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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) OF THE
SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended December 31, 19961997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-9254
UNUM Corporation
(Exact name of registrant as specified in its charter)
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Delaware 01-0405657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2211 Congress Street, Portland, Maine 04122
(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
- ------------------- -----------------------------------------
Common stock, $0.10 par value New York Stock Exchange
Pacific Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Pacific Stock Exchange
8.8% Junior Subordinated Deferrable Interest New York Stock Exchange
Debentures, Series A, Due 2025
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X][ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 7, 1997,February 20, 1998, was approximately $5,384,300,000.$6,947,700,000.
As of March 7, 1997, 70,832,485February 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 for the Annual Meeting of
Shareholders on May 9, 1997,8, 1998, is incorporated by reference into Part III.
Exhibit Index appears on page 76.70.
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TABLE OF CONTENTS
PART I
Item Page
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1. Business ............................................................................................................................................................... 1
A. Description of Business ........................................................................................................................... 1
B. Disability Insurance Segment ................................................................................................................. 2
C. Special Risk Insurance Segment ............................................................................................................ 4
D. Colonial Products Segment ......................................................... 5............................................................. 4
E. Retirement Products Segment .................................................................................................................. 5
F. Investments ......................................................................... 6........................................................................... 5
G. Risk Management and Reinsurance ................................................... 7....................................................... 6
H. Reserves ........................................................................... 8.............................................................................. 7
I. Employees ......................................................................... 8............................................................................. 7
J. Competition ......................................................................... 8........................................................................... 7
K. Regulation ........................................................................ 8............................................................................ 7
L. Participation Fund Account .......................................................... 9............................................................ 8
2. Properties ........................................................................... 10............................................................................... 8
3. Legal Proceedings ..................................................................... 10........................................................................ 8
4. Submission of Matters to a Vote of Security Holders .................................... 10...................................... 8
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters ............ 10................ 8
6. Selected Financial Data ............................................................... 11.................................................................. 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13.... 11
7A. Quantitative and Qualitative Information about Market Risk ............................... 28
8. Financial Statements and Supplementary Data .......................................... 33.............................................. 29
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... 66..... 60
PART III
10. Directors and Executive Officers of the Registrant .................................... 66....................................... 60
A. Directors of the Registrant ......................................................... 66........................................................... 60
B. Executive Officers of the Registrant ................................................ 66.................................................. 60
11. Executive Compensation ............................................................... 67................................................................... 61
12. Security Ownership of Certain Beneficial Owners and Management ........................ 67........................... 61
13. Certain Relationships and Related Transactions ....................................... 67........................................... 61
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 68.......................... 62
Signatures ........................................................................... 69............................................................................... 63
Index to Exhibits ..................................................................... 76........................................................................ 70
UNUM Corporation and Subsidiaries
PART I
Item 1--Business
A. Description of Business
UNUM Corporation is a Delaware corporation organized in 1985 as an
insurance holding company. UNUM Corporation and subsidiaries ("UNUM") are the
leading providers of group long term disability insurance ("group LTD") in the
United States and the United Kingdom. UNUM is also 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
insurance.("LTC") insurance, special risk reinsurance and payroll-deducted voluntary
employee benefit products offered to employees at their worksites. The
operations of the subsidiaries, as described below, account for substantially all
of UNUM's consolidated assets and revenues. UNUM Corporation is based in
Portland, Maine, and through its affiliates has operations in North America,
the United Kingdom, and the Pacific Rim.
Effective December 31, 1996,Rim and Latin America.
UNUM merged Commercial Life Insurance Company
("Commercial Life") intoconducts its operations in North America through a number of
wholly-owned subsidiaries including: UNUM Life Insurance Company of America
("UNUM America")
to accelerate growth of its special risk business, increase its commitment to
the Association Group disability business, and to improve operating and capital
efficiencies. Following the merger, UNUM America is a leader in special risk
insurance and professional association insurance marketing.
UNUM conducts its operations in the United States through a number of
wholly-owned subsidiaries including: UNUM America,, a Maine life insurance company licensed in 49 states and
Canada, the leading provider of group
disability insurance in the nation and a provider of employee benefits and long
term care insurance;Canada; First UNUM Life Insurance Company ("First UNUM"), a New York life
insurance company; Duncanson & Holt, Inc. ("D&H"), a New York
corporation and a leading accident and health reinsurance underwriting manager; Colonial Companies, Inc. ("Colonial Companies"), a Delaware
holding company whose wholly-owned subsidiary, Colonial Life & Accident
Insurance Company ("Colonial"), is a leaderSouth Carolina life insurance company
licensed in payroll-deducted voluntary employee benefits
offered to employees at their worksites;49 states; and UNUM Holding Company, a Delaware
corporation. Through UNUM Holding Company, UNUM Corporation also owns Claims
Service International,Duncanson & Holt, Inc. ("D&H"), a Delaware corporation, which provides claims
administration services, and UNUM Sales Corporation, a Delaware corporation. As
ofNew York
Corporation. Effective December 31, 1996, UNUM Sales Corporation is no longer registered as a
licensed broker-dealer coinciding with the sale ofmerged Commercial Life Insurance
Company ("Commercial Life") into UNUM America and First UNUM's
respective group tax-sheltered annuity ("TSA") businesses as discussed below.
UNUM Corporation also holds all of the outstanding capital stock of UNUM
European Holding Company, which is incorporated in the United Kingdom.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 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, a Japanese non-life insurance company
which was established in 1994.
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 Choices Inc. ("OCI"), which
delivers integrated information and analysis to help organizations manage their
health and disability program costs. OCI is based in Cheyenne, Wyoming, and is
a 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 TSAgroup 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 purchase price (ceding commission) at closing was approximately $71 million. The
contracts havewere initially been reinsured on an
indemnity basis. Upon consent of the TSA contractholders and/orand participants, the
contracts will beare considered reinsured on an assumption basis, legally releasing
UNUM America and First UNUM from future contractual obligation to the
respective contractholders and/orand 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 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.
To more clearly reflect UNUM's management of its businessesPremiums for insurance products described in the following sections are
based on expected morbidity, mortality and to more
appropriately group its product portfolios, UNUM began reporting its operations,
effective Januarypersistency, as well as on
assumptions concerning operating expenses and investment income.
1
1995, principally in four business segments:
1
Disability Insurance, Special Risk Insurance, Colonial Products and Retirement
Products. Corporate includes transactions that are generally non-insurance
related and interest expense on corporate borrowings. For comparative purposes,
1994 information was previously restated to reflect reporting in these segments.
Refer to Item 7 and Item 8 (Note 16) for more information.
B. Disability Insurance Segment
The Disability Insurance segment, which in 19961997 accounted for 59.0%58% of
UNUM's revenues and 63.0% of its income before income taxes, includes disability products
offered in North America, the United Kingdom and Japan including: group LTD,
group short term disability ("group STD"), individual disability,
Association Group disability,STD, ID, disability reinsurance operations and long term care insurance.
UNUM America and First UNUM:
UNUM America and First UNUM market their group and individual insurance
products, which are included in the Disability Insurance and Special Risk Insurance
segments, through a network of 3545 offices in the United States and Canada
which utilizeutilizing brokers to distribute these products. As of December 31, 1996,1997, these
branch offices were organized into five regions and were staffed with
approximately 8701,040 management, sales, service and administrative personnel.
Group Long Term Disability
UNUM America and First UNUM's group LTD product is the Disability
Insurance segment's principal product. UNUM America and First UNUM target sales
of group LTD to executive, administrative and management personnel and other
professionals such as doctors, attorneys,educators, consultants, health care providers,
accountants and engineers. Since 1976, UNUM America and First UNUM combined
have been the United 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 policies begin
providing benefits following 90- or 180-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 for group LTD insurance are
based upon the expected mortality, morbidity and persistency of the insured
group, as well as assumptions concerning operating expenses and investment
income.
The group LTD product is sold primarily on a basis that permits annualpermitting periodic
repricing. This enables UNUM to adjust the pricing of its products to more
closely matchalign with the underlying claimclaims experience and interest rate
environment.
Individual Disability
Individual disability products provide coverage for loss of income for
professionals, corporate executives, business owners and administrative support
personnel in the event of disability. As reported in the Life Insurance
Marketing Research Association's 1995 INDIVIDUAL HEALTH ISSUES AND INFORCE
SURVEY for the United States and Canada, the most recent available data, UNUM
America and First UNUM combined were the fourth largest provider of individual
disability income policies measured by inforce premium.
On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage
of the active life reserves of UNUM America's existing United States
non-cancellable individual disability ("ID") block of business. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM's announcement in late 1994, as discussed below, that it would no
longer market the non-cancellable form of ID coverage in the United States. The
agreement was effective December 31, 1996. For a detailed discussion of the
reinsurance agreement refer to Item 8 (Note 6).
UNUM announced in November 1994 that it would discontinue sales of the
traditional, fixed price, non-cancellable individual disability product
("non-cancellable product") in the United States upon introduction of a new
disability product in each state. During the second quarter of 1995, UNUM
introduced the Lifelong Disability Protection ("LDP") product, which replaces
the non-cancellable product. LDP policies are issued on a "guaranteed renewable"
basis, which means that UNUM cannot refuse to renew any policy, but it does
reserve the right to
2
increase premiums for inforce policies. This right to change premiums is or may
be subject to various state insurance department rules, regulations, and
approvals.
The LDP product provides benefits and transitional support for moderate
disabilities, while providing richer benefits for severe disabilities. Various
options are available that permit tailoring of insurance coverage to the
specific client's needs. The most common options include up to 60% base income
replacement coverage, an option to purchase up to 40% further coverage in the
event of catastrophic injury or illness involving the loss of two or more
Activities of Daily Living, and an automatic option to convert to a long term
care policy at retirement age. Following the approval of the LDP product, sales
of the non-cancellable product have been discontinued in the United States. UNUM
also markets buy/sell and key person coverage and policies that provide
reimbursement for business overhead expenses incurred during a period of
disability.
Individual disability insurance premium rates are based on expected
mortality, morbidity and persistency, as well as assumptions concerning policy
related expenses, inflation and investment income.
Following the completion of its merger with Commercial Life, UNUM America
is a leading provider of disability insurance in the association marketplace,
offering disability income coverage to members of professional associations.
UNUM expects to introduce new conditionally renewable products for sale through
its association channel in the first quarter of 1997, subject to regulatory
approvals. As a result of the merger, UNUM now reports the operations of the
Association Group disability business with the individual disability business.
Group Short Term Disability
Group STD provides employees with insurance coverage for loss of income in
the event of inability to work due to sickness or injury. Most of these
policies begin providing benefits immediately for accidents, or following a
one-week waiting period for sickness, and continue providing benefits for up to
26 weeks. Group STD benefits are paid weekly and generally are limited to 60%
of the employee's earned income up to a specified maximum benefit. As reported
by EMPLOYEE BENEFIT PLAN REVIEW,Employee Benefit Plan Review, UNUM America and First UNUM combined were the
top providerproviders of group STD for 1995,1996 based on premium and number of inforce
lives.
Long Term CareIndividual 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 America and First UNUM combined
were the fourth largest providers of individual disability income policies
measured by inforce premium.
Effective December 31, 1996, UNUM America and 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 announcement in late 1994 that it would no longer
market long term carethe 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 ("LTC"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 to
employer groupsdepartment rules, regulations and individuals.approvals.
The group LTCLDP product is offered on an employer
or employee-paid basis,provides benefits and employer groups may offertransitional support for moderate
disabilities, while providing richer benefits for severe disabilities. Various
options are available that permit tailoring insurance coverage to retirees,
spouses, parents and grandparents,the specific
client's needs. The most common options include up to 60% base income
replacement coverage, an option to purchase up to 40% further coverage in addition to the
employee. LTC provides
insurance coverage for nursing home and home care costs when the insured
sustainsevent of catastrophic injury or illness involving the loss of two or more
Activities of Daily Living, or sustains
cognitive impairment.(e.g. bathing, dressing, feeding independently) and
an automatic option to convert to a long term care policy at retirement age.
Following the approval of the LDP product, sales of the non-cancellable product
have been discontinued in the United States.
UNUM also markets buy/sell and key person coverage and policies that
provide reimbursement for business overhead expenses incurred during a period
of disability.
Following the completion of its merger with Commercial Life, UNUM America
is a leading provider of disability insurance in the association marketplace,
offering disability income coverage to members of professional associations.
UNUM introduced new conditionally renewable products for sale through its
association channel in the first quarter of 1997, which were available in 41
states at December 31, 1997.
LTD Reinsurance
UNUM America assumes certain insurance risks through long term disability
reinsurance operations managed by Duncanson & Holt Services Inc., a leading
manager of group LTD reinsurance in the United States and wholly-owned
subsidiary of D&H.
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 insured suffers the loss of two or
more Activities of Daily Living and requires 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 options provided to add coverage for
professional and/or informal home care and inflation protection. Benefits start
after an elimination period, generally of 90 days or less.
UNUM Limited:
UNUM Limited was the leading provider for 19951996 of group LTD insurance in
the United Kingdom, as reported by EMPLOYERS RE. INTERNATIONAL.ERC Frankona Reassurance Ltd's annual group
risk survey, based on premium revenue. UNUM Limited targets group LTD sales to
executive, administrative and management personnel, and other professionals. These products are marketed through a network of
independent brokers. UNUM Limited's group LTD products provideprofessionals,
providing employees with insurance coverage for loss of income in the event of
inability to work due to sickness or injury. UNUM Limited also markets
individual disability insurance through brokers and agents to self-employed individuals and those not covered
under group policies. Premiums for group LTD and individual disability insurance
are based upon the expected mortality, morbidity and persistencya network of the insured
group, as well as assumptions concerning operating expenses and investment
income.
In May 1994, UNUM Limited assumed the management of the group risk
portfolio of Windsor Life Assurance Company Limited ("Windsor Life"), which
included group LTD and group life products. Windsor Life was the third largest
group LTD provider in the United Kingdom in 1993, as reported by EMPLOYERS RE.
INTERNATIONAL.
3
independent financial
advisors.
UNUM Japan:
On June 20, 1994, the Japanese Ministry of Finance granted UNUM a
provisional license that allowed UNUM to establish a non-life insurance company,
UNUM Japan, Accident Insurance Company Limited ("UNUM Japan"), to market
disability and other accident productswhich began operations in Japan. UNUM Japan has subsequently
received an official license.
UNUM Japan1994, targets sales of group and
individual long term disability products ("LTD products") to executive,
administrative and management personnel and other professionals. TheseThe 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. The LTD products provide employees withBeginning in 1997, UNUM Japan received approval to market Credit Long
Term Disability insurance coverage for loss of incomethrough banks and credit unions. This product
protects salaried workers from inability to make their monthly mortgage/home
lease payments in the event of inability to work due to
sickness or injury. Most of these policies begin providing benefits following
90- or 365-day waiting periods and continue providing benefits until the
employee reaches age 65-70. The benefits of the LTD products are paid monthly
and generally are limited to 60% of the employee's earned income up to a
specified maximum benefit. Premiums for LTD insurance are based upon the
expected mortality, morbidity and persistency of the insured group, as well as
assumptions concerning operating expenses and investment income.disability.
UNUM Japan also acquiresreceives premiums as a reinsurer of LTD products in Japan
and Hong Kong. These reinsurance treaty arrangements are mostlyprimarily 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 and Item 8 (Note 16) under the caption "Disability Insurance Segment" and Item
8 Note 16 "Segment Information" for more information.
C. Special Risk Insurance Segment
The Special Risk Insurance segment in 19961997 accounted for 20.1%23% and 19% of
UNUM's revenues and 23.2% of its income before income taxes.taxes, respectively. The Special Risk
Insurance segment includes group life, special risk accident insurance,
non-disability
reinsurance operations, reinsurance underwriting management operations, non-disability reinsurance
operations and other special risk insurance products.
The Special Risk Insurance segment's group insurance products are sold
primarily on a basis that permits annualpermitting periodic repricing. This enables UNUM to adjust
the pricing of its products to more closely matchalign with the underlying claimclaims
experience and interest rate environment.
UNUM America and First UNUM's group life insurance products provide term
insurance to a broad range of employees. As reported by EMPLOYEE BENEFIT PLAN
REVIEWEmployee Benefit Plan
Review for 1995,1996, UNUM America and First UNUM combined were the seventhfifth largest
writer of group life insurance in the United States based on number of inforce
contracts. UNUM America and First UNUM also offer group universal life
insurance on a payroll deduction basis through a network of independent brokers
and specialty agents and group accidental death and dismemberment riders. In
addition, term life insurance is sold through the association group
channel. Following the completion of its merger with Commercial Life,Group accidental death and dismemberment coverage is offered as a
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. UNUM America markets special riskThese products which are
offered on an employer or employee-paid basis through a network of independent
brokers and specialty agents.
On July 30, 1992, UNUM purchased D&H ahas offices throughout the United States and in London, Toronto,
Bermuda and Singapore. A leading accident and health
reinsurance underwriting manager. As a reinsurance underwriting
manager, D&H is authorized to conduct reinsurance business on behalf of the
member companies participating in its reinsurance facilities. D&H provides
poolreinsurance facility management services thatwhich 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- ownedwholly-owned subsidiary of
Duncanson & Holt Europe Ltd. On May 3, 1996,
D&H acquired three associated reinsurance underwriting managers specializing in
accident and health business. D&H has offices throughout the United States and
in London, Toronto, Bermuda and Singapore.
During 1995, Duncanson & Holt Europe Ltd., an affiliatea
subsidiary of D&H based in the United Kingdom, was authorized by Lloyd's of
London to establish two new Lloyd's Managing Agents and to acquire a third existing
Lloyd's Managing Agent. Each
manages a syndicateThese agents manage syndicates that underwritesunderwrite
primarily personal accident and other "non-marine"non-marine and marine classes of business
at Lloyd's of London.
The non-disabilityNon-disability reinsurance operations include UNUM America's participation
in reinsurance facilities managed by D&H facilities managed by
non-related companies and direct reinsurance arrangements
primarily for
4
accident and health, long term care and other special risks.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 and Item 8 (Note 16) under the caption "Special Risk Insurance Segment" and
Item 8 Note 16 "Segment Information" for more information.
D. Colonial Products Segment
The Colonial Products segment in 19961997 accounted for 13.5%14% and 18% of UNUM's
revenues and 27.0% of its income before income taxes.taxes, respectively. The Colonial Products
segment includes Colonial and affiliates. Colonial markets a broad line of
payroll-deducted, voluntary benefitsemployee benefit products to employees at their
worksites, while
focusing onwhich includes accident and sickness, disability, cancer and life
products. Colonial markets its products nationwide primarily through a 7,900-member9,500-member
independent contractor sales force.force and through collaborative sales with UNUM
America. All Colonial products 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 offers a wide range
of life insurance products, with universal life and whole life accounting for
most of the life insurance sold. Colonial's cancer policies are designed to
provide payments for hospitalization and scheduled medical benefits.
All of
Colonial's insurance policies are issued on a nonparticipating basis.
More than 98% of4
UNUM Corporation and Subsidiaries
Colonial's premiums for 19961997 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 "guaranteed
renewable"guaranteed renewable basis,
which means that Colonial cannot refuse to renew any policy, but it does reserve the
right on a product-by-product basis to increase premiums for inforce policies.
This right to change premiums is, or may be, subject to various state insurance
department rules, regulations and approvals.
Colonial markets its accident and health products as qualified fringe
benefits that can be purchased with pretax employee dollars as part of a
flexible benefits program pursuant to Section 125 of the Internal Revenue Code.
In 1996,1997, premiums from sales to employees participating in such programs
accounted for approximately 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 eliminateeliminating Colonial's ability to
continue marketing its products in this way,way. However, Colonial believes its
products provide policyholders value, which will remain even if the tax
advantages offered by flexible benefit programs are eliminated.
During 1997, Colonial Companies' subsidiary, BenefitAmerica, Inc.formed a strategic marketing alliance with The
Lincoln National Life Insurance Company ("BenefitAmerica"Lincoln Life"),
offers employers administrative services for their employee benefit programs.
The services offered by BenefitAmerica include administration in order to create
cross-selling opportunities in the worksite market. In addition, Colonial
coinsures and administers Lincoln Life's existing block of flexible
spending accounts, which are offered under an employer's flexible benefits plan
pursuant to Section 125 of the Internal Revenue Code, as well as other
administrative services to those plans. The services offered by BenefitAmerica
complement the services and products offered to employers by Colonial.worksite-marketed
universal life insurance.
Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial Products Segment" and Item 8
Note 16 "Segment Information" for more information.
E. Retirement Products Segment
The Retirement Products segment in 1997 accounted for 7.0%5% and 14% of UNUM's
revenues and 0.4% of its income before income taxes, in 1996.respectively. This segment includes
products no longer actively marketed by UNUM America and First UNUM's tax-sheltered annuities ("TSA"),including: TSAs, guaranteed
investment contracts, deposit administration accounts, 401(k) plans, individual
life and group medical insurance, all of which are no longer actively marketed.insurance. On October 1, 1996, UNUM America and First
UNUM closed the sale of their respective TSA businesses to The Lincoln, National Life Insurance Company and
Lincoln Life & Annuity Companyas
discussed in Item 1 A, "Description of New York ("Lincoln"), both subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
purchase price (ceding commission) at closing was approximately $71 million. The
contracts have initially been reinsured on an indemnity basis. Upon consent of
the TSA contractholders and/or participants, the contracts will be considered
reinsured on an assumption basis, legally releasing UNUM America and First UNUM
from future contractual obligation to the respective contractholders and/or
participants.Business."
Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement Products Segment" and Item 8
Note 16 "Segment Information" for more information.
5
F. Investments
Refer to Item 7 under the caption "Investments" for more information.
Additional information about UNUM's mortgage loan portfolio is provided below.
Effective January 1, 1996, UNUM began using the categories for geographic
region and property type established by the American Council of Life Insurance.
For comparative purposes, 1995 information has been restated in the tables below
to reflect this change.
UNUM management believes that its mortgage loan portfolio is well
diversified geographically and among property types. The mortgage loan
portfolio percentages by geographic region and property type at December 31,
1996,1997, and 1995,1996, were as follows:
Geographic Region
1996 1995
---- ----
New England ............ 12.4% 12.3%
Mid-Atlantic ............ 12.7 11.3
South Atlantic ......... 16.1 16.6
Mountain ............... 7.5 7.9
Pacific .................. 15.7 14.1
West South Central ...... 6.8 7.8
East South Central ...... 5.4 5.6
West North Central ...... 11.3 10.1
East North Central ...... 12.0 14.2
Other .................. 0.1 0.1
------ ------
Total .................. 100.0% 100.0%
====== ======
1997 1996
---------- ----------
New England ................. 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 .......... 13.1 11.3
East North Central .......... 4.6 12.0
Other ....................... 0.1 0.1
----- -----
Total ..................... 100.0% 100.0%
===== =====
Property Type
1996 1995
---- ----
Office Building ......... 26.1% 28.2%
Retail ............... 33.0 33.5
Industrial ............ 27.1 23.3
Apartment ............ 8.2 7.1
Hotel/Motel ............ 3.8 5.6
1-4 Family ............ 0.1 0.1
Other Commercial ...... 1.7 2.2
------ ------
Total ............... 100% 100%
====== ======
1997 1996
---------- ----------
Office Building ........... 24.6% 26.1%
Retail .................... 28.1 33.0
Industrial ................ 32.2 27.1
Apartment ................. 10.6 8.2
Hotel/Motel ............... 2.7 3.8
1-4 Family ................ -- 0.1
Other Commercial .......... 1.8 1.7
----- -----
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, 1996,1997,
and 19951996 (dollars in millions):
Geographic Region
1996 1995
---- ----
Mid-Atlantic ............ $3.5 $--
East North Central ...... 2.1 2.8
----- ----
Total .................. $5.6 $2.8
1997 1996
--------- --------
New England ................. $ 2.9 $ --
Mid-Atlantic ................ -- 3.5
West North Central .......... 5.0 --
East North Central .......... -- 2.1
------ ----
Total ..................... $ 7.9 $ 5.6
====== =====
====
Property Type
1996 1995
---- ----
Office Building ...... $-- $2.8
Retail ............... 5.6 --
---- -----
Total ............... $5.6 $2.8
====
1997 1996
--------- --------
Office Building .......... $ 2.9 $ --
Retail ................... 5.0 5.6
------ ----
Total .................. $ 7.9 $ 5.6
====== =====
Effective January 1, 1995, UNUM adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan," which
defined the principles to measure and record a loan when it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement.
Impaired loans by geographic region and property type were as follows at
December 31, 1996,1997, and 19951996 (dollars in millions):
Geographic Region
1996 1995
---- ----
New England ............ $14.6 $14.9
Mid-Atlantic ............ 8.4 3.6
South Atlantic ......... 9.1 11.7
Mountain ............... 8.8 12.3
West South Central ...... 4.8 4.8
West North Central ...... 2.6 --
East North Central ...... 2.1 2.8
------ ------
Total .................. $50.4 $50.1
====== ======
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
1996 1995
---- ----
Office Building ...... $22.0 $28.7
Retail ............... 18.2 16.0
Industrial ............ 10.2 5.4
------ ------
Total ............... $50.4 $50.1
====== ======
6
Mortgage
1997 1996
---------- ----------
Office Building .......... $ 29.7 $ 22.0
Retail ................... 13.7 18.2
Industrial ............... -- 10.2
------- -------
Total .................. $ 43.4 $ 50.4
======= =======
Restructured mortgage loans that were restructured prior to the adoption of FAS 114, by geographic region and property type were as
follows at December 31, 1996,1997, and 19951996 (dollars in millions):
Geographic Region
1996 1995
---- ----
New England ............ $0.7 $3.3
South Atlantic ......... 13.3 13.5
Mountain ............... 7.7 7.8
Pacific .................. 7.9 9.6
West South Central ...... 2.5 2.6
West North Central ...... 8.7 8.7
East North Central ...... 14.0 14.4
----- -----
Total .................. $54.8 $59.9
===== =====
1997 1996
--------- ---------
New 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 ..................... $ 39.3 $ 54.8
====== ======
Property Type
1996 1995
---- ----
Office Building ...... $24.3 $25.0
Retail ............... 12.5 12.6
Industrial ............ 5.8 5.8
Apartment ............ 4.4 7.0
Hotel/Motel ............ 7.8 7.9
Other Commercial ...... -- 1.6
------ ------
Total ............... $54.8 $59.9
====== ======
1997 1996
---------- ----------
Office Building .......... $ 23.8 $ 24.3
Retail ................... 12.3 12.5
Industrial ............... 0.9 5.8
Apartment ................ -- 4.4
Hotel/Motel .............. 2.3 7.8
------- -------
Total .................. $ 39.3 $ 54.8
======= =======
G. Risk Management and Reinsurance
Risk management, which includes product design, pricing, underwriting,
reserving and benefits management, involves a determination of the type and
amount of risk that an insurer is willing to accept, administration and evaluation
of business inforce and 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 risk it has
underwritten. Reinsurance allows UNUM to sell policies with higher benefits
than the entire risk that UNUM is willing to assume. UNUM remains liable to the
insured for the payment of policy benefits if the reinsurers cannot meet their
obligations under the reinsurance agreements. Within the Disability Insurance and Special Risk Insurance segments, UNUM America and First UNUM have underwritersdoes not generally reinsure
risk on a product-specific basis for group disability, individual
disability, Association Group disability, group life, long term care, and
accidental death and dismemberment products. These underwriting functions are
aligned geographically with UNUM America and First UNUM's five sales regions.
