) ...................... 24.9% 24.4% 22.6%
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income see the Consolidated
Overview.
The Disability Insurance segment includes disability products offered
through: UNUM America and First UNUM in North America; UNUM Limited in the
United Kingdom; and UNUM Japan Accident Insurance Company Limited ("UNUM
Japan"). The products included in this segment are group LTD, group short term
disability ("group STD"), ID, disability reinsurance operations and long term
care insurance.
16
UNUM Corporation and Subsidiaries
Overview
UNUM completed a reinsurance agreement during the fourth quarter of 1996
for coverage related to its United States non-cancellable block of ID business
(see the "Individual Disability" caption within this segment discussion).
Starting January 1, 1997, the individual components of the operating results
for the reinsured ID business are not reflected on separate lines in UNUM's
statements of income; instead, components of the operating results are combined
and reflected as a net amount in fees and other income. UNUM continues to focus
on the underlying trends of the reinsured business, and in the following
discussion reference to ID includes both the reinsured and non-reinsured
portions of the business.
The increase in the Disability Insurance segment's pretax operating
earnings in 1997, as compared with 1996, was primarily attributable to improved
premium growth, increased investment income and improved operating expense
ratios across most lines of business. These favorable factors were partially
offset by higher benefit ratios in certain disability businesses including ID
and group STD.
After adjusting for $255.4 million of premium ceded during 1997 under the
ID reinsurance agreement and the effect of claim block acquisitions, the
Disability Insurance segment reported premium growth of 6.5%9.4% compared with
growth of 5.6% in the Employee Benefits segment1996. The improvement in 1994. Rate increases to address unfavorable experience on selected segments of
the inforce business contributed to the declinepremium growth was driven by record
sales levels and persistency improvements, primarily in both the group LTD and group
lifeSTD. Investment income, adjusted for the effect of the reinsured ID business,
increased in 1997, primarily as a result of the increased cash flow created by
improved premium persistency ratesgrowth in 1994. In general, case terminations resulting
from rate increases have occurredgroup disability products.
Pretax operating income increased in less profitable segments1996, as compared with 1995,
primarily as a result of these
businesses. Management expects to continue to seek inforce case rate increases,
as appropriate, given claims experience, to improve profitability. However,
such rate actions may increase case terminationsincreased investment income and decrease persistency rates
for these businesses. In 1994 and 1993,lower benefit ratios
in group LTD and at UNUM Limited. Partially offsetting these favorable factors
were increased operating expenses for the segment and higher benefit ratios in
disability reinsurance operations and ID. The increase in investment income for
1996 was activeprimarily the result of reinvestment of the proceeds from the 1995
sale of UNUM's common stock portfolio into investment grade fixed income
assets. During second quarter 1995, UNUM sold virtually all of the common stock
portfolio of its United States subsidiaries, primarily due to consideration of
statutory capital requirements associated with investment in acquiring
closed blocks of claimscommon stocks and
to increase future investment income.
Claim block acquisitions, which generatedgenerate one-time premiums, totaling $8.6 million
and $58.3 million, respectively.are summarized
in the table below. Management intends to pursue additional claim block
acquisitions in the future.
The 22.1%
Year Ended December 31,
------------------------------------
(Dollars in millions) 1997 1996 1995
- ------------------------------------------- ---------- ---------- ----------
Group LTD ................................. $ 18.9 $ 10.0 $ 63.8
UNUM Limited .............................. 2.6 8.4 10.6
Long Term Care ............................ 0.5 -- 4.9
Disability Reinsurance Operations ......... 2.1 -- 3.6
------- ------- -------
Total ..................................... $ 24.1 $ 18.4 $ 82.9
======= ======= =======
Additionally, premium growthfor ID includes the recapture of reinsurance premium
totaling $10.6 million in 1993 reflected record sales in all of the Employee
Benefits segment's product lines. Premium growth also reflected selected price
increases, acquisitions of closed blocks of claims, and slight growth of the
employment and salary levels for group LTD's existing customer base. Renewal
rate actions for group LTD had a minimal impact on the premium persistency rate
for 1993.
During 1994, the group LTD business experienced a higher incidence of new claims
and an increased number of large claims, which were the primary causes of the
increased benefit ratio for the Employee Benefits segment from 1993. Management
has identified a number of geographical and occupational segments of the group
LTD business which are experiencing higher than expected claims. Management
continues to pursue these segments of the business for underwriting and pricing
actions, and is addressing increased incidence rates, lower recovery rates, and
the more subjective nature of the types of disability claims by implementing
new, and enhancing existing, risk management programs.
Group LTD earnings in 1994 were also adversely affected by a decrease in the
discount rate used to determine reserves, from 9.34% at December 31, 1993, to
9.18% at December 31, 1994, which resulted in an increase to claim reserves.
The discount rate is a composite yield of assets specifically matched with the
group LTD reserves. Management expects the discount rate will further decline,
since current cash flows are invested in high quality assets at current yields,
which are below the composite yields of the existing assets purchased in prior
years. UNUM has increased prices on both existing and new business in order to
mitigate the impact of the interest rate environment.
1996.
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 and risk management programs and renewal actions.programs. 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, management periodically performs a review of reserve
estimates and assumptions. If management determines reserve assumptions are periodically reviewed andneed to
be updated, with any resulting adjustments to reserves are reflected in current
operating results. Given the complexity of the reserving
process,that insurance products contain inherent risks and
uncertainties, the ultimate liability may be more or less than such estimates
indicate.
Group Long Term Disability
During 1994,1997, group LTD experienced increased pretax operating income that
was driven primarily by strong premium growth of 11.4%. Premium growth in 1997
resulted from record sales levels and improved persistency,
17
which reflects a lower level of price increases during the year and the success
of product modifications and continuing customer service actions. Increased
investment income and continued expense management implementedalso contributed to the
improvement in 1997 earnings. Management continues to focus on steps to
increase premiums and sales, including a strengthened various risk management
programsemphasis on customer
service to address the unfavorable claims trendsfurther improve persistency and additional investments in
distribution channels. The significant sales growth experienced in group LTD. In
addition1997,
combined with general pricing competition, may affect UNUM's ability to
continue to increase sales by the selected price increases on newsame percentage growth seen in 1997, as
compared with 1996.
The benefit ratio for 1997 was consistent with 1996. While the average
incidence rate of claims declined in 1997, an increase in the average size of
claims offset the favorable impact of incidence. Management continually
monitors claim trends and inforce business, more
stringentresponds to changes by periodically adjusting prices,
altering underwriting practices, and reducing benefit options for certain
segments of the business, management has established special units to address
specific aspects of disability claims, including complex and fraudulent claims.
Additionally, management has implemented new group LTD contract provisions which
provide risk managementguidelines, changing product features and claimant rehabilitation incentives. Also,
management continually reviews the benefits management process to identify and
strengthenstrengthening
risk management policies and procedures.
Management believes these underwriting, pricingGroup Short Term Disability
Strong sales and risk management actions will
strengthen UNUM's ability to deal with these disability claims trends into the
future, and that the level of future earnings of the group LTD product will be a
function of the effectiveness of these continuing actions and the time required
for these actions to take effect.
The group life business reported favorable claims experienceimproved persistency resulted in 1994.
Management continues to address higher than expected claims in certain portions
of the business by imposing more stringent underwriting requirements and
increasing prices. Management believes these actions improved overall claims
experienceincreased premium growth
for group life productsSTD, driving improved pretax operating income in 1994.1997. The ratio of operating expenses to premiums was 20.2%, 21.0%, and 23.4% in 1994,
1993 and 1992, respectively. The decreases in 1994 and 1993 were attributable
to continuedstrong
sales levels reflect management's continuing efforts to manage expensecross-sell group STD
products with other group products sold by UNUM. Additionally, premium 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 primarilycontinued expense management contributed 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 was primarily due to favorable claims experience in the
group life and short term disability businesses, a lower operating expense
ratio, and increased realized investment gains, which were partially offset by unfavorable claims experience in the group LTD business. Stronga higher benefit ratio.
UNUM Limited
During 1997, UNUM Limited's pretax operating income was favorably affected
by premium growth, driven by solid sales levels and improved persistency.
Increased investment income, a lower benefit ratio and a lower operating
expense ratio also contributed to improved results as compared with the
corresponding period in 1996. The lower benefit ratio was primarily the result
of UNUM Limited's continuing focus on risk management.
In general, UNUM Limited's earnings expressed in U.S. dollars are affected
by fluctuations in the exchange rates used in the translation of earnings from
British pounds sterling. The weighted average exchange rate was approximately
$1.64, $1.56 and $1.58 for the years ended December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997, the spot rate was approximately $1.65.
Individual 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 reserves of UNUM America's existing United States
non-cancellable 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. Centre Re
has an obligation to absorb losses within a defined risk layer, while UNUM must
fund an experience layer representing the difference between reserves related
to the reinsured block, based on generally accepted accounting principles
("GAAP"), and the bottom of Centre Re's defined risk layer. Within this
experience layer, UNUM retains the earnings risk related to potential adverse
experience from the reinsured block. Under the agreement, UNUM funds a trust
account, initially established in late 1996, with assets equal to the related
amount of GAAP reserves plus the amount of its experience layer. The value of
UNUM's experience layer increases or decreases in conjunction with the
underlying operating results of the reinsured block. Additionally, realized
gains or losses on assets sold, and unrealized gains or losses on marketable
securities held in the trust and the related claim reserves, affect the
valuation of the experience layer. UNUM reflects the carrying value of the
experience layer in its Consolidated Balance Sheet as a deposit asset, which were partially offsetat
December 31, 1997, totaled approximately $347 million. Changes in the
experience layer derived from the underlying operating results of the reinsured
block are reflected in fees and other income and realized gains or losses from
sales of trust assets are reflected as realized investment gains (losses) in
UNUM's Consolidated Statement of Income. Changes in the experience layer
resulting from unrealized gains or losses on marketable securities held in the
trust and the related claim reserves are reflected as unrealized gains or
losses in the equity section of UNUM's Consolidated Balance Sheet.
18
UNUM Corporation and Subsidiaries
For the year ended December 31, 1997, pretax operating income for
individual disability was negatively affected by unfavorable claims experience,
in the group life business andprimarily resulting from increased incidence, partially offset by lower realized investment
gains, resulted in increased income before income taxes for 1993expense
levels, as compared with 1992.
RELATED BUSINESSESthe same period in 1996. Premium growth continued to
decline as a result of UNUM's exit from the traditional, fixed price,
non-cancellable product in the United States. Sales of the guaranteed renewable
Lifelong Disability Protection product, which replaced the non-cancellable
product, have grown 94% in 1997 over 1996.
Long Term Care
The Long Term Care ("LTC") block of business, while still relatively small,
should provide one of the company's most significant growth opportunities in the
future. LTC's pretax operating results improved for the year ended December 31,
1997, compared with the same period in 1996, driven by significant premium
growth of 32%. LTC's contribution to the segment's pretax operating income
continues to increase when compared with 1996.
Disability Reinsurance Operations
Pretax operating income for the disability reinsurance operations was
adversely affected by unfavorable claims experience and decreased premium for
the year ended December 31, 1997, as compared with the same period in 1996.
Management continues to focus on improving risk management programs and
strengthening underwriting standards to address this claims experience.
SPECIAL RISK INSURANCE SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------millions) 1997 % Change 1996 % Change 1995
- ------------------------------------------- ----------- ---------- ----------- ---------- -----------
REVENUESRevenues
Premiums
Group life ............................... $ 434.0 22.8%528.1 20.1% $ 353.4 4.9%439.6 14.2% $ 336.8384.8
Other special risk products .............. 312.4 12.6 277.5 (0.1) 277.8
------- ---- ------- ---- -------
Total premiums .......................... 840.5 17.2 717.1 8.2 662.6
Investment income 88.8 8.2 82.1 (6.2) 87.5
Net realized investment gains 0.8 (76.5) 3.4 (17.1) 4.1......................... 67.0 19.2 56.2 27.7 44.0
Fees and other income 43.5 (11.4) 49.1 nm 17.6
--------------------------------------------------------------------------------------------------------------------------..................... 49.8 30.0 38.3 (1.8) 39.0
------- ---- ------- ---- -------
Total revenues 567.1 16.2 488.0 9.4 446.0
BENEFITS AND EXPENSES.......................... 957.3 18.0 811.6 8.9 745.6
Benefits and expenses
Benefits to policyholders 333.2 24.0 268.7 2.3 262.7................. 593.7 18.8 499.6 1.5 492.0
Operating expenses 127.3 3.6 122.9 30.1 94.5........................ 180.0 (0.2) 180.4 21.2 148.8
Commissions 53.1 13.5 46.8 9.1 42.9............................... 88.2 31.6 67.0 10.0 60.9
Increase in deferred policy acquisition
costs (6.9) (12.7) (7.9) 3.9 (7.6)
Interest expense 0.1 (50.0) 0.2 nm 0.1
--------------------------------------------------------------------------------------------------------------------------.................................... (29.4) 14.8 (25.6) 61.0 (15.9)
-------- ---- -------- ---- --------
Total benefits and expenses 506.8 17.7 430.7 9.7 392.6
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES............. 832.5 15.4 721.4 5.2 685.8
-------- ---- -------- ---- --------
Pretax operating income (a) ............... $ 60.3 5.2%124.8 38.4% $ 57.3 7.3%90.2 50.8% $ 53.4
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------59.8
======== ==== ======== ==== ========
Group life sales (annualized new
premiums) ................................ $ 175.8 $ 150.0 $ 106.1
Group life persistency (premiums) ......... 86.2% 85.6% 83.0%
Benefit ratio (% of premiums) 76.8% 76.0% 78.0%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------............. 70.6% 69.7% 74.3%
Operating expense ratio (% of
premiums) ................................ 21.4% 25.2% 22.5%
- --------
(a) For the definition of pretax operating income see the Consolidated
Overview.
19
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.
Pretax operating income for the Special Risk Insurance segment increased
for the year ended December 31, 1997, as compared with 1996, primarily driven
by strong premium growth in the group life business. Additionally, pretax
operating income for this period was positively affected by favorable expense
growth levels across most lines of business, increased investment income for
the segment and additional fees and other income largely from reinsurance
underwriting management operations. Higher benefit ratios in certain product
lines partially offset these increases. Due to the nature of the risks
underwritten and the relative size of the blocks of businesses, several of the
products in the Special Risk Insurance segment can exhibit claims variability.
Solid sales results and improved persistency trends continued and were the
primary drivers of group life premium growth of 20.1% in 1997. Claim block
acquisitions generated one-time premiums for group life of $0.2 million, $3.6
million and $1.3 million, respectively, for 1997, 1996 and 1995, and for
reinsurance operations of $16.3 million and $38.3 million, respectively, for
1996 and 1995. Management intends to pursue additional claim block acquisitions
in the future.
The segment's operating expense ratio improved in 1997 to 21.4% from 25.2%
in 1996, primarily driven by favorable expense growth across most lines of
business combined with the strong premium growth in group life. In 1997, the
segment's benefit ratio increased to 70.6% as compared with 69.7% in 1996. The
increase was primarily the result of unfavorable claims experience in the
special risk accident insurance product line and certain reinsurance pools.
The increase in pretax operating income for 1996, as compared with 1995,
was primarily due to an improved benefit ratio in the group 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.
COLONIAL PRODUCTS SEGMENT
(Dollars in millions) 1997 % Change 1996 % Change 1995
- --------------------------------------- ----------- ---------- ----------- ---------- -----------
Revenues
Premiums .............................. $ 525.4 6.4% $ 493.7 4.4% $ 472.7
Investment income ..................... 57.6 21.0 47.6 15.3 41.3
Fees and other income ................. 5.4 20.0 4.5 87.5 2.4
------- ---- ------- ---- -------
Total operating revenues ............ 588.4 7.8 545.8 5.7 516.4
Benefits and expenses
Benefits to policyholders ............. 259.7 8.5 239.3 1.8 235.1
Interest credited ..................... 12.1 61.3 7.5 15.4 6.5
Operating expenses .................... 130.2 6.2 122.6 6.9 114.7
Commissions ........................... 115.1 6.8 107.8 (1.0) 108.9
Increase in deferred policy acquisition
costs ................................ (27.5) 14.1 (24.1) (5.9) (25.6)
-------- ---- -------- ---- --------
Total benefits and expenses ........... 489.6 8.1 453.1 3.1 439.6
-------- ---- -------- ---- --------
Pretax operating income (a) ........... $ 98.8 6.6% $ 92.7 20.7% $ 76.8
======== ==== ======== ==== ========
Sales (annualized first month's
premiums) ............................ $ 224.7 $ 213.6 $ 200.4
Benefit ratio (% of premiums) ......... 49.4% 48.5% 49.7%
Operating expense ratio (% of
premiums) ............................ 24.8% 24.8% 24.3%
- --------
(a) For the definition of pretax operating income see the Consolidated
Overview.
20
UNUM Corporation and Subsidiaries
The Colonial Products segment includes Colonial Life & Accident Insurance
Company ("Colonial") and affiliates. Colonial offers payroll-deducted,
voluntary employee benefit products, including accident and sickness,
disability, cancer and life insurance. These products are offered to employees
at their worksites and are marketed by Colonial primarily through independent
sales representatives.
Pretax operating income for the Colonial Products segment increased for
the year ended December 31, 1997, as compared with 1996. The increase was
primarily attributable to additional investment income, premium growth and
reduced operating expense ratios across most lines of business, partially
offset by a higher benefit ratio in the cancer product line and an increase in
interest credited. During 1997, management continued its efforts to increase
sales and premium at Colonial by enhancing collaborative sales across UNUM and
implementing organizational changes to focus on specific distribution channels
to market Colonial products. Colonial's pretax operating income increased in
1996 as compared with 1995, primarily due to favorable benefit ratios in
certain product lines and increased investment income.
During 1997, Colonial formed a strategic marketing alliance with The
Lincoln National Life Insurance Company ("Lincoln Life") in order to create
cross-selling opportunities in the worksite market. In addition, Colonial
coinsures and administers Lincoln Life's existing block of worksite-marketed
universal life insurance. This reinsurance agreement affects reported line
items in Colonial's income statement, including premiums, investment income,
operating expenses and interest credited, in relation to the amount of business
coinsured. During 1996, Colonial entered into an agreement to reinsure a
majority of the mortality risk on new and inforce universal life business. This
reinsurance agreement has negatively affected reported premium growth and
related operating expense ratios while positively affecting reported benefit
ratios.
The increase in investment income in 1997 and 1996 was primarily due to
the growth in the asset base resulting from increased cash flows largely from a
product mix shift, along with a change in asset composition to higher yielding
securities. Additionally, the alliance formed with Lincoln Life positively
affected investment income growth. The additional investment income generated
from the alliance was partially offset by the increase in interest credited.
Excluding the impact of the Lincoln Life reinsurance agreement, Colonial's
operating expense ratio improved in 1997, primarily because of management's
continued efforts to control expenses. Colonial's benefit ratio increased in
1997 primarily as a result of unfavorable claims experience in the cancer
product line. The decrease in Colonial's benefit ratio in 1996 was primarily
driven by the effect of the universal life reinsurance agreement and improved
benefit ratios in the life, and accident and sickness product lines.
