SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NUMBER 1-9254
UNUM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 01-0405657
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2211 CONGRESS STREET, PORTLAND, MAINE 04122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 770-2211
SECURITIES 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
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 10, 1995, was approximately $3,044,100,000.
As of March 10, 1995, 72,536,338 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information from the Registrant's proxy statement dated March 28, 1995, is
incorporated by reference into Part III.
Exhibit Index appears on page
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business......................................................................................................
A. Description of Business...................................................................................
B. Employee Benefits Segment.................................................................................
C. Related Businesses Segment................................................................................
D. Colonial Companies Segment................................................................................
E. Individual Disability Segment.............................................................................
F. Retirement Security Segment...............................................................................
G. Other Operations Segment..................................................................................
H. Investments...............................................................................................
I. Risk Management and Reinsurance...........................................................................
J. Reserves..................................................................................................
K. Employees.................................................................................................
L. Competition...............................................................................................
M. Regulation................................................................................................
N. Participation Fund Account................................................................................
2. Properties....................................................................................................
3. Legal Proceedings.............................................................................................
4. Submission of Matters to a Vote of Security Holders...........................................................
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters.....................................
6. Selected Financial Data.......................................................................................
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................
8. Financial Statements and Supplementary Data...................................................................
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................
PART III
10. Directors and Executive Officers of the Registrant............................................................
A. Directors of the Registrant...............................................................................
B. Executive Officers of the Registrant......................................................................
11. Executive Compensation........................................................................................
12. Security Ownership of Certain Beneficial Owners and Management................................................
13. Certain Relationships and Related Transactions................................................................
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................................
Signatures....................................................................................................
Report of Independent Accountants.............................................................................
Report of Independent Auditors................................................................................
Index to Financial Statement Schedules........................................................................
Index to Exhibits.............................................................................................
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
provider of group long term disability insurance ("group LTD") in the United
States and the United Kingdom. UNUM is also a major provider of employee
benefits, individual disability insurance and special risk reinsurance. UNUM
also markets long term care and retirement income products. The operations of
the following subsidiaries 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.
UNUM conducts its operations in the United States through a number of
wholly-owned subsidiaries: UNUM Life Insurance Company of America ("UNUM
America"), a Maine life insurance company licensed in 49 states and Canada, the
leading provider of group disability insurance in the nation, and a provider of
employee benefits, long term care and retirement products; First UNUM Life
Insurance Company ("First UNUM"), a New York life insurance company; Commercial
Life Insurance Company, a Wisconsin life insurance company and a leader in
special risk insurance and professional association insurance marketing;
Duncanson & Holt, Inc., a New York corporation and a leading accident and health
reinsurance underwriting manager; Colonial Companies, Inc., a Delaware holding
company; and UNUM Holding Company, a Delaware corporation. Colonial Life &
Accident Insurance Company, a wholly-owned subsidiary of Colonial Companies,
Inc., is the leader in payroll-deducted voluntary employee benefits offered to
employees at their worksites. Through UNUM Holding Company, UNUM Corporation
also owns UNUM Sales Corporation, a licensed broker-dealer incorporated in
Delaware, and Claims Service International, Inc., a Delaware corporation, which
provides claims administration services.
UNUM Corporation also holds all of the outstanding capital stock of UNUM
European Holding Company, which is incorporated in the United Kingdom. UNUM's
United Kingdom operations are conducted by UNUM Limited, which is the United
Kingdom's leader in group disability insurance and a wholly-owned subsidiary of
UNUM European Holding Company, and Duncanson & Holt Europe Ltd., a wholly-owned
subsidiary of Duncanson & Holt, Inc.
UNUM's Japanese operations are conducted through a wholly-owned subsidiary,
UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), a Japanese
non-life insurance company, which was established in 1994.
On December 3, 1992, UNUM and Colonial Companies, Inc. ("Colonial"), signed
a definitive merger agreement. On March 26, 1993, Colonial Class A common stock
shareholders voted to approve the merger. Under the agreement, UNUM exchanged
0.731 shares of its common stock for each share of Colonial Class A and B common
stock outstanding on March 26, 1993. UNUM issued approximately 11.4 million
shares of common stock from treasury in connection with the merger. In addition,
outstanding options to acquire shares of Colonial Class B common stock were
converted into options to acquire shares of UNUM common stock. The merger was
accounted for as a pooling of interests.
UNUM reports its operations principally in six business segments: Employee
Benefits, Related Businesses, Colonial Companies, Individual Disability,
Retirement Security and Other Operations. Corporate includes transactions which
are generally non-insurance related, expenses incurred in connection with UNUM's
long-term strategic investment in Japan, and interest expense on corporate
borrowings.
Refer to Item 7 and Item 8 (Note 16) for more information.
B. EMPLOYEE BENEFITS SEGMENT
The Employee Benefits segment, which in 1994 accounted for 47.3% of UNUM's
revenues and 129.8% of its income before income taxes, markets a range of group
disability, group life and other specialty insurance products to employers.
Group LTD is the Employee Benefits segment's principal product. UNUM targets
sales of group LTD to executive, administrative and management personnel and
other professionals. Since 1976, UNUM has been the nation's leading provider of
group LTD according to EMPLOYEE BENEFIT PLAN REVIEW, a recognized industry
publication.
Group LTD provides employees with insurance coverage for loss of income in
the event of inability to work due to sickness or injury. Most of these policies
begin providing benefits following 90 or 180 day waiting periods and continue
providing benefits until the employee reaches age 65-70. Group LTD benefits are
paid monthly and generally are limited to
two-thirds of the employee's earned income up to a specified maximum benefit.
Premiums for group LTD insurance are based upon the expected mortality,
morbidity and persistency of the insured group as well as assumptions concerning
operating expenses and future interest rates.
UNUM's group life insurance product provides term insurance for employees.
It is marketed primarily to executive, administrative and management personnel.
As reported by EMPLOYEE BENEFIT PLAN REVIEW FOR 1993, the most recent available
data, UNUM was the third largest writer of group life insurance, based on number
of contracts inforce.
Group short term disability insurance ("Group STD") provides employees with
insurance coverage for loss of income in the event of inability to work due to
sickness or injury. Most of these policies begin providing benefits immediately
for accidents or following a one week waiting period for sickness and continue
providing benefits for up to 26 weeks. Group STD benefits are paid weekly and
generally are limited to 60% of the employee's earned income up to a specified
maximum benefit. As reported by EMPLOYEE BENEFIT PLAN REVIEW, UNUM was one of
the top five providers of STD for 1993, based on premium and number of lives
inforce.
UNUM markets other employee benefits products including accidental death and
dismemberment, and dental insurance. UNUM's flexible benefits product provides
employees with the opportunity to allocate benefit dollars among the various
combinations of employee benefits products.
Employee Benefits' group insurance is sold primarily on a basis that permits
annual repricing. This enables UNUM to adjust the pricing of its products to
more closely match the underlying claim experience and interest rate
environment.
UNUM markets its Employee Benefits' insurance products through a network of
33 offices in the United States and Canada, which distribute these products as
well as the products offered by the Retirement Security segment, through
brokers. As of December 31, 1994, these branch offices were organized into four
regions and were staffed with approximately 590 management, sales, service and
administrative personnel.
Refer to Item 7 and Item 8 (Note 16) under the caption "Employee Benefits
Segment" for more information.