Quotes for prospective customers are based upon UNUM America and First UNUM's
experience with profitability and persistency of the respective employer's risk
category. The maximum group LTD, group STD Association Group disability and LTC
monthly benefit varies, but the usual maximum monthly amount available is
$35,000, $10,000, $10,000 and $6,000, respectively.or association group
disability. For group lifeother insurance products, UNUM retains up to $750,000 per individual life and reinsures the
balance with other insurance carriers. In addition, UNUM America reinsures the
risk on its accidental death and dismemberment contracts that exceeds $400,000
on any one life.
During 1996, UNUM America entered into an agreement for reinsurance
coverage of the active life reserves of UNUM America's existing United States
non-cancellable individual disability block of business. For more informationbenefits over various
amounts, depending on the reinsurance agreement refer to Item 1B under the caption "Individual
Disability."
During 1995, UNUM America and First UNUM introduced the guaranteed
renewable Lifelong Disability Protection product ("LDP"), following the decision
in late 1994 to discontinue salestype of the traditional fixed price,
non-cancellable individual disability insurance product in the United States. At
the end of 1996, the LDP product has been approved in all 50 states and the
District of Columbia. UNUM requires medical examinations, financial data, and
other information to make a decision on the acceptability of the individual risk
and to appropriately classify an applicant for individual disability insurance
products. On new sales of the LDP product, UNUM retains up to $8,000 basic
monthly indemnity per life for personal disability coverages. UNUM also retains
up to $20,000 per life for business overhead expense coverages and $500,000 per
life for buy/sell coverages.
The financial and medical underwriting areas of UNUM Limited handle the
underwriting of group and individual disability policies and group life
policies. The maximum yearly initial benefit for group LTD is 326,000 pounds
sterling. UNUM Limited retains 75,000 pounds sterling of this risk and reinsures
the balance. The maximum yearly initial benefit for individual disability
insurance is 125,000 pounds sterling, and amounts over 40,000 pounds sterling
per annum are reinsured. On group life business, UNUM Limited retains 60% of the
risk up to a maximum of 225,000 pounds sterling per individual life.
UNUM (except for Colonial) reinsures the risk of individual life insurance
contracts that exceed $425,000 on any one life. Colonial limits its risk for
death and dismemberment benefits to $100,000 per life. During 1996,
7
Colonial entered into an agreement to reinsure a majority of the mortality risk
on new and inforce universal life business, for which Colonial retains 20% of
the risk under $100,000 per individual life. Colonial also has reinsurance on
its cancer insurance products that provides coverage for claim payments in
excess of $55,000 in any one year, per claimant, up to a lifetime maximum of $1
million per claimant.coverage.
In addition to theproduct-specific reinsurance arrangements, above, UNUM 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 $250 million. This protection is activated whenever one catastrophic
event causes the disability and/or death of three or more lives insured under
UNUM's disability, life, or personal accident contracts.
ReinsuranceDuring 1996, UNUM America entered 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, 1996,1997, were $252.9$281.6 million and $106.4$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.
H. Reserves
The reserves reported in the consolidated financial statements have been
computed in accordance with generally accepted accounting principles ("GAAP").
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 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, as well as the United Kingdom, Japan and Japan,Argentina, UNUM's insurance
subsidiaries (UNUM America, First UNUM, Colonial, 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 that, 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 on UNUM's insurance
subsidiaries' experience as adjusted to provide for possible adverse
deviations. These estimates are periodically reviewed and compared towith actual
experience. The assumptions aremay be revised when it is determined that future
expected experience differs from the assumed estimates.
I. Employees
At December 31, 1996,1997, UNUM had approximately 6,7007,200 full-time employees.
UNUM does not have collective bargaining agreements with employees.Some employees in Argentina, comprising less than 1% of UNUM's total workforce,
are members of a union.
J. Competition
The principal competitive factors affecting all of UNUM's business are
reputation, financial strength, quality of service, risk management expertise,
distribution, product design and price. There is competition among insurance
companies for the types of group and individual insurance products sold by
UNUM. At the end of 1996,1997, there were more than 1,700 legal reserve life
insurance companies in the United States and Canada, andmore than 200 life
assurance offices in the United Kingdom.Kingdom, approximately 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. Group
insurance is highly competitive because of the large number of insurance
companies and other entities offering these products.
K. Regulation
UNUM's insurance subsidiaries are subject to regulation and supervision in
the jurisdictions in which they do business. 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, Canada, the United Kingdom, Japan and Japan,Argentina, as applicable.
8
UNUM's United States domiciled insurance subsidiaries are required to file
quarterly and annual statements with the various insurance departments in state
jurisdictions in which they do business. These statements comply with the rules
of the National Association of Insurance Commissioners ("NAIC"). UNUM's
insurance subsidiaries are examined periodically by examiners from Maine, New
York and South Carolina, and from other states (on an "association" or "zone"
basis) in which they are licensed to do business. UNUM's insurance branch
operation in Canada is periodically examined by Canadian insurance regulatory
authorities and is required to file annual reports that comply with the
insurance laws of Canada and with the rules of the OSFI of the Canadian Federal
government and each of the provinces. UNUM's United Kingdom subsidiary is
required to file financial statements annually with the DTI, in accordance with
United Kingdom laws and regulations. UNUM Japan is required to file financial
statements annually with the MOF, in accordance with Japanese laws and
regulations.
UNUM's insurance subsidiaries operate under insurance laws which require that they
establish and carry, as liabilities, actuarialstatutory reserves to meet their obligations on
their disability, life, accident and health policies and annuities. These
reserves are verified periodically by various regulators. UNUM's reinsurance underwriting manager, D&H, is a licensed reinsurance
intermediary in New York. It is subject to regulation in New Yorkdomestic
insurance subsidiaries are examined periodically by examiners from their states
of domicile and by other states where it doesin which they are licensed to conduct business.
Duncanson & Holt Underwriters, Ltd., a subsidiary
of D&H, is a corporate member of Lloyd's of London and is subject to rules
applicable to such members.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, and South Carolina,
which is the domiciliary state of Colonial, have similar laws. Accordingly, the UNUMUNUM's
domestic insurance subsidiaries are registered as members of the UNUM holding
company system in the states of Maine, New York and South 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, 1996, the required deposit was $313.5
million. UNUM America has the ability to withdraw assets from this account and
to substitute other assets at its discretion. The balance of the security
deposit will be reviewed and adjusted at least annually based upon the
outstanding liabilities described above.
L. 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, 1996,1997, the PFA had $354.0approximately $367 million in
assets, which were held by UNUM America. UNUM agreedAmerica, the successor to pay certain expenses associated with the PFA and at December 31, 1996, the
reserve for the present value of such expenses was $13.9 million.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.
9
All operating data of the individual participating life and annuity
contracts has been excluded from the Consolidated Statements of Income and all
other operating data included in this report unless otherwise noted. The assets
and liabilities associated with the participating business are included in
UNUM's Consolidated Balance Sheets.
Item 2--Properties
UNUM owns home office property consisting of six 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 located in Columbia, South
Carolina, is also owned by UNUM.and Boston
Seguros, respectively. In addition, UNUM leases office space, on periods
principally from threefive to sixten years, office space for use by its home office, affiliates and
sales forces.
Item 3--Legal Proceedings
In the normal course of its business operations, UNUM is involved in
litigation from timeRefer to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1996. In some instances, these
proceedings include claimsItem 8 Note 15 "Litigation" for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effectinformation on the consolidated financial
position or the consolidated operating results of UNUM.
On December 29, 1993, UNUM filed a suit in the United States District Court
for the District of Maine, seeking a federal income tax refund. The suit is
based on a claim for a deduction in certain prior tax years, for $652 million in
cash and stock distributed to policyholders in connection with the 1986
conversion of Union Mutual Life Insurance Company to a stock company. UNUM has
fully paid, and provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure.
UNUM believes its claims are meritorious, and has appealed the decision to the
United States Court of Appeals for the First Circuit. The ultimate recovery, if
any, cannot be determined at this time.legal proceedings.
Item 4--Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders, through solicitation of
proxies or otherwise, during the fourth quarter of 1996.1997.
PART II
Item 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, 1996,1997, there were 23,30322,548 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 13).Note 11 "Dividend Restrictions."
The market price (as quoted by the New York Stock Exchange) and cash
dividends paid, per share of UNUM's common stock, by calendar quarter for the
past two years were as follows:
1997 1996
1995
--------------------------------------------------- ---------------------------------------------------------------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
High ............... $73.500 $66.000 $63.000 $61.875 $56.500 $54.000 $48.000 $46.000.............. $ 54.438 $ 48.250 $ 46.500 $ 39.813 $ 36.750 $ 33.000 $ 31.500 $ 30.938
Low ............... $61.000 $56.750 $55.500 $54.750 $50.625 $45.375 $39.875 $37.750$ 45.125 $ 40.688 $ 33.625 $ 35.313 $ 30.500 $ 28.375 $ 27.750 $ 27.375
Close ............... $72.250 $64.125 $62.250 $59.500 $55.000 $52.750 $46.875 $45.250............. $ 54.375 $ 45.625 $ 42.250 $ 36.500 $ 36.125 $ 32.063 $ 31.125 $ 29.750
Dividend Paid ........... $ 0.2750.1425 $ 0.2750.1425 $ 0.2750.1425 $ 0.2650.1375 $ 0.2650.1375 $ 0.2650.1375 $ 0.2650.1375 $ 0.2400.1325
108
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, 1997,
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,
-----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ------------------------------- --------------- --------------- --------------- ---------------
Income Statement Data
Revenues:
Premiums and fees and other income
(expense):income:
Disability Insurance Segment ...... $1,917.7 $1,879.9 $1,716.2...................... $ 1,882.6 $ 1,917.7 $ 1,879.9 $ 1,716.2 $ 1,547.9
Special Risk Insurance Segment ....................... 878.6 755.4 702.3 607.1 559.4
Colonial Products Segment .................................. 530.8 498.2 475.1 441.3 407.4
Retirement Products Segment ............................. 130.3 65.8 34.1 31.4 42.5
Corporate ................................................................. 0.1 -- 0.1 0.8 --
-------- -------- -------- ------------------- ------------ ---------- ---------- -----------
Total premiums and fees and other income .............. 3,422.4 3,237.1 3,091.5 2,796.8 2,557.2
-------- -------- -------- ------------------- ------------ ---------- ---------- -----------
Net investment income (expense):income: (a)
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 Products Segment .................................. 57.6 47.3 52.2 32.6 41.4
Retirement Products Segment ............................. 54.4 217.2 323.7 338.0 387.6
Corporate ................................................................. 5.9 16.1 14.2 4.2 6.2
-------- -------- -------- ------------------- ------------ ---------- ---------- -----------
Total net investment income .............................. 654.3 805.6 1,031.4 815.8 839.8
-------- -------- -------- ------------------- ------------ ---------- ---------- -----------
Total revenues .......................................................... 4,076.7 4,042.7 4,122.9 3,612.6 3,397.0
-------- -------- -------- ------------------- ------------ ---------- ---------- -----------
Benefits and expenses:
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 Products Segment .................................. 489.6 453.1 439.6 411.2 378.4
Retirement Products Segment ............................. 108.5 281.6 312.3 327.4 375.8
Corporate ................................................................. 58.6 62.8 42.9 33.2 23.6
-------- -------- -------- ------------------- ------------ ---------- ---------- -----------
Total benefits and expenses .............................. 3,540.3 3,701.1 3,741.0 3,414.0 2,936.7
-------- -------- -------- ------------------- ------------ ---------- ---------- -----------
Income (loss) before income taxes and cumulative
effects of accounting changes:
Disability Insurance Segment ............................ 312.7 215.3 217.0 56.2 314.1
Special Risk Insurance Segment ....................... 101.3 79.2 60.3 65.9 38.9
Colonial Products Segment .................................. 98.8 92.4 87.7 62.7 70.4
Retirement Products Segment ............................. 76.2 1.4 45.5 42.0 54.3
Corporate ................................................................. (52.6) (46.7) (28.6) (28.2) (17.4)
-------- -------- -------- --------------------- ------------ ------------ ------------ -----------
Total income before income taxes and cumulative
effects of accounting changes ................................................ 536.4 341.6 381.9 198.6 460.3
-------- -------- -------- ---------
Income taxes (credit) ...................................................... 166.1 103.6 100.8 43.9 148.3
-------- -------- -------- ---------
Cumulative effects of accounting changes ...................................... -- -- -- -- (12.1)(b)
-------- -------- -------- --------------------- ------------ ------------ ------------ -----------
Net income ................................................................. $ 370.3 $ 238.0 $ 281.1 $ 154.7 $ 299.9
======== ======== ======== ===================== ============ ============ ============ ===========
Per common share:
Net income ........................income--basic .................................. $ 3.262.65 $ 3.871.63 $ 2.091.93 $ 3.81(b)1.04 $ 1.90
Net income--diluted ................................ $ 2.59 $ 1.61 $ 1.92 $ 1.04 $ 1.88
Dividends paid .......................................................... $ 1.090.5650 $ 1.0350.5450 $ 0.920.5175 $ 0.765
======== ======== ======== =========
Year Ended December 31,
--------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
----------- ----------- ----------- ---------- --------- -----------
Income Statement Data
Revenues:
Premiums and other income
(expense):
Disability Insurance Segment ...... $1,339.8 $1,214.6 $1,004.70.4600 $ 803.8 $ 681.7 $ 630.8
Special Risk Insurance Segment ... 432.8 368.5 347.0 306.2 176.3 165.7
Colonial Products Segment ......... 371.9 325.4 281.1 241.0 216.7 192.1
Retirement Products Segment ...... 52.5 64.4 92.8 130.2 180.0 238.5
Corporate ........................ 0.8 -- (0.1) 0.2 -- 0.9
-------- -------- -------- ------- -------- -------
Total premiums and other income ... 2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0
-------- -------- -------- ------- -------- -------
Net investment income (expense): (a)
Disability Insurance Segment ...... 370.5 333.8 285.4 239.4 193.1 167.8
Special Risk Insurance Segment ... 32.2 26.5 23.4 24.5 12.5 12.1
Colonial Products Segment ......... 35.4 38.5 25.2 26.7 22.3 19.0
Retirement Products Segment ...... 408.7 411.3 426.1 424.0 413.2 418.2
Corporate ........................ 3.9 1.5 (9.0) 5.9 20.3 19.1
-------- -------- -------- ------- -------- -------
Total net investment income ...... 850.7 811.6 751.1 720.5 661.4 636.2
-------- -------- -------- ------- -------- -------
Total revenues ..................... 3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2
-------- -------- -------- ------- -------- -------
Benefits and expenses:
Disability Insurance Segment ...... 1,446.6 1,306.4 1,093.7 878.8 756.0 701.4
Special Risk Insurance Segment ... 418.7 355.2 342.2 312.9 180.4 172.0
Colonial Products Segment ......... 346.8 306.4 259.6 225.5 201.1 178.6
Retirement Products Segment ...... 427.5 484.4 491.6 535.9 580.1 685.0
Corporate ........................ 10.4 12.5 10.8 12.3 9.5 15.7
-------- -------- -------- ------- -------- -------
Total benefits and expenses ...... 2,650.0 2,464.9 2,197.9 1,965.4 1,727.1 1,752.7
-------- -------- -------- ------- -------- -------
Income (loss) before income taxes
and cumulative effects of
accounting changes:
Disability Insurance Segment ...... 263.7 242.0 196.4 164.4 118.8 97.2
Special Risk Insurance Segment ... 46.3 39.8 28.2 17.8 8.4 5.8
Colonial Products Segment ......... 60.5 57.5 46.7 42.2 37.9 32.5
Retirement Products Segment ...... 33.7 (8.7) 27.3 18.3 13.1 (28.3)
Corporate ........................ (5.7) (11.0) (19.9) (6.2) 10.8 4.3
-------- -------- -------- ------- -------- -------
Total income before income taxes and
cumulative effects of accounting
changes ........................... 398.5 319.6 278.7 236.5 189.0 111.5
-------- -------- -------- ------- -------- -------
Income taxes (credit) ............... 107.3 74.3 60.9 51.1 30.1 (4.7)
-------- -------- -------- ------- -------- -------
Cumulative effects of accounting
changes ........................... -- -- -- -- -- --
-------- -------- -------- ------- -------- -------
Net income ........................ $ 291.2 $ 245.3 $ 217.8 $ 185.4 $ 158.9 $ 116.2
======== ======== ======== ======= ======== =======
Per common share:
Net income ........................ $ 3.71 $ 3.15 $ 2.73 $ 2.03 $ 1.57 $ 1.06
Dividends paid ..................... $ 0.625 $ 0.49 $ 0.375 $ 0.285 $ 0.23 $ 0.20
======== ======== ======== ======= ======== =======0.3825
============ ============ ============ ============ ============
- --------
(a) Includes investment income and net realized investment gains.gains (losses).
(b) Effective January 1, 1993, UNUM adopted Financial Accounting Standard No.
106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," which decreased net income by $32.1 million or $0.40 per share,
and Financial
Accounting Standard No. 109, "Accounting for Income Taxes," which
increased net income by $20.0 million, or $0.25 per share.
11million.
9
UNUM CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars and shares in millions)
December 31,
---------------------------------------------------
Balance Sheet Data 1996 1995 1994 1993
------------ ------------ ------------ ------------
Assets ............... $15,467.5 $14,787.8 $13,127.2 $12,437.3
Long-term debt ......... $ 409.2 $ 457.3 $ 182.1 $ 128.6
Stockholders' equity ... $ 2,263.1 $ 2,302.9 $ 1,915.4 $ 2,102.7
Shares outstanding ... 71.8 73.0 72.4 76.0
Weighted average shares
outstanding during the
year .................. 73.0 72.7 74.2 78.8
December 31,
------------------------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
Balance Sheet Data 1992 1991 1990 1989 1988 1987
------------ ------------ ------------ ------------ ------------ ------------------------- -------------- -------------- -------------- --------------
Assets ............... $11,959.8 $11,310.9 $10,063.4............................................. $ 9,045.713,200.3 $ 8,592.315,467.5 $ 7,783.014,787.8 $ 13,127.2 $ 12,437.3
Long-term debt .............................................. $ 77.2509.2 $ 51.5409.2 $ 77.2457.3 $ 1.5182.1 $ 1.5 $ 1.7128.6
Stockholders' equity .................................. $ 2,010.92,434.8 $ 1,755.52,263.1 $ 1,490.12,302.9 $ 1,445.01,915.4 $ 1,512.3 $ 1,463.82,102.7
Shares outstanding ... 79.1 78.2 77.4 82.0 96.8 104.2................................. 138.3 143.6 146.0 144.8 152.0
Weighted average shares outstanding during the year .................. 78.5 77.8 79.9 91.4 101.3 109.1year:
Basic ............................................. 139.9 145.9 145.4 148.3 157.6
Diluted ........................................... 142.9 148.0 146.6 149.5 159.3
1210
UNUM Corporation and Subsidiaries
Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations
This management'sManagement's discussion and analysis reviews the consolidated financial
condition of UNUM at December 31, 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.
To more clearly reflect UNUM's managementFORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of its businesses1995 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 to more
appropriately group its product portfolios, UNUM began reporting its operations,
effective January 1, 1995, principally in four business segments: Disability
Insurance, Special Risk Insurance, Colonial Productscontain
words or phrases such as "may," "expects," "should" or similar expressions.
Forward- looking statements are based upon estimates and Retirement Products.
Corporate includes transactionsassumptions that are
generally non-insurance related. For
comparative purposes, 1994subject 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, was previously restated to reflect the
new reporting segments.future developments or otherwise.
CONSOLIDATED OVERVIEW
(Dollars and shares in millions,
except per common share amounts, and percentage
increase (decrease) over prior year)data) 1997 % Change 1996 % Change 1995 1994
- --------------------------------------------- ----------------------------- -------------------------------------- ----------- ------------- ------------ -------------
Income Data
Revenues
Premiums ................................. $3,120.4................................... $ 3,188.7 2.2% $ 3,120.4 3.4% $3,018.2 10.9% $2,721.3$ 3,018.2
Investment income .................................................. 657.9 (18.0) 802.2 (0.5) 806.3 4.7 770.2
Net realized investment gains ............(losses) ..... (3.6) nm 3.4 nm(98.5) 225.1 nm 45.6
Fees and other income ........................................... 233.7 nm 116.7 59.2 73.3
(2.9) 75.5
------------------ ----- --------- -------- ------ ------------- ---------
Total revenues ....................................................... 4,076.7 0.8 4,042.7 (1.9) 4,122.9
14.1 3,612.6
Benefits and expenses ............................................ 3,540.3 (4.3) 3,701.1 (1.1) 3,741.0
9.6 3,414.0
------------------ ----- --------- -------- ------ ------------- ---------
Income before income taxes .................. 536.4 57.0 341.6 (10.6) 381.9
92.3 198.6
Income taxes .............................................................. 166.1 60.3 103.6 2.8 100.8
nm 43.9
------------------ ----- --------- -------- ------ ------------- ---------
Net income .............................................................. $ 370.3 55.6% $ 238.0 (15.3)% $ 281.1
81.7% $ 154.7
================== ===== ========= ======== ====== ============= =========
Net income per common share ...............share:
Basic ...................................... $ 3.262.65 62.6% $ 3.871.63 (15.5)% $ 2.09
======== ======== ========1.93
Diluted .................................... $ 2.59 60.9% $ 1.61 (16.1)% $ 1.92
========== ===== ========== ===== ==========
Summary of income (loss) before
income taxes
Disability Insurance Segment ............... $ 312.7 45.2% $ 215.3 (0.8)% $ 217.0
nm% $ 56.2
Special Risk Insurance Segment ......................... 101.3 27.9 79.2 31.3 60.3 (8.5) 65.9
Colonial Products Segment .................. 98.8 6.9 92.4 5.4 87.7
39.9 62.7
Retirement Products Segment ............................... 76.2 nm 1.4 (96.9) 45.5
8.3 42.0
Corporate ................................................................... (52.6) 12.6 (46.7) 63.3 (28.6)
1.4 (28.2)
-------- --------- -------- ------ ------------------ ----- ---------- ----- ----------
Total income before income taxes ................... $ 536.4 57.0% $ 341.6 (10.6)% $ 381.9
92.3% $ 198.6
======== ========= ======== ====== ========
Balance Sheet Data
Assets .................................... $15,467.5 $14,787.8 $13,127.2
Notes Payable .............................. $ 526.9 $ 583.8 $ 428.7
Stockholders' equity ........................ $2,263.1 $2,302.9 $1,915.4
Shares outstanding ........................ 71.8 73.0 72.4
Weighted average shares outstanding
during the year ........................... 73.0 72.7 74.2========== ===== ========== ===== ==========
- --------
nm = not meaningful or in excess of 100%
1311
CONSOLIDATED OVERVIEW
In
(Dollars and shares in millions) 1997 1996 1995
- ------------------------------------------------------ -------------- -------------- --------------
Balance Sheet Data
Assets ............................................... $ 13,200.3 $ 15,467.5 $ 14,787.8
Notes Payable ........................................ $ 635.8 $ 526.9 $ 583.8
Stockholders' equity ................................. $ 2,434.8 $ 2,263.1 $ 2,302.9
Shares outstanding ................................... 138.3 143.6 146.0
Weighted average shares outstanding--basic ........... 139.9 145.9 145.4
Weighted average shares outstanding--diluted ......... 142.9 148.0 146.6
Effective tax rates, which reflect income tax expense as a percentage of
income before income taxes, were 31.0%, 30.3% and 26.4% for 1997, 1996 netand
1995, respectively. Reported income decreased by $43.1 milliontax expense was below the federal statutory
tax rate of 35% primarily due to $238.0 million, or $3.26
per share,tax savings from $281.1 million, or $3.87 per share,investments in 1995. Nettax-exempt
bonds and mortgages. The increase in the effective tax rate over the three year
period was primarily due to reduced tax-exempt income was
$154.7 million, or $2.09 per share, for the year ended December 31, 1994.as a percentage of income
before income taxes.
A comparison of net income is impacted by the inclusion of realized
investment gains which were significantly higher in 1995,(losses), and several special items that occurred in 1997, 1996 and
1995. Operating income in 1997, 1996 and 1995, which excludes realized
investment gains (losses) and 1994.the special items, was as follows:
(Dollars in millions,
except per common share amounts) 1997 % Change 1996 % Change 1995
- ---------------------------------- ----------- ---------- ----------- ---------- -----------
Operating income ................. $ 341.7 13.3% $ 301.7 18.2% $ 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 discusses thefocuses on results of operations on a pretax
operating income basis, which is defined as income (loss) before income taxes
exclusive of realized investment gains (losses) and certain special items. Special
items are excluded from pretax
operating incomethis discussion as management considers them to be
unusual and also believes a discussion of the results on a pretax operating income
basis provides a better understanding of the results of 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 1995 and 1994,1995,
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 and percentage increase
(decrease) over prior year)millions) 1997 % Change 1996 % Change 1995
1994
- ---------------------------------------------- ------------------------ -------------------- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
Summary of pretax operating income (loss)
Disability Insurance Segment ............... $278.4........... $ 315.8 13.4% $ 278.4 28.2% $217.2 (1.7)% $220.9$ 217.2
Special Risk Insurance Segment ..................... 124.8 38.4 90.2 50.8 59.8
(9.0) 65.7
Colonial Products Segment ................................ 98.8 6.6 92.7 20.7 76.8
25.9 61.0
Retirement Products Segment ........................... 4.7 (65.4) 13.6 (37.3) 21.7
(45.5) 39.8
Corporate ............................................................... (51.8) 38.1 (37.5) 29.8 (28.9)
4.7 (27.6)
------ ------ ------ ---- -------------- ----- -------- ----- --------
Total pretax operating income ............ $437.4......... $ 492.3 12.6% $ 437.4 26.2% $346.6 (3.7)% $ 359.8
====== ====== ====== ==== ======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. The increase was primarily
attributable to improved claims experience and management's continued focus on
risk management programs, both of which lowered the benefit ratios for certain
product lines. In particular, group long term disability ("group LTD") and1995, UNUM Limited, reported in the Disability Insurance segment, and the group life
business, reported in the Special Risk Insurance segment, were favorably
affected by lower benefit ratios. Increased investment income also favorably
affectedincreased pretax operating income, driven by improved
results in the Disability Insurance and Special Risk Insurance segments. Partially offsettingThese
increases were primarily the result of improved claims experience in UNUM's
core disability lines and in group life, along with an increase in investment
income.
12
UNUM Corporation and Subsidiaries
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") closed the sale
of their respective tax-sheltered annuity ("TSA") businesses to The Lincoln
National Life Insurance Company and Lincoln Life & Annuity Company of New York,
both subsidiaries of Lincoln National Corporation. 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
favorable items were increasedconsents 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 DisabilitySpecial Risk Insurance segment,segment. Included in the group life
business reported$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, andreducing
income before income taxes by $18.4 million. The $11.7 million reduction in Corporate. In
addition,fee
income reflects lower profit commission levels in certain other disability products were negatively affected by higher
benefit ratios.older pool years
after the pool claim reserve strengthening. The decrease$6.7 million increase in
pretax operating income in 1995 was primarily attributablebenefits to higher benefit ratios atpolicyholders represents the amount of additional claim reserves
UNUM Limited andrecognized as a result of its participation in the group LTD and group life
businesses, increased interest expense, and lower interest spread margins on the
tax sheltered annuity business. Partially offsetting these items were increased
investment income, a lower benefit ratio in the individual disability business,
and lower expenses.