RETIREMENT PRODUCTS SEGMENT
(Dollars in millions) 1997 % Change 1996 % Change 1995
- --------------------------------------- --------- ------------- ---------- ------------- ------------
Revenues
Premiums .............................. $ 6.3 (68.0)% $ 19.7 (28.6)% $ 27.6
Investment income ..................... 55.5 (74.1) 214.4 (28.3) 298.9
Fees and other income ................. 51.4 11.5 46.1 nm 6.5
------- ----- ------- ----- ---------
Total operating revenues ............ 113.2 (59.6) 280.2 (15.9) 333.0
Benefits and expenses
Benefits to policyholders ............. 31.3 (36.1) 49.0 ( 9.9) 54.4
Interest credited ..................... 71.4 (63.0) 193.1 (12.6) 220.9
Operating expenses .................... 5.7 (74.2) 22.1 (31.8) 32.4
Commissions ........................... -- nm 5.2 (21.2) 6.6
(Increase) decrease in deferred policy
acquisition costs .................... 0.1 nm (2.8) (6.7) (3.0)
------- ----- ------- ----- ---------
Total benefits and expenses ......... 108.5 (59.3) 266.6 (14.4) 311.3
------- ----- ------- ----- ---------
Pretax operating income (a) ........... $ 4.7 (65.4)% $ 13.6 (37.3)% $ 21.7
======= ===== ======= ===== =========
Invested assets under management for
tax-sheltered annuities, at end of
period ............................... $ 111.5 $ 305.3 $ 3,074.3
======= ======= =========
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income see the Consolidated
Overview.
21
RELATED BUSINESSES SEGMENT
The Related Businesses segment includes: UNUM Limited, the United Kingdom's
leader in group disability insurance; Commercial Life Insurance Company
("Commercial"), a leader in special risk insurance and professional association
insurance marketing; and Reinsurance Operations, which includes Duncanson &
Holt, Inc. ("D&H"), a leading accident and health reinsurance underwriting
manager, and other special risk reinsurance operations.
UNUM LIMITED
The depressed economic environment that affected the United Kingdom in 1992 and
1993 experienced a modest recovery in 1994, which positively affected UNUM
Limited's ability to sell long term disability insurance. UNUM Limited
experienced strong premium growth in 1994 as sales increased and persistency
rates improved. Also in 1994, claim block acquisitions generated one-time
premium of $25.8 million. A reallocation of capital from UNUM Limited in 1992,
and a decreasing interest rate environment, resulted in decreased investment
income for the Related Businesses segment in 1993.
UNUM Limited experienced favorable claims levels for most of 1994, which
improved the benefit ratio from 1993. However, in late 1994, UNUM Limited
incurred unfavorable claims experience, which management is evaluating to
determine the need for pricing actions, changes in underwriting standards or
risk management programs. If the unfavorable claims experience that developed
in late 1994 were to continue, UNUM Limited's earnings could be negatively
affected. Due to the nature of the risks insured and the relative size of the
U.K. block of business, UNUM Limited's operating results can exhibit claims
variability. Investment in administrative procedures and systems was the
primary reason for increased operating expenses in 1993.
On April 1, 1995, the United Kingdom's new Social Security (Incapacity for Work)
Act of 1994 will be effective, and will shift a greater financial responsibility
for disability benefits from the U.K. government to the private sector.
Management believes this legislation will increase awareness of the need for
disability insurance and expand the U.K. insurance market for long term
disability products, which could favorably affect UNUM Limited's sales.
However, it is unclear when the effects of this legislation will be evidenced.
During 1994, the U.S. dollar weakened slightly against the British pound
sterling, increasing UNUM Limited's earnings as reported in U.S. dollars. This
reversed the trend in 1993 and 1992 when the U.S. dollar strengthened against
the British pound sterling, decreasing earnings as reported in U.S. dollars.
The weighted average exchange rate was approximately $1.53, $1.51 and $1.78 for
the years ended December 31, 1994, 1993 and 1992. At December 31, 1994, the
spot rate had increased to $1.56.
COMMERCIAL
Increased sales across all lines of Commercial's businesses in 1994 benefited
premium growth, which was partially offset by higher than expected case
terminations. The 1994 benefit ratio was driven by favorable experience in the
special risk product line, offset by unfavorable claims experience in the
association group disability business within certain occupational groups and
geographical areas. Management is implementing rate increases and stronger
underwriting policies to mitigate this unfavorable claims experience. The
decrease in the benefit ratio in 1993 was primarily due to more favorable claims
experience in the association group disability business. Due to the nature of
the risks underwritten and relative size of the block of business, Commercial's
special risk products can exhibit claims variability.
REINSURANCE OPERATIONS
In 1994, Reinsurance Operations had unfavorable claims experience in certain
reinsurance pools and decreased fee income for D&H due to increased competition
and contract terminations. Fee income and operating expenses increased in the
Related Businesses segment in 1993 due to the full year inclusion of D&H, which
was acquired in third quarter 1992.
SUMMARY
Income before income taxes increased in 1994 for the Related Businesses segment,
primarily due to strong premium growth and favorable claims experience at UNUM
Limited, partially offset by unfavorable claims experience in Commercial's
association group disability business and in certain reinsurance pools. The
principal reason for the increase in income before income taxes for the Related
Businesses segment in 1993 was the inclusion of D&H results for a full year,
which was partially offset by less favorable earnings for UNUM Limited due to a
lower weighted average exchange rate.
COLONIAL COMPANIES SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 439.1 8.7% $ 403.9 10.8% $ 364.6
Investment income 30.9 3.7 29.8 (0.3) 29.9
Net realized investment gains 1.7 (85.3) 11.6 nm 5.5
Fees and other income 2.2 (37.1) 3.5 (52.1) 7.3
--------------------------------------------------------------------------------------------------------------------------
Total revenues 473.9 5.6 448.8 10.2 407.3
BENEFITS AND EXPENSES
Benefits to policyholders 221.1 6.6 207.5 10.4 187.9
Interest credited 5.0 19.0 4.2 16.7 3.6
Operating expenses 107.1 13.7 94.2 1.0 93.3
Commissions 96.7 4.3 92.7 8.0 85.8
Increase in deferred policy acquisition costs (18.7) (7.9) (20.3) (15.1) (23.9)
Interest expense -- (100.0) 0.1 -- 0.1
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 411.2 8.7 378.4 9.1 346.8
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 62.7 (10.9)% $ 70.4 16.4% $ 60.5
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized first month's premiums) $ 183.1 $ 171.4 $ 179.7
Benefit ratio (% of premiums) 50.4% 51.4% 51.5%
Operating expense ratio (% of premiums) 24.4% 23.3% 25.6%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
COLONIAL COMPANIES SEGMENT
The Colonial CompaniesRetirement Products segment includes Colonial Life & Accident Insurance
Company and affiliates, which offer payroll-deducted, voluntary employee
benefits to employees at their worksites. The Colonial Companies segment
("Colonial") markets accident and sickness, cancer, and life insurance products primarily through independent sales representatives.
In 1994, Colonial experienced an increase in sales, which was attributed 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 uncertainty in the marketplace as to the types of
coverage that would be included in health care reform proposals. Management
does not feel that 1994 sales were as negatively affected by health care reform
fears, as the focus shifted away from legislative health care restructuring
toward private market restructuring. Additionally, management views health care
reform as an opportunity for UNUM by allowing Colonial to leverage its expertise
in worksite marketing, since the workplace is considered to be a primary means
of access to insurance benefits in the developing healthcare environment. While
premium growth slowed in 1994, enhanced customer conservation programs have
partially offset the weaker sales levels in 1993 and 1992 by improving
persistency.
Realized investment gains for 1993 include approximately $8.5 million of gains
associated with Colonial's sales of higher yielding but callable investments to
realign its investment portfolio with UNUM's investment philosophy. Fees and
other income for 1992 reflect $4.0 million received from the settlement of a
lawsuit against a competitor.
Colonial's benefit ratio improved to 50.4% in 1994 from 51.4% in 1993. The
lower 1994 benefit ratio was driven by favorable claims experience and improved
incidence rates in most product lines, particularly in the cancer product line.
Management expects the benefit ratio to increase in the future as Colonial
continues to shift its product mix toward products with higher benefit ratios,
lower expense ratios and better persistency.
During 1994, the expense ratio increased because of higher than expected costs
associated with a sales organization realignment and litigation expenses, which
were partially offset by continued expense control efforts. The decline in
1993's expense ratio reflected management's efforts to control expenditures and
improve operational efficiencies.
Income before income taxes decreased in 1994 primarily because of reduced
realized investment gains and increased expenses, partially offset by favorable
claims experience. For 1993, Colonial's income before income taxes increased
primarily through continued expense control and a higher level of realized
investment gains attributed to the investment portfolio realignment.
INDIVIDUAL DISABILITY SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 346.8 11.2% $ 312.0 10.6% $ 282.2
Investment income 77.0 3.2 74.6 5.5 70.7
Net realized investment gains 7.6 (3.8) 7.9 83.7 4.3
Fees and other income 10.7 1.9 10.5 (1.9) 10.7
--------------------------------------------------------------------------------------------------------------------------
Total revenues 442.1 9.2 405.0 10.1 367.9
BENEFITS AND EXPENSES
Benefits to policyholders 487.2 nm 212.0 3.7 204.4
Operating expenses 122.3 18.2 103.5 3.5 100.0
Commissions 82.5 9.1 75.6 6.0 71.3
Increase in deferred policy acquisition costs (61.7) 12.0 (55.1) 5.2 (52.4)
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 630.3 87.6 336.0 3.9 323.3
--------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ (188.2) nm% $ 69.0 54.7% $ 44.6
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized new premiums) $ 65.8 $ 63.2 $ 60.1
Persistency (premiums) 92.4% 92.1% 91.7%
Benefit ratio (% of premiums) 140.5% 67.9% 72.4%
Operating expense ratio (% of premiums) 35.3% 33.2% 35.4%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
INDIVIDUAL DISABILITY SEGMENT
The Individual Disability segment includes disability income products sold in
the United States and Canada through UNUM America and First UNUM, as well as
private label agreements through these companies.
The loss before income taxes of $(188.2) million for the Individual Disability
segment for 1994 is primarily due to the $192.4 million reserve strengthening
recorded in the third quarter of 1994 and a $12.3 million restructuring charge
incurred in the fourth quarter as a 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 SEGMENT
The Retirement Security segment includes tax sheltered annuities ("TSAs"), long
term care insurance, and beginning in 1993, lifestyle security protection
products, all of which areno longer actively
marketed by UNUM America and First UNUM.
During 1994 and 1993, UNUM offered the holders of certain types of TSA contracts
the opportunity to modify such contracts. The proposed contract amendments
provide for UNUM to increase the minimum guaranteed credited rates in return for
contractholders relinquishing the right to make lump-sum withdrawals without an
associated fee. As expected, certain contractholders elected to withdraw their
funds rather than convert to the modified contract provisions, which affected
the overall growth of invested assets under management. Management expects
these types of withdrawals to continue, which may affect future growth of
invested assets under management for TSAs.
During 1994, UNUM implemented an investment strategy to increase investments in
tax-exempt securities which has reduced income before income taxes for the
segment. Although investments in tax-exempt securities resulted in increased
consolidated net income, this investment strategy reduced the Retirement
Security segment's income before income taxes by approximately $6.7 million in
1994. In addition, the low interest rate environment during the past two years
has reduced the investment yields on TSA assets. As a result of these factors,
investment income decreased by $8.4 million and increased by only $0.8 million,
during 1994 and 1993, respectively.
As interest rates declined in 1993, the rate and level of interest credited to
TSA contractholders declined as well. Despite a rising interest rate
environment in 1994, the level of interest credited to TSA contractholders
continued to decline. As a result, the TSA business experienced unusually
favorable interest spread margins in 1994 and 1993. In 1994, 1993 and 1992, the
amount of interest credited to funds on deposit amounted to 70.3%, 70.5%, and
77.3% of investment income, respectively. Management does not expect interest
spread margins experienced byincluding: TSAs, in 1994 and 1993 to continue at the same
level, which may reduce future earnings for the Retirement Security segment.
Management believes the failure of the last Congress to pass health care reform
legislation positively affected long term care insurance products, which
experienced premium and sales growth during 1994 after lower than expected
growth in 1993 due to the announcement of President Clinton's health care reform
proposal that included long term care coverage. During 1994, block acquisitions
generated one-time net premiums for long term care insurance products of $15.0
million. Management may pursue additional block acquisitions in the future.
Long term care insurance products experienced an increased incidence of new
claims during 1994, which management has addressed by implementing new
underwriting guidelines.
Income before income taxes increased in 1994 reflecting continued premium growth
and expense reductions in the long term care insurance products partially offset
by unfavorable claims experience. Additionally, during 1994 UNUM continued its
investment in the development of long term care and lifestyle security
protection products, and in a TSA business initiative which management expects
will improve customer acquisition and service functions as well as reduce future
operating expenses. Unusually favorable interest spread margins on tax
sheltered annuities were the primary reason for increased income before income
taxes in 1993.
OTHER OPERATIONS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
REVENUES $131.3 (27.0)% $179.9 (14.7)% $210.9
BENEFITS AND EXPENSES
Benefits to policyholders 35.9 (4.3) 37.5 (1.1) 37.9
Interest credited 79.3 (29.1) 111.9 (22.7) 144.8
Operating expenses 5.7 (5.0) 6.0 (11.8) 6.8
Commissions 1.1 (8.3) 1.2 (25.0) 1.6
Decrease in deferred policy acquisition costs 0.8 (68.0) 2.5 (24.2) 3.3
----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 122.8 (22.8) 159.1 (18.2) 194.4
----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 8.5 (59.1)% $ 20.8 26.1% $ 16.5
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
OTHER OPERATIONS SEGMENT
The Other Operations segment includes individual life insurance business of UNUM
Life Insurance Company of America, group medical insurance, guaranteed investment contracts ("GICs"),
deposit administration accounts ("DAs"), and
401(k) plans, allindividual life and
group medical insurance. The segment reported decreased pretax operating income
for 1997 as compared with 1996, primarily due to the sale of which are no longer actively marketedUNUM's TSA
business in October 1996, as discussed below, partially offset by UNUM.favorable
volatility in the run-off of certain other discontinued products. UNUM expects
these blocks of business to continue to decline in size over several years and
experience some slight earnings volatility, reflecting their run-off nature.
On October 1, 1996, UNUM America and First UNUM closed the sale of their
respective TSA businesses to The reduced invested asset baseLincoln 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 were initially reinsured on an indemnity basis. Upon consent of the
TSA contractholders and participants, the contracts are considered reinsured on
an assumption basis, legally releasing UNUM America and First UNUM from future
contractual obligation to the respective contractholders and participants. The
sale resulted in a deferred pretax gain of $80.8 million, which is being
recognized in income, as a special item, in proportion to consents for
assumption reinsurance. Through December 31, 1997, consent for assumption
reinsurance has been provided by TSA contractholders and participants owning
approximately 92% of assets under management.
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 transfer of these assets and subsequent novations reduced investment income
and interest credited significantly in 1997, as compared with 1996.
UNUM continues 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 TSA businesses
accounted for $0.4 million, $13.5 million and $16.4 million of the Retirement
Products segment's pretax operating income in 1997, 1996 and 1995,
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 earnings from the runoff of
GICs, DAs and 401(k) plans resulted induring the year and lower revenues frominterest spread margins on
tax-sheltered annuities through October 1, 1996, the effective date of the TSA
sale. Also, investment income and reduced amounts of
interest credited. Management expects continued decreases in the amounts of
investment income and interest credited as the related GIC, DA and 401(k)
contracts mature or terminate. Management expects future earnings in the Other
Operations segment to decline,declined reflecting the run-off naturetransfer of these closed
blocks$2,690
million of businesses.
During 1992, UNUM releasedassets to Lincoln on October 1, 1996, to effect the remaining restructuring reserve forsale of the costsTSA
business, and the shifting of withdrawal fromassets to lower yielding, highly liquid
instruments during the 401(k) business since actual costs were less than expected,
resultingyear in increased pretax incomeanticipation of $5.3 million. The gain associated with
the release of this restructuring reserve reduced operating expenses in the 1992
Consolidated Statement of Income.
transfer.
CORPORATE
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------(Dollars in millions) 1997 1996 1995
- ------------------------------------ ----------- ----------- -----------
Loss before income taxes $(28.2) $(17.4) $(5.7)
------------------------------------------------------------------------------
------------------------------------------------------------------------------Pretax operating loss (a) .......... $ (51.8) $ (37.5) $ (28.9)
======= ======= =======
- --------
(a) For the definition of pretax operating loss 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, 1997, as compared with UNUM's long-term strategic1996, was primarily due to decreased investment
income, principally from the Company's increased use of capital to repurchase
shares of its common stock, and higher operating expenses. The increased pretax
operating loss in Japan1996, compared with 1995, was primarily the result of
increased international development costs and interest expense on corporate
borrowings. The increased loss before
income taxes in 1994 in Corporate was primarily due to increased interest
expense and increased costs related to the investment in Japan. The increased
loss before income taxes in 1993 was primarily due to the expenses incurred in
connection with the March 26, 1993, merger of UNUM Corporation and Colonial
Companies, Inc., decreased interest income andborrowings, partially offset by increased investment in Japan.
UNUM JAPAN
On June 20, 1994, the Japanese Ministry of Finance granted UNUM a provisional
operating license which allowed UNUMincome.
INVESTMENTS
Overview
UNUM's investment objective is to establish a non-life insurance company,
UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), to market
disability and other accident products in Japan. UNUM Japan has subsequently
received an official license and began selling group long term disability
products in the fourth quarter of 1994, with the first policies effective
January 1, 1995.
UNUM Japan formed a cooperative relationship with Japan's leading short term
disability insurer, Yasuda Fire & Marine Insurance Co., Ltd. to develop the new
long term disability products and introduce them in Japan. The two companies
continue to work together on market and product development and will also market
their own separate long term disability products. UNUM expects to continue
incurring costs to develop UNUM Japan's distribution network, advertising andoptimize total asset return within
appropriate risk management programs.
INVESTMENTS
UNUM has a fairly conservative investment philosophy, with a portfolio that is
concentrated in investment grade bonds. UNUM evaluates total expected return
after consideration of all associated expenses and losses, within criteria established for each product line. UNUM seeks to meet
this objective through its asset/liability management process and active asset
management of the portfolios. Asset/liability management requires a balance
between investment risk and business risk and is a key element for managing
certain market risks (see Item 7A "Quantitative and Qualitative
22
UNUM Corporation and Subsidiaries
Information about Market Risk" for further discussion). UNUM's long term
investment strategy is to invest primarily in investment grade bonds and
commercial mortgages. 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 generally 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 theon an overall portfolio basis,
considering the
carrying value of the underlying assets.assets and collateral. If a decline in
marketfair value is considered to be other than temporary or if a long-lived asset is
deemed permanently impaired, the investment is reduced to estimated net
realizable value and the reduction is recorded as a realized investment loss.
UNUM discontinues the accrual of investment income on invested assets when it
is determined that collectability is doubtful. Management monitors the risk
associated with the invested asset portfolio and regularly reviews and adjusts
the allowance for probable losses.
AtUNUM's invested assets were $8,934.1 million and $8,724.7 million at
December 31, 1994, the1997, and 1996, respectively. The composition of UNUM's $10,433.8 million of invested
assets at December 31, 1997, was 75.4%81.8% fixed maturities, 11.7%12.7% mortgage loans,
6.0% equity securities,
1.8%2.6% real estate and 5.1%2.9% other invested assets.
Gross realized investment gains were $117.0$24.4 million, $85.2$40.2 million and
$94.4$287.0 million, and gross realized investment losses were $71.4$28.0 million, $35.8$36.8
million and $52.9$61.9 million for the years ended December 31, 1994, 19931997, 1996 and 1992,1995,
respectively.
FIXED MATURITIES:
Effective JanuarySignificant Investment Transactions
In late 1996, UNUM transferred approximately $403 million of 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 (see Item 8 Note 6 "Reinsurance").