C. RELATED BUSINESSES SEGMENT
The Related Businesses segment in 1994 accounted for 15.6% of UNUM's
revenues and 30.4% of its income before income taxes. The Related Businesses
segment includes UNUM Limited in the United Kingdom, Commercial Life Insurance
Company ("Commercial Life"), and reinsurance operations including Duncanson &
Holt, Inc.
On July 2, 1990, UNUM acquired all of the outstanding shares of National
Employers' Life Assurance Company Limited ("NEL"). On August 1, 1990, UNUM
acquired certain remaining policyholder interests of a NEL subsidiary, N.E.L.
Permanent Health Insurances Limited (now known as UNUM Limited). In the third
quarter of 1990, UNUM announced plans to restructure the operations of its
United Kingdom acquisition by continuing to develop the permanent health
insurance (long term disability) business through UNUM Limited and by divesting
the life, pension and mortgage businesses of NEL. On January 6, 1992, the NEL
businesses were sold.
UNUM Limited is the leading provider of group long term disability insurance
in the United Kingdom. UNUM Limited targets group long term disability sales to
management personnel, other professionals and technical and skilled artisans.
These products are marketed through a network of independent brokers. UNUM
Limited's long term disability products provide employees with insurance
coverage for loss of income in the event of inability to work due to sickness or
injury. UNUM Limited also markets individual disability insurance to
self-employed individuals and those not covered under group policies through
brokers and agents.
In May 1994, UNUM Limited assumed the management of the group risk portfolio
of Windsor Life Assurance Company Limited ("Windsor Life"), which included group
long term disability and group life products. Windsor Life was the third largest
group long term disability provider in the United Kingdom in 1993, as reported
by Employers Re. International.
Commercial Life is a leading provider of group special risk accident
products, including group travel and voluntary accident insurance. Commercial
Life also provides group universal life, group term life, and long term
disability, along with payroll deduction programs for employees through a
network of independent brokers and specialty agents. Commercial Life is a leader
in the association group marketplace, offering disability income, business
overhead expense, accidental death and dismemberment, hospital indemnity and
term life insurance to members of professional associations.
On July 30, 1992, UNUM purchased Duncanson & Holt, Inc. ("D&H"), a leading
accident and health reinsurance underwriting manager. As a reinsurance manager,
D&H provides pool management as well as marketing, underwriting, administration,
claims payment and actuarial services for client companies, but does not bear
any insurance risk. D&H has offices throughout the United States and in London,
Toronto, and Singapore.
Refer to Item 7 and Item 8 (Note 16) under the caption "Related Businesses
Segment" for more information.
D. COLONIAL COMPANIES SEGMENT
The Colonial Companies segment in 1994 accounted for 13.1% of UNUM's
revenues and 31.6% of its income before income taxes. Colonial Companies'
principal subsidiary, Colonial Life & Accident Insurance Company ("Colonial
Life"), markets a broad line of payroll-deducted, voluntary benefits to
employees at their worksites. Colonial Life focuses on personal accident and
sickness, life and cancer insurance plans.
Colonial Life's accident policies generally provide benefit payments for
disability income, death, dismemberment or major injury. Accident policies are
designed to supplement other benefits available through Social Security,
workers' compensation, and other insurance plans. Colonial Life offers a wide
range of life insurance products, with universal life and whole life accounting
for most of the life insurance sold. Colonial Life's cancer policies are
designed to provide payments for hospitalization and scheduled medical benefits,
with the amounts of such payments established by the policies. All of Colonial
Life's insurance policies are issued on a nonparticipating basis.
More than 95% of Colonial Life's premiums for 1994 were derived from
policies marketed to employees at their worksites, with premiums in most cases
to be collected through payroll deduction. Such policies are issued on a
"guaranteed renewable for life" basis, which means that Colonial Life cannot
refuse to renew any policy, but it does reserve the right on a
product-by-product basis to increase premiums for inforce policies. This right
to change premiums is or may be subject to various state insurance department
rules, regulations and approvals.
Since 1985, Colonial Life has marketed its accident and health products as
qualified fringe benefits that can be purchased with pretax dollars as part of a
flexible benefits program pursuant to Section 125 of the Internal Revenue Code.
In 1994, premiums from sales to employees participating in such programs
accounted for approximately 48% of total premiums. A flexible benefits program
assists employers in managing their benefits and compensation packages and
provides policyholders with the ability to choose the benefits that best meet
their needs. Although Congress might change the tax laws to limit or eliminate
fringe benefits available on a pretax basis and such a change could limit or
eliminate Colonial Life's ability to continue marketing its products in this
way, Colonial Life believes its products provide policyholders value, which will
remain even if the tax advantages offered by flexible benefit programs are
eliminated.
Colonial Life markets its products nationwide primarily through a
5,300-member independent contractor sales force. Approximately 1,150 home office
employees provide corporate administration, sales support, internal services and
systems, claims processing, policyholder services, and employer services.
Colonial Companies' subsidiary, BenefitAmerica, Inc. ("BenefitAmerica"),
offers employers administrative services for their employee benefit programs.
The services offered by BenefitAmerica include claims adjudication and payment
for reimbursement plans, which are offered under an employer's flexible benefits
plan pursuant to Section 125 of the Internal Revenue Code, as well as other
administrative services to those plans. The services offered by BenefitAmerica
complement the services and products offered to employers by Colonial Life.
Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial Companies
Segment" for more information.
E. INDIVIDUAL DISABILITY SEGMENT
The Individual Disability segment accounted for 12.2% of UNUM's revenues and
(94.8)% of its income before income taxes in 1994. This segment's products
provide coverage for loss of income for professionals, corporate executives,
business owners and administrative support personnel in the event of disability.
As reported in the Life Insurance Marketing Research Association's 1993
INDIVIDUAL HEALTH ISSUES AND INFORCE SURVEY for the United States, the most
recent available data, UNUM was the fourth largest provider of individual
disability income policies measured by premium inforce.
UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to state
regulatory approval, UNUM expects to introduce the new disability products to
most states during the second quarter of 1995.
Until the new products are introduced, UNUM will continue to sell individual
disability products on a non-cancellable basis, with a fixed premium for the
duration of the policy. The basic individual disability policy provides the
insured with a portion of the earned income which is lost as a result of
sickness or injury. Monthly benefits available range from 30% to 70% of the
insured's earned income up to a specified maximum benefit. Various options are
available that permit tailoring of an insurance policy to the specific client's
needs. The most common options include the length of period before benefits are
paid, the length of the benefit period, partial disability payments, and
cost-of-living adjustments, college benefits and retirement benefits. UNUM also
markets buy/sell and key person coverage and policies that provide reimbursement
for business overhead expenses incurred during a period of disability.
Individual Disability insurance premium rates are based on expected mortality,
morbidity and persistency as well as assumptions concerning policy related
expenses, inflation and investment income.
UNUM currently distributes this segment's products in the United States and
Canada through a branch office system of Individual Disability sales
consultants, who distribute these products as well as products offered by the
Retirement Security Segment, through brokers and agents. UNUM has a network of
36 Individual Disability offices in the United States that are staffed with
approximately 105 management, sales, service and administrative employees.
Another 11 sales offices, staffed by approximately 39 employees, are located
throughout Canada.
Refer to Item 7 and Item 8 (Note 16) under the caption "Individual
Disability Segment" for more information.