Realized Investment Gains
During the second quarter of 1995, UNUM sold virtually all of the common
stock portfolio of its United States subsidiaries, primarily due to
consideration of statutory capital requirements associated with investment in
common stocks and to increase future investment income. The sale of the common
stock portfolio contributed to significantly higher pretax realized investment
gains for the year ended December 31, 1995, as compared with 1996 and 1994. UNUM
reinvested the proceeds from the sale of the common stock portfolio primarily in
investment grade fixed income assets, which decreased the required amount of
statutory capital for regulatory purposes and increased investment income.
Dependent on capital considerations and market conditions, UNUM may invest in
equity securities in the future.pools that strengthened
claim reserves.
Special Items in 1996
Individual Disability Reinsurance Fees
During the fourth quarter of 1996, UNUM executed a definitive reinsurance
agreement between UNUM Life Insurance Company of America ("UNUM America") and Centre Life Reinsurance Limited ("Centre
Re"), a
14
Bermuda based reinsurance specialist, for reinsurance coverage of the
active life reserves of UNUM America's existing United States non-cancellable
individual disability ("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 tax sheltered
annuityTSA business,
as well as UNUM's continued efforts to strengthen its focus on its core
products, the company initiated a review of certain products, which resulted in
the recognition of pretax charges totaling $39.4 million during third quarter
1996.
TheseThe total charges reduced income before income taxes by $13.1of $39.4 million in the Disability Insurance segment, $11.3 million in the Special Risk
Insurance segment, and $15.0 million in the Retirement Products segment, for the
year ended December 31, 1996.
The charges includeincluded the write-off of certain
intangible assets, primarily deferred acquisition costs, totaling $17.0
million. These intangible assets have
beenwere deemed unrecoverable primarily due to the
expectation of continued losses in the Association Groupassociation 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. Future lossesLosses for these
products will beare charged to the reserve at the time the losses are realized. The products
incorporated in the charge consist of certain discontinued special risk,
retirement and medical products.
UNUM is pursuingFor the saleyear 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 somebenefits to policyholders, $0.9 million of these discontinued product lines.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 future severance costs for 120
employees and $4.4
million of lease exit costs, primarily related to the merger.
Special Items in 1995
Disability Reserve Increase from Portfolio Rate Adjustment
Reserves for certain disability products are discounted using an interest
rate which is a composite yield of assets identified with each product. As a
result of the sale of the common stock portfolio, 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 LTDlong 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
case 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 Groupassociation group disability business was negatively affected
by unfavorable claims experience, which management attributed to certain
geographical and occupational segments, particularly dentists and physicians.
During the fourth quarter of 1995, UNUM increased reserves for unpaid claims
related to the Association Groupassociation group disability, business by $15.0 million reported in the Disability Insurance
segment.segment, by $15.0 million. These increased reserves were based on management's
expectations of slower than expected claim recoveries.
15
Other Charges
To strengthen its focus on its core products, UNUM recognized a charge in
the third quarter of 1995 for costs associated with the sale of its dental
business reported in the Special Risk Insurance segment. The charge, which
primarily consisted of the write-off of deferred acquisition costs, reduced
income before income taxes by $2.8 million.
During the second quarter of 1995, UNUM recorded an additional charge for
costs associated with the previously announced decision to discontinue the
individual disability non-cancellable product and organizational changes within
UNUM America, which increased operating expenses by $5.0 million. This charge
reduced income before income taxes by $2.9 million in the Disability Insurance
segment, $1.1 million in the Special Risk Insurance segment, and $1.0 million
in the Retirement Products segment for the year ended December 31, 1995.
Special Items in 1994
Individual Disability Reserve Strengthening
Throughout 1994, UNUM's individual disability business experienced a higher
incidence14
UNUM Corporation and Subsidiaries
Realized Investment Gains
During the second quarter of new claims and a disproportionate number of large claims, which
management attributed to certain geographic and occupational segments1995, UNUM sold virtually all of the business, particularly physicians. During the third quartercommon
stock portfolio of 1994, management
concluded that the deteriorationits United States subsidiaries, primarily due to
consideration of claims experience was not a temporary
fluctuationstatutory capital requirements associated with investment in
certain segmentscommon stocks and to increase future investment income. The sale of the business, but was indicative of expected
claim trends for the future. As a result, in third quarter 1994, UNUM increased
reserves for existing claims by $83.3 million and strengthened reserves for
estimated future losses by $109.1 million, resulting in an increasecommon
stock portfolio contributed to benefits
to policyholders reported in the Disability Insurance segment of $192.4 million.
These increased reserves reflected management's expectations of morbidity trends
for the existing non-cancellable individual disability business. It is not
possible to predict whether morbidity trends will be consistent with UNUM's
assumptions; however, as of December 31, 1996, management believes that the
strengthened reserve levels continue to be adequate.
Restructuring Charges
In the fourth quarter of 1994, UNUM recorded asignificantly higher pretax charge of $14.4
million related to the decision to discontinue the individual disability
non-cancellable product and the acceleration of organizational changes within
UNUM America, which increased operating expenses in the Disability Insurance
segmentrealized investment
gains for the year ended December 31, 1994. The charge consisted1995, as compared with 1997 and 1996.
UNUM reinvested the proceeds from the sale of $9.2
millionthe common stock portfolio
primarily in investment grade fixed income assets, which decreased the required
amount of statutory capital for severance costs for 379 employeesregulatory purposes and $5.2 million for exit costs of
certain leased facilitiesincreased investment
income. Dependent on capital considerations and equipment.
16
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 1995 and 1994:1995:
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)( 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 Groupgroup reserves ............................. 15.0 -- -- -- -- 15.0
Other charges ........................... 2.9 3.9 -- 1.0 -- 7.8
------- ---- ------ -------------- -------- ------- ------- ------- --------
Pretax operating income (loss) ....................... $ 217.2 $ 59.8 $ 76.8 $ 21.7 $ (28.9) $ 346.6
======== ======== ======= ==== ============= ======= ======== =======
Year Ended December 31, 1994:
Income (loss) before income taxes ......... $ 56.2 $ 65.9 $ 62.7 $ 42.0 $ (28.2) $ 198.6
Exclude realized investment (gains) losses (42.1) (0.2) (1.7) (2.2) 0.6 (45.6)
------- ---- ------ ------ -------- -------
14.1 65.7 61.0 39.8 (27.6) 153.0
Special items:
ID reserve strengthening .................. 192.4 -- -- -- -- 192.4
Restructuring charges ..................... 14.4 -- -- -- -- 14.4
------- ---- ------ ------ -------- -------
Pretax operating income (loss) ............ $ 220.9 $ 65.7 $ 61.0 $ 39.8 $ (27.6) $ 359.8
======= ==== ====== ======= ======== =======
Pretax Operating Income (Loss) by Segment
The following sections discuss the results of the four business segments
and Corporate for the years ended December 31, 1997, 1996 1995 and 1994.1995. These
business segment
discussions are based on pretax operating income (loss), which excludes
realized investment gains (losses) and the special items noted above.
17previously 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 and percentage increase
(decrease) over prior year)millions) 1997 % Change 1996 % Change 1995
1994
- ---------------------------------------------- ------------------------- ------------------------------------------------------------------ ------------- ----------- ------------- ---------- -------------
Revenues
Premiums
Group LTD ................................. $1,094.6............................ $ 1,219.1 11.4% $ 1,094.6 0.6% $ 1,088.6
14.0% $ 955.0
Group STD ............................................................. 205.3 29.9 158.1 19.0 132.9
23.5 107.6
UNUM Limited ....................................................... 147.0 10.8 132.7 6.0 125.2
(11.2) 141.0
Individual disability ..................................... 143.5 (65.9) 420.8 (0.5) 423.0
3.3 409.5
Other disability insurance ............................. 101.6 21.4 83.7 (2.2) 85.6
5.9 80.8
-------- ------ --------- -------- ------------ --------- ----- ---------
Total premiums ................................................. 1,816.5 (3.9) 1,889.9 1.9 1,855.3
9.5 1,693.9
Investment income ..................... 471.1 0.5 468.8 14.8 408.2 14.0 358.2
Net realized investment gains (losses) ...... (0.3) nm 184.7 nm 42.1
Fees and other income ......................................... 66.1 nm 27.8 13.0 24.6
10.3 22.3
-------- ------ --------- -------- ------------ --------- ----- ---------
Total operating revenues ........................... 2,386.2 (3.5) 2,472.8 16.8 2,116.5............ 2,353.7 (1.4) 2,386.5 4.3 2,288.1
Benefits and expenses
Benefits to policyholders .................. 1,514.9 (11.5) 1,711.2 8.8 1,572.1............. 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 ........................... 511.0 21.3 421.3 1.5 415.0
Commissions .................................167.9 (8.8) 184.2 (4.8) 193.5 (0.9) 195.3
Increase in deferred policy acquisition
costs (39.2) (44.2)................................ (85.9) 68.8 (50.9) (27.5) (70.2)
(42.5) (122.1)
-------- ------ --------- -------- ----------------- ----- ---------- ----- ----------
Total benefits and expenses ............... 2,170.9 (3.8) 2,255.8 9.5 2,060.3
-------- ------ --------- -------- -------
Income before income taxes .................. 215.3 (0.8) 217.0 nm 56.2
Exclude realized investment (gains) losses 0.3 (184.7) (42.1)
Special items (a) ........................... 62.8 184.9 206.8
-------- --------- -------......... 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
(1.7)% $ 220.9
======== ====== ========= ======== ================= ===== ========== ===== ==========
Sales (annualized new premiums)
Group LTD ............................................................. $ 294.4 $ 218.7 $ 197.9
$ 215.4
Group STD ............................................................. $ 94.8 $ 74.0 $ 52.4
$ 47.8
UNUM Limited ....................................................... $ 20.0 $ 14.3 $ 14.2
$ 15.5
Individual disability ..................................... $ 26.7 $ 26.4 $ 35.6
$ 74.0
Persistency (premiums)
Group LTD ............................................................. 87.7% 83.6% 82.8%
84.0%
Group STD ............................................................. 86.7% 84.5% 84.8%
83.8%
UNUM Limited ....................................................... 91.3% 85.6% 89.1%
89.9%
Individual disability ..................................... 93.6% 92.5% 91.8% 92.4%
Benefit ratio (% of premiums) ............... 80.2% 92.2% 92.8%......... 82.8% 80.1% 82.4%
Operating expense ratio
(% of premiums) ........................... 27.0% 22.7% 24.5%...................... 24.9% 24.4% 22.6%
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income and a detailed description of
special items see the Consolidated
Overview.
18
The Disability Insurance segment includes disability products offered
through: UNUM Life Insurance Company of America ("UNUM America") and First UNUM
Life Insurance Company ("First UNUM") in North America; UNUM Limited in the
United Kingdom; and UNUM Japan Accident Insurance Company Limited ("UNUM
Japan"). The products included in this segment are group LTD, group short term
disability ("group STD"), individual disability, Association Group disability,ID, disability reinsurance operations and long term
care insurance.
Summary16
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 9.4% compared with
growth of 5.6% in 1996. The improvement in premium growth was driven by record
sales levels and persistency improvements, primarily in group LTD and group
STD. 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 growth in group disability products.
Pretax operating income increased in 1996, as compared with 1995. The increase was1995,
primarily attributable toas a result of increased investment income and lower benefit ratios
in group LTD and at UNUM Limited, partially offset byLimited. Partially offsetting these favorable factors
were increased operating expenses for the segment and higher benefit ratios in
certain other disability businesses including
individual disability, disability reinsurance operations and AssociationID. The increase in investment income for
1996 was primarily 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 common stocks and
to increase future investment income.
Claim block acquisitions, which generate one-time premiums, are summarized
in the table below. Management intends to pursue additional claim block
acquisitions in the future.
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 for ID includes the recapture of reinsurance premium
totaling $10.6 million in 1996.
Reserves for unpaid claims are estimates based on UNUM's historical
experience and other actuarial assumptions that consider the effects of current
developments, anticipated trends and risk management 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. Management continuously monitors claim trends
and responds by periodically adjusting prices on selected new and inforce
business, refining underwriting guidelines and strengthening risk management
programs. In addition, management periodically performs a review of reserve
estimates and assumptions. If management determines reserve assumptions need to
be updated, any resulting adjustments 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.
Group disability.Long Term Disability
During 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 also contributed to the
improvement in 1997 earnings. Management continues to focus on steps to
increase premiums and sales, including a strengthened emphasis on customer
service to further improve persistency and additional investments in
distribution channels. The significant sales growth experienced in 1997,
combined with general pricing competition, may affect UNUM's ability to
continue to increase sales by the same 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 responds to changes by periodically adjusting prices,
altering underwriting guidelines, changing product features and strengthening
risk management policies and procedures.
Group Short Term Disability
Strong sales and improved persistency resulted in increased premium growth
for group STD, driving improved pretax operating income in 1997. The strong
sales levels reflect management's continuing efforts to cross-sell group STD
products with other group products sold by UNUM. Additionally, premium growth
and continued expense management contributed to a lower operating expense
ratio, partially offset by a 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 basedBermuda-based reinsurance specialist, for reinsurance coverage
of the active life reserves of UNUM America's existing United States
non-cancellable individual disability ("ID")ID block of business. This agreement does not reinsure any
claims incurred prior to January 1, 1996. The agreement follows UNUM's
announcement in late 1994 that it would no longer market the non-cancellable
form of ID coverage in the United States.
The agreement is a finite reinsurance arrangement that transfers
liabilities to Centre Re based on the level of statutory reserves. At December
31, 1996, active life reserves of $427 million and reserves established for
claims in 1996 of $137 million were ceded to Centre Re. Under the agreement,
Centre Re
has an obligation to fundabsorb losses within a defined risk layer, while UNUM will retainmust
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
claims experience upfrom the reinsured block. Under the agreement, UNUM funds a trust
account, initially established in late 1996, with assets equal to a certain
threshold. This thresholdthe related
amount representsof GAAP reserves plus the existenceamount of anits experience layer. The value of
UNUM's experience layer increases or decreases in conjunction with a valuethe
underlying operating results of $195 million at December 31, 1996.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 has recordedreflects the carrying value of the
experience layer onin its Consolidated Balance Sheet as a deposit asset.
UNUM funded its obligation under the agreement by transferring assets totalingasset, which at
December 31, 1997, totaled approximately $403 million into a trust account$347 million. Changes in late December 1996. The
assets transferred were equal to the
experience layer plus reserves, determined
under generally accepted accounting principles, net of related deferred
acquisition costs. Future net cash flowsderived from the underlying operating results of the reinsured
block will be transferred
to/are reflected in fees and other income and realized gains or losses from
thesales of trust account and, together with changesassets are reflected as realized investment gains (losses) in
reserve levels, will
determine the valueUNUM's Consolidated Statement of UNUM's deposit asset.Income. Changes in the deposit asset will
flow through UNUM's results of operations. The agreement generated slightly more
than $200 million of statutory capital, which will be available to repurchase
UNUM common stock.
Increased investment incomeexperience layer
resulting from unrealized gains or losses on marketable securities held in the
Disability Insurance segment for 1996
and 1995 was primarily a result of the reinvestment of the proceeds from the
sale of the common stock portfolio into investment grade fixed income assets.
During second quarter 1995, UNUM sold virtually all of the 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. As a result of the sale of the common
stock portfoliotrust and the subsequent reinvestment of the proceeds, certain reserve
discount rates were lowered during the second quarter 1995. The discount rate
used to determine group LTD reserves was reduced to 8.00% at June 30, 1995, as
compared with 9.18% at December 31, 1994. Since that time the reserve discount
rates for certain disability products have continued to decline. Management
expects further declines, since current cash flows are invested in high quality
assets at current yields, which are below the composite yield of the existing
assets purchased in prior years. The group LTD discount rate was 7.88% and 7.94%
at December 31, 1996, and 1995, respectively. The impact of increased investment
income was partially offset by the effects of these lower discount rates for
certain disability products in 1996 and 1995. UNUM periodically adjusts prices
on both existing and new business in an effort to mitigate the impact of the
current interest rate environment.
Reserves for unpaid claims are estimates based on UNUM's historical
experience and other actuarial assumptions that consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations ofrelated claim reserves including but not
limited to interest rates and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. Management continuously monitors
claim trends and responds by periodically adjusting prices on selected new and
inforce business, refining underwriting guidelines, and strengthening risk
management programs. In addition, reserve estimates and assumptions are periodically reviewed and updated with any resulting adjustments to reserves
19
reflected in benefits to policyholders of the current operating period. Given
the complexity of the reserving process, the ultimate liability may be moreas unrealized gains or
less than such estimates indicate.
Deferrals of policy acquisition costs decreased in 1996 and 1995 primarily
due to lower sales of the traditional, fixed price, non-cancellable individual
disability product, as it was discontinued in each state during 1996 and 1995
following regulatory approval of the Lifelong Disability Protection product.
Pretax operating income decreased slightly in 1995, as compared with 1994,
primarily attributable to higher benefit ratios at UNUM Limited and in group
LTD, and the inclusion of the results of UNUM Japan's operationslosses in the Disability Insurance segment effective January 1, 1995. Partially offsetting
these decreases were increased investment income, a lower benefit ratio in the
individual disability business,equity section of UNUM's Consolidated Balance Sheet.
18
UNUM Corporation and decreased operating expenses for the
segment.
Claim block acquisitions, which generated one-time premium in the
Disability Insurance segment in 1996, 1995 and 1994, are summarized in the table
below. Management intends to pursue additional claim block acquisitions in the
future. Additionally, premium for individual disability includes the recapture
of reinsurance premium totaling $10.6 million in 1996.
Year Ended December 31,
-----------------------------
(Dollars in millions) 1996 1995 1994
- ----------------------------------------- -------- -------- -------
Group LTD .............................. $10.0 $63.8 $17.4
UNUM Limited ........................... 1.3 -- 40.2
Long Term Care Insurance ............... -- 4.9 14.7
Disability Reinsurance Operations ...... -- 3.6 --
------ ------ ------
Total ................................. $11.3 $72.3 $72.3
====== ====== ======
Group Long Term Disability
During 1996, pretax operating income for group LTD was favorably affected
by increased investment income and a lower benefit ratio, partially offset by
increased operating expenses primarily from continued investment in benefit
management practices and product distribution. The lower benefit ratio was
primarily the result of lower claims incidence and higher claim recoveries,
which management primarily attributes to the continued success of its risk
management programs.
Excluding the effects of claim block acquisitions, group LTD reported
premium growth of 5.8% in 1996, reflecting increased new sales and selected
price increases. Group LTD experienced improved sales and persistency in 1996,
as compared with 1995, when prices were significantly increased in certain
segments of the business resulting in a high level of case terminations for
1995. In general, case terminations from price increases have occurred in less
profitable segments of the business. Management continues to take actions to
increase premium and sales growth, including a focus on improving premium
persistency and strengthening the product distribution channel.
During 1995 and 1994, management implemented and strengthened various risk
management programs to address the unfavorable claims experience in group LTD
during those periods. In addition to the selected price increases on new and
inforce business, more stringent underwriting practices, and the reduction of
benefit options for certain segments of the business, management established
special claims units for both its group LTD and individual disability businesses
to address specific aspects of disability claims, including complex and
fraudulent claims. Additionally, management implemented new group LTD contract
provisions that provide risk management features and claimant rehabilitation
incentives. Management continually reviews the benefits management process to
identify and strengthen risk management policies and procedures.
UNUM LimitedSubsidiaries
For the year ended December 31, 1996, UNUM Limited's pretax operating
income was favorably affected by a lower benefit ratio and increased investment
income, as compared with the corresponding period in 1995. The lower benefit
ratio was primarily the result of a focus on strengthening risk management
programs and improved new claims experience. Management believes that the level
of future earnings for UNUM Limited will be a function of various factors,
including but not limited to, the effectiveness of these continuing risk
management actions over
20
time. Additionally, UNUM Limited incurred increased operating expenses in 1996,
which were primarily the result of increased investments in information systems
technology and risk management programs. Due to the relative size of UNUM
Limited's block of business, operating results can exhibit claims variability.
In general, UNUM Limited's earnings expressed in British pound sterling are
affected by fluctuations in the exchange rates used in the translation of
earnings into U.S. dollars. The weighted average exchange rate was approximately
$1.56, $1.58 and $1.53 for the years ended December 31, 1996, 1995 and 1994,
respectively. At December 31, 1996, the spot rate was approximately $1.71.
Individual Disability
As a result of the merger of Commercial Life into UNUM America, which was
effective December 31, 1996, UNUM now reports the operations of the Association
Group disability business with the individual disability business. Current and
prior period information for individual disability has been restated to reflect
this change.
For the year ended December 31, 1996,1997, pretax operating income for
individual disability was favorablynegatively affected by unfavorable claims experience,
primarily resulting from increased investment income,incidence, partially offset by a higher benefit ratiolower expense
levels, as compared with the same period in 1995. The higher benefit ratio was primarily attributable to a decrease in
premium growth and the inclusion of the Association Group disability business,
which was affected by unfavorable claims experience.1996. Premium growth continued to
decline as a result of UNUM's exit from the transition totraditional, 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 ("LDP"LTC") product as a resultblock of management's decision in
late 1994 to discontinue salesbusiness, while still relatively small,
should provide one of the traditional, fixed price, non-
cancellable productcompany's most significant growth opportunities in the
United States. Followingfuture. LTC's pretax operating results improved for the approvalyear ended December 31,
1997, compared with the same period in 1996, driven by significant premium
growth of the LDP
product, sales of the non-cancellable individual disability product have been
discontinued in the United States.
Group Short Term Disability
Group STD's32%. LTC's contribution to the Disability Insurance segment's pretax operating income
continuedcontinues to increase in 1996, primarily due to strong premium
growth, reflecting management's continuing efforts to cross-sell the group STD
productswhen compared with group LTD and group life products. Partially offsetting the
effects of strong premium growth were higher operating expenses primarily
relating to investments in risk management programs and the inclusion of certain
office relocation expenses in 1996.
Disability Reinsurance Operations
Pretax operating income for the disability reinsurance operations was
adversely affected by unfavorable claims experience and decreased premium for
the year ended December 31, 1996,1997, as compared with the same period in 1995.1996.
Management continues to focus on improving risk management programs and
strengthening underwriting standards to address this claims experience.
21
SPECIAL RISK INSURANCE SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year)millions) 1997 % Change 1996 % Change 1995
1994
- ---------------------------------------------- ------------------------ ------------------------ ---------------------------------------------------- ----------- ---------- ----------- ---------- -----------
Revenues
Premiums
Group life insurance ........................ $439.6............................... $ 528.1 20.1% $ 439.6 14.2% $384.8 12.1% $ 343.3384.8
Other special risk products ............................. 312.4 12.6 277.5 (0.1) 277.8
26.4 219.8
------ ------ ------ ---------------- ---- ------- ---- -------
Total premiums ..................................................... 840.5 17.2 717.1 8.2 662.6
17.7 563.1
Investment income .................................................... 67.0 19.2 56.2 27.7 44.0 8.6 40.5
Net realized investment gains ............... 0.3 (93.2) 4.4 nm 0.2
Fees and other income ............................................. 49.8 30.0 38.3 (3.5) 39.7 (9.8) 44.0
------ ------ ------ ---------(1.8) 39.0
------- ---- ------- ---- -------
Total revenues ........................... 811.9 8.2 750.7 15.9 647.8.......................... 957.3 18.0 811.6 8.9 745.6
Benefits and expenses
Benefits to policyholders .................. 506.5 2.9 492.3 24.8 394.4................. 593.7 18.8 499.6 1.5 492.0
Operating expenses ........................... 184.8 20.7 153.1 4.8 146.1........................ 180.0 (0.2) 180.4 21.2 148.8
Commissions ................................................................ 88.2 31.6 67.0 10.0 60.9 11.7 54.5
Increase in deferred policy acquisition
costs .................................... (29.4) 14.8 (25.6) 61.0 (15.9)
20.5 (13.2)
Interest expense ........................... -- nm -- (100.0) 0.1
------ ------ ------ --------- --------------- ---- -------- ---- --------
Total benefits and expenses ............... 732.7 6.1 690.4 18.6 581.9
------ ------ ------ --------- -------
Income before income taxes .................. 79.2 31.3 60.3 (8.5) 65.9
Exclude realized investment gains ............ (0.3) (4.4) (0.2)
Special items (a) ........................... 11.3 3.9 --
------ ------ -------............. 832.5 15.4 721.4 5.2 685.8
-------- ---- -------- ---- --------
Pretax operating income (a) ................................. $ 124.8 38.4% $ 90.2 50.8% $ 59.8
(9.0)% $ 65.7
====== ====== ====== ========= =======
Sales======== ==== ======== ==== ========
Group life sales (annualized new
premiums) ................................ $ 175.8 $ 150.0 $ 106.1
Group life insurance ........................ $150.0 $106.1 $ 90.8
Persistencypersistency (premiums) Group life insurance ................................. 86.2% 85.6% 83.0% 84.8%
Benefit ratio (% of premiums) ............................ 70.6% 69.7% 74.3% 70.0%
Operating expense ratio (% of
premiums) ................................. 25.8% 23.1% 25.9%................................ 21.4% 25.2% 22.5%
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income and a detailed description of
special items see the Consolidated
Overview.
19
The Special Risk Insurance segment includes group life, products sold by
UNUM America and First UNUM, special risk
accident insurance, previously sold by
Commercial Life, which has been merged with UNUM America,non-disability reinsurance operations, reinsurance
underwriting management operations and other special risk insurance products.
ThePretax operating income for the Special Risk Insurance segment also includes non-disability reinsurance
operations, which represent UNUM's participation in various reinsurance pools,
and the reinsurance underwriting management operations of Duncanson & Holt, Inc.
Forincreased
for the year ended December 31, 1996,1997, as compared with 1995,1996, 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 reported ancan 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. The
increaseincome 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.
Due to the nature of the risks underwritten and the relative size of
the blocks of businesses, several of the Special Risk Insurance segment's
products can exhibit claims variability.
The improved benefit ratio for group life was primarily attributable to
favorable claims experience, coupled with pricing and risk management actions
implemented in 1995. Solid sales results, improved persistency trends,
22
and continued renewal efforts contributed to the group life premium growth of
14.2%. Claim block acquisitions generated one-time premiums for group life and
reinsurance operations of $3.6 million and $16.3 million, respectively, for
1996, and $1.3 million and $38.3 million, respectively, for 1995.
The decrease in pretax operating income for 1995, as compared with 1994,
was primarily attributable to increased claims in the group life and special
risk accident insurance businesses, combined with reduced fee income from the
reinsurance underwriting management operations. Partially offsetting these
decreases were continued premium growth, and favorable claims experience in
certain reinsurance pools.