On October 1, 1994,1996, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accountingtransferred approximately $2,690 million of
assets into a trust account held for Certain Investments in Debtthe benefit of The Lincoln National Life
Insurance Company and Equity Securities,"
which specifiedLincoln Life & Annuity Company of New York to effect the
accounting and reporting for certainsale of the TSA business (see Item 8 Note 5 "Sale of Tax-Sheltered Annuity
Business"). The assets transferred consisted of approximately $1,826 million of
short-term 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 of UNUM's fixed maturities have been classified as "held to
maturity" to match the longer term nature of UNUM's products.
- Fixed maturities and equity securities classified as "available for sale"
are reported at fair value. Related unrealized holding gains and losses,
net of deferred taxes, are reported in a separate component of
stockholders' equity. Fair values$589 million of fixed maturities are generally
obtainedand $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 external quoted market sources,the sale of the common stock portfolio primarily in investment
grade fixed income assets. The common stock sale accounts for the significantly
higher level of realized investment gains reported in 1995.
Fixed Maturities
Fixed maturities at fair value were $7,310.9 million and if not externally quoted,
are determined by UNUM primarily by using discounted cash flow models.
Upon the adoption of FAS 115, UNUM increased unrealized gains on available for
sale securities included in stockholders' equity on January 1, 1994, by $41.8
million (net of deferred taxes of $22.5 million) to reflect the unrealized
holding gains on fixed maturities classified as available for sale which were
previously carried at amortized cost. In accordance with FAS 115, prior year
consolidated financial statements have not been restated to reflect the change
in accounting principle. UNUM reclassified certain fixed maturities from held
to maturity to available for sale on January 1, 1994, in connection with the
adoption of FAS 115. The increasing interest rate environment during 1994
resulted in depressed fair values for available for sale fixed maturities, which
has decreased the initial $41.8 million increase in stockholders' equity to an
unrealized loss of $42.8$6,942.7 million
at December 31, 1994.1997, and 1996, respectively. UNUM's fixed maturity portfolio
is concentrated in high quality intermediate term bonds, which management
believes are well diversified by company and industry sector. At December 31,
1994,1997, approximately 80% of the bond portfolio was rated "A" or better. Fixed
maturity ratings are obtained from external rating agencies or are determined
internally by UNUM using similar methods if external ratings are not available.
The bond portfolio is primarily comprised of taxable corporate bonds.
Tax-exempt bonds were 13.7% of the total bond portfolio at December 31, 1997,
compared with 8.7% at December 31, 1996. Dependent on market conditions and 1993,tax
considerations, UNUM may invest in tax-exempt securities in the future.
23
The table below summarizes fixed maturity holdings by credit quality as of
December 31, 1997, and 1996.
Bond Credit Quality Ratings 1997 1996
- ----------------------------- ---------- ----------
AAA ......................... 16.2% 10.6%
AA .......................... 13.3 12.2
A ........................... 50.5 57.3
BAA ......................... 18.9 18.4
Below BAA ................... 1.1 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 higher vulnerability
to default.
At December 31, 1997, and 1996, the fixed maturity portfolio included
$193.8$83.7 million and $263.3$102.0 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$80.2 million and $279.1$101.7 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 affecteffect 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, 1994,1997, and
0.24% at
December 31, 1993.
During fourth quarter 1994, UNUM sold fixed maturities of five issuers
classified as held to maturity with an amortized cost of $49.8 million due to
evidence of significant unexpected deterioration of the issuers'
creditworthiness. These sales resulted in a net realized loss of $3.0 million.
MORTGAGES:1996.
Mortgages
At December 31, 1994,1997, and 1993,1996, UNUM's mortgage loans were $1,216.3$1,131.0
million and $1,432.2$1,132.1 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 continued to remain very low in 1994 as1997, 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 0.7% and 0.5% at
December 31, 1997, and 1996, respectively.
At December 31, 1997, and 1996, impaired loans totaled $43.4 million and
$50.4 million, respectively. Included in the $43.4 million of impaired loans at
December 31, 1997, were $20.8 million of loans which had a related allowance
providedfor probable losses of $3.5 million, and $22.6 million of loans which had no
related allowance for probable losses. Interest lost on impaired loans in 1997,
1996 and 1995, was not material.
Realized investment losses related to impaired mortgage loans amounted to
$3.3 million, $1.0 million and $9.2 million for 1997, 1996 and 1995,
respectively. Impaired mortgage loans as of December 31, 1994, is adequate1997, are not expected
to cover probable losses.have a significant impact on UNUM's results of operations, liquidity or
capital resources.
Restructured mortgage loans are defined by UNUM as loansthose whose terms have been modified to
interest rates less than market at the time of restructure and are currently
expected to perform pursuant to such modified terms. UNUM modifies loans to
protect its investment and only when it is anticipated that the borrower will
be able to meet the modified terms. As of December 31, 1994,1997, restructured
mortgage loans totaled $73.6$39.3 million, as compared with $65.9$54.8 million at
December 31, 1993.1996. Interest lost on restructured loans was not material in
1994, 19931997, 1996 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 at1995.
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 category1997, investment real estate amounted to $36.2$231.5 million,
compared with $248.1 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, 1994,1996. 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.
24
UNUM Corporation and Subsidiaries
Real estate that
has been acquired through foreclosure is valued at fair value at the date of
foreclosure. Realforeclosure and may be classified as investment real estate held for saleif it meets UNUM's
investment criteria. If investment real estate is included in other assets in the
Consolidated Balance Sheets and is valued net of an allowance which reducesdetermined to be permanently
impaired, the carrying valueamount of the asset is reduced to the lower of fair value less estimated costs to sell, or cost.value.
Occasionally, investment real estate is reclassified and revalued as real
estate held for sale when it no longer meets UNUM's investment criteria.
At December 31, 1997, and 1996, real estate held for sale amounted to
$23.3 million and $9.4 million, respectively. Real estate held for sale is
included in other assets in the Consolidated Balance Sheets and is valued net
of a valuation allowance that reduces the carrying value to the lower of fair
value less estimated costs to sell or cost. This valuation allowance is
periodically adjusted based on subsequent changes in UNUM's estimate of fair
value less costs to sell.
Additions to allowancesthe allowance for probable losses related to real estate held
for sale resulted in realized investment losses of $0.8 million, $18.8$3.0 million and $7.2$6.3
million for the years ended December 31, 1994, 19931997, and 1992,1995, respectively. GivenFor the
current real estate environment, additional foreclosures are
anticipated, but at a reduced level fromyear ended December 31, 1996, an investment gain of $0.4 million was realized.
Additions to the early 1990s. Current and
anticipated realallowance represent charges to net realized investment gains
or losses less recoveries. Real estate acquired through foreclosure is not
expected to have a significant affecteffect on UNUM's results of operations,
liquidity or capital resources.
LIQUIDITY AND CAPITAL RESOURCES
UNUM's businesses produce positive cash flows which are invested primarily
in intermediate term, fixed maturity investments intended to reflect the nature of
anticipated cash obligations of insurance benefit payments and insurance
contract maturities and to optimize investment returns at appropriate risk
levels. To meet unexpectedUnexpected cash requirements and liquidity needs UNUM maintains
part of itscan be met through
UNUM's investment portfolio inof fixed maturities classified as available for
sale, equity securities, cash and short-term investments.
From time to time, dividend payments, which may be subject to approval by
insurance regulatory authorities, are made from UNUM's affiliates and insurance
subsidiaries to UNUM
Corporation. These dividends, along with other funds, are used to service the
needs of UNUM Corporation including: debt service, common stock dividends,
corporate development, stock repurchase and administrative costscosts. Net statutory
operating income, which excludes realized investment gains and corporate
development. Income determined using statutory accountinglosses net of
tax, is one of the major determinants of an insurance company's dividend
capacity to its parent in the
following fiscal year.parent. Statutory accounting rules and practices, which differ
in certain respects from generally accepted accounting principles, are mandated
by regulators in an insurance company's state of domicile. In 1994, 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 relatedaddition to the
traditional non-cancellable individual disability products. As a result,level of net statutory operating income, UNUM's determination of amounts to be
dividended by affiliates to UNUM America recognized aCorporation depends on other factors such as
risk-based capital ratios, funding growth objectives at an affiliate level and
maintaining appropriate capital adequacy ratios as defined by certain rating
agencies (see "Ratings" section).
The states of domicile for UNUM's subsidiaries generally limit dividend
payments to the greater of the prior year's net statutory after-tax chargeoperating income or
10% of $69.6the prior year's statutory surplus. In 1997, UNUM's United States
insurance subsidiaries reported net statutory operating income of approximately
$227 million, compared with approximately $167 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, the1996. The amount
available under current law for payment of dividends during 1998 to UNUM
Corporation from all U.S. domiciled insurance subsidiaries during 1995, without state
insurance regulatory approval decreased tois approximately $81.3$210 million, as compared with
$176.8approximately $153 million for 1994.1997. UNUM Corporation also has the ability to
draw a dividend of approximately $30 million from its United Kingdom basedKingdom-based affiliate, UNUM Limited, subjectLimited. It is
not uncommon for an insurance entity to request regulatory approval for
dividends in excess of amounts available without such approval.
The risk-based capital ("RBC") standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, establish an
RBC ratio comparing adjusted surplus to required surplus for each of UNUM's
United States domiciled insurance subsidiaries. If the RBC ratio falls within
certain U.S. tax consequences.
Effectiveranges, regulatory action may be taken ranging from increased
information requirements to mandatory control by the domiciliary insurance
department. The RBC ratios for UNUM's insurance subsidiaries, measured at
December 13, 1994, management expanded UNUM Corporation's lines of
credit with31, 1997, were significantly above the ranges that would require
regulatory action.
Cash flow requirements are also supported by a new committed revolving credit
facility totaling $500 million, expiring onwhich expires October 1, 1999, which replaced previously existing facilities
totaling $300 million. UNUM Corporation's2001. UNUM's
commercial paper program is supported by the revolving credit facility and is
available for general liquidity needs, capital expansion, acquisitions and
stock repurchase. The committed revolving credit facility contains certain
covenants which,that, among other provisions, require maintenance of certain levels
of stockholders' equity and limits on leveldebt levels.
25
On December 4, 1997, UNUM borrowed 100 million pounds sterling ($168.3
million) through a private placement with an investor in the United Kingdom (see
Item 8 Note 8 "Notes Payable"). The borrowing has an expected term of debt.
In September 1993,ten years.
The borrowing is callable by either party over the life of the agreement, under
certain circumstances. UNUM announcedused the filing ofnet proceeds to repay commercial paper and
for general corporate purposes.
On July 16, 1996, UNUM filed 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 ("MTN")
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, 1994,1997, UNUM had short-term and long-term debt totaling
$246.6$126.6 million and $182.1$509.2 million, respectively. At December 31, 1994,1997,
approximately $280$449 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.
OnIn 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 $84.6 million and $56.7
million at December 31, 1997, and 1996, respectively.
Effective 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 with longer term securities.
In September 1993, UNUM announced the resumption of a program to repurchase its
common stock pursuant to an existing Board of Directors' resolution. On
February 11, 1994,13, 1998, 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 7.6by authorizing an
additional 4.6 million shares. At February 13, 1998, following the increased
authorization, approximately 6.0 million shares through December 31, 1994,of common stock remained
authorized for repurchase. During 1997 and 1996, UNUM acquired approximately
7.1 million and 3.8 million shares, respectively, of its common stock in the
open market at an aggregate cost of $375.8$285.2 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 72.4and $119.1 million,
from 76.0 million at December 31, 1993.
Prior to the resumption of this repurchase program,respectively. 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.
During 1994 and 1993, withdrawals of contracts reported in the Other Operations
segment, including contract terminations, payments to participants and transfers
to other carriers, were approximately $130 million and $309 million,
respectively. Withdrawals during 1994 and 1993 were at levels expected by
management and reflect the run-off nature of these closed blocks of businesses.
UNUM manages liquidity objectives by including certain conditions in pension
contracts which prohibit or restrict availability of funds.1995.
UNUM was committed at December 31, 1994,1997, to purchase fixed maturities and
other invested assets in the amount of $37.5$52.8 million. Independent of the cash
flows of UNUM Corporation, management anticipates that the operating cash flows
of the subsidiaries of UNUM Corporation will be sufficient to meet benefit
obligations, planned investment commitments and operational needs of those
companies.
RATINGS
Standard & Poor's Corporation ("Standard & Poor's"), Moody's Investors
Service ("Moody's") and A.M. Best Company ("A.M. Best") are among the third
parties that provide UNUM independent assessments of its overall financial
position. Ratings from these agencies for financial strength and claims paying
ability are available for the individual United States 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. Debt ratings for UNUM Corporation are based on
consolidated financial information prepared using generally accepted accounting
principles.
26
UNUM Corporation and Subsidiaries
The table below reflects the debt ratings for UNUM Corporation and the
claims paying ability and financial strength ratings for UNUM's United States
domiciled insurance company subsidiaries at February 23, 1998:
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 A A2
(Monthly Income Debt Securities) (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 February 23, 1998, the unsold portion of the shelf registration related
to preferred stock carried a rating of "(P)"a1" " (Upper-Medium Quality) from
Moody's.
DERIVATIVES
Refer to Item 8 Note 14 "Derivatives" for information.
LITIGATION
Refer to Item 8 Note 15 "Litigation" for information.
EFFECT OF INFLATION
Inflation is one of the factors that has increased the need for insurance. Many
policyholders who once had adequate insurance programs at lower coverage levels
have increased their disability insurance coverage to provide the same relative
financial benefits and protection.
Changing interest rates, which are traditionally linked to changes in
inflation, affect UNUM's level of discounted reserves. While rising interest
rates are beneficial when the company is investing current cash flows, they can
also reduce the fair value of existing fixed rate long-term investments. In
addition, lower interest rates can lead to early payoffs and refinancing of
some of UNUM's fixed rate investments. Management generally invests in fixed
rate instruments that are structured to limit the exposure to such reinvestment
risk.
RATINGS
A.M. Best Company ("Best's"), Moody's Investors Service ("Moody's") and Standard
& Poor's Corporation ("S&P") are amongYEAR 2000 ISSUE
The year 2000 issue relates to whether computer systems will properly
recognize date-sensitive information when the third partiesyear changes to 2000. UNUM has
determined that provide UNUM
independent assessmentsit is required to modify or replace significant portions of its
overall financial position. Ratings from these
agencies for financial strength and claims-paying ability are available for the
United States domiciled insurance company subsidiaries rather than on a
consolidated basis, since the financial information used to develop the ratings
is based on statutory accounting practices in the United States.
UNUM's largest affiliate, UNUM Life Insurance Company of America ("UNUM
America"), hadsoftware so its Best's financial strength rating affirmed at "A++"
(Superior), the highest rating assigned by Best's, in May 1994. Best's again
affirmed UNUM America's "A++" rating in November 1994. In January 1995, S&P
completed its review of UNUM America and lowered its claims-paying ability
rating to "AA" (Excellent) from "AA+" (Excellent). According to S&P, the
downgrade was a result of pressures on risk-adjusted capitalization and higher
financial leverage, due in part to lower profitability. In March 1995, Moody's
completed its review of UNUM America and lowered its financial strength
rating to "Aa2" (Excellent) from "Aa1" (Excellent) citing the outlook for UNUM's
group long term disability business as well as UNUM's increasing leverage and
moderately reduced financial flexibility.
First UNUM Life Insurance Company ("First UNUM") also had its financial strength
rating reaffirmed by Best's in May 1994, at "A+" (Superior). In January 1995,
S&P lowered First UNUM's claims-paying ability rating to "AA" (Excellent) from
"AA+" (Excellent). In March 1995, Moody's confirmed First UNUM's "Aa2"
(Excellent) financial strength rating.
Colonial Life & Accident Insurance Company ("Colonial Life") had its Best's
financial strength rating affirmed as "A+" (Superior) in May 1994. In March
1994, S&P assigned an "AA-" (Excellent) claims-paying ability rating to
Colonial. Subsequently, in January 1995, S&P affirmed Colonial's "AA-"
(Excellent) rating. In March 1995, Moody's lowered Colonial's financial
strength rating to "Aa3" (Excellent) from "Aa2" (Excellent).
Commercial Life Insurance Company had its Best's financial strength rating
upgraded to "A" (Excellent) in July 1994.
UNUM Corporation has the following debt ratings based on consolidated financial
information under generally accepted accounting principles. In January 1995,
S&P lowered the senior debt rating of UNUM Corporation to "A+" (Strong) from
"AA" (Very Strong), and lowered the commercial paper rating to "A-1" (Strong)
from "A-1+" (Extremely Strong). In March 1995, Moody's lowered UNUM
Corporation's senior debt rating to "A1" (Medium Quality) from "Aa3" (High
Quality) and confirmed the commercial paper rating of "P-1" (Superior Ability).
INSURANCE REGULATION
The National Association of Insurance Commissioners adopted a set of Risk-Based
Capital standards for the life and health insurance industry, which became
effective in 1993. These Risk-Based Capital standards are one way to measure
the riskcomputer systems will properly function using dates beyond
December 31, 1999. Management presently believes that insurance companies assume in the course of conducting insurance
and investment activities.
The Risk-Based Capital standards for life insurance companies are based on a
formula that establishes capital requirements relatingwith modifications to
existing asset default
risk, insurance risk, interest rate (asset/liability mismatch) risksoftware and business
risk. A company's Total Adjusted Capital (statutory capital, surplus,conversions to new software, the year 2000 issue can be
rectified. UNUM has initiated formal communications with its critical suppliers
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 testslarge customers to determine the change inextent to which it is vulnerable to the
ACL ratio frompossibility of third parties' failing to remediate their own year 2000 issues.
Management is utilizing both internal and external resources to reprogram, or
replace, and test the software for year companies with Total Adjusted Capital above 200%2000 modifications and plans to have
its computer systems compliant by year 2000. The financial impact of ACL are assumedaddressing
the year 2000 issue has not had, and is not anticipated to be
adequately capitalized. Companies below 200%have, a material
adverse impact on UNUM's results of ACL are identified as requiring
various levelsoperations, liquidity or capital resources.
The costs of regulatory action ranging from increased information
requirements for companies between 150% and 200% of ACL, to mandatory control by
the domiciliary insurance department for companies below 70% of ACL.
At December 31, 1994, the ACL ratios for UNUM America, First UNUM, Colonial Life
and Commercial Life were approximately 305%, 355%, 440% and 380%, respectively.
This compares with ACL ratios at December 31, 1993, of approximately 350%, 390%,
450% and 380%, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments such as options,
futures and forward exchange contracts to hedge certain risks associated with
future investments and certain payments denominated in foreign currencies,
primarily British pound sterling, Canadian dollar and Japanese yen. These
derivative financial instruments are used to protect UNUM from the effect of
market fluctuations in interest and exchange rates between the contract dateproject and the date on which UNUM plans to complete year 2000
modifications are based on management's best estimates, derived using numerous
assumptions about future events including the hedged transaction occurs. UNUM does not intendcontinued availability of certain
resources, third party modification plans and other factors.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Refer to hold
derivativeItem 8 Note 1 under the caption "Accounting Pronouncements
Adopted" for information.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Item 8 Note 1 under the caption "New Accounting Pronouncements"
for information.
27
Item 7A--Quantitative and Qualitative Information About Market Risk
Market-Sensitive Instruments and Risk Management
The following discussion about UNUM's risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements (see "Forward-Looking Information" in Item 7).
UNUM's financial instruments forare exposed to market risk, which is the purposerisk
of trading.
At December 31, 1994, UNUM had no open derivativemarket volatility and potential disruptions in the market that may result in
certain financial instruments. At
December 31, 1993, UNUM heldinstruments becoming less valuable. UNUM's primary market
risk is interest rate futures contracts with commitments to
purchase government securities with total par valuesrisk, which is the sensitivity of $207.0 million. In
using theseearnings, cash flows
and the fair value of financial instruments UNUM is subject to the off-balance-sheet risk that the
counterparties to the transactions will fail to completely perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges.