F. RETIREMENT SECURITY SEGMENT
The Retirement Security segment accounted for 8.0% of UNUM's revenues and
12.9% of its income before income taxes in 1994. This segment markets and
services tax-sheltered annuities ("TSA"), long term care insurance and lifestyle
security protection ("LSP") products.
TSA products (Section 403(b) plans under the Internal Revenue Code) are
marketed to non-profit hospitals and organizations. These contracts offer a
fixed fund which provides for annual renewable guarantees of principal and
interest. In addition, some TSA contracts offer variable annuity investment
alternatives. These investment alternatives are mutual funds offered as
subaccounts in a UNUM separate account. The mutual funds, managed by nationally
recognized investment managers, include a variety of choices such as growth,
balanced and stock index funds. UNUM also offers recordkeeping and reporting
services to TSA contractholders.
LSP products are marketed to employers to supplement their employees'
retirement planning needs. It provides plan participants with insurance coverage
for retirement savings in the event of the inability to continue retirement
contributions due to death or disability.
UNUM markets its TSA and LSP products through a network of 13 offices in the
United States, which distribute these products as well as the products offered
by the Employee Benefits segment, primarily through brokers.
UNUM markets long term care insurance to employer groups, continuing care
retirement communities and individuals. The group product is offered on an
employer or employee paid basis, and employer groups may offer coverage to
retirees, spouses, parents and grandparents, in addition to the employee. UNUM
distributes long term care products in the United States through brokers and
agents from the branch office system as described in the Employee Benefits and
Individual Disability Segments.
Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement Security
Segment" for more information.
G. OTHER OPERATIONS SEGMENT
The Other Operations segment accounted for 3.6% of UNUM's revenues and 4.3%
of its income before income taxes in 1994. This segment includes individual life
insurance business of UNUM America, group medical insurance, guaranteed
investment contracts ("GICs"), deposit administration accounts ("DAs"), and
401(k) plans, all of which are no longer actively marketed by UNUM.
In the fourth quarter of 1991, UNUM announced plans to withdraw from the
401(k) market by the end of 1992. UNUM has transferred 401(k) service
responsibilities to its formerly wholly-owned subsidiary, Preferred Benefits
Corporation, which was sold in the second quarter of 1992.
UNUM discontinued active marketing of GICs and DAs primarily due to the lack
of demand and the level of investment risk. UNUM discontinued new sales of
universal life and other individual life policies as of January 1, 1988. UNUM
began exiting the group medical product line in 1987 with the discontinuance of
new sales on the traditional group medical product. In 1990, management
announced its intention to exit the group medical product entirely. Beginning
with
the February 1991 renewals, policyholders had the option of transferring their
group medical product to another insurer. UNUM services commitments to inforce
policyholders, which include conversions of group life and group medical
insurance.
Refer to Item 7 and Item 8 (Note 16) under the caption "Other Operations
Segment" for more information.
H. INVESTMENTS
Refer to Item 7 under the caption "Investments" for more information.
Additional information about UNUM's mortgage loan portfolio is provided below:
Overall, UNUM management believes that its mortgage loan portfolio is well
diversified geographically and among property types. The mortgage loan portfolio
percentages by geographic region and property type at December 31, 1994, and
1993, were as follows:
GEOGRAPHIC REGION
1994 1993
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New England............................. 10.6% 10.5%
Mid-Atlantic............................ 17.4 16.6
Southeast............................... 15.0 16.4
Southwest............................... 8.4 7.7
Pacific................................. 15.1 16.2
North Central........................... 16.0 15.1
Farm Belt............................... 9.5 9.9
Oil Patch............................... 8.0 7.6
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Total............................... 100.0% 100.0%
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PROPERTY TYPE
1994 1993
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Office Building......................... 26.2% 28.1%
Retail.................................. 30.9 29.5
Industrial.............................. 19.5 19.1
Residential............................. 7.2 6.4
Medical................................. 6.5 6.5
Nursing Home............................ 2.7 3.6
Hotel/Motel............................. 5.8 5.5
Other................................... 1.2 1.3
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Total............................... 100.0% 100.0%
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Mortgage loans delinquent 60 days or more on a contract delinquency basis by
geographic region and property type were as follows at December 31, 1994, and
1993 (Dollars in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 15.7 $ 15.7
Mid-Atlantic................................. 3.5 4.6
Southwest.................................... -- 2.7
Pacific...................................... 0.9 3.1
North Central................................ 2.2 --
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Total.................................... $ 22.3 $ 26.1
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PROPERTY TYPE
1994 1993
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Office Building.............................. $ 22.3 $ 23.4
Retail....................................... -- 2.7
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Total.................................... $ 22.3 $ 26.1
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Restructured mortgage loans by geographic region and property type were as
follows at December 31, 1994, and 1993 (Dollars in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 3.3 $ 3.4
Mid-Atlantic................................. 4.4 2.2
Southeast.................................... 9.5 12.2
Pacific...................................... 10.8 5.6
North Central................................ 14.5 13.9
Farm Belt.................................... 8.8 8.8
Oil Patch.................................... 14.4 16.3
Other........................................ 7.9 3.5
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Total.................................... $ 73.6 $ 65.9
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PROPERTY TYPE
1994 1993
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Office Building.............................. $ 32.2 $ 31.5
Retail....................................... 12.8 8.5
Industrial................................... 8.6 7.6
Residential.................................. 7.1 6.2
Hotel/Motel.................................. 2.4 --
Other........................................ 10.5 12.1
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Total.................................... $ 73.6 $ 65.9
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Potential problem mortgage loans are defined by UNUM as current and
performing loans with which management has some concerns about the ability of
the borrower to comply with present loan terms and whose book value exceeds the
market value of the underlying collateral. Potential problem loans by geographic
region and property type were as follows at December 31, 1994, and 1993 (Dollars
in millions):
GEOGRAPHIC REGION
1994 1993
--------- ---------
New England.................................. $ 3.4 $ 6.2
Mid-Atlantic................................. 9.3 31.3
Southeast.................................... 6.3 3.1
Southwest.................................... 1.5 2.2
Oil Patch.................................... 4.9 3.5
Pacific...................................... 4.1 17.4
North Central................................ 0.8 22.1
Farm Belt.................................... 5.9 6.9
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Total.................................... $ 36.2 $ 92.7
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PROPERTY TYPE
1994 1993
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Office Building.............................. $ 17.2 $ 25.9
Industrial................................... -- 25.5
Retail....................................... 0.7 20.7
Residential.................................. 2.2 --
Hotel/Motel.................................. 11.5 18.3
Medical...................................... 4.6 2.3
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Total.................................... $ 36.2 $ 92.7
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I. 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 of business
inforce, and control of claims. UNUM has underwriters organized within business
segments who evaluate policy applications on the basis of information provided
by the applicant and other sources.
UNUM reinsures with other companies portions of the insurance policies it
has underwritten. Reinsurance allows UNUM to sell policies with greater benefits
than the entire risk that UNUM is willing to assume. UNUM remains liable to the
insured for the payment of policy benefits if the reinsurers cannot meet their
obligations under the reinsurance agreements.
In the Employee Benefits segment, UNUM has underwriters for each major
product line. Quotes for prospective customers are based on UNUM's experience
with the profitability and persistency of the respective employer's risk
category. The maximum group LTD and group STD monthly benefit varies, but the
usual maximum monthly amount available is $35,000 and $2,500, respectively. For
group life insurance products, UNUM retains up to $750,000 per individual life
and reinsures the balance with other insurance carriers.