COLONIAL PRODUCTS SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year)millions) 1997 % Change 1996 % Change 1995
1994
- ---------------------------------------------- ----------------------- ----------------------- ----------------------------------------------- ----------- ---------- ----------- ---------- -----------
Revenues
Premiums .................................... $493.7.............................. $ 525.4 6.4% $ 493.7 4.4% $472.7 7.7% $439.1$ 472.7
Investment income ................................................ 57.6 21.0 47.6 15.3 41.3 33.7 30.9
Net realized investment gains (losses) ...... (0.3) nm 10.9 nm 1.7
Fees and other income ......................................... 5.4 20.0 4.5 87.5 2.4
9.1 2.2
------ ----- ------ ----- ------------- ---- ------- ---- -------
Total operating revenues ........................... 545.5 3.5 527.3 11.3 473.9............ 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
6.3 221.1
Interest credited ................................................ 12.1 61.3 7.5 15.4 6.5
30.0 5.0
Operating expenses ............................................... 130.2 6.2 122.6 6.9 114.7
7.1 107.1
Commissions ............................................................ 115.1 6.8 107.8 (1.0) 108.9 12.6 96.7
Increase in deferred policy acquisition
costs ................................ (27.5) 14.1 (24.1) (5.9) (25.6)
36.9 (18.7)
------ ----- ------ ----- -------------- ---- -------- ---- --------
Total benefits and expenses .......................... 489.6 8.1 453.1 3.1 439.6
6.9 411.2
------ ----- ------ ----- ------
Income before income taxes .................. 92.4 5.4 87.7 39.9 62.7
Exclude realized investment (gains) losses 0.3 (10.9) (1.7)
------ ------ -------------- ---- -------- ---- --------
Pretax operating income (a) ............................. $ 98.8 6.6% $ 92.7 20.7% $ 76.8
25.9% $ 61.0
====== ===== ====== ===== ============== ==== ======== ==== ========
Sales (annualized first month's
premiums) ................................. $213.6 $200.4 $183.1............................ $ 224.7 $ 213.6 $ 200.4
Benefit ratio (% of premiums) ........................ 49.4% 48.5% 49.7% 50.4%
Operating expense ratio (% of
premiums) ............................................................. 24.8% 24.3% 24.4%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.
The Colonial Products segment includes Colonial Life & Accident Insurance
Company ("Colonial") and affiliates. Colonial offers payroll-deducted, voluntary
employee benefits to employees at their worksites. Accident and sickness, cancer
and life insurance products are marketed by Colonial primarily through
independent sales representatives.
The Colonial Products segment reported increased pretax operating income
for the year ended December 31, 1996, as compared with 1995. The increase in
pretax operating income was primarily attributable to favorable benefit ratios
in the life, and accident and sickness product lines, and increased investment
income, partially offset by an increased operating expense ratio. During 1996,
Colonial entered into an agreement to reinsure a majority of the mortality risk
on new and inforce universal life business. The reinsurance agreement negatively
affects reported premium growth and related expense ratios while positively
affecting reported benefit ratios. Colonial's pretax operating income increased
in 1995 as compared to 1994, primarily because of increased investment income
and an improved benefit ratio.
2321
Colonial's benefit ratio improved again in 1996 to 48.5%, as compared with
49.7% in 1995 and 50.4% in 1994, primarily driven by the effect of the universal
life reinsurance agreement, continued favorable claims experience, and improved
incidence rates in the life, and accident and sickness product lines.
Investment income increased during 1996, primarily because of increased
cash flows resulting from a product mix shift and a change in asset mix to
higher yielding securities. Investment income increased during 1995, primarily
because of increased cash flows and additional income realized from the
reinvestment of the proceeds from the second quarter 1995 sale of Colonial's
equity portfolio into investment grade fixed income assets.
The expense ratio increased in 1996 primarily due to the impact of the
universal life reinsurance agreement. Excluding the impact of the universal life
reinsurance agreement, the expense ratio declined slightly compared to 1995 as a
result of continuing expense management efforts.
During 1996, Colonial experienced slower growth in sales and premium as
compared with 1995, reflecting the effects of weaker sales growth during the
third and fourth quarters of the year. Management is focusing on increasing
sales and premium at Colonial by enhancing collaborative sales across the UNUM
enterprise, introducing several new products and developing alternative
distribution channels.
RETIREMENT PRODUCTS SEGMENT
(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
- ---------------------------------------------- --------------------------- --------------------------- ---------
Revenues
Premiums .................................... $ 19.7 (28.6)% $ 27.6 9.5% $ 25.2
Investment income ........................... 214.4 (28.3) 298.9 (11.0) 335.8
Net realized investment gains ............... 2.8 (88.7) 24.8 nm 2.2
Fees and other income ........................ 46.1 nm 6.5 4.8 6.2
------ ---------- ------- --------- -------
Total revenues ........................... 283.0 (20.9) 357.8 (3.1) 369.4
Benefits and expenses
Benefits to policyholders .................. 64.0 17.6 54.4 5.8 51.4
Interest credited ........................... 193.1 (12.6) 220.9 (7.1) 237.7
Operating expenses ........................... 22.1 (33.8) 33.4 10.6 30.2
Commissions ................................. 5.2 (21.2) 6.6 (29.8) 9.4
Increase in deferred policy acquisition costs (2.8) (6.7) (3.0) nm (1.3)
------ ---------- ------- --------- -------
Total benefits and expenses ............... 281.6 (9.8) 312.3 (4.6) 327.4
------ ---------- ------- --------- -------
Income before income taxes .................. 1.4 (96.9) 45.5 8.3 42.0
Exclude realized investment gains ............ (2.8) (24.8) (2.2)
Special items (a) ........................... 15.0 1.0 --
------ ------- -------
Pretax operating income (a) .................. $ 13.6 (37.3)% $ 21.7 (45.5)% $ 39.8
====== ========== ======= ========= =======
Invested assets under management for
tax sheltered annuities, at end of
period .................................... $ 305.3 $3,074.3 $3,065.0
====== ======= =======
- --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income and a detailed description of
special items see the Consolidated Overview.
The Retirement Products segment includes tax sheltered annuities ("TSA") inproducts no longer actively
marketed by UNUM America and First UNUM,including: TSAs, guaranteed investment contracts ("GICs"),
deposit administration accounts ("DAs"), 401(k) plans, individual life and
group medical insurance, allinsurance. 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.
24
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 Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
purchase price (ceding commission) paid upon closing was approximately $71
million, and the transaction generated statutory capital of approximately $160
million. The contracts havewere initially been reinsured on an indemnity basis. Upon consent of the
TSA contractholders and/orand participants, the contracts will beare considered reinsured on
an assumption basis, legally releasing UNUM America and First UNUM from future
contractual obligation to the respective contractholders and/orand participants. The
sale resulted in a deferred pretax gain of $80.8 million, which will beis being
recognized in income, as a special item, in proportion to contractholder and/or participant consents for
assumption reinsurance, the
majority of which management believes will occur during 1997.reinsurance. Through March 1,December 31, 1997, consent for assumption
reinsurance has been provided by TSA contractholders and/orand participants owning
approximately 60%92% of assets under management.
Fees and other income reported byTo effect the sale of the TSA business, increased in 1996,
reflectingUNUM transferred into a $38.2trust
account held for the benefit of Lincoln approximately $2,690 million reimbursement of assets.
The transfer of these assets and subsequent novations reduced investment income
and interest credited from Lincoln under
the reinsurance agreement.significantly in 1997, as compared with 1996.
UNUM will continuecontinues to report the amount of interest credited to TSA contracts
for which the consent to transfer from indemnity reinsurance to assumption
reinsurance has not been received, with an equivalent amount being reported in
fees and other income for the reimbursement from Lincoln. The group TSA businesses
accounted for $0.4 million, $13.5 million $16.4 million and $31.6$16.4 million of the Retirement
Products segment's pretax operating income in 1997, 1996 1995 and 1994,1995,
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 during the year and lower interest spread margins on
tax shelteredtax-sheltered annuities through October 1, 1996, the effective date of the TSA
sale. For 1995, the decrease in pretax operating income was primarily
attributable to lower interest spread margins on tax sheltered annuities, as
compared with the unusually favorable levels experienced during 1994.
During 1996,Also, investment income declined reflecting the transfer of $2,690
million of assets to Lincoln on October 1, 1996, to effect the sale of the TSA
business, and the shifting of assets to lower yielding, highly liquid
instruments during the year in anticipation of the transfer.
During 1995,
investment income decreased primarily due to investments in lower yielding
tax-exempt securities and a reduced average investment yield caused by the low
interest rate environment. In addition, the reduced asset base under management
for GICs, DAs and 401(k) plans has resulted in lower investment income and
reduced amounts of interest credited during 1996 and 1995. Management expects
continued decreases in the amounts of investment income and interest credited as
the related GICs, DAs and 401(k) contracts mature or terminate.
CORPORATE
(Dollars in millions) 1997 1996 1995
1994
- -------------------------------------------------- ---------------- ---------------- --------------------------------------------- ----------- ----------- -----------
Loss before income taxes ........................ $ (46.7) $ (28.6) $ (28.2)
Exclude realized investment (gains) losses ...... (0.9) (0.3) 0.6
Special items (a) .............................. 10.1 -- --
----- ----- -------
Pretax operating loss (a) .................................. $ (51.8) $ (37.5) $ (28.9)
$ (27.6)
===== ============ ======= =======
- --------
(a) For the definition of pretax operating loss and a detailed description of
special items see the Consolidated Overview.
Corporate includes transactions that are generally non-insurance related.
The increased pretax operating loss in Corporate for the year ended December
31, 1997, as compared with 1996, aswas 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 1996, compared with 1995, was primarily the result of
increased international development costs and interest expense on corporate
borrowings, partially offset by increased investment income.
The increased pretax operating loss in 1995, compared with 1994, was
primarily attributable to increased interest expense, partially offset by
reduced operating expenses. Effective January 1, 1995, the operations of UNUM
Japan are reported in the Disability Insurance segment. Costs related toINVESTMENTS
Overview
UNUM's investment in Japan priorobjective is to January 1, 1995, were reported as operating
expenses in Corporate.
25optimize total asset return within
appropriate risk criteria established for each product line. UNUM seeks to meet
this objective through its asset/liability management process and active asset
management of the portfolios. Asset/liability management requires a balance
between investment risk and business risk and is a key element for managing
certain market risks (see Item 7A "Quantitative and Qualitative
22
INCOME TAXES
Effective tax rates, which reflect income tax expense as a percentage of
income before income taxes, were 30.3%, 26.4%UNUM Corporation and 22.1%Subsidiaries
Information about Market Risk" for 1996, 1995 and 1994,
respectively. Reported income tax expense was below the federal statutory tax
rate of 35% primarily due to tax savings from investments in tax-exempt
securities. The increase in the effective tax rate over the three year period
was primarily due to reduced tax-exempt income, both in amount and as a
percentage of income before income taxes. Beginning in late 1996, UNUM commenced
a plan to increase purchases of tax-exempt bonds and mortgages.
INVESTMENTSfurther discussion). UNUM's long term
investment strategy is to invest primarily in investment grade bonds and
commercial mortgages. UNUM evaluates total expected return after
consideration of associated expenses and losses, within criteria established for
each product line. Product line investment strategies are developed to
complement business risks by meeting the liquidity and solvency requirements of
each product. UNUM purchases assets with 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 applicable allowances for probable losses.
Allowances for real estate held for sale and mortgages are established based on
a review of specific assets as well as theon an overall portfolio basis,
considering the
carrying value of the underlying assets.assets and collateral. If a decline in
fair value is considered to be other than temporary or if a long-lived asset is
deemed permanently impaired, the investment is reduced to estimated net
realizable value and the reduction is recorded as a realized investment loss.
UNUM discontinues the accrual of investment income on invested assets when it
is determined that collectability is doubtful. Management monitors the risk
associated with the invested asset portfolio and regularly reviews and adjusts
the allowance for probable losses.
UNUM's invested assets were $8.7 billion$8,934.1 million and $11.7 billion$8,724.7 million at
December 31, 1997, and 1996, and 1995, respectively. The decrease from 1995 reflects asset transfers
that occurred in the fourth quarter of 1996, as discussed below. The composition of UNUM's invested
assets at December 31, 1996,1997, was 79.6%81.8% fixed maturities, 13.0%12.7% mortgage loans,
2.8%2.6% real estate and 4.6%2.9% other invested assets.
Gross realized investment gains were $24.4 million, $40.2 million and
$287.0 million, and gross realized investment losses were $28.0 million, $36.8
million and $61.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Significant Investment Transactions
In late December 1996, UNUM transferred approximately $403 million inof cash into a
trust account held for the benefit of Centre Life Reinsurance Limited ("Centre
Re"), in accordance with the reinsurance agreement between UNUM America and
Centre Re which became effective December 31, 1996 (see Item 8 Note 6 in Item 8)"Reinsurance").
On October 1, 1996, UNUM transferred approximately $2,690 million of
assets into a trust account held for the benefit of The Lincoln National Life
Insurance Company and Lincoln Life & Annuity Company of New York to effect the
sale of the TSA business (see Item 8 Note 5 in Item 8)"Sale of Tax-Sheltered Annuity
Business"). The assets transferred consisted of approximately $1,826 million of
short-term investments, $589 million of fixed maturities and $275 million of
cash.
During the second quarter of 1995, UNUM sold virtually all of the common
stock portfolio of its United States subsidiaries, primarily due to
consideration of statutory capital requirements associated with investment in
common stocks and to increase future investment income. UNUM reinvested the
proceeds from the sale of the common stock portfolio primarily in investment
grade fixed income assets. Dependent on capital considerations and market
conditions, UNUM may invest in equity securities inThe common stock sale accounts for the future.
Grosssignificantly
higher level of realized investment gains reported in 1995.
Fixed Maturities
Fixed maturities at fair value were $40.2 million, $287.0$7,310.9 million and $117.0$6,942.7 million
and gross realized investment losses were $36.8 million, $61.9
million and $71.4 million for the years endedat December 31, 1997, and 1996, 1995 and 1994,
respectively.
Fixed Maturities UNUM's fixed maturity portfolio
is concentrated in high quality intermediate term bonds, which management
believes are well diversified by company and industry sector. At December 31,
1996, over1997, 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 internally using similar methods if external ratings are not available.
The bond portfolio is primarily composedcomprised of taxable corporate bonds.
In late 1996, UNUM commenced a plan to
increase purchasesTax-exempt bonds were 13.7% of tax-exempt bonds and mortgages due to after-tax yield
considerations.the total bond portfolio at December 31, 1997,
compared with 8.7% at December 31, 1996. Dependent on market conditions and tax
considerations, theseUNUM may invest in tax-exempt securities can provide attractive after-tax yields as compared with
similarly rated taxable securities.
26in the future.
23
The table below summarizes fixed maturity holdings by credit quality as of
December 31, 1996,1997, and 1995.
Bond Credit Quality Ratings 1996 1995
- ----------------------------- ---------- ----------
AAA ........................ 10.6% 12.0%
AA ........................ 12.2 12.4
A ........................... 57.3 57.1
BAA ........................ 18.4 17.0
Below BAA .................. 1.5 1.5
------ ------
Total ..................... 100.0% 100.0%
====== ======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, 1996,1997, and 1995,1996, the fixed maturity portfolio included
$102.0$83.7 million and $139.4$102.0 million, respectively, of below investment grade bonds
(below "BAA") recorded at fair value. These bonds had an associated amortized
cost of $101.7$80.2 million and $133.8$101.7 million, respectively. Virtually all of the
below investment grade bonds were purchased at investment grade, but were
subsequently downgraded. Management does not expect any risks or uncertainties
associated with below investment grade bonds to have a significant affecteffect on
UNUM's consolidated financial position or results of operations. The amount of
fixed maturities delinquent 60 days or more was zero at December 31, 1996,1997, and
1995.
In November 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," which provided a one-time opportunity to reassess the
appropriateness of the classifications of securities described in Financial
Accounting Standard ("FAS") No. 115, and to reclassify fixed maturities from the
held to maturity category without calling into question the intent to hold other
debt securities to maturity in the future. On December 31, 1995, UNUM reassessed
its fixed maturity portfolio, and as allowed under the implementation guidance,
reclassified fixed maturities with an amortized cost of $6,082.8 million and a
related unrealized gain of $393.0 million from the held to maturity category to
available for sale. The unrealized gain on the total available for sale fixed
maturity portfolio was $551.9 million at December 31, 1995. In connection with
the reclassification of the held to maturity fixed maturities to available for
sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to
reflect the changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized. At December 31, 1996, the unrealized gain on available for sale fixed
maturities was $286.0 million and the related unpaid claims adjustment was
$168.7 million.1996.
Mortgages
At December 31, 1996,1997, and 1995,1996, UNUM's mortgage loans were $1,132.1$1,131.0
million and $1,163.4$1,132.1 million, respectively. UNUM invests new funds in
commercial properties in targeted geographical areas that meet UNUM's
underwriting standards. Management uses a comprehensive rating system to
evaluate the investment and credit risk of each mortgage loan and to identify
specific properties for inspection and reevaluation. Management establishes
allowances for mortgage loans based on a review of individual loans and the
overall loan portfolio, considering the value of the underlying collateral.
Management believes that its mortgage loan portfolio is well diversified
geographically and among property types, as summarized in Item 1 F.
Investments."Investments." UNUM's incidence of new problem mortgage loans and foreclosure
activity has remainedcontinued to remain very low in 1996,1997, reflecting improvements in
overall economic activity and improving real estate markets in the geographic
areas where UNUM has mortgage loans. Management expects a modest level of
delinquencies and problem loans in the future. The percentage of mortgage loans
delinquent 60 days or more on a contract delinquency basis was 0.5%0.7% and 0.2%0.5% at
December 31, 1997, and 1996, and
1995, respectively.
Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors
for Impairment of a Loan," and FAS 118, "Accounting by Creditors for Impairment
of a Loan-- Income Recognition and Disclosures," which defined the principles to
measure and record a loan when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The adoption of FAS 114 and FAS 118 did not have a material affect on
UNUM's results of operations or financial position.
27
At December 31, 1996,1997, and 1995,1996, impaired loans totaled $50.4$43.4 million and
$50.1$50.4 million, respectively. Included in the $50.4$43.4 million of impaired loans at
December 31, 1996,1997, were $38.9$20.8 million of loans which had a related allowance
for probable losses of $5.7$3.5 million, and a loan$22.6 million of $11.5 millionloans which had no
related allowance for probable losses. Interest lost on impaired loans in 1997,
1996 1995 and 1994,1995, 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 $8.5 million for 1996, 1995, and 1994,
respectively. Impaired mortgage loans as of December 31, 1996,1997, are not expected
to have a significant impact on UNUM's results of operations, liquidity or
capital resources.
MortgageRestructured mortgage loans that were restructured prior to the adoption of FAS 114 are defined by UNUM as loansthose whose terms have been modified to
interest rates less than market at the time of restructure and are currently
expected to perform pursuant to such modified terms. UNUM modifies loans to
protect its investment and only when it is anticipated that the borrower will
be able to meet the modified terms. As of December 31, 1996,1997, restructured
mortgage loans totaled $54.8$39.3 million, as compared with $59.9$54.8 million at
December 31, 1995.1996. Interest lost on restructured loans was not material in
1997, 1996 1995 or 1994.1995.
Real Estate
At December 31, 1996,1997, investment real estate amounted to $248.1$231.5 million,
compared with $222.2$248.1 million at December 31, 1995.1996. UNUM purchases investment
real estate in selected markets when certain investment criteria are 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 acquired through foreclosure is valued at fair value at the date of
foreclosure and may be classified as investment real estate if it meets UNUM's
investment criteria. If investment real estate is determined to be permanently
impaired, the carrying amount of the asset is reduced to fair value.
Occasionally, investment real estate is reclassified and revalued as real
estate held for sale when it no longer meets UNUM's investment criteria.
At December 31, 1996,1997, and 1995,1996, real estate held for sale amounted to
$23.3 million and $9.4 million, and $35.5 million, respectively. Real estate acquired through
foreclosure is valued at fair value at the date of foreclosure and may be
classified as investment real estate, if it meets UNUM's investment criteria. Real estate held for sale is
included in other assets in the Consolidated Balance Sheets and is valued net
of a valuation allowance whichthat reduces the carrying value to the lower of fair
value less estimated costs to sell or cost. This valuation allowance is
periodically adjusted based on subsequent changes in UNUM's estimate of fair
value less costs to sell.
Additions to the allowance for probable losses related to real estate held
for sale resulted in a realized investment gain of $0.4 million and realized investment losses of $6.3$3.0 million and $0.8$6.3
million for the years ended December 31, 1997, and 1995, respectively. For the
year ended December 31, 1996, 1995 and 1994, respectively.an investment gain of $0.4 million was realized.
Additions to the allowance represent charges to net realized investment gains
or losses less recoveries. Current and
anticipated realReal estate acquired through foreclosure is not
expected to have a significant affecteffect on UNUM's results of operations,
liquidity or capital resources.
Effective January 1, 1996, UNUM adopted FAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long- lived assets and certain identifiable intangibles to
be disposed of. FAS 121 applies to both real estate held for investment and real
estate held for sale. The adoption of FAS 121 did not have a material affect on
UNUM's results of operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
UNUM's businesses produce positive cash flows thatwhich are invested primarily
in intermediate term, fixed maturity investments intended to reflect the
anticipated cash obligations of insurance benefit payments and insurance
contract maturities and to optimize investment returns at appropriate risk
levels. Unexpected cash requirements and liquidity needs can be met through
UNUM's investment portfolio of fixed maturities classified as available for
sale, equity securities, cash and short-term investments.
From time to time, dividend payments, which may be subject to approval by
insurance regulatory authorities, are made from UNUM's affiliates and insurance
subsidiaries to UNUM
Corporation. These dividends, along with other funds, are used to service the
needs of UNUM Corporation including: debt service, common stock dividends,
corporate development, stock repurchase and administrative costs and corporate
development.costs. Net statutory
operating income, which excludes realized investment gains and losses net of
tax, is one of the major determinants of an insurance company's dividend
capacity to its parent in the following fiscal year.parent. Statutory accounting rules and practices, which differ
in certain respects
28
from generally accepted accounting principles, are mandated
by regulators in an insurance company's state of domicile. In 1996,addition to the
level of net statutory operating income, UNUM's determination of amounts to be
dividended by affiliates to UNUM Corporation depends on other factors such as
risk-based capital ratios, funding growth objectives at an affiliate level and
maintaining appropriate capital adequacy ratios as defined by certain rating
agencies (see "Ratings" section).
The states of domicile for UNUM's subsidiaries generally limit dividend
payments to the greater of the prior year's net statutory operating income or
10% of the prior year's statutory surplus. In 1997, UNUM's United States
insurance subsidiaries reported net statutory operating income of approximately
$167$227 million, compared with approximately $143$167 million in 1995.1996. The amount
available under current law for payment of dividends during 19971998 to UNUM
Corporation from all U.S. domiciled insurance subsidiaries without state
insurance regulatory approval is approximately $153$210 million, as compared with
approximately $135$153 million for 1996.1997. UNUM Corporation also has the ability to
draw a dividend from its United Kingdom-based affiliate, UNUM Limited, subjectLimited. It is
not uncommon for an insurance entity to certain U.S. tax consequences.
In connection with the closing of the TSA sale on October 1, 1996, as
described in the Retirement Products segment, UNUM America paid an extraordinary
dividend of $123 million to UNUM Corporation during the fourth quarter of 1996.
As a result of the reinsurance of the individual disability business, discussed
in the Disability Insurance segment, UNUM America and First UNUM intend to pay
extraordinary dividends to UNUM Corporation during 1997, subject torequest regulatory approval andfor
dividends in excess of amounts available without such approval.
The risk-based capital ("RBC") standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, establish an
RBC ratio comparing adjusted surplus to required surplus for each of UNUM's
United States domiciled insurance subsidiaries. If the RBC ratio falls within
certain capital considerations.ranges, regulatory action may be taken ranging from increased
information requirements to mandatory control by the domiciliary insurance
department. The RBC ratios for UNUM's insurance subsidiaries, measured at
December 31, 1997, were significantly above the ranges that would require
regulatory action.
Cash flow requirements are also supported by a committed revolving credit
facility totaling $500 million. On October 29, 1996, a new committed revolving
credit facility became effective, expiring onmillion, which expires October 1, 2001, which replaced a
previously existing facility of the same amount.2001. UNUM's
commercial paper program is supported by the revolving credit facility and is
available for general liquidity needs, capital expansion, acquisitions and
stock repurchase. The committed revolving credit facility contains certain
covenants that, among other provisions, require maintenance of certain levels
of stockholders' equity and limits on debt levels.
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 ten years.
The borrowing is callable by either party over the life of the agreement, under
certain circumstances. UNUM used the net proceeds to repay commercial paper and
for general corporate purposes.
On July 16, 1996, UNUM filed an omnibus shelf registration with the
Securities and Exchange Commission, which became effective August 2, 1996,
relating to $500 million of securities (including debt securities, preferred
stock, common stock and other securities). On August 15, 1996, UNUM filed a
prospectus supplement to establish a $250 million medium-term note ("MTN")
program under the shelf registration.
At December 31, 1996,1997, UNUM had short-term and long-term debt totaling
$117.7$126.6 million and $409.2$509.2 million, respectively. At December 31, 1996,1997,
approximately $439$449 million was available for additional financing under the
existing revolving credit facility and $500 million of investment grade debt
instruments was available for issuance under the shelf registration. Contingent
upon market conditions and corporate needs, management may refinance short-term
notes payable for longer term securities.
In the normal course of business, UNUM enters into letters of credit,
primarily to satisfy capital requirements related to certain subsidiary
transactions. UNUM had outstanding letters of credit of $56.7$84.6 million and $12.3$56.7
million at December 31, 1996,1997, and 1995,1996, respectively.
Effective October 23, 1996,February 13, 1998, UNUM's Board of Directors approved an
expansion of the Company's stock repurchase program to 6.0 million shares by authorizing an
additional 3.74.6 million shares. At December 31, 1996,February 13, 1998, following the increased
authorization, approximately 4.56.0 million shares of common stock remained
authorized for repurchase. During 1997 and 1996, UNUM acquired approximately
1.97.1 million and 3.8 million shares, respectively, of its common stock in the
open market at an aggregate cost of $285.2 million and $119.1 million.million,
respectively. UNUM did not acquire any shares in the open market in 1995.
During 1994, UNUM repurchased 3.9 million shares in
the open market at an aggregate cost of $183.3 million.
UNUM was committed at December 31, 1996,1997, to purchase fixed maturities and
other invested assets in the amount of $104.3$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.
2926
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 March 7, 1997: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 (MIDS) 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 March 7, 1997,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.
INSURANCE REGULATION
The Risk-Based Capital standardsDERIVATIVES
Refer to Item 8 Note 14 "Derivatives" for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, are based on
a formula that establishes capital requirements relatinginformation.
LITIGATION
Refer to existing asset
default risk, insurance risk, interest rate (asset/liability mismatch) risk, and
business risk. A company's Total Adjusted Capital (statutory capital, surplus
and Asset Valuation Reserve plus certain other adjustments) is compared to the
Authorized Control Level ("ACL") of Risk-Based Capital produced by the formula.
Subject to certain trend tests to determine the change in the ACL ratio from
year to year, companies with Total Adjusted Capital above 200% of ACL are
assumed to be adequately capitalized. Companies below 200% of ACL are identified
as requiring various levels of regulatory action ranging from increased
information requirementsItem 8 Note 15 "Litigation" for companies between 150% and 200% of ACL, to
mandatory control by the domiciliary insurance department for companies below
70% of ACL.
At December 31, 1996, the ACL ratios for UNUM America, First UNUM, and
Colonial were 406%, 467%, and 389%, respectively. This compares with ACL ratios
at December 31, 1995, of 382%, 382%, and 436%, respectively. For 1996, UNUM
America's ACL ratio reflects the merger of Commercial Life into UNUM America as
of December 31, 1996. At December 31, 1995, Commercial Life had an ACL ratio of
329% that is not included in the UNUM America 1995 ACL ratio.
DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments such as
options, futures and forward exchange contracts to hedge certain risks
associated with anticipated purchases and sales of investments and certain
payments denominated in foreign currencies, primarily British pound sterling,
Canadian dollar and Japanese yen. These derivative financial instruments are
used to protect UNUM from the effect of market fluctuations in interest and
exchange rates between the contract date and the date on which the hedged
transaction occurs. In using these instruments, UNUM is subject to the
off-balance-sheet risk that the counterparties of the transactions will fail to
perform as contracted. UNUM manages this risk by only entering into contracts
with highly rated institutions and listed exchanges. UNUM does not hold
derivative financial instruments for the purpose of trading.
At December 31, 1996, UNUM had open interest rate futures contracts with
notional amounts of $178.2 million to hedge anticipated sales of investments in
1997. These contracts had a related net unrealized gain of $1.6 million. At
December 31, 1995, UNUM had no open derivative financial instruments.
30
LITIGATION
In the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1996. In some instances, these
proceedings include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position or the consolidated operating results of UNUM.
On December 29, 1993, UNUM filed suit in the United States District Court
for the District of Maine, seeking a federal income tax refund. The suit is
based on a claim for a deduction in certain prior tax years, for $652 million in
cash and stock distributed to policyholders in connection with the 1986
conversion of Union Mutual Life Insurance Company to a stock company. UNUM has
fully paid, and provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure.
UNUM believes its claims are meritorious, and has appealed the decision to the
United States Court of Appeals for the First Circuit. The ultimate recovery, if
any, cannot be determined at this time.information.
EFFECT OF INFLATION
Inflation is one of the factors that has increased the need for insurance.
Many policyholders who once had adequate insurance programs at lower coverage
levels have increased their disability insurance coverage to provide the same
relative financial benefits and protection.
Changing interest rates, which are traditionally linked to changes in
inflation, affect UNUM's level of discounted reserves. While rising interest
rates are beneficial when the company is investing current cash flows, they can
also reduce the fair value of existing fixed rate long-term investments. In
addition, lower interest rates can lead to early payoffs and refinancing of
some of UNUM's fixed rate investments. Management generally invests in fixed
rate instruments that are structured to limit the exposure to such reinvestment
risk.
ACCOUNTING CHANGES
Effective January 1, 1996,YEAR 2000 ISSUE
The year 2000 issue relates to whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. UNUM adopted Financial Accounting Standard
("FAS") No. 121, "Accountinghas
determined that it is required to modify or replace significant portions of its
software so its computer systems will properly function using dates beyond
December 31, 1999. Management presently believes that with modifications to
existing software and conversions to new software, the year 2000 issue can be
rectified. UNUM has initiated formal communications with its critical suppliers
and large customers to determine the extent to which it is vulnerable to the
possibility 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 2000 modifications and plans to have
its computer systems compliant by year 2000. The financial impact of addressing
the Impairment of Long-Lived Assetsyear 2000 issue has not had, and for
Long-Lived Assetsis not anticipated 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
effectadverse impact on UNUM's results of operations, liquidity or capital resources.
The costs of the project and the date on which UNUM plans to complete year 2000
modifications are based on management's best estimates, derived using numerous
assumptions about future events including the continued availability of certain
resources, third party modification plans and other factors.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Refer to Item 8 Note 1 under the caption "Accounting Pronouncements
Adopted" for information.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Item 8 Note 1 under the caption "New Accounting Pronouncements"
for information.
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 position.
Effective January 1, 1996, UNUM adopted FAS 123, "Accounting for
Stock-Based Compensation." FAS 123 establishedinstruments are exposed to market risk, which is the risk
of market volatility and potential disruptions in the market that may result in
certain financial accountinginstruments becoming less valuable. UNUM's primary market
risk is interest rate risk, which is the sensitivity of earnings, cash flows
and
reporting standards for stock-based employee compensation plans. The statement
defines a new method of accounting for employee stock compensation plans using a
fair value based method, under which compensation cost is measured and
recognized in results of operations. Alternatively, FAS 123 allows an entity to
retain the accounting for employee stock compensation plans defined under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." UNUM retained the accounting defined under APB No. 25, and as
required, will disclose in a footnote the pro forma effects of stock-
based compensation using the fair value based method defined under FAS 123.
Referof financial instruments to Note 9 in Item 8 for the related disclosures.
Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors
for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures," which defined the
principles to measure and record a loan when it is probable that a creditor will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. The adoption of FAS 114 and FAS 118 did not have a material
effect on UNUM's results of operations or financial position.
Effective January 1, 1994, UNUM adopted FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," which specified the accounting and
reporting for certain investments in equity securities and for all investments
in debt securities. In November 1995, the Financial Accounting Standards Board
("FASB") issued "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," which provided a one-time
opportunity to reassess the appropriateness of the classifications of securities
described in FAS 115, and to reclassify fixed maturities from the held to
maturity category without calling into question the
31
intent to hold other debt securities to maturitychanges in the future. On December 31,
1995, UNUM reassessed its fixed maturity portfolio and, as allowed under the
implementation guidance, reclassified fixed maturities with an amortized costlevel of $6,082.8 million and a related unrealized gain of $393.0 million from the held
to maturity category to available for sale.interest
rates. In connectionaccordance with the reclassificationSecurities and Exchange Commission's Financial
Reporting Release No. 48, the following quantitative analysis provides the
estimated loss in fair value of the held to maturity fixed maturities to available for sale,
on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to
reflect the changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued FAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes accounting and reporting standards for transfers and servicing ofcertain market sensitive financial assets and
extinguishmentsliabilities held at December 31, 1997, given a hypothetical 10-percent adverse
change in interest rates and related qualitative information on how UNUM
manages interest rate risk. All of liabilities.UNUM's financial instruments are held for
purposes other than trading.
Interest-Rate Risk Management
UNUM's asset/liability duration management activities represent a key
element for managing interest rate risk to the overall business. The statement provides
guidanceobjective
of asset/liability duration management is to support the achievement of
business strategies while minimizing levels of investment risk, which includes
interest rate risk. As part of the Company's asset/liability duration
management strategy, detailed actuarial models of the cash flows associated
with each type of insurance liability are generated under various interest rate
scenarios allowing the calculation of an estimated duration for recognition or derecognitioneach insurance
product line. This duration measure can then be used to compare the price
sensitivities of the insurance liabilities versus the price sensitivities of
the financial assets held to provide the required liability cash flows. When
the durations of assets and liabilities focusingare equal, interest rate exposure is
effectively neutralized on an economic basis as the conceptschange in value of
controlfinancial assets should be largely offset by the change in the value of the
liabilities.
The model used in the following analysis included UNUM's fixed maturities,
mortgage loans and extinguishment. UNUM is required to adopt FAS 125
effective January 1, 1997. The adoption of FAS 125 is not expected to have a
material effect on UNUM's results of operations or financial position.
In March 1997, the FASB issued FAS No. 128, "Earnings Per Share," which is
intended to simplify the computation and presentation of earnings per share
("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." FAS 128 will eliminate the concept of "primary" EPS and
require dual presentation of "basic" and "diluted" EPS. Diluted EPS under FAS
128 is similar to "fully diluted" EPS as defined by APB 15. UNUM is required to
adopt FAS 128 effectivedeposit assets held at December 31, 1997. As stated1997, and incorporated
assumptions regarding the impact of changing interest rates on expected cash
flows for certain financial assets with prepayment features, such as callable
bonds, mortgage-backed securities and mortgage loans. The hypothetical
reduction in Note 1the fair value of UNUM's financial assets included in the model
resulting from a hypothetical 10-percent adverse change in interest rates
prevalent at December 31, 1997, is estimated to be $323 million. In
consideration of UNUM's ongoing strategy of asset/liability duration alignment,
this hypothetical reduction in fair value would be largely offset by the
corresponding decrease in the fair value of insurance reserves.
UNUM has established policies and procedures governing its issuance of
debt. UNUM manages its debt composition and related interest rate risk by
considering such factors as the debt to equity ratio, fixed rate to variable
rate debt ratio, future debt requirements, interest rate environment and market
conditions. Based upon the interest rate exposure relating to UNUM's notes
payable at December 31, 1997, a hypothetical 10-percent adverse change in
interest rates in the near term would not materially affect the fair value of
UNUM's notes payable.
Additionally, UNUM periodically uses options, futures and interest rate
swaps, which are common derivative financial instruments, to hedge interest
rate risk associated with anticipated purchases and sales of investments and
debt issuance (see Item 8 under
the caption "Earnings Per Share," the assumed exercise of UNUM's outstanding
stock options does not result in a material dilution of earnings per share.
In March 1997, the FASB issued FAS No. 129, "Disclosures of Information
About Capital Structure," which clarifies disclosure requirements related to the
type,Note 14 "Derivatives" for further information on
derivatives).
28
UNUM Corporation and nature, of securities contained in an entity's capital structure. UNUM
is required to adopt FAS 129 effective December 31, 1997.
32
Subsidiaries
Item 8--Financial Statements and Supplementary Data
INDEX Page
- ------------------------------------------------------------------------------------------ -----------
Report of Independent Accountants ...................................................... 34........................................................ 30
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 and 1994 35.. 31
Consolidated Balance Sheets as of December 31, 1997, and 1996 and 1995 ........................ 36........................... 32
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 and 1994 ........................................................................ 38....................................................... 33
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 and 39
1994................................................. 34
Notes to Consolidated Financial Statements ............................................. 40............................................... 36
3329
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 as
listed in Item 14(a) of this Form 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 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, 19961997 and 1995,1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 19961997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
/s/COOPERS & LYBRAND L.L.P.
Portland, Maine
February 5, 1997,4, 1998, except for Note 510 for which the
date is March 1, 1997,
and Note 18 for which the date is March 14, 1997
34February 13, 1998
30
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------------------------------------------
(Dollars in millions, except per common share data) 1997 1996 1995
1994
- ----------------------------------------------------- ----------- ----------- ----------------------------------------------------------------- ------------- ------------- -------------
Revenues
Premiums $3,120.4 $3,018.2 $2,721.3.............................................. $ 3,188.7 $ 3,120.4 $ 3,018.2
Investment income ...................................................................... 657.9 802.2 806.3 770.2
Net realized investment gains .....................(losses) ................ (3.6) 3.4 225.1 45.6
Fees and other income ............................................................... 233.7 116.7 73.3
75.5
-------- -------- ------------------ --------- ---------
Total revenues .......................................................................... 4,076.7 4,042.7 4,122.9 3,612.6
Benefits and expenses
Benefits to policyholders ........................................................ 2,395.3 2,324.7 2,493.0
2,239.0
Interest credited ...................................................................... 83.5 200.6 227.4
242.7
Operating expenses ..................................................................... 790.6 862.6 728.2
713.0
Commissions .................................................................................. 371.2 364.2 369.9 355.9
Increase in deferred policy acquisition costs ............... (142.7) (91.7) (114.7)
(155.3)
Interest expense .......................................................................... 42.4 40.7 37.2
18.7
-------- -------- ------------------ ---------- ----------
Total benefits and expenses .............................................. 3,540.3 3,701.1 3,741.0
3,414.0
-------- -------- ------------------ ---------- ----------
Income before income taxes ........................536.4 341.6 381.9 198.6
Income taxes
Current ............................................................................................ 68.3 122.3 98.6
30.4
Deferred ........................................................................................ 97.8 (18.7) 2.2
13.5
-------- -------- ------------------ ---------- ----------
Total income taxes ................................................................ 166.1 103.6 100.8
43.9
-------- -------- ------------------ ---------- ----------
Net income ...................................................................................... $ 370.3 $ 238.0 $ 281.1
$ 154.7
======== ======== ================== ========== ==========
Net income per common share ........................share:
Basic ................................................ $ 3.262.65 $ 3.871.63 $ 2.09
======== ======== ========1.93
Diluted .............................................. $ 2.59 $ 1.61 $ 1.92
========== ========== ==========
See notes to consolidated financial statements.
3531
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------------------------
(Dollars in millions) 1997 1996
1995
- --------------------------------------------------------- ------------ ------------------------------------------------------------------------ ------------- -------------
ASSETS
Investments
Fixed maturities available for sale--at fair value
(amortized cost: 1997--$6,893.0; 1996--$6,656.7; 1995--6,656.7) .......... $8,583.5) ...... $6,942.7 $9,135.4 7,310.9 $ 6,942.7
Equity securities available for sale--at fair value
(cost: 1997--$21.1; 1996--$23.8; 1995--$21.1) .....................23.8) .......................... 30.7 31.3 25.2
Mortgage loans .................................................................................... 1,131.0 1,132.1 1,163.4
Real estate, net .................................................................................. 231.5 248.1 222.2
Policy loans ......................................................................................... 128.5 232.9 219.2
Other long-term investments ........................................................... 1.8 14.2 30.4
Short-term investments ...................................................................... 99.7 123.4
896.7
--------- ------------------- ----------
Total investments ............................................................................ 8,934.1 8,724.7
11,692.5
Cash ........................................................................................................... 47.9 77.0 42.5
Accrued investment income ................................................................. 160.3 166.1 208.5
Premiums due .......................................................................................... 307.8 252.4 224.3
Deferred policy acquisition costs ................................................ 983.5 844.2 1,142.3
Property and equipment, net ............................................................ 196.2 181.0 153.7
Reinsurance receivables ...................................................................... 1,357.0 1,113.8 420.9
Deposit assets ........................................................................................ 688.3 2,846.6 --
Other assets .......................................................................................... 495.6 518.0 370.9
Separate account assets ...................................................................... 29.6 743.7
532.2
--------- ------------------- ----------
Total assets .......................................... $15,467.5 $14,787.8
========= =========
See notes to consolidated financial statements.
36
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------------- ------------ -----------
............................................. $ 13,200.3 $ 15,467.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits ....................................... $1,881.1 $1,718.7..................................... $ 1,981.4 $ 1,881.1
Unpaid claims and claim expenses ........................... 5,831.6 5,289.3 4,856.4
Other policyholder funds ....................................................................... 1,004.9 3,533.6 3,840.3
Income taxes
Current ................................................... 20.7 61.3
20.7
Deferred ..................................................................................................... 496.2 341.8 392.0
Notes payable .............................................................................................. 635.8 526.9 583.8
Other liabilities .......................................... 765.3 826.7 540.8
Separate account liabilities ................................................................ 29.6 743.7
532.2
-------- ------------------ ----------
Total liabilities .................................................................................. 10,765.5 13,204.4 12,484.9
Stockholders' equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000240,000,000 shares, issued 99,987,958199,975,916 shares ............... 10.0............. 20.0 10.0
Additional paid-in capital ................................. 1,123.0 1,103.4 1,088.2
Unrealized gains, on available for sale securities, net ............................................ 211.4 82.3 213.1
Unrealized foreign currency translation adjustment ......... (16.0) (1.2) (23.1)
Retained earnings .......................................... 2,162.5 1,871.4
1,713.2
-------- ------------------ ----------
3,500.9 3,065.9 3,001.4
Less:
Treasury stock, at cost (1996--28,165,594(1997--61,703,924 shares;
1995--26,980,3311996--56,331,188 shares) ...................................................................... 1,050.3 792.2 691.6
Restricted stock deferred compensation ..................... 15.8 10.6
6.9
-------- ------------------ ----------
Total stockholders' equity ................................. 2,434.8 2,263.1
2,302.9
-------- ------------------ ----------
Total liabilities and stockholders' equity .................. $15,467.5 $14,787.8
======== ========............... $ 13,200.3 $ 15,467.5
========== ==========
See notes to consolidated financial statements.
3732
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
(Dollars in millions,common share $0.10 Par Paid-in Securities, Translation Retained Treasury Deferred
except per common share
data) Value Capital Net Adjustment Earnings Stock Compensation Total
- -------------------------------- --------- ----------- ------------- ----------- -------- -------- ------------ ----------------------------------------------------------------------------------------------------------------------------------------
Balance at
January 1, 1994 .... $10.0 $1,078.4 1995 .......$ 149.110.0 $ (24.1) $1,420.81,080.5 $ (529.8)49.6 $ (1.7) $2,102.7
1994 Transactions:
Net income ................... 154.7 154.7
Unrealized losses on available
for sale securities, net .... (99.5) (99.5)
Unrealized foreign currency
translation adjustment ....... 0.4 0.4
Dividends to stockholders
($0.92 per common share) ..... (68.3) (68.3)
Treasury stock acquired ....... (183.3) (183.3)
Employee stock option and
other transactions .......... 2.1 6.5 0.1 8.7
----- --------- ------- -------- -------- -------- ------ --------
Balance at December 31, 1994 .. 10.0 1,080.5 49.6 (23.7) $ 1,507.2 $ (706.6) $ (1.6) $ 1,915.4
1995 Transactions:
Net income ................................ 281.1 281.1
Unrealized gains on
available for sale
securities, net ........... 163.5 163.5
Unrealized foreign
currency translation
adjustment ................... 0.6 0.6
Dividends to
stockholders
($1.0350.5175 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
($1.090.545 per
common share) .............. (79.8) (79.8)
Treasury stock
acquired ..................... (119.1) (119.1)
Employee stock
option and other
transactions .......................... 15.2 18.5 (3.7) 30.0
----- --------- ------- ---------- -------- -------- -------- ------ --------------- ---------- ---------- ------- ----------
Balance at
December 31, 1996 .. $10.0 $1,103.4 ..... 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
($0.565 per
common share) ......... (79.2) (79.2)
Treasury stock
acquired .............. (285.2) (285.2)
Employee stock
option and other
transactions .......... 29.6 27.1 (5.2) 51.5
------- ---------- -------- ------- ---------- ---------- ------- ----------
Balance at
December 31, 1997 .....$ 82.320.0 $ (1.2) $1,871.41,123.0 $ (792.2) $(10.6) $2,263.1
====== =========211.4 $ (16.0) $ 2,162.5 $ (1,050.3) $ (15.8) $ 2,434.8
======= ========== ======== ======= ======== ======== ====== ================== ========== ======= ==========
See notes to consolidated financial statements.
3833
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995
1994
- ------------------------------------------------------------------------------------------------------------------------------------ ------------- ------------- ----------------------
Operating activities:
Net income .............................................................................................................. $ 370.3 $ 238.0 $ 281.1 $ 154.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in future policy benefits and unpaid claims and
claim expenses .................................................................................................. 599.7 630.1 905.3 720.1
Increase in amounts receivable under reinsurance
agreements ....................................................... (227.8) (686.7) (61.0) (18.6)
Increase (decrease) in income tax liability ........................................ 52.8 20.4 (3.5) (3.3)
(Increase) decrease in deferred policy acquisition costs ............... (140.0) 299.2 (114.9) (155.4)
Increase in deposit assets ........................................................................... (55.9) (432.1) --
--
DeferredDeferral (recognition) of gain on sale of tax shelteredtax-sheltered
annuities ...................................................................... (72.6) 80.8 -- --
Charge for individual disability reinsurance fees ............................ -- 49.7 -- --
Realized investment (gains) losses .......................................................... 4.4 4.0 (242.0)
(59.0)
Other ..................................................................................................................... (59.7) 76.4 (8.9)
62.3
--------- --------- ----------------- ---------- ----------
Net cash provided by operating activities ........................................ 471.2 279.8 756.1
700.8
--------- --------- ----------------- ---------- ----------
Investing activities:
Maturities of fixed maturities available for sale ................. 457.7 775.2 99.3
Maturities of fixed maturities held to maturity .................................. -- -- 835.7
754.8
MaturitiesSales of fixed maturities available for sale ............... 775.2 99.3 41.2...................... 652.1 2,514.4 577.3
Sales of fixed maturities held to maturity ............................................. -- -- 2.8
46.8
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 .................. 2,514.4 577.3 407.6
Sales of equity securities available for sale .................. -- 836.7 314.1
Sales and maturities of other investments ..................... 269.5 312.0 414.9(1,360.6) (1,890.9) (1,971.9)
Purchases of fixed maturities held to maturity ...................................... -- -- (230.2) (795.2)
Purchases of fixed maturities available for sale ............... (1,890.9) (1,971.9) (943.9)
Purchases of equity securities available for sale ................................ -- -- (131.3) (216.6)
Purchases of other investments ..................................................................... (216.3) (263.0) (322.4)
(211.5)
Net increase(increase) decrease in short-term investments ......................................... 23.5 (1,051.9) (604.8) (221.7)
Net additions to property and equipment ................................................... (26.1) (54.3) (28.9)
(29.9)
--------- --------- ----------------- ---------- ----------
Net cash provided by (used in) investing activities ..................... (234.8) 299.0 (625.7)
(439.4)
--------- --------- ----------------- ---------- ----------
Financing activities:
Deposits and interest credited to investment contracts ..................... 285.1 597.1 669.6 608.6
Maturities and withdrawals from investment contracts .......................... (327.2) (903.8) (888.1) (800.5)
Dividends to stockholders ................................................................................ (79.2) (79.8) (75.1) (68.3)
Treasury stock acquired .................................................................................. (285.2) (119.1) -- (183.3)
Proceeds from notes payable ........................................................................... 168.3 -- 291.5 54.7
Repayment of notes payable ............................................................................ (48.5) (15.0) (1.3)
(1.2)
Net increase (decrease)decrease in short-term debt ........................................................ (10.6) (42.3) (135.1)
136.6
Other ...................................................................................................................... 32.8 18.9 13.8
7.2
--------- --------- ----------------- ---------- ----------
Net cash used in financing activities .................................................. (264.5) (544.0) (124.7)
(246.2)
--------- --------- ----------------- ---------- ----------
Effect of exchange rate changes on cash ................................................... (1.0) (0.3) 0.7
0.1
--------- --------- ----------------- ---------- ----------
Net increase (decrease) in cash ............................................................................. (29.1) 34.5 6.4 15.3
Cash at beginning of year ................................................................................ 77.0 42.5 36.1
20.8
--------- --------- ----------------- ---------- ----------
Cash at end of year ............................................................................................ $ 47.9 $ 77.0 $ 42.5
$ 36.1
========= ========= ================= ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes ........................................................................................................ $ 76.1 $ 76.4 $ 82.6
Interest ......................................................... $ 48.8
Interest ......................................................43.3 $ 40.8 $ 40.8 $ 44.7 $ 20.4
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
tax-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 separate account assets and liabilities by
$526.5 million.
In conjunction with the sale of UNUM's tax shelteredtax-sheltered annuity business
as
discussed in Note 5,during 1996, fixed maturities available for sale of $588.6 million and
short-term investments of $1,825.9 million were transferred to the buyer on
October 1, 1996. Upon transfer, there was a corresponding increase in UNUM's
deposit assets.
See notes to consolidated financial statements.
3935
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. 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 19951996 and 19941995 amounts have been reclassified in 19961997 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.
40
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
UNUM discontinues the accrual of investment income on invested assets when
it is determined that collectability is doubtful. UNUM recognizes investment
income on impaired loans when the income is received.
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 whichthat reduces the
carrying value to the lower of fair value less estimated costs to sell or cost.
This valuation allowance is periodically adjusted based on subsequent changes
in UNUM's estimate of fair value less costs to sell.
Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management program.
Therefore, short-term financial instruments are classified as investments in
the Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.
Derivative Financial Instruments
Gains or losses on hedges of existing assets or liabilities are deferred
and included in the carrying amounts of those assets or liabilities. Gains or
losses related to qualifying hedges of firm commitments or anticipated
transactions are also deferred and recognized in the carrying amount of the
underlying asset or liability when the hedged transaction occurs.
Recognition of Premium Revenues and Related Expenses
Group insurance premiums are recognized as income over the period to which
the premiums relate. Individual disability premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums to result in
recognition of profits over the life of the contracts. This association is
accomplished by recording a provision for future policy benefits and unpaid
claims and claim expenses, and by amortizing deferred policy acquisition costs.
For retirement and universal life products, premium and other policy fee
revenue consist of charges for the cost of insurance, policy administration and
surrenders assessed during the period. Charges related to services to be
performed in the future are deferred until earned. The amounts received in
excess of premium and fees are recorded as deposits and included in other
policyholder funds in the Consolidated Balance Sheets. Benefits and expenses
include benefit claims in excess of related account balances, interest credited
at various rates, and amortization of deferred policy acquisition costs.
Deferred Policy Acquisition Costs
The costs of acquiring new business that vary with and are related
primarily to the production of new business have been deferred to the extent
such costs are deemed recoverable from future profits. Such costs include
commissions, certain costs of policy issue and underwriting and certain
variable field office expenses.
For individual disability, group disability, and group life and health
business, the costs are amortized in proportion to expected future premiums.
For universal life products, the costs are amortized in proportion to estimated
gross profits from interest margins, mortality and other elements of
performance under the contracts. Amortization is adjusted periodically to
reflect differences between actual experience and original assumptions, with
any resulting changes reflected in current operating results. The amounts
deferred and amortized were as follows:
Year Ended December 31,
----------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995
1994
- -------------------------------------------------------- ---------- ---------------------------------------------------------------------- ----------- ----------- -----------
Deferred ............................................................................................. $ 341.4 $ 305.6 $ 308.3
$ 308.1
Less amortized ................................................................................. (198.7) (213.9) (193.6)
(152.8)
------- ------- --------------- -------- --------
Increase in deferred policy acquisition costs ............... $ 142.7 $ 91.7 $ 114.7
$ 155.3
======= ======= =============== ======== ========
41
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 CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ReservesLife 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 Future Policy Benefits
Reservesassumption
reinsurance.
Accounting for future policy benefits are calculatedParticipating Individual Life Insurance
Participating policies issued by the net-level premium
method,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 are based on UNUM's expected morbidity, mortalityannuity policies and
interest rate
assumptions atcontracts.
The assets of the time a policy is issued. These reserves represent the portion
of premiums received, accumulated with interest and held toPFA provide for claims
thatthe 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 not yet been incurred. The reserve assumptions are periodically
reviewed and compared to actual experience and are revised if it is determined
that future expected experience is differentexcluded from the reserve assumptions.
Reserves for group insurance policies consist primarilyConsolidated Statements of
unearned premiums.Income. The interest rates used in the calculationPFA represented approximately 2.8% and 2.3% of reserves for future policy
benefitsconsolidated assets
and 3.3% and 2.7% of consolidated liabilities at December 31, 1997, and 1996,
and 1995, principally ranged from:
1996 1995
--------------- --------------
Individual disability ............... 6.0% to 9.5% 5.5% to 9.5%
Individual life ..................... 5.0% to 9.0% 5.0% to 9.0%
Individual accident and health ...... 5.0% to 9.0% 5.0% to 9.0%
Individual and group annuities ...... 5.0% to 9.0% 5.0% to 9.0%
Certain reserve calculations are based on interest rates within these
ranges graded down over periods from 15 to 20 years.
Reserves for Unpaid Claims and Claim Expenses
Unpaid claims and claim expense reserves represent the amount estimated to
fund claims that have been reported but not settled and claims incurred but not
reported. Reserves for unpaid claims are estimated based on UNUM's historical
experience and other actuarial assumptions that consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to interest rates and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. Reserve estimates and assumptions
are periodically reviewed and updated with any resulting adjustments to reserves
reflected in current operating results. Given the complexity of the reserving
process, the ultimate liability may be more or less than such estimates
indicate.