NEW ACCOUNTING PRONOUNCEMENT
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 114 "Accounting by Creditors for Impairment of a
Loan," which defines the principles to measure and record a loan when it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement.
In October 1994, the FASB issued FAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which amends FAS 114
to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan. UNUM will adopt FAS 114 and FAS
118 effective January 1, 1995. Adoption of FAS 114 and FAS 118 is not expected
to have a material effect on UNUM's results of operations or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1994 1993 1992
----------------------------------------------------------------------------------------------
REVENUES
Premiums $2,732.4 $2,474.1 $2,142.4
Investment income 770.2 790.4 809.2
Net realized investment gains 45.6 49.4 41.5
Fees and other income 75.5 83.1 55.4
----------------------------------------------------------------------------------------------
Total revenues 3,623.7 3,397.0 3,048.5
BENEFITS AND EXPENSES
Benefits to policyholders 2,248.1 1,775.7 1,532.6
Interest credited 242.7 281.0 328.4
Operating expenses 715.0 675.6 590.9
Commissions 355.9 326.8 298.9
Increase in deferred policy acquisition costs (155.3) (135.1) (111.7)
Interest expense 18.7 12.7 10.9
----------------------------------------------------------------------------------------------
Total benefits and expenses 3,425.1 2,936.7 2,650.0
----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECTS
OF ACCOUNTING CHANGES 198.6 460.3 398.5
INCOME TAXES
Current 30.4 73.4 68.0
Deferred 13.5 74.9 39.3
----------------------------------------------------------------------------------------------
Total income taxes 43.9 148.3 107.3
----------------------------------------------------------------------------------------------
Income before cumulative effects of accounting changes 154.7 312.0 291.2
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 20.0 --
Postretirement benefits other than pensions, net of tax -- (32.1) --
----------------------------------------------------------------------------------------------
NET INCOME $ 154.7 $ 299.9 $ 291.2
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before cumulative effects of accounting changes $ 2.09 $ 3.96 $ 3.71
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 0.25 --
Postretirement benefits other than pensions, net of tax -- (0.40) --
----------------------------------------------------------------------------------------------
NET INCOME $ 2.09 $ 3.81 $ 3.71
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities:
Held to maturity-principally at amortized cost
(fair value: 1994-$6,168.6; 1993-$7,149.9) $ 6,227.2 $ 6,560.7
Available for sale-at fair value (amortized
cost: $1,701.4) 1,640.6 --
Available for sale-principally at amortized
cost (fair value: $929.9) -- 872.0
Equity securities available for sale-at fair value
(cost: 1994-$492.2; 1993-$508.3) 627.9 730.0
Mortgage loans 1,216.3 1,423.2
Real estate, net 190.8 193.5
Policy loans 201.0 187.9
Other long-term investments 38.1 59.0
Short-term investments 291.9 69.6
-------------------------------------------------------------------------------------------------------
Total investments 10,433.8 10,095.9
Cash 36.1 20.8
Accrued investment income 195.9 184.0
Premiums due 189.7 165.5
Deferred policy acquisition costs 1,035.2 879.1
Property and equipment, net 153.4 143.5
Other assets 737.2 681.8
Separate account assets 345.9 266.7
-------------------------------------------------------------------------------------------------------
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 the level of interest
rates, resultant
prepayment risk, liquidityrates. In accordance with the Securities 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 inExchange Commission's Financial
Reporting Release No. 48, the Consolidated Balance Sheets, is valued atfollowing quantitative analysis provides 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 declineloss in fair value of an invested asset is considered to be other than
temporary, the investment is reduced to its net realizable valuecertain market sensitive financial assets and
the
reduction is accounted for asliabilities held at December 31, 1997, given a realized investment loss. Subsequent increaseshypothetical 10-percent adverse
change in interest rates and decreases in fair value, if not an other than temporary impairment,related qualitative information on how UNUM
manages interest rate risk. All 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-termUNUM's financial instruments are partheld for
purposes other than trading.
Interest-Rate Risk Management
UNUM's asset/liability duration management activities represent a key
element for managing interest rate risk to the overall business. The objective
of investing
activities and not necessarily aasset/liability duration management is to support the achievement of
business strategies while minimizing levels of investment risk, which includes
interest rate risk. As part of the cashCompany's asset/liability duration
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 amountstrategy, detailed actuarial models 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 arecash flows associated
with earned premiumseach type of insurance liability are generated under various interest rate
scenarios allowing the calculation of an estimated duration for each insurance
product line. This duration measure can then be used to result in
recognition of profits overcompare the lifeprice
sensitivities 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 consistsinsurance liabilities versus the price sensitivities 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 andfinancial assets 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 representrequired liability cash flows. When
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 basesdurations of assets and liabilities are equal, interest rate exposure is
effectively neutralized on an economic basis as the change in value of
financial assets should be largely offset by the change in the value of the
liabilities.
The model used in the following analysis included UNUM's fixed maturities,
mortgage loans and are measured using enacted taxdeposit assets held at December 31, 1997, and incorporated
assumptions regarding the impact of changing interest rates on expected cash
flows for certain financial assets with prepayment features, such as callable
bonds, mortgage-backed securities and 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 SHAREmortgage loans. The weighted average number of shares outstanding used to calculate earnings
per share was approximately 74,158,000, 78,779,000 and 78,542,000hypothetical
reduction 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. Derivedthe 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 instrumentsassets included in the model
resulting from a hypothetical 10-percent adverse change in interest rates
prevalent 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 used1997, is estimated to be $323 million. In
consideration of UNUM's ongoing strategy of asset/liability duration alignment,
this hypothetical reduction 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,would be largely offset by the
corresponding decrease in the casefair value of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the yield, credit
qualityinsurance reserves.
UNUM has established policies and maturityprocedures governing its issuance of
the investments.
EQUITY SECURITIES AVAILABLE FOR SALE: Fair values for equity securities
available for sale are based on quoted market pricesdebt. UNUM manages its debt composition 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 ofrelated interest rate risk which minimizesby
considering such factors as the debt to equity ratio, fixed rate to variable
rate debt ratio, future debt requirements, interest rate environment and market
conditions. Based upon the interest rate exposure relating 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-termUNUM's 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 maturitiespayable 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 estimated1997, a hypothetical 10-percent adverse change in
interest rates in the near term would not materially affect the 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 INSTRUMENTSUNUM's notes payable.
Additionally, UNUM periodically uses options, futures and interest rate
swaps, which are common derivative financial instruments, such as options,
futures and forward exchange contracts to hedge certain risksinterest
rate risk 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 datedebt issuance (see Item 8 Note 14 "Derivatives" for further information on
which the hedged transaction occurs. UNUM does not intend
to hold derivative financial instruments for the purpose of trading.
At December 31, 1994, UNUM had no open derivative financial instruments. At
December 31, 1993, UNUM held interest rate futures contracts with commitments
to purchase government securities with total par values of $207.0 million. In
using these instruments, UNUM is subject to the off-balance-sheet risk that the
counterparties to the transactions will fail to completely perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges.
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.derivatives).
28
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 1994Subsidiaries
Item 8--Financial Statements 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:Supplementary Data
Restricted
Options Stock
-------------------------------------------------------------------------------INDEX Page
- ------------------------------------------------------------------------------------------ -----
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
LapseReport 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'sIndependent Accountants ........................................................ 30
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. 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 INFORMATION
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 Limited in the United Kingdom, Commercial
Life Insurance Company, and reinsurance operations including Duncanson & Holt,
Inc. The Colonial Companies segment includes Colonial Companies, Inc. and
subsidiaries, which offer payroll-deducted, voluntary employee benefits to
employees at their worksites. The Individual Disability segment includes
disability income products. The Retirement Security segment includes tax
sheltered annuities, long term care insurance and lifestyle security protection
products. The Other Operations segment includes individual life insurance
business of UNUM Life Insurance Company of America, group medical operations,
guaranteed investment contracts, deposit administration accounts, and 401(k)
plans, all of which are no longer actively marketed by UNUM. Corporate
includes transactions which are generally non-insurance related and expenses
incurred to effect the March 26, 1993, merger of UNUM and Colonial.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. SEGMENT INFORMATION (Continued)
Summarized financial information for the six business segments 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)
The following is a summary of unaudited quarterly results of operations for
1994 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
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 2, 1993, the Registrant determined not to reappoint Ernst & Young
L.L.P. as the Registrant's independent auditors for 1993. Also on August 2,
1993, the Registrant engaged Coopers & Lybrand L.L.P. as the Registrant's
independent auditors. In connection with the audit of the fiscal year ended
December 31, 1992, and for the interim period dating from January 1, 1993, until
August 2, 1993, there were no disagreements between Ernst & Young L.L.P. and the
Registrant on any matter of accounting principles or practices, financial
statements disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of Ernst & Young L.L.P., would have resulted in reference or
disclosure in Ernst & Young L.L.P.'s reports.
Ernst & Young L.L.P.'s report for the fiscal year ended December 31, 1992,
contained no adverse opinion, no disclaimer of opinion and no qualification or
modification of opinion as to uncertainty, audit scope, or accounting
principles.
The change of independent auditors was recommended by the Audit 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 information under the caption "Election of Directors" included in UNUM's
proxy statement dated March 28, 1995, 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 24, 1995) POSITION HELD WITH UNUM SINCE
----------------------- ------------------- ------------------------------------------------------------------ ----------
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 Chief 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, 1994, 19931997, 1996 and 1992............................1995 .. 31
Consolidated Balance Sheets as of December 31, 1994,1997, and 1993.....................................................1996 ........................... 32
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 19931997, 1996 and 1992..............1995 ....................................................... 33
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1994, 19931997, 1996 and 1992........................1995 ................................................. 34
Notes to Consolidated Financial Statements........................................................................Statements ............................................... 36
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)
29
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, 19941997 and 1993,1996, and the
consolidated results of their operations and their cash flows for each of the
twothree years in the period ended December 31, 1994,1997 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, 1995,4, 1998, except for Note 1110 for which the
date is February 28, 199513, 1998
30
REPORTUNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INDEPENDENT AUDITORS
ToINCOME
Year Ended December 31,
---------------------------------------------
(Dollars in millions, except per common share data) 1997 1996 1995
- ------------------------------------------------------- ------------- ------------- -------------
Revenues
Premiums .............................................. $ 3,188.7 $ 3,120.4 $ 3,018.2
Investment income ..................................... 657.9 802.2 806.3
Net realized investment gains (losses) ................ (3.6) 3.4 225.1
Fees and other income ................................. 233.7 116.7 73.3
---------- --------- ---------
Total revenues ...................................... 4,076.7 4,042.7 4,122.9
Benefits and expenses
Benefits to policyholders ............................. 2,395.3 2,324.7 2,493.0
Interest credited ..................................... 83.5 200.6 227.4
Operating expenses .................................... 790.6 862.6 728.2
Commissions ........................................... 371.2 364.2 369.9
Increase in deferred policy acquisition costs ......... (142.7) (91.7) (114.7)
Interest expense ...................................... 42.4 40.7 37.2
---------- ---------- ----------
Total benefits and expenses ......................... 3,540.3 3,701.1 3,741.0
---------- ---------- ----------
Income before income taxes 536.4 341.6 381.9
Income taxes
Current ............................................... 68.3 122.3 98.6
Deferred .............................................. 97.8 (18.7) 2.2
---------- ---------- ----------
Total income taxes .................................. 166.1 103.6 100.8
---------- ---------- ----------
Net income ............................................ $ 370.3 $ 238.0 $ 281.1
========== ========== ==========
Net income per common share:
Basic ................................................ $ 2.65 $ 1.63 $ 1.93
Diluted .............................................. $ 2.59 $ 1.61 $ 1.92
========== ========== ==========
See notes to consolidated financial statements.
31
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
(Dollars in millions) 1997 1996
- ------------------------------------------------------------- ------------- -------------
ASSETS
Investments
Fixed maturities available for sale--at fair value
(amortized cost: 1997--$6,893.0; 1996--$6,656.7) .......... $ 7,310.9 $ 6,942.7
Equity securities available for sale--at fair value
(cost: 1997--$21.1; 1996--$23.8) .......................... 30.7 31.3
Mortgage loans ............................................. 1,131.0 1,132.1
Real estate, net ........................................... 231.5 248.1
Policy loans ............................................... 128.5 232.9
Other long-term investments ................................ 1.8 14.2
Short-term investments ..................................... 99.7 123.4
---------- ----------
Total investments ........................................ 8,934.1 8,724.7
Cash ........................................................ 47.9 77.0
Accrued investment income ................................... 160.3 166.1
Premiums due ................................................ 307.8 252.4
Deferred policy acquisition costs ........................... 983.5 844.2
Property and equipment, net ................................. 196.2 181.0
Reinsurance receivables ..................................... 1,357.0 1,113.8
Deposit assets .............................................. 688.3 2,846.6
Other assets ................................................ 495.6 518.0
Separate account assets ..................................... 29.6 743.7
---------- ----------
Total assets ............................................. $ 13,200.3 $ 15,467.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits ..................................... $ 1,981.4 $ 1,881.1
Unpaid claims and claim expenses ........................... 5,831.6 5,289.3
Other policyholder funds ................................... 1,004.9 3,533.6
Income taxes
Current ................................................... 20.7 61.3
Deferred .................................................. 496.2 341.8
Notes payable .............................................. 635.8 526.9
Other liabilities .......................................... 765.3 826.7
Separate account liabilities ............................... 29.6 743.7
---------- ----------
Total liabilities ........................................ 10,765.5 13,204.4
Stockholders' equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
240,000,000 shares, issued 199,975,916 shares ............. 20.0 10.0
Additional paid-in capital ................................. 1,123.0 1,103.4
Unrealized gains, net ...................................... 211.4 82.3
Unrealized foreign currency translation adjustment ......... (16.0) (1.2)
Retained earnings .......................................... 2,162.5 1,871.4
---------- ----------
3,500.9 3,065.9
Less:
Treasury stock, at cost (1997--61,703,924 shares;
1996--56,331,188 shares) .................................. 1,050.3 792.2
Restricted stock deferred compensation ..................... 15.8 10.6
---------- ----------
Total stockholders' equity ................................. 2,434.8 2,263.1
---------- ----------
Total liabilities and stockholders' equity ............... $ 13,200.3 $ 15,467.5
========== ==========
See notes to consolidated financial statements.
32
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
(Dollars in Gains (Losses) Unrealized
millions, Common On Available Foreign Restricted
except per Stock Additional for Sale Currency Stock
common share $0.10 Par Paid-in Securities, Translation Retained Treasury Deferred
data) Value Capital Net Adjustment Earnings Stock Compensation Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
January 1, 1995 .......$ 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
($0.5175 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
($0.545 per
common share) ......... (79.8) (79.8)
Treasury stock
acquired .............. (119.1) (119.1)
Employee stock
option and other
transactions .......... 15.2 18.5 (3.7) 30.0
------- ---------- -------- ------- ---------- ---------- ------- ----------
Balance at
December 31, 1996 ..... 10.0 1,103.4 82.3 (1.2) 1,871.4 (792.2) (10.6) 2,263.1
1997 Transactions:
Net income ............. 370.3 370.3
Unrealized gains
on available
for sale
securities, net ....... 129.1 129.1
Unrealized foreign
currency
translation
adjustment ............ (14.8) (14.8)
Two-for-one
common stock split .... 10.0 (10.0) --
Dividends to
stockholders
($0.565 per
common share) ......... (79.2) (79.2)
Treasury stock
acquired .............. (285.2) (285.2)
Employee stock
option and other
transactions .......... 29.6 27.1 (5.2) 51.5
------- ---------- -------- ------- ---------- ---------- ------- ----------
Balance at
December 31, 1997 .....$ 20.0 $ 1,123.0 $ 211.4 $ (16.0) $ 2,162.5 $ (1,050.3) $ (15.8) $ 2,434.8
======= ========== ======== ======= ========== ========== ======= ==========
See notes to consolidated financial statements.
33
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------
(Dollars in millions) 1997 1996 1995
- ------------------------------------------------------------------- ------------- ------------- -------------
Operating activities:
Net income ........................................................ $ 370.3 $ 238.0 $ 281.1
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in future policy benefits and unpaid claims and
claim expenses .................................................. 599.7 630.1 905.3
Increase in amounts receivable under reinsurance
agreements ...................................................... (227.8) (686.7) (61.0)
Increase (decrease) in income tax liability ...................... 52.8 20.4 (3.5)
(Increase) decrease in deferred policy acquisition costs ......... (140.0) 299.2 (114.9)
Increase in deposit assets ....................................... (55.9) (432.1) --
Deferral (recognition) of gain on sale of tax-sheltered
annuities ....................................................... (72.6) 80.8 --
Charge for individual disability reinsurance fees ................ -- 49.7 --
Realized investment (gains) losses ............................... 4.4 4.0 (242.0)
Other ............................................................ (59.7) 76.4 (8.9)
---------- ---------- ----------
Net cash provided by operating activities ...................... 471.2 279.8 756.1
---------- ---------- ----------
Investing activities:
Maturities of fixed maturities available for sale ................. 457.7 775.2 99.3
Maturities of fixed maturities held to maturity ................... -- -- 835.7
Sales of fixed maturities available for sale ...................... 652.1 2,514.4 577.3
Sales of fixed maturities held to maturity ........................ -- -- 2.8
Sales of equity securities available for sale ..................... 2.2 -- 836.7
Sales and maturities of other investments ......................... 232.7 269.5 312.0
Purchases of fixed maturities available for sale .................. (1,360.6) (1,890.9) (1,971.9)
Purchases of fixed maturities held to maturity .................... -- -- (230.2)
Purchases of equity securities available for sale ................. -- -- (131.3)
Purchases of other investments .................................... (216.3) (263.0) (322.4)
Net (increase) decrease in short-term investments ................. 23.5 (1,051.9) (604.8)
Net additions to property and equipment ........................... (26.1) (54.3) (28.9)
---------- ---------- ----------
Net cash provided by (used in) investing activities ............ (234.8) 299.0 (625.7)
---------- ---------- ----------
Financing activities:
Deposits and interest credited to investment contracts ............ 285.1 597.1 669.6
Maturities and withdrawals from investment contracts .............. (327.2) (903.8) (888.1)
Dividends to stockholders ......................................... (79.2) (79.8) (75.1)
Treasury stock acquired ........................................... (285.2) (119.1) --
Proceeds from notes payable ....................................... 168.3 -- 291.5
Repayment of notes payable ........................................ (48.5) (15.0) (1.3)
Net decrease in short-term debt ................................... (10.6) (42.3) (135.1)
Other ............................................................. 32.8 18.9 13.8
---------- ---------- ----------
Net cash used in financing activities .......................... (264.5) (544.0) (124.7)
---------- ---------- ----------
Effect of exchange rate changes on cash ........................... (1.0) (0.3) 0.7
---------- ---------- ----------
Net increase (decrease) in cash ................................... (29.1) 34.5 6.4
Cash at beginning of year ......................................... 77.0 42.5 36.1
---------- ---------- ----------
Cash at end of year ............................................... $ 47.9 $ 77.0 $ 42.5
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes ..................................................... $ 76.1 $ 76.4 $ 82.6
Interest ......................................................... $ 43.3 $ 40.8 $ 44.7
See notes to consolidated financial statements.
34
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of noncash operating and investing activities:
As discussed in Note 5, "Sale of Tax-Sheltered Annuity Business," consent
for assumption reinsurance has been given by contractholders and participants
owning approximately 92% of assets under management related to the
Directorstax-sheltered annuity business UNUM sold in 1996. In connection with the
consents received during 1997, UNUM reduced its deposit assets by $2,317.8
million, policy loan assets by $104.8 million, other policyholder fund
liabilities by $2,486.5 million and Stockholders
UNUM Corporation
Portland, Maine
We have auditedseparate account assets and liabilities by
$526.5 million.