Colonial Life has reinsurance on its cancer insurance products that provides
coverage for claim payments in excess of $50,000 in any one year, per claimant,
up to a lifetime maximum of $1 million per claimant.
The financial and medical underwriting areas of UNUM Limited handle the
underwriting of group and individual disability policies and group life
policies. The maximum yearly benefit for group LTD is 326,000 pounds
sterling. UNUM Limited retains 75,000 pounds sterling of this risk and
reinsures the balance. The maximum yearly initial benefit for individual
disability insurance is 125,000 pounds sterling and amounts over 40,000 pounds
sterling per annum are reinsured. On group life business, UNUM Limited retains
60% of the risk up to a maximum of 150,000 pounds sterling per individual life.
Commercial Life reinsures the risk on its accidental death and dismemberment
contracts that exceed $400,000 on any one life. Commercial Life also reinsures
the risk on individual, group, and franchise life contracts that exceed $250,000
on any one life.
UNUM requires medical examinations, financial data, and other information to
make a decision on the acceptability of the individual risk and to appropriately
classify an applicant for individual disability insurance products. On new sales
of the existing non-cancellable product, UNUM retains up to $8,000 plus 25% of
amounts in excess of $8,000 basic monthly indemnity per life for personal
disability coverages, $20,000 plus 25% of amounts in excess of $20,000 per life
for business overhead expenses coverages and $500,000 per life for buy/sell
coverages. UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to regulatory
approval, UNUM expects to introduce new disability products to most states
during the second quarter of 1995.
UNUM (except for Colonial Life) reinsures the risk of individual life
insurance contracts that exceed $425,000 on any one life. Colonial Life limits
its risk for death and dismemberment benefits to $100,000 per life.
In addition to the reinsurance arrangements above, UNUM (except for Colonial
Life, UNUM Limited and Commercial Life) is covered by catastrophe reinsurance,
which provides additional protection against aggregate losses in excess of $1
million up to a maximum of $100 million. This protection is activated whenever
one event causes the disability and/or death of five or more people covered
under UNUM's life or disability contracts. Colonial Life is covered by
catastrophe reinsurance for accidental deaths totaling more than $300,000 from a
single disaster, up to a limit of $5 million. UNUM Limited's group disability
business is partially covered by catastrophe reinsurance of 3 million
pounds sterling for losses from one event involving more than twenty-five
lives. Commercial Life is covered by catastrophe reinsurance, which provides
additional protection against aggregate losses in excess of $1 million up to a
maximum of $54 million for losses involving three or more covered lives.
Also, UNUM purchased excess-of-loss reinsurance totaling $60 million over
three years through a Lloyd's of London syndicate for the non-cancellable
individual disability business of UNUM America and First UNUM.
Reinsurance premiums assumed and ceded for the year ended December 31, 1994,
were $170.7 million and $112.5 million, respectively. No current or planned
reinsurance activity is expected to have a significant impact on the ability of
UNUM to underwrite additional insurance.
J. RESERVES
The reserves reported in the consolidated financial statements of UNUM
Corporation and subsidiaries have been computed in accordance with generally
accepted accounting principles ("GAAP") for stock life insurance companies.
These reserve balances generally differ from those specified by the laws of the
various states and those carried in the statutory financial statements. The
differences between GAAP and statutory reserves arise from the use of different
mortality, morbidity, interest, expense and lapse assumptions.
Pursuant to insurance laws of the states of Maine, New York, South Carolina,
and Wisconsin, the United Kingdom and of Japan, UNUM's insurance subsidiaries
(UNUM America, First UNUM, Colonial Life, Commercial Life, UNUM Limited and UNUM
Japan, respectively) set up statutory reserves, carried as liabilities, to meet
obligations on their various policies. These statutory reserves are amounts
which, together with premiums to be received and interest on such reserves at
assumed rates, are calculated to be sufficient to meet the policy and contract
obligations of UNUM's insurance subsidiaries. Pursuant to 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 upon UNUM's insurance
subsidiaries' experience as adjusted to provide for possible adverse deviations.
These estimates are periodically reviewed and compared to actual experience. The
assumptions are revised when it is determined that future expected experience
differs from the assumed estimates.
K. EMPLOYEES
At December 31, 1994, UNUM had approximately 7,200 full-time employees. UNUM
does not have collective bargaining agreements with employees.
L. COMPETITION
The principal competitive factors affecting UNUM's business are reputation,
financial strength, quality of service, risk management, product design and
price. There is competition among insurance companies for the types of
individual and group insurance and retirement products sold by UNUM. At the end
of 1994, there were approximately 1,900 legal reserve life insurance companies
in the United States and Canada and life assurance offices in the United
Kingdom, which may offer insurance products similar to those marketed by UNUM.
UNUM also competes with banks, investment advisors, mutual funds and other
financial entities to provide products and services. All areas of group
insurance are highly competitive because of the large number of insurance
companies and other entities offering these products.
M. REGULATION
UNUM's insurance subsidiaries are subject to regulation and supervision in
the jurisdictions in which they do business. Although the extent of such
regulation varies, U.S. state, Canadian, United Kingdom and Japanese insurance
laws generally establish supervisory agencies, such as state insurance
departments, the Office of the Superintendent of Financial Institutions
("OSFI"), The Department of Trade and Industry ("DTI") and the Ministry of
Finance ("MOF"), respectively, with broad administrative powers. These powers
relate chiefly to the granting and revocation of the licenses to transact
business, and establishing reserve requirements and the form and content of
required financial statements. Such powers also include the licensing of agents
in the U.S. and the approval of policy forms in the U.S. and Japan. UNUM's
insurance operations and subsidiaries must meet the standards and tests for its
investments promulgated by insurance laws and regulations of Maine, New York,
South Carolina, Wisconsin, Canada, the United Kingdom and Japan, as applicable.
UNUM's United States domiciled insurance subsidiaries are required to file
quarterly and annual statements with the various insurance departments in state
jurisdictions in which they do business. These statements comply with the rules
of the National Association of Insurance Commissioners ("NAIC"). UNUM's
insurance subsidiaries are examined periodically by examiners of the states of
Maine, New York, South Carolina and Wisconsin and of other states (on an
"association"
or "zone" basis) in which they are licensed to do business. UNUM's insurance
branch operation in Canada is periodically examined by Canadian insurance
regulatory authorities and is required to file annual reports that comply with
the insurance laws of Canada and with the rules of the OSFI of the Canadian
Federal government and each of the provinces. UNUM's United Kingdom subsidiary
is required to file financial statements annually with the DTI, in accordance
with United Kingdom law and regulation. UNUM Japan is required to file periodic
financial statements with the MOF, in accordance with Japanese laws and
regulations.
UNUM's insurance subsidiaries operate under insurance laws, which require
that they establish and carry, as liabilities, actuarial reserves to meet their
obligations on their life, disability, accident and health policies and
annuities. These reserves are verified periodically by various regulators.
UNUM's reinsurance underwriting manager, Duncanson & Holt, Inc., ("D&H") is
a licensed reinsurance intermediary in New York. It is subject to regulation in
New York and other states where it does business. Duncanson & Holt Underwriters,
Ltd., a subsidiary of D&H, is a corporate member of Lloyds of London and is
subject to all rules applicable to such members.