The interest rates used in the calculation of disability claims reserves at
December 31, 1996, and 1995, were principally as follows:
1996 1995
----------------- ----------------
Group long term disability (North America) ......... 7.88% 7.94%
Group long term disability (United Kingdom) ...... 9.46% 9.67%
Individual disability .............................. 6.75% to 9.46% 6.75% to 9.67%
The interest rate used to discount the disability reserves is a composite
of the yields on assets specifically identified with each block of business.
Management expects the reserve discount rate for certain disability products
will further decline, since current cash flows are invested in high quality
assets at current yields, which are below the composite yield of the existing
assets purchased in prior years. UNUM periodically adjusts prices on both
existing and new business in an effort to mitigate the impact of the current
interest rate environment.
For other accident and health business, reserves are based on projections
of historical claims run-out patterns.
42
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Activity in the liability for unpaid claims and claim expenses is
summarized as follows:
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------- ------------------- ------------------ ------------------
Balance at January 1 ................................. $4,856.4 $3,853.9 $3,341.5
Less reinsurance recoverables ..................... (115.4) (82.7) (68.0)
Effect of unrealized gains on fixed maturities ...... (261.2) -- --
---- ----- -----
Net Balance at January 1 ........................... 4,479.8 3,771.2 3,273.5
Incurred related to:
Current year ....................................... 1,673.9 1,825.0 1,609.3
Prior years ....................................... 366.0 507.0 436.0
---- ----- -----
Total incurred ....................................... 2,039.9 2,332.0 2,045.3
Paid related to:
Current year ....................................... 532.8 523.9 517.6
Prior years ....................................... 1,214.5 1,099.5 1,030.0
---- ----- -----
Total paid .......................................... 1,747.3 1,623.4 1,547.6
Net Balance at December 31 ........................... 4,772.4 4,479.8 3,771.2
Plus reinsurance recoverables ..................... 346.8 115.4 82.7
Effect of unrealized gains on fixed maturities ...... 170.1 261.2 --
---- ----- -----
Balance at December 31 .............................. $5,289.3 $4,856.4 $3,853.9
==== ===== =====
The components of the increase in unpaid claims and claims expenses
incurred and related to prior years were as follows:
(Dollars in millions) 1996 1995 1994
- ----------------------------------------------------- --------- --------- --------
Interest accrued on reserves ..................... $292.9 $270.0 $267.0
Changes in reserve estimates and assumptions ...... 36.2 239.0 154.0
Changes in foreign exchange rates .................. 36.9 (2.0) 15.0
------- ------ -------
Increase in incurrals related to prior years ...... $366.0 $507.0 $436.0
======= ====== =======
The increases in incurrals related to prior years were primarily the result
of interest accrued on reserves, changes in reserve estimates and assumptions of
interest rates, morbidity, mortality and expense costs, and changes in foreign
exchange rates, primarily related to the disability reserves of UNUM's United
Kingdom-based affiliate, UNUM Limited. Due to the long-term claims payment
pattern of some of UNUM's businesses, certain reserves, particularly disability,
are discounted for interest.
The effects of changes in reserve estimates and assumptions were more
significant in 1995 and 1994, primarily as a result of increased reserves from
lower discount rates for certain disability products following the sale of the
common stock portfolio in 1995, and adjustments to strengthen certain disability
reserves in 1995 and 1994.
Beginning in 1995, as explained in Note 2, unpaid claims are adjusted to
reflect changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized. Where applicable, UNUM has reflected those adjustments in the
liability balances with corresponding credits or charges, net of related
deferred taxes, reported as a component of unrealized gains on available for
sale securities in stockholders' equity.
43
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Changes in Accounting Estimates
During 1995, UNUM sold virtually all of the common stock portfolio of its
United States subsidiaries. The sale of the common stock portfolio, which
partially supported certain disability reserves, and the reinvestment of the
proceeds primarily in investment grade fixed income assets at yields below the
average portfolio yield, resulted in lower reserve discount rates for certain
disability products reported in the Disability Insurance segment. This change in
accounting estimate to lower certain discount rates resulted in an increase of
$128.6 million to benefits to policyholders in the Consolidated Statement of
Income, and a decrease to net income of $83.6 million, or $1.15 per share.
During 1995, UNUM increased the group long term disability reserves for
incurred but not reported ("IBNR") claims, as reported in the Disability
Insurance segment. The increased IBNR reserves were based on management's
judgment that claims incurred but not yet reported would reflect increased
levels of claims incidence and severity. This change in accounting estimate
resulted in an increase to benefits to policyholders in the Consolidated
Statement of Income of $38.4 million, and a decrease to net income of $25.0
million, or $0.34 per share.
During 1995, UNUM increased reserves for unpaid claims related to the
Association Group disability business by $15.0 million to reflect management's
expectations of slower than expected claim recoveries. This change in accounting
estimate, which was reflected in the Disability Insurance segment, decreased net
income by $9.8 million, or $0.14 per share.
During 1994, UNUM increased reserves for existing claims by $83.3 million
and strengthened reserves for estimated future losses by $109.1 million. These
increased reserves reflected management's expectations of morbidity trends for
the existing non-cancellable individual disability business, reported in the
Disability Insurance segment. This change in accounting estimate resulted in an
increase to benefits to policyholders in the Consolidated Statement of Income of
$192.4 million, and a decrease to net income of $125.1 million, or $1.69 per
share.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.
Separate Accounts
Certain assets from tax sheltered annuity ("TSA") contracts and UNUM's
defined benefit plans are in separate accounts that are pooled investment funds
of securities. Investment income and realized gains and losses on these accounts
accrue directly to the contractholders. Assets, carried at market value, and
liabilities of the separate accounts are shown separately in the Consolidated
Balance Sheets. The assets of the separate accounts are legally segregated and
are not subject to claims that arise out of any other business of UNUM.
On October 1, 1996, UNUM America and First UNUM closed the sale of their
respective TSA businesses to The Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of
Lincoln National Corporation (see Note 5). For legal considerations, the
separate account's TSA-related assets were not transferred on October 1, 1996.
TSA-related assets will be transferred only upon receipt of a contractholder
and/or participant's consent for assumption reinsurance. Beginning in 1997, the
assets of UNUM's defined benefit plan are no longer held in the separate
accounts (see Note 8).
44
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Participating Individual Life Insurance
Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to UNUM's conversion to a stock life insurance
company on November 14, 1986, will remain participating as long as they remain
in force. A Participation Fund Account ("PFA") was established for the sole
benefit of all of Union Mutual's individual participating life and annuity
policies and contracts.
The assets of the PFA are to provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies and
annuity contracts. This line of business participates in the experience of the
PFA and its operations have been excluded from the Consolidated Statements of
Income. The PFA represented approximately 2.3% and 2.5% of consolidated assets
and 2.7% and 2.8% of consolidated liabilities at December 31, 1996, and 1995,
respectively.
Income Taxes
The provision for income taxes includes amounts currently payable and
deferred income taxes, which result from differences between financial
reporting and tax bases of assets and liabilities and are measured using
enacted tax rates and laws. Deferred U.S. income taxes have not been provided on accumulated
earnings of UNUM's foreign subsidiaries. These earnings could generate
additional U.S. tax if remitted to UNUM Corporation. A valuation allowance is established for deferred
tax assets when it is more likely than not that an amount will not be realized.
Foreign Currency Translation
Foreign subsidiaries' balance sheet and income statement accounts
expressed in local functional currencies are translated into U.S. dollars using
ending and quarterly average exchange rates, respectively. The resulting
translation adjustments are reported in a separate component of stockholders'
equity.
Earnings Per Share
The weighted average numberRecognition of shares outstanding usedPremium Revenues and Related Expenses
Group insurance premiums are recognized as income over the period to calculate
earnings per share was approximately 72,969,000, 72,677,000which
the premiums relate. Individual disability premiums are recognized as income
when due. Benefits and 74,158,000 in
1996, 1995 and 1994, respectively. The assumed exercise of outstanding stock
options does notexpenses are matched with earned premiums to result in
recognition of profits over the life of the contracts. This association is
accomplished by recording a material dilutionprovision 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 earnings per share.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.
LettersEarnings Per Share
Effective December 31, 1997, UNUM adopted Financial Accounting Standards
("FAS") No. 128, "Earnings Per Share," which requires dual presentation of
Credit
Inbasic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing
net income available to common stockholders by the normal courseweighted average number of
business, UNUM enters into letterscommon shares outstanding. The weighted average number of credit,
primarilyshares outstanding
used to satisfy capital requirements related to certain subsidiary
transactions. UNUM had outstanding letters of credit of $56.7 millioncalculate basic EPS was approximately 139,852,000, 145,939,000 and
$12.3
million at December 31,145,354,000 in 1997, 1996 and 1995, respectively. NewDiluted 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 In June 1996,Adopted
Effective December 31, 1997, UNUM adopted FAS No. 128 which changed the
Financialcomputation of EPS and requires dual presentation of "basic" and "diluted" EPS.
FAS 128 supersedes Accounting StandardsPrinciples Board ("FASB"APB") issued
Financial Accounting Standard ("FAS")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 establishesestablished accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The statement provides guidance for recognition or derecognition of assets and
45
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
liabilities, focusing on the concepts of control and extinguishment. UNUM is
required to adopt FAS 125 effective January 1, 1997. The
adoption of FAS 125 is
not expected to have a material effect on UNUM's results of operations or
financial position.
In March 1997, the FASB issued FAS No. 128, "Earnings Per Share," which is
intended to simplify the computation and presentation of earnings per share
("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." FAS 128 will eliminate the concept of "primary" EPS and
require dual presentation of "basic" and "diluted" EPS. Diluted EPS under FAS
128 is similar to "fully diluted" EPS as defined by APB 15. UNUM is required to
adopt FAS 128 effective December 31, 1997. As stated in Note 1, under the
caption "Earnings Per Share," the assumed exercise of UNUM's outstanding stock
options does not result in a material dilution of earnings per share.
In March 1997, the FASB issued FAS No. 129, "Disclosures of Information
About Capital Structure," which clarifies disclosure requirements related to the
type, and nature, of securities contained in an entity's capital structure. UNUM
is required to adopt FAS 129 effective December 31, 1997.
NOTE 2. INVESTMENTS
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities," which
provided a one-time opportunity to reassess the appropriateness of the
classifications of securities described in FAS 115, and to reclassify fixed
maturities from the held to maturity category without calling into question the
intent to hold other debt securities to maturity in the future. On December 31,
1995, UNUM reassessed its fixed maturity portfolio and as allowed under the
implementation guidance, reclassified fixed maturities with an amortized cost of
$6,082.8 million and a related unrealized gain of $393.0 million from the held
to maturity category to available for sale. The unrealized gain on the total
available for sale fixed maturity portfolio was $551.9 million at December 31,
1995. In connection with the reclassification of the held to maturity fixed
maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid
claims by $261.2 million to reflect the changes that would have been necessary
if the unrealized gains and losses related to fixed maturities classified as
available for sale had been realized. At December 31, 1996, the unrealized gain
on available for sale fixed maturities was $286.0 million and the related unpaid
claims adjustment was $168.7 million.
The following tables summarize the components of investment income, net
realized investment gains, and changes in unrealized investment gains on
available for sale securities:
46
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
Investment Income
Year Ended December 31,
----------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------ --------- --------- ----------
Fixed maturities:
Available for sale ................................. $642.2 $182.2 $ 87.9
Held to maturity ................................. -- 488.0 548.1
Equity securities available for sale ............... -- 5.3 10.4
Mortgage loans .................................... 112.1 119.9 137.4
Real estate ....................................... 20.0 15.2 15.8
Policy loans ....................................... 10.2 8.6 10.2
Other long-term investments ........................ 7.3 1.6 0.9
Short-term investments .............................. 51.2 27.1 8.5
------ ------ ------
Gross investment income ........................... 843.0 847.9 819.2
Less investment expenses ........................... (16.3) (17.0) (23.9)
Less investment income on participating individual
life insurance policies and annuity contracts ...... (24.5) (24.6) (25.1)
------ ------ ------
Investment income ................................. $802.2 $806.3 $770.2
====== ====== ======
Net Realized Investment Gains
Year Ended December 31,
----------------------------------
(Dollars in millions) 1996 1995 1994
- ---------------------------------------------- --------- --------- ----------
Gross realized investment gains:
Fixed maturities:
Available for sale ........................ $ 22.0 $ 14.2 $ 10.2
Held to maturity ........................... -- 0.1 0.2
Equity securities available for sale ...... -- 253.3 93.1
Mortgage loans, real estate and other ...... 18.2 19.4 13.5
------ ------ ------
Gross realized investment gains ............ 40.2 287.0 117.0
------ ------ ------
Gross realized investment losses:
Fixed maturities:
Available for sale ........................ (29.2) (12.8) (28.8)
Held to maturity ........................... -- (0.7) (6.8)
Equity securities available for sale ...... -- (18.7) (12.2)
Mortgage loans, real estate and other ...... (7.6) (29.7) (23.6)
------ ------ ------
Gross realized investment losses ......... (36.8) (61.9) (71.4)
------ ------ ------
Net realized investment gains ............ $ 3.4 $225.1 $ 45.6
====== ====== ======
47
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
Change in Unrealized Gains on Available For Sale Securities
Year Ended December 31,
--------------------------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------- ----------- ---------- -----------------
Fixed maturities available for sale .................. $ (265.9) $ 612.7 $ (60.8)
Equity securities available for sale .................. 3.4 (131.6) (86.0)
Unpaid claims adjustment .............................. 92.5 (261.2) --
Deferred taxes ....................................... 39.2 (56.4) 47.3
-------- ------- -------
Total change in unrealized gains on available for sale
securities, as included in stockholders' equity ...... $ (130.8) $ 163.5 $ (99.5)
======== ======= =======
Fixed Maturities
The amortized cost and fair values of fixed maturities available for sale
at December 31, 1996, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------ ------------ ------------- ------------- ----------
U.S. Government .................. $ 57.0 $ 3.6 $ -- $ 60.6
States and municipalities ......... 550.2 14.9 (0.8) 564.3
Foreign governments ............... 379.9 32.6 (0.7) 411.8
Public utilities .................. 1,354.7 60.4 (4.2) 1,410.9
Corporate bonds .................. 4,299.7 197.5 (17.1) 4,480.1
Redeemable preferred stocks ...... 3.6 -- (0.7) 2.9
Mortgage-backed securities ...... 11.6 0.5 -- 12.1
-------- ------ ------ --------
Total ........................... $6,656.7 $309.5 $(23.5) $6,942.7
======== ====== ====== ========
The amortized cost and fair values of fixed maturities available for sale
at December 31, 1995, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------ ------------ ------------- ------------- ----------
U.S. Government .................. $ 402.6 $10.3 $ -- $ 412.9
States and municipalities ......... 670.5 23.7 (0.7) 693.5
Foreign governments ............... 229.4 26.1 (0.5) 255.0
Public utilities .................. 1,617.8 117.6 (0.6) 1,734.8
Corporate bonds .................. 5,617.9 377.3 (2.7) 5,992.5
Redeemable preferred stocks ...... 27.8 1.5 (1.2) 28.1
Mortgage-backed securities ...... 17.5 1.1 -- 18.6
-------- ------ ----- --------
Total ........................... $8,583.5 $557.6 $(5.7) $9,135.4
======== ====== ===== ========
48
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
The amortized cost and fair value of fixed maturities available for sale at
December 31, 1996, by contractual maturity date, are shown below. Expected
maturities will differ from contractual maturities since certain borrowers have
the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Fair
(Dollars in millions) Cost Value
- ------------------------------------------------------------------- ------------ ----------
Due in one year or less .......................................... $ 279.4 $ 288.9
Due after one year through five years ........................... 2,181.8 2,292.6
Due after five years through ten years ........................... 3,551.3 3,674.9
Due after ten years ............................................. 632.6 674.2
-------- --------
6,645.1 6,930.6
Mortgage-backed securities (primarily due after 10 years) ...... 11.6 12.1
-------- --------
Total ......................................................... $6,656.7 $6,942.7
======== ========
During 1995, UNUM sold fixed maturities of two issuers classified as held
to maturity with an amortized cost of $4.0 million due to evidence of
significant deterioration of the issuers' creditworthiness, as evidenced by
bankruptcy filings. These sales resulted in a net realized loss of $1.2 million
in 1995. During 1994, UNUM sold fixed maturities of five issuers classified as
held to maturity with an amortized cost of $49.8 million due to evidence of
significant deterioration of the issuers' creditworthiness. These sales resulted
in a net realized loss of $3.0 million in 1994.
Equity Securities
The fair values, which also represent carrying amounts, and the cost of
equity securities available for sale were as follows at December 31, 1996:
Fair
(Dollars in millions) Cost Value
- ------------------------------------------------- -------- -------
Common stocks:
Industrial, miscellaneous and all other ...... $23.8 $31.3
====== ======
Gross unrealized investment gains on equity securities available for sale
totaled $7.5 million and $5.5 million, at December 31, 1996, and 1995,
respectively. There were no gross unrealized investment losses at December 31,
1996, and gross unrealized investment losses totaled $1.4 million, at December
31, 1995.
Mortgages
Effective January 1, 1995, UNUM adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and FAS No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," which defined the principles to measure and record an impaired
loan. When it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of a loan agreement, the loan is deemed
impaired. Once a loan is determined to be impaired, an allowance for probable
losses is established for the difference between the carrying amount of the loan
and its estimated value. The estimated value is based on either the present
value of expected future cash flows discounted using the loan's effective
interest rate, the loan's observable market price, or the fair value of the
collateral. The adoption of FAS 114 and FAS 118 did not have a material effect on UNUM's results of
operations or financial position.
At December 31, 1996, and 1995, impaired loans totaled $50.4 million and
$50.1 million, respectively. Included in the $50.4 million were $38.9 million of
loans which had a related allowance for probable losses of $5.7 million, and a
loan of $11.5 million which had no related allowance for probable losses.
Included in the $50.1 million of impaired loans at December 31, 1995, were $38.4
million of loans which had a related allowance for probable losses of $7.1
million, and a loan of $11.7 million which had no related allowance for probable
losses.
Mortgage loans that were restructured prior to the adoption of FAS 114
amounted to $54.8 million and $59.9 million at December 31, 1996, and 1995,
respectively. Troubled debt restructurings represent loans that are
49
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS (Continued)
refinanced with terms more favorable to the borrower. Interest lost on
restructured loans was not material for the years ended December 31, 1996, 1995
or 1994.
Real Estate and Other
Effective January 1, 1996, UNUM adopted FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. FAS 121 applies to both real estate held for investment and real
estate held for sale. The adoption of FAS 121 did not have a material effect on
UNUM's results of operations or financial position.
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 amountsamounted to
$86.4$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 held for sale amounted to $9.4 million
at December 31, 1996, and $35.5 million at December 31, 1995.
Real estate with a depreciated cost of $7.7$3.5 million and no bonds or
mortagesmortgages were non-income producing for the twelve months ended December 31,
1996.1997. Interest lost on these investments was not material in 1997, 1996 1995 or
1994.1995.
UNUM was committed at December 31, 1996,1997, to purchase fixed maturities and
other invested assets in the amount of $104.3$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 invested assetsmortgage loans and real
estate held for sale were as follows:
Balance at Balance
beginning at end
(Dollars in millions) of year Additions Deductions of year
- ------------------------------------ ---------------------------------------------------- ------------ ------------- -------------------- ------------ ----------
Year Ended December 31, 19961997
Mortgage loans .................. $39.2.................... $ 1.037.7 $ (2.5) $37.73.3 $ (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)( 0.4) (3.9) 14.8
------- ------ ----- ------ ------------- -------
Total ........................... $58.3............................ $ 58.3 $ 0.6 $ (6.4) $52.5$ 52.5
======= ====== ===== ====== ============= =======
Year Ended December 31, 1995
Mortgage loans .................. $43.2.................... $ 43.2 $ 9.2 $(13.2) $39.2$ (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............................ $ 56.4 $ 15.5 $ (13.6) $ 58.3
======= ====== ===== ====== ======
Year Ended December 31, 1994
Fixed maturities held to maturity
and available for sale ......... $ 0.3 $ -- $ (0.3) $ --
Mortgage loans .................. 48.6 8.5 (13.9) 43.2
Real estate held for sale ...... 20.9 0.8 (8.5) 13.2
------ ----- ------ ------
Total ........................... $69.8 $ 9.3 $(22.7) $56.4
====== ===== ====== ============= =======
Additions represent charges to net realized investment gains (losses) less
recoveries and deductions represent reserves released upon disposal or
restructuring of the related asset.
50NOTE 4. RESERVES
Reserves for Future Policy Benefits
Reserves for future policy benefits are calculated by the net-level
premium method and are based on UNUM's expected morbidity, mortality and
interest rate assumptions at the time a policy is issued. These reserves
represent the portion of premiums received, accumulated with interest and held
to provide for claims that have not yet been incurred. The reserve assumptions
are periodically reviewed and compared with actual experience and may be
revised if it is determined that future expected experience is 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTSCorporation and Subsidiaries
environment. UNUM periodically uses common derivative financial instruments suchadjusts 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 options, futuresfollows:
(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 forward exchange contractsclaims expenses incurred and
related to hedge certain risks
associated with anticipated purchasesprior 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 salesassumptions of investmentsinterest rates, morbidity, mortality and certain
payments denominatedexpense
costs, and changes in foreign currencies, primarily British pound sterling,
Canadian dollar and Japanese yen. These derivative financial instruments are
used to protect UNUM from the effect of market fluctuations in interest and
exchange rates, between the contract date and the date on which the hedged
transaction occurs. In using these instruments, UNUM is subjectprimarily related to the
off-balance-sheet risk thatdisability reserves of UNUM's United Kingdom-based affiliate, UNUM Limited. Due
to the counterpartieslong 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 transactions will failcommon
stock portfolio, and adjustments to performstrengthen certain disability reserves in
1995.
Beginning in 1995, as contracted.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 manages this risk by only entering into contractshas reflected those
adjustments in the liability balances with highly rated institutions and listed exchanges. UNUM does not hold
derivative financial instruments for the purposecorresponding credits or charges,
net of trading.
At December 31, 1996, UNUM had open interest rate futures contracts with
notional amountsrelated deferred taxes, reported as a component of $178.2 million to hedge anticipated sales of investmentsunrealized gains in
1997. These contracts had a related net unrealized gain of $1.6 million. At
December 31, 1995, UNUM had no open derivative financial instruments.stockholders' equity.
NOTE 5. SALE OF TAX SHELTEREDTAX-SHELTERED ANNUITY BUSINESS
On October 1, 1996, UNUM Life Insurance Company of America ("UNUM America") and First UNUM Life Insurance Company ("First UNUM") closed the sale of their
respective group tax-sheltered annuity ("TSA") businesses to The Lincoln
National Life Insurance Company and Lincoln Life & Annuity Company of New York
("Lincoln"), both subsidiaries of Lincoln National Corporation. The sale
involved approximately 1,700 group contractholders and assets under management
of approximately $3.3 billion. The contracts havewere initially been reinsured on an
indemnity basis. Upon consent of the TSA contractholders and/orand participants, the
contracts will beare
45
considered reinsured on an assumption basis, legally releasing UNUM America and
First UNUM from future contractual obligation to the respective contractholders
and/orand participants.
To effect the sale of the TSA business, UNUM transferred into a trust
account held for the benefit of Lincoln approximately $2,690 million of assets.
The assets transferred consisted of approximately $1,826 million of short-
term investments, $589 million of fixed maturities, and $275 million of cash.
The amount of assets in the trust will increase or decrease in conjunction with
the on-going activity in participant accounts, and assets will be released from
the trust to Lincoln upon consents for assumption reinsurance. UNUM has recorded a deposit asset in its Consolidated Balance Sheet
representing the assets remaining in the trust, which supportssupport the TSA contracts of those
contractholders and/orand participants that have not given consent for assumption
reinsurance. At December 31, 1996,1997, the deposit asset related to the TSA
transaction was approximately $2,651$264 million.
The sale resulted in a deferred pretax gain of $80.8 million, which will beis
being recognized in income in proportion to contractholder and/orand participant
consents for assumption reinsurance, the majority of which management believes will occur
during 1997. The purchase price (ceding commission) paid upon closing was
approximately $71 million, and the transaction generated statutory capital of
approximately $160 million. As of March 1,reinsurance. Through December 31, 1997, consent for
assumption reinsurance has been provided by TSA contractholders and/orand
participants owning approximately 60%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, exceptexpect per common share data) 1997 1996 1995
1994
- ------------------------------------------------------ --------- --------- ------------------------------------------------------------- ----------- ----------- -----------
Revenues .......................................... $206.7 $247.6 $238.1......................................... $ 126.2 $ 206.7 $ 247.6
Net income ................................................................................. $ 48.4 $ 12.8 $ 31.1
$ 29.9
Net income per common share ........................share:
Basic ........................................... $ 0.180.35 $ 0.430.09 $ 0.400.21
Diluted ......................................... $ 0.34 $ 0.09 $ 0.21
======== ======== ========
51
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The results shown above for the year ended December 31, 1997, 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 basedBermuda-based reinsurance specialist, for reinsurance coverage
of the active life reserves of UNUM America's existing United States
non-cancellable individual disability ("ID") block of business. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM's announcement in late 1994 that it would no longer market the
non-cancellable form of ID coverage in the United States.
The agreement is a finite reinsurance arrangement that transfers
liabilities to Centre Re based on the level of statutory reserves. At December
31, 1996, active life reserves of $427 million and reserves established for
claims in 1996 of $137 million were ceded to Centre Re. Under the agreement,
Centre Re
has an obligation to fundabsorb losses within a defined risk layer, while UNUM will retainmust
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
claims experience upfrom the reinsured block. Under the agreement, UNUM funds a trust
account, initially established in late 1996, with assets equal to a certain
threshold. This thresholdthe amount representsof
GAAP reserves related to the existencereinsured block plus the amount of anits experience
layer. The value of UNUM's experience layer increases or decreases in
conjunction with a valuethe underlying operating results of $195 million at December 31, 1996.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 has recordedreflects the
carrying value of the experience layer onin its Consolidated Balance Sheet as a
deposit asset.
UNUM funded its obligation under the agreement by transferring assets totalingasset, which at December 31, 1997, totaled approximately $403 million into a trust account$347 million.
Changes in late December 1996. The
assets transferred were equal to the experience layer plus reserves, determined
under generally accepted accounting principles, net of related deferred
acquisition costs. Future net cash flowsderived from the underlying operating results
of the reinsured block will be transferred
to/are reflected in fees and other income and realized
gains or losses from thesales of trust account and, together with changesassets are reflected as realized investment
gains (losses) in reserve levels, will
determine the valueUNUM's Consolidated Statement of UNUM's deposit asset.Income. Changes in the
deposit asset will
flow throughexperience 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 results of operations. The agreement generated slightly more
than $200 million of statutory capital.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 1995 and 19941995 was as follows:
Year Ended December 31,
--------------------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------- ----------- ----------- ----------
Premiums earned:
Direct .................. $2,973.9 $2,842.9 $2,663.1
Assumed ............... 252.9 241.5 170.7
Ceded .................. (106.4) (66.2) (112.5)
-------- -------- --------
Premiums earned ...... $3,120.4 $3,018.2 $2,721.3
======== ======== ========
Premiums written:
Direct .................. $3,008.1 $2,877.2 $2,702.7
Assumed ............... 289.3 250.4 170.9
Ceded .................. (131.0) (64.4) (112.6)
-------- -------- --------
Premiums written ...... $3,166.4 $3,063.2 $2,761.0
======== ======== ========
(Dollars in millions) 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 1995 and 1994,1995, recoveries
recognized under reinsurance agreements reducedoffset benefits to policyholders by
$309.7 million, $90.8 million $58.9 million and $53.3$58.9 million, respectively.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
Business Restructuring
Charges of $6.0 million, $7.2 million $8.4 million and $14.4$8.4 million were recorded in
1997, 1996 and 1995, respectively. The charge in 1997 was related to a
management and 1994, respectively.field office reorganization within the North American
reinsurance operations, and consisted of $4.0 million of lease exit costs, $1.4
million of severance related costs, and $0.6 million of abandoned assets. The
charge in 1996 was related to the merger of Commercial Life Insurance Company
("Commercial Life") into 52
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES (Continued)
UNUM America, and consisted of $2.8 million of severance costs for 120 employees
and $4.4 million of lease exit costs.America. The chargescharge in 1995 and 1994 relaterelated to the
acceleration of organizational changes within UNUM America and the decision to
discontinue the individual disability non-cancellable product. Partially
offsetting the charge recorded in 1995 was a $3.4 million curtailment gain, related to
workforce reductions in UNUM Corporation's noncontributory defined benefit
pension plan. As of December 31, 1996,1997, the liability carried in the
Consolidated Balance Sheet for all three charges was $5.3$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)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 or $0.36 per share for 1996.