In conjunction with the sale of UNUM's tax-sheltered annuity business
during 1996, fixed maturities available for sale of $588.6 million and
short-term investments of $1,825.9 million were transferred to the buyer on
October 1, 1996. Upon transfer, there was a corresponding increase in UNUM's
deposit assets.
See notes to consolidated statementsfinancial statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of income, stockholders' equity,
and cash flowsPresentation
The accompanying consolidated financial statements of UNUM Corporation and
subsidiaries ("UNUM") have been prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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 1996 and 1995 amounts have been reclassified in 1997 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 realized investment loss.
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.
36
UNUM Corporation and Subsidiaries
Real estate held for sale is included in other assets in the Consolidated
Balance Sheets and is valued net of a valuation allowance that reduces the
carrying value to the lower of fair value less estimated costs to sell or cost.
This valuation allowance is periodically adjusted based on subsequent changes
in UNUM's estimate of fair value less costs to sell.
Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management program.
Therefore, short-term financial instruments are classified as investments in
the Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.
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) 1997 1996 1995
- ------------------------------------------------------------ ----------- ----------- -----------
Deferred ................................................ $ 341.4 $ 305.6 $ 308.3
Less amortized .......................................... (198.7) (213.9) (193.6)
-------- -------- --------
Increase in deferred policy acquisition costs ......... $ 142.7 $ 91.7 $ 114.7
======== ======== ========
Separate Accounts
Certain assets from tax-sheltered annuity ("TSA") contracts are in
separate accounts that are pooled investment funds of securities. Prior to
January 1, 1997, the assets of UNUM's defined benefit plan were held in the
separate accounts (see Note 9 "Employee Benefit and Incentive Plans").
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 Life Insurance Company of America ("UNUM
America") and First UNUM Life Insurance Company ("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, both subsidiaries of
Lincoln National Corporation (see Note 5 "Sale of Tax-Sheltered Annuity
Business"). For legal considerations, the separate account's TSA related assets
were not transferred on October 1, 1996. TSA related assets are transferred
only upon receipt of a contractholder and participant's consent for assumption
reinsurance.
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 benefit
of all of Union Mutual's individual participating life and annuity policies and
contracts.
The assets of the PFA provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies and
annuity contracts. This line of business participates in the experience of the
PFA and its operations have been excluded from the Consolidated Statements of
Income. The PFA represented approximately 2.8% and 2.3% of consolidated assets
and 3.3% and 2.7% of consolidated liabilities at December 31, 1997, and 1996,
respectively.
Other Policyholder Funds
Other policyholder funds are liabilities for investment-type contracts and
represent customer deposits plus interest credited to those deposits at various
rates.
37
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.
Income Taxes
The provision for income taxes includes amounts currently payable and
deferred income taxes, which result from differences between financial
reporting and tax bases of assets and liabilities and are measured using
enacted tax rates and laws. A valuation allowance is established for deferred
tax assets when it is more likely than not that an amount will not be realized.
Foreign Currency Translation
Foreign subsidiaries' balance sheet and income statement accounts
expressed in local functional currencies are translated into U.S. dollars using
ending and quarterly average exchange rates, respectively. The resulting
translation adjustments are reported in a separate component of stockholders'
equity.
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 matched 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.
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.
Earnings Per Share
Effective December 31, 1997, UNUM adopted Financial Accounting Standards
("FAS") No. 128, "Earnings Per Share," which requires dual presentation of
basic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing
net income available to common stockholders by the weighted average number of
common shares outstanding. The weighted average number of shares outstanding
used to calculate basic EPS was approximately 139,852,000, 145,939,000 and
145,354,000 in 1997, 1996 and 1995, respectively. Diluted EPS is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding while giving effect to all dilutive
potential common shares outstanding. The weighted average number of shares
outstanding used to calculate diluted EPS was approximately 142,923,000,
148,028,000 and 146,609,000, in 1997, 1996 and 1995, respectively. Outstanding
options to purchase approximately 227,000 shares, 143,000 shares and 1,769,000
shares for 1997, 1996 and 1995, respectively, were not dilutive because the
options' exercise prices were greater than the average market price. These
options were excluded from the diluted EPS calculation.
Changes in Accounting Estimates
During fourth quarter 1997, certain reinsurance pools managed by UNUM's
wholly-owned subsidiary, Duncanson & Holt Inc. ("D&H"), received new claim
information from ceding insurance enterprises about certain
38
UNUM Corporation and Subsidiaries
older pool years and completed an analysis of recent claims experience
deterioration. As a result of these factors, certain pools have strengthened
claim reserves. The impact to UNUM in fourth quarter 1997 from these pool claim
reserve increases was an $11.7 million reduction in fee income and a $6.7
million increase in benefits to policyholders reported in the Special Risk
Insurance segment, reducing net income by $12.0 million in the Consolidated
Statement of Income.
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.
During 1995, UNUM increased 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.
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 reported in the Disability Insurance segment,
decreased net income by $9.8 million.
Accounting Pronouncements Adopted
Effective December 31, 1997, UNUM adopted FAS No. 128 which changed the
computation of EPS and requires dual presentation of "basic" and "diluted" EPS.
FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share."
Effective December 31, 1997, UNUM adopted FAS No. 129, "Disclosures of
Information About Capital Structure," which consolidates disclosure
requirements related to the type and nature of securities contained in an
entity's capital structure. FAS 129 does not add to or change any of UNUM's
disclosures.
Effective January 1, 1997, UNUM adopted FAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which established accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The statement provides guidance for recognition or derecognition of assets and
liabilities, focusing on the concepts of control and extinguishment. The
adoption of FAS 125 did not have a material effect on UNUM's results of
operations or financial position.
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. The adoption of FAS 121 did not have a material effect on
UNUM's results of operations or financial position.
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 APB
25, "Accounting for Stock Issued to Employees." UNUM retained the accounting
defined under APB 25, and as required, discloses in a footnote the pro forma
effects of stock-based compensation using the fair value based method defined
under FAS 123. Refer to Note 10 "Stockholders' Equity" for the related
disclosures.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a financial
statement with the same prominence as other financial statements. Comprehensive
income is defined as net income adjusted for changes in stockholders' equity
resulting from events other than net income
39
or transactions related to an entity's capital instruments. UNUM is required to
adopt FAS 130 effective January 1, 1998, with reclassification of financial
statements for earlier years required.
In June 1997, the FASB issued FAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments. Generally, FAS 131 requires
that financial information be reported on the basis that is used internally for
evaluating performance. UNUM is required to adopt FAS 131 effective January 1,
1998, and comparative information for earlier years must be restated. This
statement does not need to be applied to interim financial statements in the
initial year of application. UNUM is currently considering what impact, if any,
FAS 131 will have on its current segment reporting structure.
In February 1998, the FASB issued FAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises current
disclosure requirements for employers' pension and other retiree benefits. FAS
132 does not change the measurement or recognition of pension or other
postretirement benefit plans. UNUM is required to adopt FAS 132 effective
January 1, 1998, with restatement of disclosures for earlier years required.
In December 1997, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments," which provides guidance on
accounting for insurance-related assessments. UNUM is required to adopt SOP
97-3 effective January 1, 1999. Previously issued financial statements should
not be restated unless the SOP is adopted prior to the effective date and
during an interim period. The adoption of SOP 97-3 is not expected to have a
material impact on UNUM's results of operations, liquidity or financial
position.
40
UNUM Corporation and Subsidiaries
NOTE 2. INVESTMENTS
The following tables summarize the components of investment income, net
realized investment gains (losses) and changes in unrealized gains, net:
Investment Income
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1997 1996 1995
- ----------------------------------------------------------- ----------- ----------- -----------
Fixed maturities:
Available for sale .................................... $ 539.1 $ 642.2 $ 182.2
Held to maturity ...................................... -- -- 488.0
Equity securities available for sale ................... -- -- 5.3
Mortgage loans ......................................... 110.6 112.1 119.9
Real estate ............................................ 23.1 20.0 15.2
Policy loans ........................................... 6.7 10.2 8.6
Other long-term investments ............................ 2.8 7.3 1.6
Short-term investments ................................. 14.5 51.2 27.1
-------- -------- --------
Gross investment income ............................... 696.8 843.0 847.9
Less investment expenses ............................... (14.5) (16.3) (17.0)
Less investment income on participating individual
life insurance policies and annuity contracts ......... (24.4) (24.5) (24.6)
-------- -------- --------
Investment income ..................................... $ 657.9 $ 802.2 $ 806.3
======== ======== ========
Net Realized Investment Gains (Losses)
Year Ended December 31,
------------------------------------
(Dollars in millions) 1997 1996 1995
- ----------------------------------------------------- ---------- ---------- ----------
Gross realized investment gains:
Fixed maturities:
Available for sale .............................. $ 17.1 $ 22.0 $ 14.2
Held to maturity ................................ -- -- 0.1
Equity securities available for sale ............. 0.7 -- 253.3
Mortgage loans, real estate and other ............ 6.6 18.2 19.4
------- ------- -------
Gross realized investment gains ................. 24.4 40.2 287.0
------- ------- -------
Gross realized investment losses:
Fixed maturities:
Available for sale .............................. (14.6) (29.2) (12.8)
Held to maturity ................................ -- -- (0.7)
Equity securities available for sale ............. -- -- (18.7)
Mortgage loans, real estate and other ............ (13.4) (7.6) (29.7)
------- ------- -------
Gross realized investment losses ................ (28.0) (36.8) (61.9)
------- ------- -------
Net realized investment gains (losses) ......... $ (3.6) $ 3.4 $ 225.1
======= ======= =======
During 1995, UNUM sold fixed maturities of two issuers classified as held
to maturity due to evidence of significant deterioration of the issuers'
creditworthiness, as evidenced by bankruptcy filings.
41
Change in Unrealized Gains, Net
Year Ended December 31,
--------------------------
(Dollars in millions) 1997 1996
- ------------------------------------------------------------------------------ ----------- ------------
Fixed maturities available for sale ....................................... $ 131.9 $ (265.9)
Equity securities available for sale ...................................... 2.1 3.4
Marketable securities held in trust ....................................... 127.8 --
Unpaid claims adjustment .................................................. (68.4) 92.5
Deferred taxes ............................................................ (64.3) 39.2
-------- --------
Total change in unrealized gains, net, as included in stockholders' equity $ 129.1 $ (130.8)
======== ========
UNUM's fixed maturities are reported at fair value as a result of being
classified as available for sale. Accordingly, the related liability for unpaid
claims and claims expenses is adjusted to reflect the changes that would have
been necessary if the related fixed maturities were sold at their fair value
and the proceeds were reinvested at current yields. At December 31, 1997, and
1996, the unrealized gain on available for sale fixed maturities was $417.9
million and $286.0 million, respectively, and the related unpaid claims
adjustment was $237.1 million and $168.7 million, respectively.
The marketable securities held in trust relate to the individual
disability reinsurance agreement (see Note 6 "Reinsurance"). Changes in fair
value of the assets and the related adjustment to unpaid claims are reflected
in the equity section of UNUM's Consolidated Balance Sheet.
Fixed Maturities
The amortized cost and fair values of fixed maturities available for sale
at December 31, 1997, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ---------------------------------------- ----------- ------------ ------------ ------------
U.S. Government ..................... $ 48.8 $ 2.5 $ -- $ 51.3
States and municipalities ........... 942.5 36.6 (0.2) 978.9
Foreign governments ................. 359.6 40.3 -- 399.9
Public utilities .................... 1,369.0 89.0 (0.1) 1,457.9
Corporate bonds ..................... 3,964.6 248.7 (1.1) 4,212.2
Redeemable preferred stocks ......... 3.5 -- (0.2) 3.3
Mortgage-backed securities .......... 205.0 2.4 -- 207.4
--------- ------- ------ ---------
Total .............................. $ 6,893.0 $ 419.5 $ (1.6) $ 7,310.9
========= ======= ====== =========
The amortized cost and fair 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 value of fixed maturities available for sale
at December 31, 1997, 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.
42
UNUM Corporation and Subsidiaries
Amortized Fair
(Dollars in millions) Cost Value
- ----------------------------------------------------------------------- ------------ -----------
Due in one year or less ............................................ $ 222.4 $ 225.1
Due after one year through five years .............................. 2,359.3 2,481.7
Due after five years through ten years ............................. 3,521.6 3,752.7
Due after ten years ................................................ 584.7 644.0
--------- ---------
6,688.0 7,103.5
Mortgage-backed securities (primarily due after 10 years) ......... 205.0 207.4
--------- ---------
Total ............................................................ $ 6,893.0 $ 7,310.9
========= =========
Equity Securities
The fair values, which also represent carrying amounts, and the cost of
equity securities available for sale were as follows at December 31, 1997:
Fair
(Dollars in millions) Cost Value
- ----------------------------------------------------- ---------- ----------
Common stocks:
Industrial, miscellaneous and all other ......... $ 21.1 $ 30.7
====== ======
Gross unrealized investment gains on equity securities available for sale
totaled $9.6 million and $7.5 million, at December 31, 1997, and 1996,
respectively. Gross unrealized investment losses were immaterial at December
31, 1997, and 1996.
Mortgages
At December 31, 1997, and 1996, impaired loans totaled $43.4 million and
$50.4 million, respectively. Included in the $43.4 million were $20.8 million
of loans which had a related allowance for probable losses of $3.5 million, and
loans of $22.6 million which had no related allowance for probable losses.
Included in the $50.4 million of impaired loans at December 31, 1996, 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.
Restructured mortgage loans amounted to $39.3 million and $54.8 million at
December 31, 1997, and 1996, respectively. Troubled debt restructurings
represent loans that are refinanced with terms more favorable to the borrower.
Interest lost on restructured loans was not material for the years ended
December 31, 1997, 1996 or 1995.
Real Estate and Other
Real estate acquired in satisfaction of debt cumulatively amounted to
$78.8 million at December 31, 1997. Real estate held for sale amounted to $23.3
million at December 31, 1997, and $9.4 million at December 31, 1996.
Real estate with a depreciated cost of $3.5 million and no bonds or
mortgages were non-income producing for the twelve months ended December 31,
1997. Interest lost on these investments was not material in 1997, 1996 or
1995.
UNUM was committed at December 31, 1997, to purchase fixed maturities and
other invested assets in the amount of $52.8 million.
43
NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE HELD
FOR SALE
Changes in the allowance for probable losses on mortgage loans and real
estate held for sale were as follows:
Balance at Balance
beginning at end
(Dollars in millions) of year Additions Deductions of year
- --------------------------------------- ------------ ----------- ------------ ----------
Year Ended December 31, 1997
Mortgage loans .................... $ 37.7 $ 3.3 $ (7.1) $ 33.9
Real estate held for sale ......... 14.8 3.0 -- 17.8
------- ------ ------- -------
Total ............................ $ 52.5 $ 6.3 $ (7.1) $ 51.7
======= ====== ======= =======
Year Ended December 31, 1996
Mortgage loans .................... $ 39.2 $ 1.0 $ (2.5) $ 37.7
Real estate held for sale ......... 19.1 ( 0.4) (3.9) 14.8
------- ------ ------- -------
Total ............................ $ 58.3 $ 0.6 $ (6.4) $ 52.5
======= ====== ======= =======
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
======= ====== ======= =======
Additions represent charges to net realized investment gains (losses) less
recoveries and deductions represent reserves released upon disposal or
restructuring of the related asset.
NOTE 4. RESERVES
Reserves for Future Policy Benefits
Reserves for future policy benefits are calculated by the net-level
premium method and are based on UNUM's expected morbidity, mortality and
interest rate assumptions at the time a policy is issued. These reserves
represent the portion of premiums received, accumulated with interest and held
to provide for claims that have not yet been incurred. The reserve assumptions
are periodically reviewed and compared with actual experience and may be
revised if it is determined that future expected experience is 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, 1997, and 1996, principally
ranged from 5.0% to 9.5%. Certain reserve calculations are based on variable
interest rates within these ranges.
Reserves for Unpaid Claims and Claim Expenses
Unpaid claims and claim expense reserves represent the amount estimated to
fund claims that have been reported but not settled and claims incurred but not
reported. Reserves for unpaid claims are estimated based on UNUM's historical
experience and other actuarial assumptions that consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to interest rates and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. Management periodically performs a
review of reserve estimates and assumptions. If management determines reserve
assumptions need to be updated, any resulting adjustment to reserves are
reflected in current results. Given that insurance products contain inherent
risks and uncertainties, the ultimate liability may be more or less than such
estimates indicate.
The interest rates used in the calculation of disability claims reserves
at December 31, 1997, and 1996, were principally as follows:
1997 1996
-------------- ---------------
Group long term disability (North America) ........... 7.84% 7.88%
Group long term disability (United Kingdom) .......... 9.27% 9.46%
Individual disability ................................ 7.0% to 9.5% 6.75% to 9.46%
The interest rate used to discount the disability reserves is a composite
of the yields on assets specifically identified with each block of business.
The discount rate may decline further depending on the interest rate
44
UNUM Corporation and Subsidiaries
environment. 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.
Activity in the liability for unpaid claims and claim expenses is
summarized as follows:
(Dollars in millions) 1997 1996 1995
- ------------------------------------------- ------------- ------------- -------------
Balance at January 1 ................... $ 5,289.3 $ 4,856.4 $ 3,853.9
Less reinsurance receivables .......... (346.8) (115.4) (82.7)
Effect of unrealized gains ............. (170.1) (261.2) --
---------- ---------- ----------
Net balance at January 1 ............... 4,772.4 4,479.8 3,771.2
Incurred related to:
Current year .......................... 1,854.0 1,673.9 1,825.0
Prior years ........................... 373.2 366.0 507.0
---------- ---------- ----------
Total incurred ......................... 2,227.2 2,039.9 2,332.0
Paid related to:
Current year .......................... 615.7 532.8 523.9
Prior years ........................... 1,341.4 1,214.5 1,099.5
---------- ---------- ----------
Total paid ............................. 1,957.1 1,747.3 1,623.4
Net balance at December 31 ............. 5,042.5 4,772.4 4,479.8
Plus reinsurance receivables .......... 552.2 346.8 115.4
Effect of unrealized gains ............. 236.9 170.1 261.2
---------- ---------- ----------
Balance at December 31 ................. $ 5,831.6 $ 5,289.3 $ 4,856.4
========== ========== ==========
The components of the unpaid claims and claims expenses incurred and
related to prior years were as follows:
(Dollars in millions) 1997 1996 1995
- ---------------------------------------------------------- ----------- ----------- -----------
Interest accrued on reserves .......................... $ 300.5 $ 292.9 $ 270.0
Changes in reserve estimates and assumptions .......... 89.9 36.2 239.0
Changes in foreign exchange rates ..................... (17.2) 36.9 (2.0)
-------- -------- --------
Incurred related to prior years ....................... $ 373.2 $ 366.0 $ 507.0
======== ======== ========
The additional reserves for amounts incurred related to prior years were
primarily the result of interest accrued on reserves, changes in reserve
estimates and assumptions of interest rates, morbidity, mortality and expense
costs, and changes in foreign exchange rates, 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, primarily as a result of increased reserves from lower
discount rates for certain disability products following the sale of the common
stock portfolio, and adjustments to strengthen certain disability reserves in
1995.
Beginning in 1995, as explained in Note 2 "Investments," unpaid claims are
adjusted to reflect changes that would have been necessary if the unrealized
gains and losses 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 in
stockholders' equity.