UNUM Sales Corporation, a registered broker-dealer, is regulated by the
National Association of Securities Dealers, Inc. and the Securities and Exchange
Commission. It is the principal underwriter for variable annuity contracts
offered by UNUM America and First UNUM.
The laws of the State of Maine require periodic registration and reporting
by insurance companies domiciled within its jurisdiction, which control or are
controlled by other corporations or persons. This constitutes, by definition, a
holding company system. UNUM America is domiciled in Maine and is subject to
these laws. New York, which is the domiciliary state of First UNUM; South
Carolina, which is the domiciliary state of Colonial Life; and Wisconsin, which
is the domiciliary state of Commercial Life, have similar laws. Accordingly, the
UNUM insurance subsidiaries are registered as members of the UNUM holding
company system in the states of Maine, New York, South Carolina and Wisconsin.
The statutes of these states require periodic disclosure concerning the ultimate
controlling person and intercorporate transactions within the holding company
system, some of which require prior approval.
Effective December 31, 1991, UNUM America merged with two of UNUM
Corporation's wholly-owned Maine life insurance subsidiaries, UNUM Life
Insurance Company ("UNUM Life") and UNUM Pension and Insurance Company ("UPIC"),
with UNUM America remaining as the surviving corporation. In connection with the
merger of UNUM Life and UPIC into UNUM America, UNUM Life ceased to maintain its
licensing status in the State of New York effective December 31, 1991, with all
future New York business being transacted by First UNUM. As a condition of New
York regulatory approval, UNUM America agreed to maintain a security deposit in
the State of New York equal to 102% of outstanding statutory liabilities to New
York policyholders, insureds and claimants of UNUM Life. The security deposit
consists of certain cash and invested assets. An initial deposit was made in
February 1992 and at December 31, 1994, the required deposit was $819.2 million.
UNUM America has the ability to withdraw assets from this account and to
substitute other assets at its discretion. The balance of the security deposit
will be reviewed and adjusted at least annually based upon the outstanding
liabilities described above.
N. PARTICIPATION FUND ACCOUNT
Participating policies issued prior to November 14, 1986, by the former
Union Mutual Life Insurance Company ("Union Mutual") will remain participating
as long as they remain in force. A Participation Fund Account ("PFA") has been
established for the sole benefit of all of Union Mutual's individual
participating life and annuity policies and contracts. At December 31, 1994, the
PFA had $347.0 million in assets, which are held by UNUM America. UNUM has
agreed to pay certain expenses associated with the PFA and at December 31, 1994,
the reserve for the present value of such expenses was $15.9 million.
PFA assets, investment earnings and income from operations are not available
to UNUM America or UNUM during the operation or upon the termination of the PFA.
In the unlikely event that the assets of the PFA are not adequate to provide for
policyholder benefits (exclusive of dividends, which are not guaranteed), UNUM
America would be required to provide for any shortfall, and such amounts, if
any, would reduce earnings of UNUM America and UNUM.
All operating data of the individual participating life and annuity
contracts has been excluded from the Consolidated Statements of Income and all
other operating data included in this report unless otherwise noted. The assets
and liabilities associated with the participating business are included in
UNUM's Consolidated Balance Sheets.
ITEM 2. PROPERTIES
UNUM owns home office property consisting of five office buildings and four
service buildings located throughout the Portland, Maine area. UNUM also owns an
office building in the United Kingdom, which is the home office of UNUM
Limited. The home office of the Colonial Companies is located in Columbia, South
Carolina, and is also owned by UNUM. In addition, UNUM leases, on periods
principally from five to ten years, office and warehouse space for use by its
home office affiliates and sales forces.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1994. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position or the consolidated operating results of UNUM.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders, through solicitation of
proxies or otherwise, during the fourth quarter 1994.
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, 1994, there were 25,280 shareholders of record of
common stock. Information concerning restrictions on the ability of UNUM's
subsidiaries to transfer funds to UNUM in the form of cash dividends is
described in Item 8 (Note 14).
The market price (as quoted by the New York Stock Exchange) and cash
dividends paid, per share of UNUM's common stock, by calendar quarter for the
past two years were as follows:
1994 1993
------------------------------------------ ------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
--------------------------------------------------------------------------------------------------------------------------------
High.................................... $ 46.875 $ 50.000 $ 56.750 $ 58.000 $ 54.750 $ 60.125 $ 57.750 $ 58.375
Low..................................... $ 35.125 $ 43.000 $ 44.500 $ 48.000 $ 47.750 $ 53.250 $ 51.000 $ 49.250
Close................................... $ 37.750 $ 46.000 $ 44.750 $ 52.750 $ 52.500 $ 54.500 $ 54.000 $ 56.500
Dividend Paid........................... $ 0.24 $ 0.24 $ 0.24 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $0.16 1/2
ITEM 6. SELECTED FINANCIAL DATA
UNUM CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1994 1993 1992 1991 1990 1989 1988 1987
--------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Revenues:
Premiums and other income (expense):
Employee Benefits $1,451.4 $1,362.6 $1,116.2 $1,000.0 $ 909.8 $ 769.3 $ 723.3 $ 670.5
Related Businesses 477.5 402.5 354.4 324.2 269.2 192.9 -- --
Colonial Companies 441.3 407.4 371.9 325.4 281.1 241.0 216.6 192.1
Individual Disability 357.5 322.5 292.9 253.4 169.4 147.2 134.7 126.1
Retirement Security 62.5 36.3 32.3 28.0 21.7 22.7 17.1 9.1
Other Operations 16.9 25.9 29.3 41.9 74.4 108.1 162.9 229.3
Corporate 0.8 -- 0.8 -- (0.1) 0.2 0.1 0.9
--------------------------------------------------------------------------------------------------------------------------------
Total premiums and other income 2,807.9 2,557.2 2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0
--------------------------------------------------------------------------------------------------------------------------------
Net investment income (expense): (a)
Employee Benefits 263.5 234.7 234.4 196.1 176.5 160.8 151.3 133.7
Related Businesses 89.6 85.5 91.6 95.3 63.5 38.3 -- --
Colonial Companies 32.6 41.4 35.4 38.5 25.2 26.7 22.3 19.0
Individual Disability 84.6 82.5 75.0 67.5 67.3 64.1 54.4 46.2
Retirement Security 226.9 235.5 228.8 227.8 209.6 196.8 172.4 157.6
Other Operations 114.4 154.0 181.6 184.9 218.0 227.8 240.7 260.6
Corporate 4.2 6.2 3.9 1.5 (9.0) 6.0 20.3 19.1
--------------------------------------------------------------------------------------------------------------------------------
Total net investment income 815.8 839.8 850.7 811.6 751.1 720.5 661.4 636.2
--------------------------------------------------------------------------------------------------------------------------------
Total revenues 3,623.7 3,397.0 3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2
--------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Employee Benefits 1,457.1 1,358.2 1,128.1 1,002.2 915.6 779.7 743.5 703.7
Related Businesses 506.8 430.7 392.6 358.4 298.3 213.4 -- --
Colonial Companies 411.2 378.4 346.8 306.4 259.6 225.5 201.1 178.6
Individual Disability 630.3 336.0 323.3 284.2 210.8 195.0 192.3 169.8
Retirement Security 263.7 250.7 254.4 257.9 230.9 212.9 176.2 151.1
Other Operations 122.8 159.1 194.4 243.3 271.9 326.5 404.5 533.7
Corporate 33.2 23.6 10.4 12.5 10.8 12.4 9.5 15.8
--------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 3,425.1 2,936.7 2,650.0 2,464.9 2,197.9 1,965.4 1,727.1 1,752.7
--------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1994 1993 1992 1991 1990 1989 1988 1987
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effects of accounting changes:
Employee Benefits 257.8 239.1 222.5 193.9 170.7 150.4 131.1 100.5
Related Businesses 60.3 57.3 53.4 61.1 34.4 17.8 -- --
Colonial Companies 62.7 70.4 60.5 57.5 46.7 42.2 37.8 32.5
Individual Disability (188.2) 69.0 44.6 36.7 25.9 16.3 (3.2) 2.5
Retirement Security 25.7 21.1 6.7 (2.1) 0.4 6.6 13.3 15.6
Other Operations 8.5 20.8 16.5 (16.5) 20.5 9.4 (0.9) (43.8)
Corporate (28.2) (17.4) (5.7) (11.0) (19.9) (6.2) 10.9 4.2
--------------------------------------------------------------------------------------------------------------------------------
Total income before income taxes and
cumulative effects of accounting changes 198.6 460.3 398.5 319.6 278.7 236.5 189.0 111.5
--------------------------------------------------------------------------------------------------------------------------------
Income taxes (credit) 43.9 148.3 107.3 74.3 60.9 51.1 30.1 (4.7)
--------------------------------------------------------------------------------------------------------------------------------
Cumulative effects of accounting changes -- (12.1)(b) -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------------------
Net income $ 154.7 $ 299.9 $ 291.2 $ 245.3 $ 217.8 $ 185.4 $ 158.9 $ 116.2
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Per common share:
Net income $2.09 $3.81(b) $3.71 $3.15 $2.73 $2.03 $1.57 $1.06
Dividends paid $0.92 $0.76-1/2 $0.62-1/2 $0.49 $0.37-1/2 $0.28-1/2 $0.23 $0.20
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Includes investment income and net realized investment gains.