The charges includeincluded the write-off of certain
intangible assets, primarily deferred acquisition costs, totaling $17.0
million. These intangible assets have
beenwere deemed unrecoverable primarily due to the
expectation of continued losses in the Association Groupassociation group disability business.
Additionally, in conjunction with the completion of a review of UNUM's
discontinued product portfolio, a $22.4 million charge was taken to establish a
reserve for the present value of expected future losses on certain discontinued
products. Future lossesLosses for these products will beare charged to the reserve at the time the losses are
realized. The products incorporated in the charge consist of certain
discontinued special risk, retirement and medical products.
UNUM is pursuing the sale of some of
these discontinued product lines.47
NOTE 8. NOTES PAYABLE
Notes payable consisted of the following 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 repay 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 the 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 $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, 1996,1997, UNUM had a noncontributory defined benefit pension
plan covering substantially all domestic employees, excluding employees of
Colonial Companies, Inc. ("Colonial Companies") and Duncanson & Holt, Inc.
("D&H"), who were covered under separate plans through 1996. The plan provided
benefits based on the employee's years of service and compensation during the
highest five consecutive years out of the last ten years of employment. Plan
assets, which were held in UNUM's separate accounts, consisted primarily of
group annuity contracts and 224,392 shares of UNUM Corporation common stock.
UNUM funds its pension plan in accordance with the requirements of the Employee
Retirement Income Security Act of 1974, as amended.
Effective January 1, 1997, UNUM replaced its existing pension plans with a
new noncontributory defined benefit pension
plan ("Lifecycle Plan") covering substantially all domestic UNUM employees,
including employees of Duncanson & Holt, Inc. ("D&H") and Colonial Companies,
and D&H. Under theInc. ("Colonial Companies"). The Lifecycle Plan a new benefit formula is used, resulting inprovides benefits being earned more consistently over an employee's career, and is based on the
employee's age at retirement, years of service and earnings during the highest
five of the last ten years of employment. UNUM funds its pension plan in
accordance with the 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.
The calculationparticipants,
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 postretirement benefit plan assets and actuarially determined
obligations from December 31, 1996,to September 30. The change in measurement date
had no effect on 1997 or prior years' net pension and periodic postretirement
benefit obligations shown below
is based on the Lifecycle Plan, reflecting the impacts of adding Colonial
Companies and D&H employees to the plan, merging Colonial Companies' previous
defined benefit plan, and changes in certain actuarial assumptions related to
the new benefit formula.
53
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)costs.
Net pension cost included the following components:
Year Ended December 31,
-----------------------------------
(Dollars in millions) 1997 1996 1995
1994
- ------------------------------------------------------ ------------------------------------------------------------------- ---------- ---------- ---------
Service cost--benefits earned during the year ............... $ 12.9 $ 13.5 $ 7.7 $ 9.2
Interest cost on projected benefit obligation ............... 15.2 15.1 12.3 11.6
Actual return on plan assets .................................................. (61.4) (57.1) (42.5) 3.3
Net amortization and deferral .............................................. 33.8 36.9 28.2
(16.5)
Curtailment gain .......................................................................... -- (3.4) -- ------ ------ ------( 3.4)
------- ------- -------
Net pension cost ...................................................................... $ 0.5 $ 8.4 $ 2.3
$ 7.6
====== ====== ============= ======= =======
The funded status of the plan and amounts recognized in UNUM's
Consolidated Balance Sheets, as determined by the plan's actuaries, using the
applicable measurement dates, were as follows:
December 31,
------------------------
(Dollars in millions) 1997 1996
1995
- ------------------------------------------------------------------ -------------------------------------------------------------------------------- ----------- -----------
Actuarial present value of benefit obligation:
Vested benefit obligation ............................................................................ $ 196.9 $ 166.9
$ 174.4
======= =============== ========
Accumulated benefit obligation .................................................................... $ 206.6 $ 189.3
$ 178.7
======= =============== ========
Projected benefit obligation for service rendered to date ...... $(203.2) $(183.9)......... $ (230.4) $ (203.2)
Plan assets at fair value ................................................................................ 324.2 267.7
192.7
------- --------------- --------
Projected benefit obligation less than plan assets ............................ 93.8 64.5 8.8
Unrecognized net gain ....................................................................................... (86.8) (54.7) (0.7)
Unrecognized prior service cost .................................................................... (25.8) (28.4) (17.0)
Unamortized net obligation ............................................................................ 1.5 1.8
2.1
------- --------------- --------
Accrued pension cost ....................................................................................... $ (17.3) $ (16.8)
$ (6.8)
======= =============== ========
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.25% and 4.75%, respectively, at September
30, 1997, and 7.50% and 5.00%, respectively, at December 31, 1996, and 7.25% and 4.70%, respectively, at December 31, 1995.1996. The expected
long-term rate of return on plan assets was 9.0% in 1997, 1996 1995 and 1994.1995. 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, 1997, 1996 1995 and 1994.1995.
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 $10.0 million and $8.2$10.0 million for the years
ended December 31, 1997, 1996 1995 and 1994,1995, respectively. At December 31, 1996,1997, and
19951996 the liability associated with these plans was $83.2 million and $80.9
million, and $72.4 million,
respectively.
49
Retirement Savings Plans
UNUM has several retirement savings and profit sharing plans for
substantially all full-time and part-time employees who work 1,000 hours a year
and have been employed for at least one year. Dependent upon which
54
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
plan the employee participates in, eligible employees may contribute primarily
up to 10% of their annual base salary, and UNUM matches a portion of each
employee's contribution up to 6% of the employee's compensation. Employees may
become 100% vested immediately upon becoming eligible to participate, or
incrementally over a five year period. Expense for these plans amounted to $8.4
million in 1996, 1995 and 1994, respectively.
Effective January 1, 1997, UNUM introduced a single retirement savings
plan for all domestic employees who meet the eligibility requirement of one
year of service, including all employees eligible under the former plans.service. Dependent upon the employee's annual earnings, eligible
employees may contribute up to 15% of their annual compensation, including
incentive payouts. UNUM will matchmatches 100% of the employee's contribution up to 3% of
the employee's compensation, plus 50% of the employee's contribution on the
next 2% of the employee's compensation, to a maximum of 4%. 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 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS
Stock-Based Compensation Plans10. 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 number of authorized shares of common
stock to 240 million from 120 million. The stock split was completed on June 2,
1997, through the distribution of one additional share for each share of stock
already issued, to holders of record on May 19, 1997. Accordingly, all numbers
of common shares and per common share data 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 January 1, 1996, UNUM adopted FAS No. 123, "AccountingFebruary 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 Stock-Based Compensation." FAS 123 established financial accounting and
reporting standards for stock-based employee compensation plans. The statement
defines a new methodrepurchase.
Changes in the number of accounting for employee stock compensation plans using a
fair value based method, under which compensation cost is measured and
recognized in results of operations. Alternatively, FAS 123 allows an entity to
retain the accounting for employee stock compensation plans defined under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting forshares 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 Issued
to Employees." UNUM retained the accounting defined in APB No. 25, under which
no compensation expense is recognized for fixed stock option grants. As
required, UNUM will disclose the pro forma effects of stock-based compensation
using the fair value based method defined under FAS 123.Options
At December 31, 1996,1997, 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 ....................................... $238.0 $281.1..................................... $ 370.3 $ 238.0 $ 281.1
Pro forma .......................................... $231.9 $277.2....................................... $ 361.4 $ 231.9 $ 277.2
Earnings per common share:
As reported ............................................................................
Basic .......................................... $ 3.262.65 $ 3.871.63 $ 1.93
Diluted ........................................ $ 2.59 $ 1.61 $ 1.92
Pro forma
Basic .......................................... $ 3.182.58 $ 3.811.59 $ 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-
pricingoption-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
55
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)
Because some options vest over several years and additional awards
generally are made each year, the pro forma amounts above may not be
representative of the effects on net income for future years.
The 1987 Executive Stock Option Plan ("Option Plan") provided for granting
to officers and key employees options to purchase UNUM Corporation common stock
over ten years. Options were granted at the discretion of the Compensation
Committee of the Board of Directors ("the Committee") and had vesting schedules
of one to four years. The number of shares subject to options under the Option
Plan could not exceed 2.55.0 million. Grants are no longer made under this plan.
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for
granting of options to officers, non-
employeenon-employee directors of UNUM Corporation and
key employees, to purchase UNUM Corporation common stock over ten years.
Options may be granted annually at the discretion of the Committee and vest in
one to five years.
The Incentive Plan also provides for granting to key officers restricted
stock awards whose vesting is contingent upon UNUM's achieving prescribed
financial performance objectives, with the exception of 5,80011,600 shares granted
in 1996 20,200and 40,400 shares granted in 1995, and 10,000 shares granted in 1994, which will vest upon the grantee
remaining in UNUM's employ for a specified period of time. Plan participants
are entitled to voting rights on their respective shares at grant. The
compensation cost related to restricted stock grants was not material in 1997,
1996 1995 and 1994.1995.
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 6.813.6 million, including both options and shares of restricted stock. At
December 31, 1997, 1996 and 1995, and 1994, 692,5181,603,580 shares, 1,680,2351,385,036 shares and
2,511,1453,360,470 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 3.57.0 million. At December 31, 1997, and 1996, 3,495,0005,003,480
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 150300 options to purchase UNUM
Corporation common stock. The options will vest to the employee nine years from
the date of grant. Vesting may be accelerated to an earlier date if it is determined that UNUM has
attainedat the
1998 Goals.discretion of the plan administrator. Grants of 102,500166,200 shares, 205,000 shares
and 1,105,3502,210,700 shares were made in 1997, 1996 and 1995, respectively. AdditionalNo further
grants will be made in 1997. The
number of shares subject to options under this plan cannot exceed 1.5 million.plan.
For all of UNUM's stock basedstock-based compensation plans, the exercise price of
each option is not less than 100% of the fair market value of UNUM's stock on
the date of grant.
5651
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)
A summary of the status of UNUM's four stock-based compensation plans as
of December 31, 1997, 1996 1995 and 1994,1995, and changes during the years then ended is
presented below:
Restricted
(Per share amounts are weighted-average) Options Stock
- -------------------------------------------------------- ------------ ------------------------------------------------------------------------- --------------- -------------
Outstanding at January 1, 1994 ........................ 3,402,954 146,425
19941995 ........................... 7,706,044 219,900
1995 Activity:
Granted at $50.92$20.53 per share ........................... 884,375.............................. 4,400,000 --
Granted for restricted stock at $50.05$21.50 per share ............... -- 46,850141,900
Lapse of restrictions on restricted stock ............................ -- (80,800)(66,200)
Exercised at $24.99$12.88 per share ........................ (282,729)............................ (1,082,376) --
Forfeited at $46.08$23.43 per share for options ............ (151,578) (2,525)................ (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, 1994 ..................... 3,853,022 109,950
---------- --------
1995 Activity
Granted at $41.06 per share ........................... 2,200,000 --
Granted for restricted stock at $42.99 per share ...... -- 70,950
Lapse of restrictions on restricted stock ............ -- (33,100)
Exercised at $25.75 per share ........................ (541,188) --
Forfeited at $46.85 per share for options ............ (314,200) (5,600)
---------- --------
Outstanding at December 31, 1995 ..................... 5,197,634 142,200
---------- --------
1996 Activity
Granted at $60.75 per share ........................... 1,080,690 --
Granted for restricted stock at $59.36 per share ...... -- 93,300
Exercised at $37.72 per share ........................ (637,261) --
Forfeited at $46.78 per share for options ............ (271,741) (32,600)
---------- --------
Outstanding at December 31, 1996 ..................... 5,369,322 202,9001997 ......................... 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 1994, was $45.85, $41.81 and $40.32$20.91 per share, respectively.
The number and weighted-average exercise price of exercisable shares as of
December 31, 1997, 1996 and 1995 and 1994 was 2,381,5924,686,562 shares at $41.45$22.71 per share,
2,108,0604,763,184 shares at $39.13$20.73 per share and 1,975,2194,216,120 shares at $32.54$19.57 per share,
respectively.
The weighted-average fair value of options granted during the years ended
December 31, 1997, 1996, and 1995 was $13.83$8.56, $6.92 and $10.20,$5.10, respectively.
57
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)
The following table summarizes information about stock options outstanding
at December 31, 1996:1997:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- ---------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 12/31/9697 Contractual Life Exercise Price at 12/31/9697 Exercise Price
- ------------ -------------- ------------------- ------------------- --------------------------- ------------------ ------------------ ------------- -----------------
$10$ 5 to 30 487,086 3.49 $23.38 487,086 $23.38
3115 632,919 2.69 $ 11.93 632,919 $ 11.93
16 to 48 2,414,512 7.35 39.43 970,009 38.78
4924 3,758,125 6.47 19.79 1,631,160 19.85
25 to 72 2,467,724 7.81 56.57 924,497 53.7637 4,142,331 6.90 28.43 2,422,483 27.45
38 to 54 1,917,770 9.28 39.33 -- --
----------- ---------- ---------- ------ ------- ---------- -------
$10---- -------- --------- --------
$ 5 to 72 5,369,322 7.21 $45.85 2,381,592 $41.4554 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 conjunction with their options for those
years. If a change in control of UNUM Corporation, as defined in the plans,
should occur, the option holder can exercise the LSAR. An LSAR is meant to
compensate an officer if the associated options lose value due to a change in
control by allowing the officer to receive payment for the difference between
the option exercise price and the highest price paid per share in connection
with the change in control. As an underlying stock option is exercised, the
LSARs are automatically canceled. At December 31, 1997, 1996 1995 and 1994,1995, there
were 398,300557,800 LSARs, 480,825796,600 LSARs and 590,275961,650 LSARs outstanding, respectively.
Annual Incentive Plans
UNUM has several annual incentive plans for certain employees and executive
officers that provide additional compensation based on achievement of
predetermined annual corporate and affiliate financial and non-financial goals.
In 1996, 1995 and 1994, expense for these plans was $41.7 million, $19.9 million
and $7.5 million, respectively.
NOTE 10. INCOME TAXES
A reconciliation of income taxes computed by applying the federal income
tax rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
Year Ended December 31,
-------------------------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------------------------- ---------- ----------------- ----------
Tax at federal statutory rate of 35% ...... $119.6 $ 133.7 $ 69.5
Tax-exempt income ........................ (18.8) (30.0) (32.0)
Prior years' taxes ........................ (1.2) (6.6) --
State income tax ........................... 2.5 3.8 2.2
Realized investment gains .................. -- (5.0) (1.3)
Other .................................... 1.5 4.9 5.5
------ ---- ------
Income taxes .............................. $103.6 $ 100.8 $ 43.9
====== ==== ======
5852
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. INCOME TAXES (Continued)
Deferred income tax liabilitiesCorporation and assets consist of the following:
December 31,
--------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------ --------- --------
Deferred tax liabilities:
Deferred policy acquisition costs .................. $210.7 $321.6
Policy reserve adjustments ........................ 106.5 --
Net unrealized gains .............................. 101.7 174.0
Value of business acquired ........................ 19.8 17.7
Invested assets .................................... 9.6 10.9
Other ............................................. 11.0 16.0
------- -------
Gross deferred tax liabilities .................. 459.3 540.2
------- -------
Deferred tax assets:
Alternative minimum tax credit carryforwards ...... 1.1 29.0
Policy reserve adjustments ........................ -- 65.9
Net realized losses .............................. 17.4 25.1
Postretirement benefits ........................... 26.7 22.1
Deferred gains .................................... 28.5 --
Accrued liabilities .............................. 27.0 --
Other ............................................. 26.8 12.1
------- -------
Gross deferred tax assets ........................ 127.5 154.2
Less valuation allowance ........................... 10.0 6.0
------- -------
Net deferred tax assets ........................... 117.5 148.2
------- -------
Net deferred tax liability ........................ $341.8 $392.0
======= =======
Deferred income taxes relating to cumulative net unrealized gains on
available for sale fixed maturity and equity securities were $101.7 million,
$174.0 million and $27.1 million at December 31, 1996, 1995 and 1994,
respectively.
Prior to the Tax Reform Act of 1984 ("1984 Act"), half the excess of the
tax basis gain from operations of a life insurance company over its taxable
investment income was currently taxable. The other half was set aside in a
Policyholders Surplus Account, together with certain special life insurance
company deductions. The cumulative amount in the Policyholders Surplus Account
as of December 31, 1983, was frozen by the 1984 Act and amounted to $31.8
million at December 31, 1996. Any direct or indirect distributions from this
account would be taxed at current tax rates; however, no provision has been made
for related taxes. If the amount set aside in this account were taxed at the
current rate at December 31, 1996, for all life insurance subsidiaries, the tax
would have amounted to $11.1 million.
UNUM's Consolidated Statements of Income for 1996, 1995 and 1994, included
the following amounts of foreign income and related income tax expense:
Year Ended December 31,
------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------ -------- --------- -------
Foreign income ............ $27.4 $ (1.2) $24.2
====== ====== ======
Income tax expense (credit):
Current .................. $10.4 $ 1.4 $ 0.7
Deferred .................. 1.8 (0.2) 9.7
------ ------ ------
Total ..................... $12.2 $ 1.2 $10.4
====== ====== ======
59
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. INCOME TAXES (Continued)
UNUM subsidiaries had operating loss carryforwards totaling $3.6 million as
of December 31, 1996. The operating loss carryforward will expire, if not
utilized, in 1999 through 2002.
NOTE 11. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1996, and 1995:
December 31,
--------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------------- --------- --------
Short-term debt:
Commercial paper, with weighted average interest rates of
5.5% in 1996 and 5.9% in 1995 .............................. $60.6 $82.4
Other notes payable, with weighted average interest rates of
0.7% in 1996 and 1.0% in 1995 .............................. 8.6 29.1
Medium-term notes payable, due 1997, with interest rates
ranging from 6.0% to 6.7% ................................. 48.5 15.0
------ ------
Total short-term debt .................................... 117.7 126.5
------ ------
Long-term debt:
Medium-term notes payable, due 1998 to 2024, with interest
rates ranging from 5.1% to 7.5% ........................... 242.1 290.4
Monthly income debt securities, due 2025, with interest rate
of 8.8%, $172.5 million issued net of unamortized offering
costs of $5.4 million in 1996 and $5.6 million in 1995 ...... 167.1 166.9
------ ------
Total long-term debt .................................... 409.2 457.3
------ ------
Total notes payable ....................................... $526.9 $583.8
====== ======
At December 31, 1996, UNUM Corporation had a $500 million committed
revolving credit facility that expires on October 1, 2001. UNUM's commercial
paper program is supported by the revolving credit facility and is available for
general liquidity needs, capital expansion, acquisitions or stock repurchase.
The committed revolving credit facility contains certain covenants which, among
other provisions, require maintenance of certain levels of stockholders' equity
and limits on debt levels.
Aggregate maturities of notes payable are as follows: 1997-$117.7 million;
1998-$68.0 million; 1999-$21.5 million; 2000-$60.0 million; thereafter-$259.7
million.
NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS
Effective October 23, 1996, UNUM's Board of Directors approved an expansion
of the Company's stock repurchase program to 6.0 million shares by authorizing
an additional 3.7 million shares. At December 31, 1996, approximately 4.5
million shares of common stock remained authorized for stock repurchase. During
1996, UNUM acquired approximately 1.9 million shares of its common stock in the
open market at an aggregate cost of $119.1 million. UNUM did not acquire any
shares in the open market in 1995. During 1994, UNUM repurchased 3.9 million
shares in the open market at an aggregate cost of $183.3 million.
Under UNUM's stock-based compensation plans and the plans of Colonial
Companies (see Note 9), 730,561 shares, 612,138 shares and 329,579 shares were
issued in 1996, 1995 and 1994, respectively.Subsidiaries
Preferred Stock Purchase Rights
UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan,
each Right, under certain specific circumstances, entitles the holder to purchase one
one-hundredth of a share of Series A Junior Participating
60
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS (Continued) Preferred Stock at a
purchase price of $150. The Rights become exercisable at a specified time after
(1) a person or group acquires 10% or more of UNUM Corporation common stock or
(2) a tender or exchange offer for 10% or more of UNUM Corporation common
stock. The Rights expire at the close of business on March 13, 2002, unless
earlier redeemed by the Company under certain circumstances at a price of $0.01
per Right.
NOTE 13.11. DIVIDEND RESTRICTIONS
UNUM is subject to various state insurance regulatory restrictions that
limit the maximum amount of dividends available from its United States
domiciled insurance subsidiaries without prior approval. The amount available
under current law for payment of dividends during 19971998 to UNUM Corporation from
all U.S. domiciled insurance subsidiaries without state insurance regulatory
approval is approximately $153$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 $1,205$1,186 million and $1,149$1,205 million, at
December 31, 1996,1997, and 1995,1996, 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
$33 million for 1996, 1995, and 1994, respectively. State insurance regulatory authorities prescribe statutory
accounting practices that differ in certain respects from generally accepted
accounting principles. The significant differences relate to deferred
acquisition costs, deferred income taxes, non-admitted asset balances,
required investment risk reserves and reserve calculation assumptions. UNUM
Corporation also has the ability to draw a dividend from its United Kingdom
based affiliate, UNUM Limited, subject to certain U.S. tax consequences.Limited.
NOTE 14. LITIGATION
In12. INCOME TAXES
A reconciliation of income taxes computed by applying the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1996. In some instances, these
proceedings include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position or the consolidated operating results of UNUM.
On December 29, 1993, UNUM filed a suit in the United States District Court
for the District of Maine, seeking a federal income
tax refund. The suit is
based on a claimrate 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 deduction in certaindeferred tax liability of approximately $11
million that arose prior tax years, for $652 million in
cash and stock distributed to policyholders in connection with the 1986
conversion of Union Mutual Life Insurance Company to a stock company. UNUM has
fully paid, and provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure.
UNUM believes its claims are meritorious, and has appealed the decision1984, which related to the United States Courtpolicyholders' surplus
accounts of AppealsUNUM's life insurance subsidiaries, 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 First Circuit.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 ultimate recovery,operating loss carryforwards will expire, if any, cannot be determined at this time.not
utilized, in 1999 through 2003.
NOTE 15.13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values are based on quoted market prices, when available. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. These valuation
techniques require management to develop a significant number of assumptions,
including discount rates and estimates of future cash flow. Derived fair value
estimates cannot be substantiated by comparison to independent markets or to
disclosures by other companies with similar financial instruments. These fair
value disclosures do not purport to be the amount that could be realized in
immediate settlement of the financial instrument.
6154
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)Corporation and Subsidiaries
The following table summarizes the carrying amounts and fair values of
UNUM's financial instruments at December 31, 1996,1997, and 1995:1996:
1997 1996
1995
--------------------------- ----------------------------------------------------- -----------------------------
Carrying Fair Carrying Fair
(Dollars in millions) Amount Value Amount Value
- ----------------------------------------- ----------- ----------- ----------- -------------------------------------------------------------- ------------- ------------- ------------- -------------
Financial assets:
Fixed maturities available for sale ... $6,942.7 $6,942.7 $9,135.4 $9,135.4............ $ 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
25.2 25.2
Mortgage loans ......................................................... 1,131.0 1,243.7 1,132.1 1,213.4
1,163.4 1,274.9
Policy loans ........................................................... 128.5 128.5 232.9 232.9
219.2 219.2
Short-term investments ........................................ 99.7 99.7 123.4 123.4
896.7 896.7
Cash ............................................................................ 47.9 47.9 77.0 77.0 42.5 42.5
Accrued investment income .................................. 160.3 160.3 166.1 166.1
208.5 208.5
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
$ 400.0 $ 440.0
With no defined maturities ........................... 332.0 328.0 2,901.0 2,839.0 3,031.0 2,967.0
Individual annuities and
supplementary contracts not
involving life contingencies ......................... 67.1 67.1 76.2 76.2
81.4 81.4
Notes payable .......................................................... 635.8 656.0 526.9 542.5 583.8 610.8
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Fixed Maturities Available for Sale: Fair values for fixed maturities are
based on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality and maturity of the investments.
Equity Securities Available for Sale: Fair values for equity securities
available for sale are based on quoted market prices and are reported in the
Consolidated Balance Sheets at these values.
Mortgage Loans: Fair values for mortgage loans are estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar mortgage loans to borrowers with similar credit ratings and
maturities. Mortgage loans with similar characteristics are aggregated for
purposes of the calculations.
Policy Loans, Short-term Investments, Cash, Accrued Investment Income and
Deposit Assets: Fair values for these instruments approximate the carrying
amounts reported in the Consolidated Balance Sheets.
Investment-type Insurance Contracts: Fair values for liabilities under
investment-type insurance contracts with defined maturities are estimated
using discounted cash flow calculations based on interest rates that would be
offered currently for similar contracts with maturities consistent with those
remaining for the contracts being valued. Fair values for liabilities under
investment-type insurance contracts with no defined maturities are the amounts
payable on demand after surrender charges at the balance sheet date.
62
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of liabilities under all insurance contracts
(investment-type and other than investment-type) are taken into consideration
in UNUM's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
Individual Annuities and Supplementary Contracts not Involving Life
Contingencies: Fair values approximate the carrying amounts reported in other
policyholder funds in the Consolidated Balance Sheets.
Notes Payable: Fair values of short-term borrowings approximate the carrying
amount. Fair values of long-term notes are estimated using discounted cash
flow analyses based on UNUM's current incremental borrowing rates for similar
types of borrowing arrangements.
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, and the Pacific Rim.Rim and Argentina.
Through its affiliates, UNUM is the leading provider of group long term
disability insurance, its principal product, in the United States and the
United Kingdom. Products are marketed through sales personnel, independent
contractors and brokers, and specialty agents. UNUM targets sales of its
disability products to executive, administrative and management personnel, and
other professionals such as doctors, attorneys,educators, consultants, health care providers,
accountants and engineers.
To more clearly reflect UNUM's management of its businesses and to more
appropriately group its product portfolios, UNUM began reporting its operations,
effective January 1, 1995, principally in four business segments: Disability
Insurance, Special Risk Insurance, Colonial Products and Retirement Products.
For comparative purposes, 1994 information was previously restated to reflect
reporting in these segments.