NOTE 5. SALE OF TAX-SHELTERED ANNUITY BUSINESS
On October 1, 1996, UNUM America and 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 were initially reinsured on an
indemnity basis. Upon consent of the TSA contractholders and participants, the
contracts are
45
considered reinsured on an assumption basis, legally releasing UNUM America and
First UNUM from future contractual obligation to the respective contractholders
and participants.
To effect the sale of the TSA business, UNUM transferred into a trust
account held for the benefit of Lincoln approximately $2,690 million of assets.
UNUM has recorded a deposit asset in its Consolidated Balance Sheet
representing the assets which support the TSA contracts of those
contractholders and participants that have not given consent for assumption
reinsurance. At December 31, 1997, the deposit asset related to the TSA
transaction was approximately $264 million.
The sale resulted in a deferred pretax gain of $80.8 million, which is
being recognized in income in proportion to contractholder and participant
consents for assumption reinsurance. Through December 31, 1997, consent for
assumption reinsurance has been provided by TSA contractholders and
participants owning approximately 92% 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, expect per common share data) 1997 1996 1995
- ----------------------------------------------------- ----------- ----------- -----------
Revenues ......................................... $ 126.2 $ 206.7 $ 247.6
Net income ....................................... $ 48.4 $ 12.8 $ 31.1
Net income per common share:
Basic ........................................... $ 0.35 $ 0.09 $ 0.21
Diluted ......................................... $ 0.34 $ 0.09 $ 0.21
======== ======== ========
The results shown above for the year ended December 31, 1992. Our audit also1997, include
$72.6 million of revenues, reported as fees and other income, $47.0 million of
net income and basic and diluted net income per common share of $0.34 and
$0.33, respectively, related to the recognition of the deferred pretax gain for
those contractholders and participants that have given consent for assumption
reinsurance.
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. Centre Re
has an obligation to absorb losses within a defined risk layer, while UNUM must
fund an experience layer representing the difference between reserves related
to the reinsured block, based on generally accepted accounting principles
("GAAP"), and the bottom of Centre Re's defined risk layer. Within this
experience layer, UNUM retains the earnings risk related to potential adverse
experience from the reinsured block. Under the agreement, UNUM funds a trust
account, initially established in late 1996, with assets equal to the amount of
GAAP reserves related to the reinsured block plus the amount of its experience
layer. The value of UNUM's experience layer increases or decreases in
conjunction with the underlying operating results of the reinsured block.
Additionally, realized gains or losses on assets sold, and unrealized gains or
losses on marketable securities held in the trust and the related claim
reserves, affect the valuation of the experience layer. UNUM reflects the
carrying value of the experience layer in its Consolidated Balance Sheet as a
deposit asset, which at December 31, 1997, totaled approximately $347 million.
Changes in the experience layer derived from the underlying operating results
of the reinsured block are reflected in fees and other income and realized
gains or losses from sales of trust assets are reflected as realized investment
gains (losses) in UNUM's Consolidated Statement of Income. Changes in the
experience layer resulting from unrealized gains or losses on marketable
securities held in the trust and the related claim reserves are reflected as
unrealized gains or losses in the equity section of UNUM's Consolidated Balance
Sheet.
46
UNUM Corporation and Subsidiaries
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 all reinsurance on premiums earned and written for the years
ended December 31, 1997, 1996 and 1995 was as follows:
(Dollars in millions) 1997 1996 1995
- ------------------------------- ------------- ------------- -------------
Premiums earned:
Direct .................... $ 3,309.9 $ 2,973.9 $ 2,842.9
Assumed ................... 281.6 252.9 241.5
Ceded ..................... (402.8) (106.4) (66.2)
---------- ---------- ----------
Premiums earned .......... $ 3,188.7 $ 3,120.4 $ 3,018.2
========== ========== ==========
Premiums written:
Direct .................... $ 3,315.2 $ 3,008.1 $ 2,877.2
Assumed ................... 330.3 289.3 250.4
Ceded ..................... (436.3) (131.0) (64.4)
---------- ---------- ----------
Premiums written ......... $ 3,209.2 $ 3,166.4 $ 3,063.2
========== ========== ==========
For the years ended December 31, 1997, 1996 and 1995, recoveries
recognized under reinsurance agreements offset benefits to policyholders by
$309.7 million, $90.8 million and $58.9 million, respectively.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
Business Restructuring
Charges of $6.0 million, $7.2 million and $8.4 million were recorded in
1997, 1996 and 1995, respectively. The charge in 1997 was related to a
management and field office reorganization within the North American
reinsurance operations, and consisted of $4.0 million of lease exit costs, $1.4
million of severance related costs, and $0.6 million of abandoned assets. The
charge in 1996 was related to the merger of Commercial Life Insurance Company
("Commercial Life") into UNUM America. The charge in 1995 related 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 curtailment gain, related to
workforce reductions in UNUM Corporation's noncontributory defined benefit
pension plan. As of December 31, 1997, the liability carried in the
Consolidated Balance Sheet for all three charges was $5.7 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 "Sale of Tax-Sheltered
Annuity Business"), as well as UNUM's continued efforts to strengthen its focus
on its core products, the company initiated a review of certain products, which
resulted in the recognition of pretax charges totaling $39.4 million during
1996. 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.
The total charges of $39.4 million included the financial statement schedules for 1992
listedwrite-off of certain
intangible assets, primarily deferred acquisition costs, totaling $17.0
million. These intangible assets were deemed unrecoverable primarily due to the
expectation of continued losses in the Indexassociation 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. Losses for these products are charged to the reserve at Item 14(a). These financial statementsthe time
realized. The products incorporated in the charge consist of certain
discontinued special risk, retirement and schedules are
the responsibilitymedical products.
47
NOTE 8. NOTES PAYABLE
Notes payable consisted of the Corporation's management. Our responsibilityfollowing at December 31:
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------- ---------- ----------
Short-term debt:
Commercial paper, with weighted average interest rates of
6.3% in 1997 and 5.5% in 1996 .................................. $ 50.9 $ 60.6
Other notes payable, with weighted average interest rates of
1.0% in 1997 and 0.7% in 1996 .................................. 7.7 8.6
Medium-term notes payable, due 1998, with interest rates
ranging from 5.1% to 6.7% ...................................... 68.0 48.5
------- -------
Total short-term debt ......................................... 126.6 117.7
------- -------
Long-term debt:
Medium-term notes payable, due 1999 to 2024, with interest
rates ranging from 5.9% to 7.5% ................................ 174.2 242.1
Monthly income debt securities, due 2025, with interest rate of
8.8%, $172.5 million issued net of unamortized offering
costs of $5.2 million in 1997 and $5.4 million in 1996 ......... 167.3 167.1
Other borrowing, due 2007, with effective interest rate of 5.8%
$168.3 million issued net of unamortized costs of $0.6
million in 1997 ................................................ 167.7 --
------- -------
Total long-term debt .......................................... 509.2 409.2
------- -------
Total notes payable ........................................... $ 635.8 $ 526.9
======= =======
At December 31, 1997, UNUM Corporation had a $500 million committed
revolving credit facility that expires on October 1, 2001. UNUM's commercial
paper program is supported by the revolving credit facility and is available
for general liquidity needs, capital expansion, acquisitions and stock
repurchase. The committed revolving credit facility contains certain covenants
which, among other provisions, require maintenance of certain levels of
stockholders' equity and limits on debt levels.
On December 4, 1997, UNUM borrowed 100 million pounds sterling ($168.3
million) through a private placement with an investor in the United Kingdom. The
borrowing has an expected term of 10 years. The borrowing is callable by either
party over the life of the agreement, under certain circumstances. UNUM used the
net proceeds to express an opinionrepay commercial paper and for general corporate purposes.
Upon issuance of the 100 million pounds sterling borrowing, UNUM entered
into currency and interest rate swap agreements that converted the principal
amount to U.S. dollars and the interest obligation on these financial statementsthe debt from a pound
sterling based fixed rate to a U.S. dollar fixed rate.
Aggregate maturities of notes payable are as follows: 1998-$126.6 million;
1999-$21.5 million; 2000-$60.0 million; 2001-none; thereafter-$427.7 million.
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 $84.6 million and schedules$56.7
million at December 31, 1997, and 1996, respectively, which are not reflected
in the Consolidated Balance Sheets.
NOTE 9. EMPLOYEE BENEFIT AND INCENTIVE PLANS
Pension Plans
At December 31, 1997, UNUM had a noncontributory defined benefit pension
plan ("Lifecycle Plan") covering substantially all domestic UNUM employees,
including employees of Duncanson & Holt, Inc. ("D&H") and Colonial Companies,
Inc. ("Colonial Companies"). The Lifecycle Plan provides benefits based on our
audit.
We conducted our auditthe
employee's age at retirement, years of service and earnings during the highest
five of the last ten years of employment. UNUM funds its pension plan in
accordance with generally accepted auditing
standards. Those standards require that wethe requirements of the Employee Retirement Income Security Act
of
48
UNUM Corporation and Subsidiaries
1974, as amended. Beginning in 1997, plan assets were transferred from UNUM's
separate accounts into a trust for the exclusive benefit of plan participants,
and include 448,784 shares of UNUM Corporation common stock.
Prior to January 1, 1997, UNUM had a noncontributory defined benefit
pension plan covering substantially all domestic UNUM employees, excluding
employees of D&H and Colonial Companies, who were covered under separate plans.
These plans were replaced by the Lifecycle Plan.
In 1997, UNUM changed the measurement date for the valuation of its
pension plan and performpostretirement benefit plan assets and actuarially determined
obligations from December 31, to September 30. The change in measurement date
had no effect on 1997 or prior years' net pension and periodic postretirement
benefit costs.
Net pension cost included the audit to obtain
reasonable assurance about whetherfollowing components:
Year Ended December 31,
-----------------------------------
(Dollars in millions) 1997 1996 1995
- ---------------------------------------------------------- ---------- ---------- ---------
Service cost--benefits earned during the year ......... $ 12.9 $ 13.5 $ 7.7
Interest cost on projected benefit obligation ......... 15.2 15.1 12.3
Actual return on plan assets .......................... (61.4) (57.1) (42.5)
Net amortization and deferral ......................... 33.8 36.9 28.2
Curtailment gain ...................................... -- -- ( 3.4)
------- ------- -------
Net pension cost ..................................... $ 0.5 $ 8.4 $ 2.3
======= ======= =======
The funded status of the financial statementsplan and amounts recognized in UNUM's
Consolidated Balance Sheets, as determined by the plan's actuaries, using the
applicable measurement dates, were as follows:
(Dollars in millions) 1997 1996
- ---------------------------------------------------------------------- ----------- -----------
Actuarial present value of benefit obligation:
Vested benefit obligation ........................................ $ 196.9 $ 166.9
======== ========
Accumulated benefit obligation ................................... $ 206.6 $ 189.3
======== ========
Projected benefit obligation for service rendered to date ......... $ (230.4) $ (203.2)
Plan assets at fair value ......................................... 324.2 267.7
-------- --------
Projected benefit obligation less than plan assets ................ 93.8 64.5
Unrecognized net gain ............................................. (86.8) (54.7)
Unrecognized prior service cost ................................... (25.8) (28.4)
Unamortized net obligation ........................................ 1.5 1.8
-------- --------
Accrued pension cost ............................................. $ (17.3) $ (16.8)
======== ========
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 7.25% and 4.75%, respectively, at September
30, 1997, and 7.50% and 5.00%, respectively, at December 31, 1996. The expected
long-term rate of return on plan assets was 9.0% in 1997, 1996 and 1995. Prior
year service costs are free of material
misstatement. An audit includes examining,being amortized on a teststraight-line basis evidence supportingover 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 amountsyears ended December 31, 1997, 1996 and disclosures1995.
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 $4.3 million, $10.3 million and $10.0 million for the years
ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, and
1996 the liability associated with these plans was $83.2 million and $80.9
million, respectively.
49
Retirement Savings Plans
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. Dependent upon the employee's annual earnings, eligible
employees may contribute up to 15% of their annual compensation, including
incentive payouts. UNUM matches 100% of the employee's contribution up to 3% of
the employee's compensation, plus 50% of the employee's contribution on the
next 2% of the employee's compensation, to a maximum of 4%. Employees become
100% vested immediately upon becoming eligible to participate. Expense for this
plan and the former plans amounted to $9.6 million in 1997, and $8.4 million in
1996 and 1995, 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 1997, 1996 and 1995, expense for these plans was $37.2 million, $41.7
million and $19.9 million, respectively.
NOTE 10. STOCKHOLDERS' EQUITY
Common Stock
On March 14, 1997, UNUM's Board of Directors authorized a two-for-one
common stock split, subject to shareholder approval of a proposal to increase
the number of authorized shares of common stock. On May 9, 1997, UNUM's
shareholders approved an increase in the financial statements. An audit also includes
assessingnumber of authorized shares of common
stock to 240 million from 120 million. The stock split was completed on June 2,
1997, through the accounting principles useddistribution of one additional share for each share of stock
already issued, to holders of record on May 19, 1997. Accordingly, all numbers
of common shares and significant estimatesper common share data have been restated to reflect the
stock split. Par value of $10.0 million was transferred to common stock from
additional paid-in capital in second quarter 1997.
Effective February 13, 1998, UNUM's Board of Directors approved an
expansion of the Company's stock repurchase program by authorizing an
additional 4.6 million shares. At February 13, 1998, following the increased
authorization, approximately 6.0 million shares of common stock remained
authorized for repurchase.
Changes in the number of shares outstanding were as follows:
(Shares in millions) 1997 1996 1995
- --------------------------------------------------- ---------- ---------- ----------
Shares outstanding, beginning of year .......... 143.6 146.0 144.8
Shares issued under stock plans ................ 1.8 1.4 1.2
Shares reacquired .............................. (7.1) (3.8) --
------ ------ -----
Shares outstanding, end of year ................ 138.3 143.6 146.0
====== ====== =====
Stock Options
At December 31, 1997, 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 (see Note 1
"Summary of Significant Accounting Policies"), 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) 1997 1996 1995
- ---------------------------------------------------- ----------- ----------- -----------
Net income:
As reported ..................................... $ 370.3 $ 238.0 $ 281.1
Pro forma ....................................... $ 361.4 $ 231.9 $ 277.2
Earnings per common share:
As reported .....................................
Basic .......................................... $ 2.65 $ 1.63 $ 1.93
Diluted ........................................ $ 2.59 $ 1.61 $ 1.92
Pro forma
Basic .......................................... $ 2.58 $ 1.59 $ 1.91
Diluted ........................................ $ 2.53 $ 1.57 $ 1.89
======== ======== ========
50
UNUM Corporation and Subsidiaries
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:
1997 1996 1995
---------------- ---------------- ---------------
Dividend yield ........................... 1.0% 1.5% 1.9%
Expected stock price volatility .......... 22.7% to 24.2% 23.1% to 24.8% 24.8% to 25.9%
Risk-free interest rate .................. 5.7% to 6.8% 5.2% to 6.5% 5.4% to 7.9%
Expected option lives .................... 4 to 8 years 4 to 8 years 4 to 8 years
Because some options vest over several years and additional awards
generally are made by
management, as well as evaluatingeach year, the overall financial statement presentation.
We believe that our auditpro forma amounts above may not be
representative of the effects on net income for future years.
The 1987 Executive Stock Option Plan ("Option Plan") provided for granting
to officers and key employees options to purchase UNUM Corporation common stock
over ten years. Options were granted at the discretion of the Compensation
Committee of the Board of Directors ("the Committee") and had vesting schedules
of one to four years. The number of shares subject to options under the Option
Plan could not exceed 5.0 million. Grants are no longer made under this plan.
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referredgranting of options to above
present fairly, in all material respects, the consolidated results of operations
and cash flowsofficers, non-employee directors of UNUM Corporation and
subsidiarieskey 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 yearexception of 11,600 shares granted
in 1996 and 40,400 shares granted in 1995, 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 1997,
1996 and 1995.
The unamortized market value of the restricted shares issued under the
Incentive Plan has been recorded as deferred compensation and is included as a
reduction of stockholders' equity in the Consolidated Balance Sheets.
The number of shares subject to issuance under the Incentive Plan cannot
exceed 13.6 million, including both options and shares of restricted stock. At
December 31, 1997, 1996 and 1995, 1,603,580 shares, 1,385,036 shares and
3,360,470 shares, respectively, were available for grant under the Incentive
Plan.
The 1996 Long-Term Stock Incentive Plan ("1996 Incentive Plan") provides
for granting of options to officers, non-employee directors of UNUM
Corporation, and key employees to purchase UNUM Corporation common stock over
ten years. The 1996 Incentive Plan also provides for granting to key officers
restricted stock awards whose vesting is contingent upon achieving prescribed
financial performance objectives or upon the grantee remaining in UNUM's employ
for a specified period of time. Options and restricted stock may be granted
annually at the discretion of the Committee. The number of shares subject to
issuance cannot exceed 7.0 million. At December 31, 1997, and 1996, 5,003,480
and 6,990,000 shares, respectively, were available for grant under the 1996
Incentive Plan.
The 1998 Goals Stock Option Plan ("1998 Option Plan") provides for
granting to all eligible employees up to 300 options to purchase UNUM
Corporation common stock. The options will vest to the employee nine years from
the date of grant. Vesting may be accelerated to an earlier date at the
discretion of the plan administrator. Grants of 166,200 shares, 205,000 shares
and 2,210,700 shares were made in 1997, 1996 and 1995, respectively. No further
grants will be made under this plan.
For all of UNUM's stock-based compensation plans, the exercise price of
each option is not less than 100% of the fair market value of UNUM's stock on
the date of grant.
51
A summary of the status of UNUM's four stock-based compensation plans as
of December 31, 1997, 1996 and 1995, and changes during the years then ended is
presented below:
Restricted
(Per share amounts are weighted-average) Options Stock
- ------------------------------------------------------------- --------------- -------------
Outstanding at January 1, 1995 ........................... 7,706,044 219,900
1995 Activity:
Granted at $20.53 per share .............................. 4,400,000 --
Granted for restricted stock at $21.50 per share ......... -- 141,900
Lapse of restrictions on restricted stock ................ -- (66,200)
Exercised at $12.88 per share ............................ (1,082,376) --
Forfeited at $23.43 per share for options ................ (628,400) (11,200)
---------- -------
Outstanding at December 31, 1995 ......................... 10,395,268 284,400
---------- -------
1996 Activity:
Granted at $30.38 per share .............................. 2,161,380 --
Granted for restricted stock at $29.68 per share ......... -- 186,600
Exercised at $18.86 per share ............................ (1,274,522) --
Forfeited at $23.39 per share for options ................ (543,482) (65,200)
---------- -------
Outstanding at December 31, 1996 ......................... 10,738,644 405,800
---------- -------
1997 Activity:
Granted at $39.18 per share .............................. 2,064,820 --
Granted for restricted stock at $37.75 per share ......... -- 224,700
Exercised at $20.59 per share ............................ (1,617,469) --
Forfeited at $26.88 per share for options ................ (734,850) (128,800)
---------- --------
Outstanding at December 31, 1997 ......................... 10,451,145 501,700
========== ========
The weighted-average exercise price of options outstanding at December 31,
1997, 1996 and 1995, was $26.32, $22.93 and $20.91 per share, respectively.
The number and weighted-average exercise price of exercisable shares as of
December 31, 1997, 1996 and 1995 was 4,686,562 shares at $22.71 per share,
4,763,184 shares at $20.73 per share and 4,216,120 shares at $19.57 per share,
respectively.