(b) Effective January 1, 1993, UNUM adopted Financial Accounting Standard No.
106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," which decreased net income by $32.1 million, or $0.40 per share,
and Financial Accounting Standard No. 109, "Accounting for Income Taxes,"
which increased net income by $20.0 million, or $0.25 per share.
UNUM CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
December 31,
------------
(DOLLARS AND SHARES IN MILLIONS) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Assets $13,127.2 $12,437.3 $11,959.8 $11,310.9 $10,063.4 $9,045.7 $8,592.3 $7,783.0 $7,333.8 $6,019.0
Long-term debt $ 182.1 $ 128.6 $ 77.2 $ 51.5 $ 77.2 $ 1.5 $ 1.5 $ 1.7 $ 1.4 --
Stockholders' equity $ 1,915.4 $ 2,102.7 $ 2,010.9 $ 1,755.5 $ 1,490.1 $1,445.0 $1,512.3 $1,463.8 $1,471.1 $ 770.0(a)
Shares outstanding 72.4 76.0 79.1 78.2 77.4 82.0 96.8 104.2 111.4 NA(a)
Weighted average shares
outstanding during
the year 74.2 78.8 78.5 77.8 79.9 91.4 101.3 109.1 NA(a) NA(a)
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
<FN>
(a) In November 1986, UNUM converted to a stock company from a mutual company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This management's discussion and analysis reviews the consolidated financial
condition of UNUM at December 31, 1994, and the consolidated results of
operations for the past three years and, where appropriate, factors that may
affect future financial performance are identified and discussed. Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Selected Consolidated Financial Data.
CONSOLIDATED OVERVIEW
(Dollars and shares in millions, except per share amounts, and
percentage increase (decrease) over prior year) 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $2,732.4 10.4% $2,474.1 15.5% $2,142.4
Investment income 770.2 (2.6) 790.4 (2.3) 809.2
Net realized investment gains 45.6 (7.7) 49.4 19.0 41.5
Fees and other income 75.5 (9.1) 83.1 50.0 55.4
---------------------------------------------------------------------------------------------------------------------------
Total revenues 3,623.7 6.7 3,397.0 11.4 3,048.5
BENEFITS AND EXPENSE 3,425.1 16.6 2,936.7 10.8 2,650.0
---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECTS OF ACCOUNTING CHANGES 198.6 (56.9) 460.3 15.5 398.5
INCOME TAXES 43.9 (70.4) 148.3 38.2 107.3
---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effects of
accounting changes 154.7 (50.4) 312.0 7.1 291.2
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- nm 20.0 nm --
Postretirement benefits other than pensions, net of tax -- nm (32.1) nm --
---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 154.7 (48.4)% $ 299.9 3.0% $ 291.2
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before cumulative effects of accounting changes $ 2.09 $ 3.96 $ 3.71
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 0.25 --
Postretirement benefits other than pensions, net of tax -- (0.40) --
---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2.09 $ 3.81 $ 3.71
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF INCOME (LOSS) BEFORE INCOME TAXES
Employee Benefits Segment $ 257.8 7.8% $ 239.1 7.5% $ 222.5
Related Businesses Segment 60.3 5.2 57.3 7.3 53.4
Colonial Companies Segment 62.7 (10.9) 70.4 16.4 60.5
Individual Disability Segment (188.2) nm 69.0 54.7 44.6
Retirement Security Segment 25.7 21.8 21.1 nm 6.7
Other Operations Segment 8.5 (59.1) 20.8 26.1 16.5
Corporate (28.2) 62.1 (17.4) nm (5.7)
---------------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 198.6 (56.9)% $ 460.3 15.5% $ 398.5
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
1994 1993 1992
BALANCE SHEET DATA
Assets $13,127.2 $12,437.3 $11,959.8
Long-term debt $ 182.1 $ 128.6 $ 77.2
Stockholders' equity $ 1,915.4 $ 2,102.7 $ 2,010.9
Shares outstanding 72.4 76.0 79.1
Weighted average shares outstanding
during the year 74.2 78.8 78.5
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OVERVIEW
During 1994, UNUM reported decreased income before income taxes, which was
primarily attributable to unfavorable claims experience in two of UNUM's largest
product lines, individual disability as reported in the Individual Disability
segment, and group long term disability, as reported in the Employee Benefits
segment.
As further described in the Individual Disability segment, throughout 1994
UNUM's individual disability business in the United States experienced a higher
incidence of new claims and a disproportionate number of larger claims that
management has attributed to certain geographical and occupational segments,
particularly physicians. As a result, in 1994 UNUM increased reserves for
existing claims by $83.3 million and established a reserve for future estimated
losses of $109.1 million. These increased reserves reflect management's current
expectations for morbidity trends for the existing individual disability
business, as reported in the Individual Disability segment. This reserve
strengthening resulted in an increase to benefits to policyholders in the
Consolidated Statement of Income of $192.4 million and a decrease to net income
of $125.1 million, or $1.69 per share, for the year ended December 31, 1994. It
is not possible to predict whether morbidity trends will be consistent with
UNUM's current assumptions.
During 1994, UNUM's North American group long term disability results, as
reported in the Employee Benefits segment, were adversely affected through a
combination of increased incidence of new claims and an increased number of
large claims. Management continues to address these unfavorable claim trends by
increasing prices on selected new and inforce business, implementing more
stringent underwriting guidelines, and strengthening risk management programs.