The Disability Insurance segment includes disability products offered in
North America, the United Kingdom and Japan including: group long term
disability, group short term disability, individual disability, Association
Group disability, disability
reinsurance operations and long term care insurance. The Special Risk Insurance
segment includes group life, special risk accident insurance, non-disability
reinsurance operations, reinsurance underwriting management operations and
other special risk insurance products. The Colonial Products segment includes
Colonial Companies, Inc.Life & Accident Insurance Company and subsidiaries, which offer,
payroll-deducted, voluntary employee benefits
includingprimarily through payroll deduction, accident and sickness, disability, cancer
and life insurance products to employees at their worksites. The Retirement
Products segment includes tax shelteredproducts 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, all of which are no
longer actively marketed by UNUM.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.
6357
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. SEGMENT INFORMATION (Continued)
Summarized financial information for the four business segments and
Corporate is as follows:
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------ ----------- ----------- -----------
Revenues:
Disability Insurance ............ $2,386.2 $2,472.8 $2,116.5
Special Risk Insurance ......... 811.9 750.7 647.8
Colonial Products ............... 545.5 527.3 473.9
Retirement Products ............ 283.0 357.8 369.4
Corporate ........................ 16.1 14.3 5.0
-------- -------- --------
Total revenues .................. $4,042.7 $4,122.9 $3,612.6
======== ======== ========
Income (loss) before income taxes:
Disability Insurance ............ $ 215.3 $ 217.0 $ 56.2
Special Risk Insurance ......... 79.2 60.3 65.9
Colonial Products ............... 92.4 87.7 62.7
Retirement Products ............ 1.4 45.5 42.0
Corporate ........................ (46.7) (28.6) (28.2)
-------- -------- --------
Income before income taxes ...... 341.6 381.9 198.6
Income taxes ..................... 103.6 100.8 43.9
-------- -------- --------
Net income ..................... $ 238.0 $ 281.1 $ 154.7
======== ======== ========
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
1995 1994
- --------------------------------------------------- ------------ ------------ ------------------------------------------------------------------ ------------- -------------
Identifiable Assets:
Disability Insurance ........................... $7,846.8 $7,280.3 $6,131.9.............................. $ 8,546.6 $ 7,846.8
Special Risk Insurance .................................................... 1,581.8 1,297.1 1,056.5 846.8
Colonial Products ............................................................... 1,334.7 1,094.1 996.5 846.2
Retirement Products .......................................................... 1,115.9 4,478.8
4,717.4 4,504.0
Corporate ................................................................................ 254.0 396.7 372.9 451.3
Individual Participating Life and Annuity ............... 367.3 354.0
364.2 347.0
--------- --------- ------------------- ----------
Total assets ................................. $15,467.5 $14,787.8 $13,127.2
========= ========= =========..................................... $ 13,200.3 $ 15,467.5
========== ==========
6458
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Corporation and Subsidiaries
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for 19961997 and 1995:1996:
1996
--------------------------------------------1997
-----------------------------------------------------
(Dollars in millions, except per common share data) 4th 3rd 2nd 1st
- ------------------------------------------------------ --------- --------- --------- ------------------------------------------------------------- ----------- ----------- ----------- -----------
Premiums .......................................... $793.8 $796.2 $762.3 $768.1......................................... $ 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
NetBasic net income per common share ........................ 0.66 0.60 1.01 0.99
1995
--------------------------------------------
4th 3rd 2nd 1st
--------- --------- --------- --------
Premiums ........................... $817.0 $738.0 $729.2 $734.0
Investment income .................. 207.3 207.8 199.3 191.9
Net realized investment gains ...... 3.2 2.9 208.1 10.9
Benefits to policyholders ......... 634.8 568.7 717.7 571.8
Net income ........................ 62.1 66.7 88.9 63.4
Net.............. 0.33 0.30 0.50 0.49
Diluted net income per common share ......... 0.85 0.92 1.22 0.87............ 0.33 0.30 0.50 0.49
NOTE 18. SUBSEQUENT EVENTS
On March 14, 1997, UNUM's Board of Directors authorized a two-for-one
common stock split. The split is subject to shareholder approval of a proposal
to increase the number of authorized shares of common stock to 240 million from
120 million. UNUM's shareholders will vote on the proposal to increase the
number of authorized shares at the Annual Meeting of Shareholders on May 9,
1997. Under the proposed split, on or about June 2, 1997, one additional share
would be distributed for each share of common stock already issued, to holders
of record on May 19, 1997. The financial information contained in this report
has not been adjusted to reflect the impact of the proposed common stock split.
On March 14, 1997, the Board of Directors also announced its intent to
increase the next regularly scheduled cash dividend, payable in May, to 28.5
cents from 27.5 cents per common share on a pre-split basis.
6559
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 disclosure have been reported on a Form 8-K
during the past two years prior to the date of the most recent financial
statements.
PART III
Item 10--Directors and Executive Officers of the Registrant
A. Directors of the Registrant
The information under the caption "Election of Directors" included in
UNUM's proxy statement for the Annual Meeting of Shareholders on May 9, 1997,8, 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 25, 1997)10, 1998) Position held with UNUM Since
- --------------------- ------------------ ------------------------------ ----------------------------------- ----------------- ----------------------------- -----------
James F. Orr III 5455 Chairman, President and 1986
Chief Executive Officer
Robert E. Broatch 49 Senior Vice President 1996
and Chief Financial Officer
Thomas G. Brown 5253 Executive Vice President 1992
Stephen B. Center 59 Executive Vice President 1972
Robert W. Crispin 5051 Executive Vice President 1995
and Chief Financial Officer
Peter J. Moynihan 5354 Senior Vice President 1979
Kevin P. O'Connell 5152 Executive Vice President 1987
Elaine D. Rosen* 4445 President, UNUM America 1983
Robert E. Staton* 5051 President, Colonial 1993
- --------
*Denotes an officer of a subsidiary who is not an officer of the Corporation
but who is considered an "executive officer" under regulations of the
Securities and Exchange Commission.
The officers are elected annually and hold office until their respective
successors have been chosen and qualified, or until death, resignation or
removal. The UNUM Board may also appoint or delegate the appointment of
officers, assistant officers and agents as it may deem necessary for such
periods as the By-Laws, the UNUM Board, or the delegatee may prescribe.
Mr. Orr was elected Chairman of the Board of UNUM in February 1988. In
addition, he has served as President and Chief Executive Officer since
September 1987. He joined UNUM in 1986.
Mr. 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 continues to serveserved as Chairman of the Board and Chief Executive Officer of
Duncanson & Holt, Inc. ("D&H"), a post he has held since 1987. 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. Center was elected Executive Vice President of UNUM in September 1992.
Additionally, he served as President of UNUM America from September 1992 until
December 1996. Previously, he served as Group Executive Vice President of UNUM
America from May 1990 to August 1992. He joined UNUM America in 1963.
Mr. Crispin was elected Executive Vice President of UNUM in January 1995
and additionally1995.
In addition he served as Chief Financial Officer infrom August 1995.1995 until
September 1997. Prior to joining UNUM in 1995, Mr. Crispin served as Vice
Chairman and Chief Investment Officer of The Travelers Insurance Companies from
July 1991 to January 1995.
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.
6660
UNUM Corporation 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 9, 1997,8, 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 9, 1997,8, 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 9, 1997,8, 1998, is incorporated by reference.
6761
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index of documents filed as part of this report:
1. The following Consolidated Financial Statements of UNUM Corporation
and subsidiaries are included in Item 8.
Page
-----------
Report of Independent Accountants ..................... 34....................... 30
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 and 1994 ..................... 35...................... 31
Consolidated Balance Sheets as of December 31, 1997,
and 1996 and 1995 ............................................. 36.............................................. 32
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 and 1994 ......... 38.......... 33
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 and 1994 ............... 39................ 34
Notes to Consolidated Financial Statements ............ 40.............. 36
2. Financial Statement Schedules
II Condensed Financial Information of UNUM Corporation (Registrant) 7064
III Supplementary Insurance Information 7468
IV Reinsurance 7569
3. Exhibits. See Index to Exhibits on page 7670 of this report.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1996.1997.
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.
6862
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Portland, State of Maine, on March 25, 1997.10, 1998.
UNUM Corporation
By /s/ JAMESJames F. ORROrr 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/ JAMESJames F. ORROrr III Chairman, President and
- ------------------------------------- Chief Executive Officer March 25, 199710, 1998
(James F. Orr III)
/s/ ROBERT W. CRISPIN ExecutiveRobert E. Broatch Senior Vice President
- ------------------------------------- and Chief Financial Officer March 25, 199710, 1998
(Robert W. Crispin)E. Broatch)
/s/ STEPHEN D. ROBERTSJohn M. Lang, Jr. Vice President and
- ------------------------------------- Corporate Controller March 25, 1997
(Stephen D. Roberts)10, 1998
(John M. Lang, Jr.)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(Gayle O. Averyt)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(Robert E. Dillon, Jr.)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(Gwain H. Gillespie)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(Ronald E. Goldsberry)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(Donald W. Harward)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(George J. Mitchell)
*- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(Cynthia A. Montgomery)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(James L. Moody, Jr.)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(Lawrence R. Pugh)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(Lois Dickson Rice)
*
- ------------------------------------- Director March 25, 1997
- -------------------------------------10, 1998
(John W. Rowe)
*/s/ JOHN-PAUL DEROSA/s/ Kevin J. Tierney
- -------------------------------------
(John-Paul DeRosa,*(Kevin J. Tierney, as Attorney-in-fact
for each of the persons indicated)
(Assistant(Senior Vice President, General Counsel & Secretary)
6963
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995
1994
- ------------------------------------------------------------ --------- --------- ------------------------------------------------------------------ ----------- ----------- ----------
Revenues
Dividends from subsidiaries* ........................... $259.7......................... $ 462.4 $ 259.7 $ 23.6
$102.0
Investment income ........................................................................... 0.1 0.3 0.4 0.1
Interest income on loans to subsidiaries* ........................... 2.6 2.5 5.5 --
Fees and other income .................................................................... 0.1 -- 0.3
0.8
------- -------------- -------- -------
Total revenues ................................................................................ 465.2 262.5 29.8 102.9
Expenses
Operating expenses .......................................................................... 8.3 4.7 2.3
8.7
Interest expense ............................................................................ 41.7 40.7 37.2 18.6
Interest expense on loans from subsidiaries* ..................... 2.5 0.1 3.9
2.3
------- -------------- -------- -------
Total expenses ................................................................................ 52.5 45.5 43.4
29.6
------- -------------- -------- -------
Income (loss) before income taxes ............................................. 412.7 217.0 (13.6) 73.3
Income tax benefit ........................................................................... 17.3 15.1 13.1
6.2
------- -------------- -------- -------
Income (loss) before equity in undistributed net
income (loss) of subsidiaries ............................................................ 430.0 232.1 (0.5) 79.5
Equity in undistributed net income (loss) of
subsidiaries* .............................................. (59.7) 5.9 281.6
75.2
------- -------------- -------- -------
Net income ................................................ $238.0 $281.1 $154.7
======= ======............................................ $ 370.3 $ 238.0 $ 281.1
======== ======== =======
- --------
*Eliminated in consolidation
See note to condensed financial statements.
7064
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31,
-----------------------------------------------------
(Dollars in millions) 1997 1996
1995
- ------------------------------------------------------------ ----------- -------------------------------------------------------------------------- ------------- -------------
Assets
Investments
Investment in subsidiaries* ........................... $2,749.8 $2,836.1............................... $ 3,085.2 $ 2,749.8
Short-term investments ..................................................................... 2.1 0.6
0.6
-------- ------------------ ----------
Total investments ............................................................................ 3,087.3 2,750.4 2,836.7
Amounts receivable from subsidiaries, net* ................................ 16.2 15.0 6.6
Notes receivable from subsidiary* .................................................. 35.7 32.5 50.0
Property and equipment, net .............................................................. 28.8 22.3
18.1
-------- ------------------ ----------
Total assets .......................................... $2,820.2 $2,911.4
======== ========............................................. $ 3,168.0 $ 2,820.2
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Notes payable ....................................................................................... $ 526.9467.5 $ 583.8526.9
Notes payable to subsidiary* ......................................................... 245.8 -- 10.0
Income taxes ........................................................................................ 8.3 16.5 4.8
Other liabilities ................................................................................ 11.6 13.7
9.9
-------- ------------------ ----------
Total liabilities ............................................................................ 733.2 557.1 608.5
Stockholders' Equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000240,000,000 shares, issued 99,987,958 shares ............ 10.0199,975,916 .................... 20.0 10.0
Additional paid-in capital ............................................................... 1,086.0 1,077.2 1,065.7
Unrealized gains, on available for sale securities of
subsidiaries, net ............................................................................. 248.4 108.5 235.6
Unrealized foreign currency translation adjustment ............... (16.0) (1.2) (23.1)
Retained earnings (including undistributed earnings of
subsidiaries of $1,342.1 million and $1,401.8 million in
1997 and $1,395.9 million in
1996, and 1995, respectively) .............................. 2,162.5 1,871.4
1,713.2
-------- ------------------ ----------
3,500.9 3,065.9 3,001.4
Less:
Treasury stock, at cost (1996--28,165,594(1997--61,703,924 shares;
1995--26,980,3311996--56,331,188 shares) ................................................................... 1,050.3 792.2 691.6
Restricted stock deferred compensation ....................................... 15.8 10.6
6.9
-------- ------------------ ----------
Total stockholders' equity .............................................................. 2,434.8 2,263.1
2,302.9
-------- ------------------ ----------
Total liabilities and stockholders' equity ............ $2,820.2 $2,911.4
======== ========................ $ 3,168.0 $ 2,820.2
========== ==========
- --------
*Eliminated in consolidation
See note to condensed financial statements.
7165
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995
1994
- ------------------------------------------------------------- ---------- ---------- ------------------------------------------------------------------- ----------- ----------- -----------
Operating activities:
Net income ........................................................................................... $ 370.3 $ 238.0 $ 281.1 $ 154.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase (decrease) in income tax liability .................................. (8.2) 11.7 2.1 0.4
(Increase) decrease in amounts due to/from
subsidiaries* .................................................................................... (1.2) (8.4) 11.8
(6.0)
Other ................................................................................................... 11.3 16.1 (3.1) 11.1
Equity in undistributed net income of subsidiaries* ......(104.1) (5.9) (281.6)
(75.2)
------- ------- --------------- -------- --------
Net cash provided by operating activities .......................... 268.1 251.5 10.3
85.0
------- ------- --------------- -------- --------
Investing activities:
Investment in subsidiaries, net* ............................................. (107.8) (13.1) (1.1) (30.6)
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 ........................ (1.5) -- (0.1) 3.9
Net additions to property and equipment ................................ (10.7) (8.6) (5.4)
(3.3)
------- ------- --------------- -------- --------
Net cash used in investing activities ................................. (123.2) (4.2) (56.6)
(30.0)
------- ------- --------------- -------- --------
Financing activities:
Dividends to stockholders ............................................................. (79.2) (79.8) (75.1) (68.3)
Treasury stock acquired ............................................................... (285.2) (119.1) -- (183.3)
Proceeds from notes payable ........................................................ -- -- 291.5 54.7
Repayment of notes payable ......................................................... (48.5) (15.0) --
--
Net increase (decrease)decrease in short-term debt ..................................... (10.6) (42.3) (135.1)
136.7Proceeds from notes payable to subsidiaries* ......... 245.8 -- --
Repayment of notes payable to subsidiaries* ......................... -- (10.0) (50.0)
--
Other ................................................................................................... 32.8 18.9 13.0
5.9
------- ------- --------------- -------- --------
Net cash provided by (used in) financing
activities ...................................................................................... (144.9) (247.3) 44.3
(54.3)
------- ------- --------------- -------- --------
Net increase (decrease)decrease in cash ............................................................. -- -- (2.0) 0.7
Cash at beginning of year .............................................................. -- -- 2.0
1.3
------- ------- --------------- -------- --------
Cash at end of year .......................................................................... $ -- $ -- $ 2.0
======= ======= =======--
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Income taxes ..................................................................................... $ (10.6) $ (25.8) $ (15.1)
Interest ............................................ $ (6.6)
Interest ................................................43.3 $ 40.8 $ 36.2
$ 18.1
Interest to subsidiaries* ......................................................... $ -- $ 0.2 $ 4.0
$ 2.2Supplemental 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.
7266
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes of UNUM
Corporation and subsidiaries, which are included in Item 8.
7367
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in millions)
(1)(2)
Future policy
Deferred benefits, and
policy unpaid claims (3)
acquisition and claim Premium
Segment costs expenses revenue
- ------------------------------ -------------- --------------- -----------
Year Ended December 31, 1996
Disability Insurance ...... $ 443.1 $5,526.0 $1,917.7
Special Risk Insurance ...... 125.6 615.0 755.4
Colonial Products ......... 274.6 410.8 498.2
Retirement Products ......... 0.9 618.6 65.8
Corporate .................. -- -- --
-------- ------- ---------
Total ..................... $ 844.2 $7,170.4 $3,237.1
======== ======= =========
Year Ended December 31, 1995
Disability Insurance ...... $ 758.3 $5,130.6 $1,879.9
Special Risk Insurance ...... 99.8 476.5 702.3
Colonial Products ......... 250.5 372.0 475.1
Retirement Products ......... 33.7 596.0 34.1
Corporate .................. -- -- 0.1
-------- ------- ---------
Total ..................... $1,142.3 $6,575.1 $3,091.5
======== ======= =========
Year Ended December 31, 1994
Disability Insurance ...... $ 695.6 $4,175.9 $1,716.2
Special Risk Insurance ...... 84.1 357.7 607.1
Colonial Products ......... 224.8 330.5 441.3
Retirement Products ......... 30.7 581.9 31.4
Corporate .................. -- (0.5) 0.8
-------- ------- ---------
Total ..................... $1,035.2 $5,445.5 $2,796.8
======== =======
(1)(2)
Future 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) Benefits to of deferred (5)
Net policyholders policy Other (6)
investment and interest acquisition operating Premiums
Segment income credited costs expenses written
- ------------------------------ ------------------------------------------ ------------ --------------- ------------- ----------- --------- ---------------------
Year Ended December 31, 1997
Disability Insurance .......... $ 468.0 $ 1,503.9 $ 52.1 $ 481.9 $ 1,828.5
Special Risk Insurance ........ 68.4 600.4 65.8 179.5 236.2
Colonial Products ............. 57.6 271.8 80.7 137.1 467.2
Retirement Products ........... 54.4 102.7 0.1 5.7 2.5
Corporate ..................... 5.9 -- -- 58.6 --
--------- ---------- ------- -------- ----------
Total ........................ $ 654.3 $ 2,478.8 $ 198.7 $ 862.8 $ 2,534.4
========= ========== ======= ======== ==========
Year Ended December 31, 1996
Disability Insurance ................ $ 468.5 $1,514.9 $99.0 $557.0 $1,893.0$ 1,514.9 $ 99.0 $ 557.0 $ 1,893.0
Special Risk Insurance .............. 56.5 506.5 42.4 183.8 220.1
Colonial Products ...................... 47.3 246.8 72.5 133.8 446.5
Retirement Products .................... 217.2 257.1 -- 24.5 15.0
Corporate ....................................... 16.1 -- -- 62.8 --
--------- ---------- ------- -------- --------- ------ ------- -------------------
Total ............................................. $ 805.6 $2,525.3 $213.9 $961.9 $2,574.6$ 2,525.3 $ 213.9 $ 961.9 $ 2,574.6
========= ========== ======= ======== ========= ====== ======= ===================
Year Ended December 31, 1995
Disability Insurance ................ $ 592.9 $1,711.2 $90.6 $454.0 $1,853.2$ 1,711.2 $ 90.6 $ 454.0 $ 1,853.2
Special Risk Insurance .............. 48.4 492.3 35.5 162.6 223.6
Colonial Products ...................... 52.2 241.6 66.7 131.3 417.5
Retirement Products .................... 323.7 275.3 0.8 36.2 23.3
Corporate ....................................... 14.2 -- -- 42.9 --
--------- ---------- ------- -------- --------- ------ ------- -------------------
Total ..................... $1,031.4 $2,720.4 $193.6 $827.0 $2,517.6........................ $ 1,031.4 $ 2,720.4 $ 193.6 $ 827.0 $ 2,517.6
========= ========== ======= ======== ========= ====== ======= =========
Year Ended December 31, 1994
Disability Insurance ...... $ 400.3 $1,572.1 $70.7 $417.5 $1,705.5
Special Risk Insurance ...... 40.7 394.4 19.2 168.3 156.8
Colonial Products ......... 32.6 226.1 60.6 124.5 388.1
Retirement Products ......... 338.0 289.1 2.3 36.0 21.6
Corporate .................. 4.2 -- -- 33.2 --
-------- --------- ------ ------- ---------
Total ..................... $ 815.8 $2,481.7 $152.8 $779.5 $2,272.0
======== ========= ====== ======= ===================
(1) Excludes other policyholder funds, as follows:
December 31,
--------------------------------------
Segment 1996 1995 1994
- ------------------------------- ----------- ----------- ----------
Disability Insurance ......... $ 5.9 $ 3.1 $ 2.1
Special Risk Insurance ...... 12.7 14.6 8.4
Colonial Products ............ 156.6 128.0 100.1
Retirement Products ......... 3,358.4 3,694.6 3,948.2
-------- -------- --------
Total ........................ $3,533.6 $3,840.3 $4,058.8
======== ======== ========
December 31,
----------------------------------------
Segment 1997 1996 1995
- ------------------------------------- ------------ ----------- -----------
Disability Insurance ........... $ 2.4 $ 5.9 $ 3.1
Special Risk Insurance ......... 15.4 12.7 14.6
Colonial Products .............. 258.1 156.6 128.0
Retirement Products ............ 729.0 3,358.4 3,694.6
--------- --------- ---------
Total .......................... $ 1,004.9 $ 3,533.6 $ 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.gains
(losses).
(5) Investment income and net realized investment gains are allocated to
the segments based on designation of ownership of assets identified to
the segments. Operating expenses are allocated to the segments based
on direct association with a product whenever possible. If, however,
the expense cannot be readily associated with a particular product,
the costs are allocated based on ratios of the relative time spent,
extent of usage or varying volume of work performed for each segment.
(6) Premiums written for health and disability income policies.
Certain 1994 amounts have been reclassified for comparative purposes.
7468
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
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, 19961997
Life insurance in force ..................... $199,019.2 $11,476.5inforce ........................ $ -- $187,542.7 --260,014.8 $ 16,036.5 $ 2,069.7 $ 246,048.0 0.8%
============ =========== ========== ====== ======================= ====
Premiums
Life insurance and individual annuities ....... $ 650.7 $ 33.9 $ 9.0 $ 625.8 1.4%
Accident and health insurance ................ 2,656.7 368.9 272.6 2,560.4 10.6%
Group annuities .............................. 2.5 -- -- 2.5 --
------------ ----------- ---------- ------------
Total premiums .............................. $ 3,309.9 $ 402.8 $ 281.6 $ 3,188.7
============ =========== ========== ============
Year Ended December 31, 1996
Life insurance inforce ....................... $ 199,019.2 $ 11,476.5 $ -- $ 187,542.7 --
============ =========== ========== ============ ====
Premiums
Life insurance and individual annuities ...... $ 552.0 $ 28.6 $ -- $ 523.4 --
Accident and health insurance ............................ 2,406.9 77.8 252.9 2,582.0 9.8%
Group annuities ......................................................... 15.0 -- -- 15.0 --
------------ ----------- ---------- ------ -----------------------
Total premiums ......................................................... $ 2,973.9 $ 106.4 $252.9$ 252.9 $ 3,120.4
============ =========== ========== ====== =======================
Year Ended December 31, 1995
Life insurance in force ..................... $164,478.4inforce ....................... $ 164,478.4 $ 4,119.5 $ -- $160,358.9$ 160,358.9 --
============ =========== ========== ====== ======================= ====
Premiums
Life insurance and individual annuities ....... $ 571.4 $ 19.3 $ 2.0 $ 554.1 0.4%
Accident and health insurance ............................ 2,248.4 46.9 239.5 2,441.0 9.8%
Group annuities ......................................................... 23.1 -- -- 23.1 --
------------ ----------- ---------- ------ -----------------------
Total premiums ......................................................... $ 2,842.9 $ 66.2 $241.5$ 241.5 $ 3,018.2
============ =========== ========== ====== ===========
Year Ended December 31, 1994
Life insurance in force ..................... $145,425.9 $ 4,425.3 $ -- $141,000.6 --
=========== ========== ====== ===========
Premiums
Life insurance and individual annuities ... $ 517.9 $ 15.7 $ 1.6 $ 503.8 0.3%
Accident and health insurance ............... 2,123.9 96.8 169.1 2,196.2 7.7%
Group annuities ........................... 21.3 -- -- 21.3 --
----------- ---------- ------ -----------
Total premiums ........................... $ 2,663.1 $ 112.5 $170.7 $ 2,721.3
=========== ========== ====== =======================
Certain 1994 amounts have been reclassified for comparative purposes.
7569
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Number Description Method of Filing
- -------- ------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------
3.1 Certificate of Incorporation Filed herewith.
of UNUM Corporation, as
amended
3.2 By-Laws of UNUM Filed herewith.as Exhibit 3.2 to the Registrant's Annual Report on Form
Corporation 10-K dated March 25, 1997, and incorporated herein by reference.
4 Rights Agreement Filed as Exhibit 1 to the Registrant's Current Report on Form 8-K
dated March 18, 1992, and incorporated herein by reference.
10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.2 Incentive Compensation Plan Filed herewith.as Exhibit 3.2 to the Registrant's Annual Report on Form
for Designated Executive 10-K dated March 25, 1997, and incorporated herein by reference.
Officers
10.3 1987 Executive Stock Filed as Exhibit 10.3 to the Registrant's Annual Report on Form
Option Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.4 1990 Long-Term Stock Filed as Exhibit 10.4 to the Registrant's Annual Report on Formherewith.
Incentive Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.5 1996 Long-Term Stock Filed as Exhibit 10.5 to the Registrant's Annual Report on Formherewith.
Incentive Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.6 Supplementary Retirement Filed as Exhibit 10.4 to the Registrant's Registration Statement on
Plan Form S-1 (Registration No. 33-6571) dated June 18, 1986, and
incorporated herein by reference.
10.7 Supplemental Executive Filed as Exhibit 10.6 to the Registrant's Annual Report on Form
Retirement Plan 10-K dated March 26, 1991, and incorporated herein by reference.
10.8 Form of Executive Filed as Exhibit 10.7 to the Registrant's Annual Report on Form
Severance Agreement 10-K dated March 25, 1992, and incorporated herein by reference.
10.9 Employment Agreement Filed as Exhibit 10.9 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.10(a) Employment Letter Filed as Exhibit 10.10 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.11(b) Employment Letter Filed herewith.
10.10 $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.
10.12 Asset Transfer and10.11 Non-Qualified 401(k) Plan Filed as Exhibit 10.123.2 to the Registrant's Annual Report on Form
Acquisition Agreement 10-K dated March 27, 1996,25, 1997, and incorporated herein by reference.
10.13 Non-Qualified 401(k) Plan Filed herewith.
12 Computation of Ratio of Filed herewith.
Earnings to Fixed Charges
21 Subsidiaries of UNUM Filed herewith.
Corporation
23 Consent of Independent Filed herewith.
Accountants
24 Power of Attorney Filed herewith.
27 Financial Data Schedule Filed herewith.
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