The weighted-average fair value of options granted during the years ended
December 31, 1992,1997, 1996, and 1995 was $8.56, $6.92 and $5.10, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------ ---------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- -------------- ------------- ------------------ ------------------ ------------- -----------------
$ 5 to 15 632,919 2.69 $ 11.93 632,919 $ 11.93
16 to 24 3,758,125 6.47 19.79 1,631,160 19.85
25 to 37 4,142,331 6.90 28.43 2,422,483 27.45
38 to 54 1,917,770 9.28 39.33 -- --
----------- ---------- ---- -------- --------- --------
$ 5 to 54 10,451,145 6.93 $ 26.32 4,686,562 $ 22.71
========== =========
Between 1991 and 1994, certain officers were granted limited stock
appreciation rights ("LSARs") in conformityconjunction 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, 1997, 1996 and 1995, there
were 557,800 LSARs, 796,600 LSARs and 961,650 LSARs outstanding, respectively.
52
UNUM Corporation and Subsidiaries
Preferred Stock Purchase Rights
UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan,
each Right, under specific circumstances, entitles the holder to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at a
purchase price of $150. The Rights become exercisable at a specified time after
(1) a person or group acquires 10% or more of UNUM Corporation common stock or
(2) a tender or exchange offer for 10% or more of UNUM Corporation common
stock. The Rights expire at the close of business on March 13, 2002, unless
earlier redeemed by the Company under certain circumstances at a price of $0.01
per Right.
NOTE 11. DIVIDEND RESTRICTIONS
UNUM is subject to various state insurance regulatory restrictions that
limit the maximum amount of dividends available from its United States
domiciled insurance subsidiaries without prior approval. The amount available
under current law for payment of dividends during 1998 to UNUM Corporation from
all U.S. domiciled insurance subsidiaries without state insurance regulatory
approval is approximately $210 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 $1,186 million and $1,205 million, at
December 31, 1997, and 1996, respectively. The aggregate statutory net
operating income, which excludes realized investment gains and losses net of
tax, of UNUM Corporation's United States domiciled insurance subsidiaries was
approximately $227 million, $167 million and $143 million for 1997, 1996 and
1995, respectively. State insurance regulatory authorities prescribe statutory
accounting practices that differ in certain respects from generally accepted
accounting principles. Also,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.
NOTE 12. INCOME TAXES
A reconciliation of income taxes computed by applying the federal income
tax rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1997 1996 1995
- ------------------------------------------------- ----------- ----------- -----------
Tax at federal statutory rate of 35% ......... $ 187.7 $ 119.6 $ 133.7
Tax-exempt income ............................ (20.3) (18.8) (30.0)
Other ........................................ (1.3) 2.8 (2.9)
-------- -------- --------
Income taxes ................................. $ 166.1 $ 103.6 $ 100.8
======== ======== ========
53
Deferred income tax liabilities and assets consist of the following:
December 31,
-------------------------
(Dollars in millions) 1997 1996
- ----------------------------------------------- ----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs ......... $ 239.4 $ 210.7
Policy reserve adjustments ................ 118.0 106.5
Net unrealized gains ...................... 144.0 101.7
Value of business acquired ................ 23.2 19.8
Invested assets ........................... 12.0 9.6
Other ..................................... 12.2 11.0
-------- --------
Gross deferred tax liabilities ........... 548.8 459.3
-------- --------
Deferred tax assets:
Net realized losses ....................... $ 6.9 $ 17.4
Postretirement benefits ................... 26.6 26.7
Deferred gains ............................ 2.2 28.5
Accrued liabilities ....................... 13.3 27.0
Other ..................................... 10.6 27.9
-------- --------
Gross deferred tax assets ................ 59.6 127.5
Less valuation allowance ................... 7.0 10.0
-------- --------
Net deferred tax assets .................. 52.6 117.5
-------- --------
Net deferred tax liability ................. $ 496.2 $ 341.8
======== ========
UNUM has not provided for a deferred tax liability of approximately $11
million that arose prior to 1984, which related to the policyholders' surplus
accounts of UNUM's life insurance subsidiaries, as management believes the
conditions under which such taxes would be paid to be remote.
UNUM's Consolidated Statements of Income for 1997, 1996 and 1995, included
the following amounts of foreign income and related income tax expense:
Year Ended December 31,
------------------------------------
(Dollars in millions) 1997 1996 1995
- ------------------------------- ---------- ---------- ----------
Foreign income ............. $ 46.7 $ 27.4 $ (1.2)
======= ======= ======
Income tax expense (credit):
Current .................... $ 23.3 $ 10.4 $ 1.4
Deferred ................... (7.6) 1.8 (0.2)
------- ------- ------
Total ...................... $ 15.7 $ 12.2 $ 1.2
======= ======= ======
UNUM subsidiaries had operating loss carryforwards totaling $5.3 million
as of December 31, 1997. The operating loss carryforwards will expire, if not
utilized, in our opinion,1999 through 2003.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values are based on quoted market prices, when available. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. These valuation
techniques require management to develop a significant number of assumptions,
including discount rates and estimates of future cash flow. Derived fair value
estimates cannot be substantiated by comparison to independent markets or to
disclosures by other companies with similar financial instruments. These fair
value disclosures do not purport to be the amount that could be realized in
immediate settlement of the financial instrument.
54
UNUM Corporation and Subsidiaries
The following table summarizes the carrying amounts and fair values of
UNUM's financial instruments at December 31, 1997, and 1996:
1997 1996
----------------------------- -----------------------------
Carrying Fair Carrying Fair
(Dollars in millions) Amount Value Amount Value
- ---------------------------------------------------- ------------- ------------- ------------- -------------
Financial assets:
Fixed maturities available for sale ............ $ 7,310.9 $ 7,310.9 $ 6,942.7 $ 6,942.7
Equity securities available for sale ........... 30.7 30.7 31.3 31.3
Mortgage loans ................................. 1,131.0 1,243.7 1,132.1 1,213.4
Policy loans ................................... 128.5 128.5 232.9 232.9
Short-term investments ......................... 99.7 99.7 123.4 123.4
Cash ........................................... 47.9 47.9 77.0 77.0
Accrued investment income ...................... 160.3 160.3 166.1 166.1
Deposit assets ................................. 688.3 688.3 2,846.6 2,846.6
Financial liabilities:
Other policyholder funds:
Investment-type insurance contracts:
With defined maturities ..................... $ 141.6 $ 159.3 $ 191.0 $ 216.0
With no defined maturities .................. 332.0 328.0 2,901.0 2,839.0
Individual annuities and
supplementary contracts not
involving life contingencies ................. 67.1 67.1 76.2 76.2
Notes payable .................................. 635.8 656.0 526.9 542.5
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.
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.
55
NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses options, futures, forward exchange contracts and
interest rate swaps, which are common derivative financial instruments, to
hedge certain risks associated with anticipated purchases and sales of
investments, anticipated debt issuance and certain payments denominated in
foreign currencies, primarily British pounds sterling, Canadian dollars and
Japanese yen. These derivative financial instruments are used to protect UNUM
from the effect of market fluctuations in interest and exchange rates between
the contract date and the date on which the hedged transaction occurs.
Additionally, UNUM uses swap agreements to convert foreign currency based debt
instruments to U.S. dollars and to convert variable rate debt to a fixed rate.
In using these instruments, UNUM is subject to the off-balance-sheet
credit risk that the counterparties of the transactions will fail to perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges. UNUM does not hold or issue derivative
financial instruments for the purpose of trading.
Historically, all positions UNUM has taken in derivative contracts have
qualified for hedge accounting in accordance with the criteria established by
FAS 52, "Foreign Currency Translation," and FAS 80, "Accounting for Futures
Contracts." Upon entering a derivative contract, UNUM uses this criteria to
evaluate the correlation of risk protection provided by a derivative contract
to the risk created by market fluctuations to ensure hedge accounting is
appropriate for the contract. Accordingly, gains or losses related to
qualifying hedges of firm commitments or anticipated transactions involving
investment purchases and debt issuance are deferred and recognized as an
adjustment to the carrying amount of the underlying asset or liability when the
hedged transaction occurs. Gains or losses related to qualifying hedges of
anticipated transactions involving the sale of investments are deferred and
recognized in income when the hedged transaction occurs. No gains or losses
related to qualifying hedges of anticipated transactions involving payments
denominated in foreign currencies are recorded if the hedged transaction is
likely to occur.
The amount of any deferred gains or losses on outstanding interest rate
futures contracts, which require daily cash settlement, are included in fixed
maturities in UNUM's Consolidated Balance Sheet. The fair values of any
outstanding forward exchange rate contracts, options and swap agreements, which
do not require daily cash settlement, are not recognized in UNUM's Consolidated
Balance Sheet.
Any resulting gains or losses from early termination of a derivative
designated as a hedge are deferred and recognized in income or as an adjustment
of the carrying amount of the underlying asset or liability when the hedged
transaction occurs. Any gains or losses that result when the designated item is
extinguished, such as maturity, sale, or termination, or when the hedged
transaction is no longer likely to occur, are included in income in the period
in which the extinguishment takes place or it is known that the hedged
anticipated transaction will not occur.
On December 4, 1997, UNUM borrowed 100 million pounds sterling ($168.3
million) through a private placement with an investor in the United Kingdom (see
Note 8 "Notes Payable"). Upon issuance of the 100 million pounds sterling
borrowing, UNUM entered into currency and interest rate swap agreements that
converted the principal amount to U.S. dollars and the interest obligation on
the debt from a pound sterling based fixed rate to a U.S. dollar fixed rate. No
gains or losses on the swap agreements, which qualify for hedge accounting, are
recorded while the related debt is outstanding. These swap agreements expire in
December 2007 and have notional amounts that equal the principal amount of the
loan.
Other than the swap agreements discussed previously, UNUM had no other
open derivative financial instruments at December 31, 1997. UNUM had open
interest rate futures contracts at December 31, 1996, with notional amounts of
$178.2 million to hedge anticipated sales of investments in 1997. These futures
contracts had a related net unrealized gain of $1.6 million.
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, 1997. 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
56
UNUM Corporation and Subsidiaries
of management, the ultimate liability, if any, arising from this litigation is
not expected to have a material adverse effect on the consolidated financial
position, operating results or liquidity of UNUM.
On December 29, 1993, UNUM filed a suit in the United States District
Court for the District of Maine, seeking a federal income tax refund. The suit
was based on a claim for a deduction in certain prior tax years for $652
million in cash and stock distributed to policyholders in connection with the
1986 conversion of Union Mutual Life Insurance Company to a stock company. UNUM
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. On
December 2, 1997, the United States Court of Appeals affirmed the decision of
the District Court denying UNUM's claim for refund. UNUM is currently
considering whether to request that the United States Supreme Court review the
decision of the United States Court of Appeals.
NOTE 16. SEGMENT INFORMATION
UNUM's markets for its insurance products are the United States, its
principal market, Canada, the United Kingdom, the Pacific Rim and Argentina.
Through its affiliates, UNUM is the leading provider of group long term
disability insurance, its principal product, in the United States and the
United Kingdom. Products are marketed through sales personnel, independent
contractors and brokers, and specialty agents. UNUM targets sales of its
disability products to executive, administrative and management personnel, and
other professionals such as educators, consultants, health care providers,
accountants and engineers.
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, 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 Life & Accident Insurance Company and subsidiaries, which offer,
primarily through payroll deduction, accident and sickness, disability, cancer
and life insurance products to employees at their worksites. The Retirement
Products segment includes products no longer actively marketed by UNUM
including: tax-sheltered annuities, guaranteed investment contracts, deposit
administration accounts, 401(k) plans, individual life and group medical
products. Corporate includes transactions that are generally non-insurance
related.
Investment income and net realized investment gains and losses are
allocated to the segments based on designation of ownership of assets
identified to the products in each segment. Operating expenses are allocated to
the segments based on direct association with a product whenever possible. If
the expense cannot be readily associated with a particular product, the costs
are allocated based on ratios of the relative time spent, extent of usage or
varying volume of work performed for each segment.
57
Summarized financial information for the four business segments and
Corporate is as follows:
Year Ended December 31,
---------------------------------------------
(Dollars in millions) 1997 1996 1995
- ----------------------------------------- ------------- ------------- -------------
Revenues:
Disability Insurance ................ $ 2,350.6 $ 2,386.2 $ 2,472.8
Special Risk Insurance .............. 947.0 811.9 750.7
Colonial Products ................... 588.4 545.5 527.3
Retirement Products ................. 184.7 283.0 357.8
Corporate ........................... 6.0 16.1 14.3
---------- ---------- ----------
Total revenues ..................... $ 4,076.7 $ 4,042.7 $ 4,122.9
========== ========== ==========
Income (loss) before income taxes:
Disability Insurance ................ $ 312.7 $ 215.3 $ 217.0
Special Risk Insurance .............. 101.3 79.2 60.3
Colonial Products ................... 98.8 92.4 87.7
Retirement Products ................. 76.2 1.4 45.5
Corporate ........................... (52.6) (46.7) (28.6)
---------- ---------- ----------
Income before income taxes ......... 536.4 341.6 381.9
Income taxes ......................... 166.1 103.6 100.8
---------- ---------- ----------
Net income ......................... $ 370.3 $ 238.0 $ 281.1
========== ========== ==========
December 31,
-----------------------------
(Dollars in millions) 1997 1996
- ------------------------------------------------------- ------------- -------------
Identifiable Assets:
Disability Insurance .............................. $ 8,546.6 $ 7,846.8
Special Risk Insurance ............................ 1,581.8 1,297.1
Colonial Products ................................. 1,334.7 1,094.1
Retirement Products ............................... 1,115.9 4,478.8
Corporate ......................................... 254.0 396.7
Individual Participating Life and Annuity ......... 367.3 354.0
---------- ----------
Total assets ..................................... $ 13,200.3 $ 15,467.5
========== ==========
58
UNUM Corporation and Subsidiaries
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for 1997 and 1996:
1997
-----------------------------------------------------
(Dollars in millions, except per common share data) 4th 3rd 2nd 1st
- ----------------------------------------------------- ----------- ----------- ----------- -----------
Premiums ......................................... $ 840.2 $ 813.5 $ 768.7 $ 766.3
Investment income ................................ 164.7 163.5 164.9 164.8
Net realized investment gains (losses) ........... (1.1) 2.7 (3.0) (2.2)
Benefits to policyholders ........................ 625.8 617.0 573.9 578.6
Net income ....................................... 76.2 91.5 87.6 115.0
Basic net income per common share ................ 0.55 0.66 0.63 0.81
Diluted net income per common share .............. 0.54 0.64 0.62 0.79
1996
-----------------------------------------------------
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
Basic net income per common share .............. 0.33 0.30 0.50 0.49
Diluted net income per common share ............ 0.33 0.30 0.50 0.49
59
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 schedules, when considered in
relationdisclosure have been reported on a Form 8-K
during the past two years prior to the basicdate of the most recent financial
statements takenstatements.
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 8, 1998,
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 10, 1998) Position held with UNUM Since
- ----------------------- ----------------- ----------------------------- -----------
James F. Orr III 55 Chairman, President and 1986
Chief Executive Officer
Robert E. Broatch 49 Senior Vice President 1996
and Chief Financial Officer
Thomas G. Brown 53 Executive Vice President 1992
Robert W. Crispin 51 Executive Vice President 1995
Peter J. Moynihan 54 Senior Vice President 1979
Kevin P. O'Connell 52 Executive Vice President 1987
Elaine D. Rosen* 45 President, UNUM America 1983
Robert E. Staton* 51 President, Colonial 1993
- --------
*Denotes an officer of a whole, present fairlysubsidiary 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 all material respectsFebruary 1988. In
addition, he has served as President and Chief Executive Officer since
September 1987. He joined UNUM in 1986.
Mr. Broatch was elected Senior Vice President of UNUM in May 1996. In
addition, he was elected as Chief Financial Officer in September 1997. Prior to
joining UNUM in 1996, Mr. Broatch served as Senior Vice President of Finance at
Aetna Life & Casualty Company from 1993 until May 1996.
Mr. Brown was elected Executive Vice President of UNUM in January 1995. In
addition, he served as Chairman of the information set forth therein.
/s/ ERNSTBoard and Chief Executive Officer of
Duncanson & YOUNG L.L.P.
Boston, Massachusetts
March 26,Holt, Inc. ("D&H") from 1987 until September 1997. 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. Crispin was elected Executive Vice President of UNUM in January 1995.
In addition he served as Chief Financial Officer from August 1995 until
September 1997. Prior to joining UNUM in 1995, Mr. Crispin served as Vice
Chairman and Chief Investment Officer of The Travelers Insurance Companies from
July 1991 to January 1995.
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.
60
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULESCorporation and Subsidiaries
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 8, 1998, 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 8, 1998, 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 8, 1998, is incorporated by reference.
61
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 financial statement schedulesConsolidated Financial Statements of UNUM Corporation
and subsidiaries are included in Item 14(a):8.
Page
-----
Report of Independent Accountants ....................... 30
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 ...................... 31
Consolidated Balance Sheets as of December 31, 1997,
and 1996 .............................................. 32
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 .......... 33
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 ................ 34
Notes to Consolidated Financial Statements .............. 36
2. Financial Statement Schedules
II Condensed Financial Information of UNUM Corporation (Registrant) 64
III Supplementary Insurance Information 68
IV Reinsurance 69
3. Exhibits. See Index to Exhibits on page 70 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 1997.
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.
62
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 10, 1998.
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 10, 1998
(James F. Orr III)
/s/ Robert E. Broatch Senior Vice President
- ------------------------------------- and Chief Financial InformationOfficer March 10, 1998
(Robert E. Broatch)
/s/ John M. Lang, Jr. Vice President and
- ------------------------------------- Corporate Controller March 10, 1998
(John M. Lang, Jr.)
*
- ------------------------------------- Director March 10, 1998
(Gayle O. Averyt)
*
- ------------------------------------- Director March 10, 1998
(Robert E. Dillon, Jr.)
*
- ------------------------------------- Director March 10, 1998
(Gwain H. Gillespie)
*
- ------------------------------------- Director March 10, 1998
(Ronald E. Goldsberry)
*
- ------------------------------------- Director March 10, 1998
(Donald W. Harward)
*
- ------------------------------------- Director March 10, 1998
(George J. Mitchell)
- ------------------------------------- Director March 10, 1998
(Cynthia A. Montgomery)
*
- ------------------------------------- Director March 10, 1998
(James L. Moody, Jr.)
*
- ------------------------------------- Director March 10, 1998
(Lawrence R. Pugh)
*
- ------------------------------------- Director March 10, 1998
(Lois Dickson Rice)
*
- ------------------------------------- Director March 10, 1998
(John W. Rowe)
/s/ Kevin J. Tierney
- -------------------------------------
*(Kevin J. Tierney, as Attorney-in-fact
for each of UNUM Corporation (Registrant)..
III Supplementary Insurance Information...............................
IV Reinsurance.......................................................the persons indicated)
(Senior Vice President, General Counsel & Secretary)
63
UNUM CORPORATION (PARENT COMPANY)(Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBERYear Ended December 31,
-----------------------------
1994 1993 1992--------------------------------------
(Dollars in millions) 1997 1996 1995
- ---------------------------------------------------------- ----------- ----------- ----------
------------------------------------------------------------------------------------------------------
Revenues
Dividends from subsidiaries*........................................ $102.0 $131.8 $110.8 ......................... $ 462.4 $ 259.7 $ 23.6
Investment income...................................................income .................................... 0.1 0.2 0.8
Net realized investment gains....................................... -- -- 1.90.3 0.4
Interest income on loans to subsidiaries* ............ 2.6 2.5 5.5
Fees and other income............................................... 0.8income ................................ 0.1 -- --
------- -------0.3
-------- -------- -------
Total revenues.................................................. 102.9 132.0 113.5revenues ...................................... 465.2 262.5 29.8
Expenses
Operating expenses.................................................. 8.7 11.6 9.2expenses ................................... 8.3 4.7 2.3
Interest expense.................................................... 18.6 12.4 10.7expense ..................................... 41.7 40.7 37.2
Interest expense on loans from subsidiaries*........................ 2.3 ......... 2.5 0.1 --
------- -------3.9
-------- -------- -------
Total expenses.................................................. 29.6 24.1 19.9
------- -------expenses ...................................... 52.5 45.5 43.4
-------- -------- -------
Income (loss) before income taxes............................................ 73.3 107.9 93.6taxes ..................... 412.7 217.0 (13.6)
Income tax expense (benefit).......................................... (6.2) (5.7) 3.5benefit .................................... 17.3 15.1 13.1
-------- -------- -------
------- -------
Income (loss) before equity in undistributed net
income (loss) of subsidiaries...... 79.5 113.6 90.1subsidiaries ........................ 430.0 232.1 (0.5)
Equity in undistributed net income (loss) of
subsidiaries*................... 75.2 186.3 201.1
------- ------- ........................................ (59.7) 5.9 281.6
-------- -------- -------
Net income............................................................ $154.7 $299.9 $291.2
------- ------- -------
------- ------- -------
------------income ............................................ $ 370.3 $ 238.0 $ 281.1
======== ======== =======
- --------
*Eliminated in consolidation
See note to condensed financial statements.