Management believes these actions will strengthen UNUM's ability to deal with
these disability claims trends into the future, and that the level of future
earnings of the group long term disability product will be a function of the
effectiveness of these continuing actions and the time required for these
actions to take effect.
During 1994, several of UNUM's businesses were contending with various proposals
to reform the health care delivery system in the United States. While proposed
federal health care legislation was not enacted in 1994, structural reform is
under way, which UNUM believes has and will continue to alter the medical
profession, as well as the social and economic environment of the health care
industry. Management believes the uncertainties as to how the health care
industry will emerge from such structural reform, as well as changes in and
consolidation of the health care delivery system, contributed to a higher
incidence of new and larger claims for physicians.
The interest rate environment changed dramatically during 1994, as long-term
interest rates rose from a more than twenty-year low experienced in 1993, along
with increases in the prime lending rates and short-term rates. However,
average investment yields on new fixed maturity purchases for the past two years
remain below the existing average portfolio yield, which has decreased the
average rate used to discount disability claim reserve liabilities and decreased
levels of investment income in 1994 and 1993, despite continued growth in
invested assets. Management anticipates that the average investment portfolio
yield will further decline, since UNUM invests its cash flows in high quality
assets that currently have yields below the existing average portfolio yields.
Economic indicators at the end of 1994 and in early 1995 were predicting modest
growth in 1995 for UNUM's major markets: the United States, Canada and the
United Kingdom. In February 1995, the Federal Reserve Board tightened credit
policy, due to continued concerns about inflation, by raising the federal funds
rate to 6%, the highest level in four years. This represents an increase of
three full percentage points since the Federal Reserve Board started raising
rates in February 1994. Also in 1994, the central banks in Canada and the
United Kingdom increased interest rates. During 1994, long-term yields
increased; however, since long-term yields are based on market dynamics,
management cannot predict the impact of a higher short-term rate on future long-
term yields.
The increase in income before income taxes in 1993 was primarily due to expense
management, favorable claims experience in the Individual Disability segment and
unusually favorable interest spread margins on tax sheltered annuities in the
Retirement Security segment. Expenses of $9.6 million, or $0.12 per share,
incurred in connection with the merger of UNUM and Colonial Companies, Inc.,
included in Corporate, and unfavorable group life claims experience in the
Employee Benefits segment partially offset these results.
ACCOUNTING CHANGES
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after January
1, 1994. Upon the adoption of FAS 115, UNUM increased unrealized gains on
available for sale securities included in stockholders' equity on January 1,
1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the
unrealized holding gains on fixed maturities classified as available for sale
which were previously carried at amortized cost. In accordance with FAS 115,
prior year consolidated financial statements have not been restated to reflect
the change in accounting principle. The adoption of FAS 115 did not affect 1994
net income.
Included in 1993 net income were the cumulative and incremental effects of the
adoption of FAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions," and FAS No. 109, "Accounting for Income Taxes."
Effective January 1, 1993, UNUM adopted FAS 106, which changed the method for
recognition of the cost of postretirement benefits other than pensions from a
cash basis to an accrual basis over the years in which employees render the
related services. UNUM elected to recognize the FAS 106 liability at January 1,
1993, of $48.8 million as a cumulative effect of an accounting change which
decreased net income by $32.1 million, or $0.40 per share, in 1993. The
incremental effect of FAS 106 for 1993 was increased operating expenses of
approximately $6.0 million from 1992.
Also effective January 1, 1993, UNUM adopted FAS 109, which changed the method
for calculating and reporting deferred income taxes in the financial statements
from the deferred method to the liability method. The cumulative effect of this
accounting change amounted to a $20.0 million increase, or $0.25 per share, in
1993 net income.
UNUM also adopted FAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," effective January 1, 1993, which
resulted in an increase in other assets of $80.0 million and a corresponding
increase in future policy benefits and unpaid claims and claim expenses, but did
not affect 1993 net income.
INCOME TAXES
Effective tax rates, which reflect income tax expense as a percentage of pretax
income, were 22.1%, 32.2% and 26.9% for 1994, 1993 and 1992, respectively. The
significant reduction in the effective tax rate for 1994 resulted primarily from
reduced pretax earnings. Reported income tax expense was below the federal
statutory tax rate of 35% for 1994 and 1993, and 34% for 1992, primarily due to
tax savings from investments in tax-exempt securities. Although investments in
tax-exempt securities result in increased consolidated net income, these
investments reduce UNUM's business segments' income before income taxes.
In 1993, UNUM's growth in pretax income outpaced the growth of income from tax-
exempt securities, which resulted in an increased effective tax rate. On August
10, 1993, legislation was enacted to increase the federal corporate income tax
rate of 34% to 35%, retroactive to January 1, 1993. The change in tax rates
resulted in a $7.8 million, or $0.10 per share, charge related to the adjustment
of deferred tax liabilities. Excluding the adjustment to deferred income tax
expense of $7.8 million for the enacted tax rate change, the 1993 effective tax
rate would have been 30.5%.
EMPLOYEE BENEFITS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums
Group LTD $ 966.1 3.5% $ 933.4 20.4% $ 775.2
Group life insurance 312.3 14.8 272.0 28.2 212.2
Other employee benefits 162.2 10.0 147.4 22.2 120.6
--------------------------------------------------------------------------------------------------------------------------
Total premiums 1,440.6 6.5 1,352.8 22.1 1,108.0
Investment income 229.2 8.2 211.9 5.4 201.0
Net realized investment gains 34.3 50.4 22.8 (31.7) 33.4
Fees and other income 10.8 10.2 9.8 19.5 8.2
--------------------------------------------------------------------------------------------------------------------------
Total revenues 1,714.9 7.4 1,597.3 18.3 1,350.6
BENEFITS AND EXPENSES
Benefits to policyholders 1,117.0 9.7 1,018.3 26.0 808.0
Operating expenses 290.9 2.2 284.6 9.7 259.5
Commissions 108.0 10.3 97.9 10.7 88.4
Increase in deferred policy
acquisition costs (58.8) 38.0 (42.6) 53.2 (27.8)
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,457.1 7.3 1,358.2 20.4 1,128.1
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 257.8 7.8% $ 239.1 7.5% $ 222.5
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized new premiums)
Group LTD $ 218.0 $ 196.2 $ 160.0
Group life insurance $ 91.2 $ 89.4 $ 77.6
Other employee benefits $ 63.6 $ 52.9 $ 46.7
Persistency (premiums)
Group LTD 84.0% 88.7% 90.3%
Group life insurance 84.8% 89.2% 89.2%
Benefit ratio (% of premiums) 77.5% 75.3% 72.9%
Operating expense ratio (% of premiums) 20.2% 21.0% 23.4%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
EMPLOYEE BENEFITS SEGMENT
The Employee Benefits segment includes group long term disability ("group LTD"),
group life and other employee benefits products including short term disability,
accidental death and dismemberment and dental insurance, which are sold by UNUM
Life Insurance Company of America ("UNUM America") and First UNUM Life Insurance
Company ("First UNUM").