64
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) 1997 1996
- ---------------------------------------------------------------- ------------- -------------
----------------------------------------------------------------------------------------------------
Assets
Investments
Investment in subsidiaries*................................................. $2,386.0 $2,376.9 ............................... $ 3,085.2 $ 2,749.8
Short-term investments...................................................... 0.5 4.4
-------- --------investments .................................... 2.1 0.6
---------- ----------
Total investments......................................................... 2,386.5 2,381.3
Cash.......................................................................... 2.0 1.3investments ........................................ 3,087.3 2,750.4
Amounts receivable from subsidiaries, net*.................................... 18.4 12.4 ................. 16.2 15.0
Notes receivable from subsidiary* .......................... 35.7 32.5
Property and equipment, net................................................... 16.7 17.3
-------- --------net ................................ 28.8 22.3
---------- ----------
Total assets.............................................................. $2,423.6 $2,412.3
-------- --------
-------- --------assets ............................................. $ 3,168.0 $ 2,820.2
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Notes payable...............................................................payable ............................................. $ 427.4467.5 $ 236.0526.9
Notes payable to subsidiary*................................................ 60.0 60.0 .............................. 245.8 --
Income taxes................................................................ 2.7 2.3taxes .............................................. 8.3 16.5
Other liabilities........................................................... 18.1 11.3
-------- --------liabilities ......................................... 11.6 13.7
---------- ----------
Total liabilities......................................................... 508.2 309.6liabilities ........................................ 733.2 557.1
Stockholders' Equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000240,000,000 shares, issued 99,987,958 shares................................................... 10.0199,975,916 .................... 20.0 10.0
Additional paid-in capital.................................................. 1,062.4 1,062.3capital ................................. 1,086.0 1,077.2
Unrealized gains, on available for sale securities of subsidiaries, net of
deferred taxes............................................................. 67.7 165.2...................................... 248.4 108.5
Unrealized foreign currency translation adjustment.......................... (23.7) (24.1)adjustment ......... (16.0) (1.2)
Retained earnings (including undistributed earnings of
subsidiaries of $1,114.3$1,342.1 million and $1,039.1$1,401.8 million in
19941997 and 1993,1996, respectively)...... 1,507.2 1,420.8
-------- --------
2,623.6 2,634.2 .............................. 2,162.5 1,871.4
---------- ----------
3,500.9 3,065.9
Less:
Treasury stock, at cost (1994-27,575,430(1997--61,703,924 shares;
1993-24,006,8161996--56,331,188 shares).... 706.6 529.8 .................................. 1,050.3 792.2
Restricted stock deferred compensation...................................... 1.6 1.7
-------- --------compensation ..................... 15.8 10.6
---------- ----------
Total stockholders' equity................................................ 1,915.4 2,102.7
-------- --------equity ................................ 2,434.8 2,263.1
---------- ----------
Total liabilities and stockholders' equity................................ $2,423.6 $2,412.3equity ................ $ 3,168.0 $ 2,820.2
========== ==========
- -------- --------
-------- --------
*Eliminated in consolidation
See note to condensed financial statements.
65
UNUM CORPORATION (Parent Company)
SCHEDULE II -- CONDENSEDII--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBERYear Ended December 31,
-------------------------
1994 1993 1992---------------------------------------
(Dollars in millions) 1997 1996 1995
- ---------------------------------------------------------- ----------- ----------- -----------
-----------------------------------------------------------------------------------------------------------
Operating activities:
Net income....................................................................income ........................................... $ 154.7370.3 $ 299.9238.0 $ 291.2281.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase (decrease) in income tax liability............................................ 0.4 2.3 3.2liability .......... (8.2) 11.7 2.1
(Increase) decrease in amounts due to/from
subsidiaries..................... (6.0) 7.5subsidiaries* ....................................... (1.2) Other....................................................................... 11.1 4.6 (5.4)(8.4) 11.8
Other ................................................ 11.3 16.1 (3.1)
Equity in undistributed net income of subsidiaries*........................... (75.2) (186.3) (201.1)
------- ------- ------- (104.1) (5.9) (281.6)
-------- -------- --------
Net cash provided by operating activities................................. 85.0 128.0 86.7
------- ------- -------activities ........... 268.1 251.5 10.3
-------- -------- --------
Investing activities:
Sales of investments.......................................................... -- -- 86.2
Purchases of investments...................................................... -- 0.3 (89.9)
Investment in subsidiaries, net*.............................................. (30.6) 0.9 (43.8) ..................... (107.8) (13.1) (1.1)
Issuance of notes receivable from subsidiaries* ...... (3.2) (32.5) (100.0)
Repayment of notes receivable from subsidiaries* ..... -- 50.0 50.0
Net (increase) decreaseincrease in short-term investments............................. 3.9 (2.3) 1.4investments ............... (1.5) -- (0.1)
Net additions to property and equipment....................................... (3.3) (2.4) (1.7)
------- ------- -------equipment .............. (10.7) (8.6) (5.4)
-------- -------- --------
Net cash used in investing activities..................................... (30.0) (3.5) (47.8)
------- ------- -------activities ............... (123.2) (4.2) (56.6)
-------- -------- --------
Financing activities:
Dividends to stockholders..................................................... (68.3) (61.4) (41.9)stockholders ............................ (79.2) (79.8) (75.1)
Treasury stock acquired....................................................... (183.3) (192.5)acquired .............................. (285.2) (119.1) --
Proceeds from notes payable................................................... 54.7 51.5 74.6payable .......................... -- -- 291.5
Repayment of notes payable....................................................payable ........................... (48.5) (15.0) --
(50.0) (25.0)
Increase (decrease)Net decrease in short-term debt........................................ 136.7 58.1 (58.1)
Net proceedsdebt ...................... (10.6) (42.3) (135.1)
Proceeds from notes payable to subsidiaries*.............................. ......... 245.8 -- 60.0 1.3
Other......................................................................... 5.9 10.4 10.7
------- ------- ---------
Repayment of notes payable to subsidiaries* .......... -- (10.0) (50.0)
Other ................................................ 32.8 18.9 13.0
-------- -------- --------
Net cash usedprovided by (used in) financing
activities ......................................... (144.9) (247.3) 44.3
-------- -------- --------
Net decrease in financing activities..................................... (54.3) (123.9) (38.4)
------- ------- -------
Net increase in cash............................................................ 0.7 0.6 0.5cash .................................. -- -- (2.0)
Cash at beginning of year....................................................... 1.3 0.7 0.2
------- ------- -------year ............................. -- -- 2.0
-------- -------- --------
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 ........................................ $ (6.6)(10.6) $ (8.1)(25.8) $ (4.7)
Interest....................................................................(15.1)
Interest ............................................ $ 18.143.3 $ 12.140.8 $ 11.036.2
Interest to subsidiaries*................................................... $ 2.2 ........................... $ -- $ --0.2 $ 4.0
Supplemental disclosure of noncash operating and investing activities:
During 1997, UNUM Corporation received a $168.3 note receivable in
satisfaction of a dividend payment from one affiliate, which was
immediately contributed to another affiliate.
*Eliminated- --------
* Eliminated in consolidation
See note to condensed financial statements.
66
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.67
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARYIII--SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN MILLIONS)(Dollars in millions)
(1)(2)
FUTURE
POLICY AMORTIZATION
BENEFITS, BENEFITS TO OF
DEFERRED AND UNPAIDFuture policy
Deferred benefits, and
policy unpaid claims (3)
acquisition and claim Premium
Segment costs expenses revenue
- -------------------------------- ------------- --------------- -------------
Year Ended December 31, 1997
Disability Insurance .......... $ 526.7 $ 5,977.4 $ 1,882.6
Special Risk Insurance ........ 154.7 761.5 878.6
Colonial Products ............. 302.1 458.6 530.8
Retirement Products ........... -- 615.5 130.3
Corporate ..................... -- -- 0.1
--------- ---------- ----------
Total ........................ $ 983.5 $ 7,813.0 $ 3,422.4
========= ========== ==========
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
========= ========== ==========
Amortization
(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, 1994
Employee Benefits......1997
Disability Insurance .......... $ 308.2 $2,301.1 $1,451.4 $263.5 $1,117.0468.0 $ 39.6 $300.5 $1,108.8
Related Businesses..... 33.3 887.8 477.5 89.6 333.2 8.0 165.6 358.41,503.9 $ 52.1 $ 481.9 $ 1,828.5
Special Risk Insurance ........ 68.4 600.4 65.8 179.5 236.2
Colonial Companies..... 224.8 330.5 441.3 32.6 226.1 60.7 124.4 388.1
Individual Disability.. 409.9 1,289.1 357.5 84.6 487.2 39.5 103.6 346.6Products ............. 57.6 271.8 80.7 137.1 467.2
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) 0.8 4.2Products ........... 54.4 102.7 0.1 5.7 2.5
Corporate ..................... 5.9 -- -- 33.258.6 --
----------- ------------ ---------- --------- ----------- ----------
--------- ---------- Total................ $1,035.2 $5,445.5 $2,807.9 $815.8 $2,490.8 $152.8 $781.5 $2,272.0
----------- ------------------- -------- ----------
--------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------Total ........................ $ 654.3 $ 2,478.8 $ 198.7 $ 862.8 $ 2,534.4
========= ========== ======= ======== ==========
Year Ended December 31, 1993
Employee Benefits......1996
Disability Insurance .......... $ 249.4 $2,080.8 $1,362.6 $234.7 $1,018.3468.5 $ 42.1 $297.8 $1,060.6
Related Businesses..... 25.6 795.4 402.5 85.5 268.7 1.1 160.9 282.21,514.9 $ 99.0 $ 557.0 $ 1,893.0
Special Risk Insurance ........ 56.5 506.5 42.4 183.8 220.1
Colonial Companies..... 206.0 282.2 407.4 41.4 211.7 56.1 110.6 365.4
Individual Disability.. 348.2 949.1 322.5 82.5 212.0 35.3 88.7 313.1Products ............. 47.3 246.8 72.5 133.8 446.5
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..............Products ........... 217.2 257.1 -- (0.5) -- 6.224.5 15.0
Corporate ..................... 16.1 -- -- 23.662.8 --
----------- ------------ ---------- --------- ----------- ----------
--------- ---------- Total................------- -------- ----------
Total ........................ $ 879.1 $4,704.0 $2,557.2 $839.8 $2,056.7 $147.7 $732.3 $2,069.7
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------805.6 $ 2,525.3 $ 213.9 $ 961.9 $ 2,574.6
========= ========== ======= ======== ==========
Year Ended December 31, 1992
Employee Benefits......1995
Disability Insurance .......... $ 206.8 $1,865.6 $1,116.2 $234.4592.9 $ 808.01,711.2 $ 34.4 $285.790.6 $ 895.1
Related Businesses..... 18.0 696.5 354.4 91.6 262.7 (2.9) 132.8 287.1454.0 $ 1,853.2
Special Risk Insurance ........ 48.4 492.3 35.5 162.6 223.6
Colonial Companies..... 185.7 243.0 371.9 35.4 191.5 50.5 104.8 330.8
Individual Disability.. 293.1 827.7 292.9 75.0 204.4 31.2 87.7 283.5Products ............. 52.2 241.6 66.7 131.3 417.5
Retirement Security.... 35.8 90.0 32.3 228.8 211.7 9.4 33.3 11.9
Other Operations....... 14.4 475.0 29.3 181.6 182.7 3.3 8.4 0.9
Corporate..............Products ........... 323.7 275.3 0.8 36.2 23.3
Corporate ..................... 14.2 -- -- 0.8 3.942.9 -- -- 10.4 --
----------- ------------ ---------- --------- ----------- ----------
--------- ---------- Total................------- -------- ----------
Total ........................ $ 753.8 $4,197.8 $2,197.8 $850.7 $1,861.0 $125.9 $663.1 $1,809.3
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------1,031.4 $ 2,720.4 $ 193.6 $ 827.0 $ 2,517.6
========= ========== ======= ======== ==========
(1) Excludes other policyholder funds, as follows:
DECEMBERDecember 31,
------------------------------------
SEGMENT 1994 1993 1992----------------------------------------
Segment 1997 1996 1995
- ------------------------------------- ------------ ----------- -----------
--------------------------------------------------------------------
Employee Benefits.............Disability Insurance ........... $ 6.32.4 $ 6.85.9 $ 5.8
Related Businesses............ 4.2 4.0 8.93.1
Special Risk Insurance ......... 15.4 12.7 14.6
Colonial Companies............ 100.1 76.0 57.0
Individual Disability......... -- -- --Products .............. 258.1 156.6 128.0
Retirement Security........... 3,192.0 3,204.1 3,229.9
Other Operations.............. 756.2 959.8 1,236.3
---------- ---------- ----------
Total.....................Products ............ 729.0 3,358.4 3,694.6
--------- --------- ---------
Total .......................... $ 4,058.81,004.9 $ 4,250.73,533.6 $ 4,537.9
---------- ---------- ----------
---------- ---------- ----------
3,840.3
========= ========= =========
(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
(losses).
(4) Includes investment income (expense) and net realized investment gains.
(5) Investment income and net realized investment gains are allocated to
the segments based on designation of ownership of assets identified to
the segments. Operating expenses are allocated to the segments based
on direct association with a product whenever possible. If, however,
the expense cannot be readily associated with a particular product,
the costs are allocated based on ratios of the relative time spent,
extent of usage or varying volume of work performed for each segment.
(6) Premiums written for health and disability income policies.
Certain December 31, 1993, and 1992 amounts have been reclassified in 1994
for comparative purposes.68
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, 19941997
Life insurance in force..................... $145,425.9 $4,425.3inforce ........................ $ -- $141,000.6 --
---------- --------- ------ ----------
---------- --------- ------ ----------260,014.8 $ 16,036.5 $ 2,069.7 $ 246,048.0 0.8%
============ =========== ========== ============ ====
Premiums
Life insurance and individual annuities...annuities ...... $ 517.9650.7 $ 15.733.9 $ 1.69.0 $ 503.8 0.3%625.8 1.4%
Accident and health insurance............. 2,135.0 96.8 169.1 2,207.3 7.7%insurance ................ 2,656.7 368.9 272.6 2,560.4 10.6%
Group annuities........................... 21.3annuities .............................. 2.5 -- -- 21.32.5 --
------------ ----------- ---------- --------- ------ ----------------------
Total premiums........................premiums .............................. $ 2,674.23,309.9 $ 112.5 $170.7402.8 $ 2,732.4
---------- --------- ------ ----------
---------- --------- ------ ----------281.6 $ 3,188.7
============ =========== ========== ============
Year Ended December 31, 19931996
Life insurance in force................... $130,323.4 $2,247.9inforce ....................... $ 199,019.2 $ 11,476.5 $ -- $128,075.5$ 187,542.7 --
---------- --------- ------ ----------
---------- --------- ------ ----------============ =========== ========== ============ ====
Premiums
Life insurance and individual annuities...annuities ...... $ 487.2552.0 $ 11.928.6 $ 1.6-- $ 476.9 0.3%523.4 --
Accident and health insurance............. 1,818.6 38.1 191.0 1,971.5 9.7%insurance ................ 2,406.9 77.8 252.9 2,582.0 9.8%
Group annuities........................... 25.7annuities .............................. 15.0 -- -- 25.715.0 --
------------ ----------- ---------- --------- ------ ----------------------
Total premiums........................premiums .............................. $ 2,331.52,973.9 $ 50.0 $192.6106.4 $ 2,474.1
---------- --------- ------ ----------
---------- --------- ------ ----------252.9 $ 3,120.4
============ =========== ========== ============
Year Ended December 31, 19921995
Life insurance in force..................... $105,361.0inforce ....................... $ 586.8164,478.4 $ 4,119.5 $ -- $104,774.2$ 160,358.9 --
---------- --------- ------ ----------
---------- --------- ------ ----------============ =========== ========== ============ ====
Premiums
Life insurance and individual annuities...annuities ...... $ 409.9571.4 $ 6.219.3 $ 0.52.0 $ 404.2 0.1%554.1 0.4%
Accident and health insurance............. 1,615.7 45.3 135.7 1,706.1 8.0%insurance ................ 2,248.4 46.9 239.5 2,441.0 9.8%
Group annuities........................... 32.1annuities .............................. 23.1 -- -- 32.123.1 --
------------ ----------- ---------- --------- ------ ----------------------
Total premiums........................premiums .............................. $ 2,057.72,842.9 $ 51.5 $136.266.2 $ 2,142.4
---------- --------- ------ ----------
---------- --------- ------ ----------241.5 $ 3,018.2
============ =========== ========== ============
69
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
Corporation 10-K dated March 25, 1992,1997, and incorporated herein by reference.
4 Rights Agreement Filed as Exhibit 1 to the Registrant's Current Report on Form 8-K
dated March 18, 1992, and incorporated herein by reference.
10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual Report on Form
10-K dated March 26, 1991,27, 1996, and incorporated herein by reference.
10.2 Annual Incentive Compensation Plan Filed as Exhibit 10.23.2 to the Registrant's Annual Report on Form
for Designated Executive 10-K dated March 29, 1993,25, 1997, and incorporated herein by reference.
10.2.1 Annual Incentive Plan-Summary of Significant Filed herewith.
ChangesOfficers
10.3 1987 Executive Stock Option Plan Filed as Exhibit 10.3 to the Registrant's Annual Report on Form
Option Plan 10-K dated March 29, 1993,27, 1996, and incorporated herein by reference.
10.4 1990 Long-Term Stock Filed herewith.
Incentive Plan
10.5 1996 Long-Term Stock Filed as Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K dated March 29, 1993, and
incorporated herein by reference.
10.5 Supplementalherewith.
Incentive Plan
10.6 Supplementary Retirement Plan Filed as Exhibit 10.4 to the Registrant's Registration Statement on
Plan Form S-1 (Registration No. 33-6571) dated June 18, 1986, and
incorporated herein by reference.
10.610.7 Supplemental Executive Retirement Plan Filed as Exhibit 10.6 to the Registrant's Annual Report on Form
Retirement Plan 10-K dated March 26, 1991, and incorporated herein by reference.
10.710.8 Form of Executive Severance Agreement Filed as Exhibit 10.7 to the Registrant's Annual Report on Form
Severance Agreement 10-K dated March 25, 1992, and incorporated herein by reference.
10.8 Colonial Life & Accident Insurance Co.10.9 (a) Employment Letter Filed as Exhibit 10.10 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
(b) Employment Letter Filed herewith.
Incentive Plan
10.910.10 $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.
10.11 Non-Qualified 401(k) Plan Filed herewithas Exhibit 3.2 to the Registrant's Annual Report on Form
10-K dated March 25, 1997, and incorporated herein by reference.
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.
70