Increased sales and selected price increases on new and inforce cases
contributed to the premium growth of 6.5% in the Employee Benefits segment in
1994. Rate increases to address unfavorable experience on selected segments of
the inforce business contributed to the decline in both the group LTD and group
life premium persistency rates in 1994. In general, case terminations resulting
from rate increases have occurred in less profitable segments of these
businesses. Management expects to continue to seek inforce case rate increases,
as appropriate, given claims experience, to improve profitability. However,
such rate actions may increase case terminations and decrease persistency rates
for these businesses. In 1994 and 1993, group LTD was active in acquiring
closed blocks of claims which generated one-time premiums totaling $8.6 million
and $58.3 million, respectively. Management intends to pursue additional claim
block acquisitions in the future.
The 22.1% premium growth in 1993 reflected record sales in all of the Employee
Benefits segment's product lines. Premium growth also reflected selected price
increases, acquisitions of closed blocks of claims, and slight growth of the
employment and salary levels for group LTD's existing customer base. Renewal
rate actions for group LTD had a minimal impact on the premium persistency rate
for 1993.
During 1994, the group LTD business experienced a higher incidence of new claims
and an increased number of large claims, which were the primary causes of the
increased benefit ratio for the Employee Benefits segment from 1993. Management
has identified a number of geographical and occupational segments of the group
LTD business which are experiencing higher than expected claims. Management
continues to pursue these segments of the business for underwriting and pricing
actions, and is addressing increased incidence rates, lower recovery rates, and
the more subjective nature of the types of disability claims by implementing
new, and enhancing existing, risk management programs.
Group LTD earnings in 1994 were also adversely affected by a decrease in the
discount rate used to determine reserves, from 9.34% at December 31, 1993, to
9.18% at December 31, 1994, which resulted in an increase to claim reserves.
The discount rate is a composite yield of assets specifically matched with the
group LTD reserves. Management expects the discount rate will further decline,
since current cash flows are invested in high quality assets at current yields,
which are below the composite yields of the existing assets purchased in prior
years. UNUM has increased prices on both existing and new business in order to
mitigate the impact of the interest rate environment.
Reserves for unpaid claims are estimates based on UNUM's historical experience
and other actuarial assumptions, which consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to interest rates, and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. Reserve estimates and assumptions
are periodically reviewed and updated with any resulting adjustments to reserves
reflected in current operating results. Given the complexity of the reserving
process, the ultimate liability may be more or less than such estimates
indicate.
During 1994, management implemented and strengthened various risk management
programs to address the unfavorable claims trends experienced in group LTD. In
addition to the selected price increases on new and inforce business, more
stringent underwriting practices, and reducing benefit options for certain
segments of the business, management has established special units to address
specific aspects of disability claims, including complex and fraudulent claims.
Additionally, management has implemented new group LTD contract provisions which
provide risk management features and claimant rehabilitation incentives. Also,
management continually reviews the benefits management process to identify and
strengthen risk management policies and procedures.
Management believes these underwriting, pricing and risk management actions will
strengthen UNUM's ability to deal with these disability claims trends into the
future, and that the level of future earnings of the group LTD product will be a
function of the effectiveness of these continuing actions and the time required
for these actions to take effect.
The group life business reported favorable claims experience in 1994.
Management continues to address higher than expected claims in certain portions
of the business by imposing more stringent underwriting requirements and
increasing prices. Management believes these actions improved overall claims
experience for group life products in 1994.
The ratio of operating expenses to premiums was 20.2%, 21.0%, and 23.4% in 1994,
1993 and 1992, respectively. The decreases in 1994 and 1993 were attributable
to continued efforts to manage expense growth and increased premium from claim
block purchases in 1993, which do not have proportionally higher expenses.
Deferred policy acquisition costs increased in 1994 and 1993 due primarily to
deferrals of higher marketing costs associated with increased sales and renewal
activity.
In summary, the improvement in income before income taxes for the Employee
Benefits segment in 1994 was primarily due to favorable claims experience in the
group life and short term disability businesses, a lower operating expense
ratio, and increased realized investment gains, which were partially offset by
unfavorable claims experience in the group LTD business. Strong premium growth
and a lower operating expense ratio, which were partially offset by unfavorable
claims experience in the group life business and lower realized investment
gains, resulted in increased income before income taxes for 1993 as compared
with 1992.
RELATED BUSINESSES SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 434.0 22.8% $ 353.4 4.9% $ 336.8
Investment income 88.8 8.2 82.1 (6.2) 87.5
Net realized investment gains 0.8 (76.5) 3.4 (17.1) 4.1
Fees and other income 43.5 (11.4) 49.1 nm 17.6
--------------------------------------------------------------------------------------------------------------------------
Total revenues 567.1 16.2 488.0 9.4 446.0
BENEFITS AND EXPENSES
Benefits to policyholders 333.2 24.0 268.7 2.3 262.7
Operating expenses 127.3 3.6 122.9 30.1 94.5
Commissions 53.1 13.5 46.8 9.1 42.9
Increase in deferred policy
acquisition costs (6.9) (12.7) (7.9) 3.9 (7.6)
Interest expense 0.1 (50.0) 0.2 nm 0.1
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 506.8 17.7 430.7 9.7 392.6
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 60.3 5.2% $ 57.3 7.3% $ 53.4
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Benefit ratio (% of premiums) 76.8% 76.0% 78.0%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
RELATED BUSINESSES SEGMENT
The Related Businesses segment includes: UNUM Limited, the United Kingdom's
leader in group disability insurance; Commercial Life Insurance Company
("Commercial"), a leader in special risk insurance and professional association
insurance marketing; and Reinsurance Operations, which includes Duncanson &
Holt, Inc. ("D&H"), a leading accident and health reinsurance underwriting
manager, and other special risk reinsurance operations.
UNUM LIMITED
The depressed economic environment that affected the United Kingdom in 1992 and
1993 experienced a modest recovery in 1994, which positively affected UNUM
Limited's ability to sell long term disability insurance. UNUM Limited
experienced strong premium growth in 1994 as sales increased and persistency
rates improved. Also in 1994, claim block acquisitions generated one-time
premium of $25.8 million. A reallocation of capital from UNUM Limited in 1992,
and a decreasing interest rate environment, resulted in decreased investment
income for the Related Businesses segment in 1993.
UNUM Limited experienced favorable claims levels for most of 1994, which
improved the benefit ratio from 1993. However, in late 1994, UNUM Limited
incurred unfavorable claims experience, which management is evaluating to
determine the need for pricing actions, changes in underwriting standards or
risk management programs. If the unfavorable claims experience that developed
in late 1994 were to continue, UNUM Limited's earnings could be negatively
affected. Due to the nature of the risks insured and the relative size of the
U.K. block of business, UNUM Limited's operating results can exhibit claims
variability. Investment in administrative procedures and systems was the
primary reason for increased operating expenses in 1993.
On April 1, 1995, the United Kingdom's new Social Security (Incapacity for Work)
Act of 1994 will be effective, and will shift a greater financial responsibility
for disability benefits from the U.K. government to the private sector.
Management believes this legislation will increase awareness of the need for
disability insurance and expand the U.K. insurance market for long term
disability products, which could favorably affect UNUM Limited's sales.
However, it is unclear when the effects of this legislation will be evidenced.
During 1994, the U.S. dollar weakened slightly against the British pound
sterling, increasing UNUM Limited's earnings as reported in U.S. dollars. This
reversed the trend in 1993 and 1992 when the U.S. dollar strengthened against
the British pound sterling, decreasing earnings as reported in U.S. dollars.
The weighted average exchange rate was approximately $1.53, $1.51 and $1.78 for
the years ended December 31, 1994, 1993 and 1992. At December 31, 1994, the
spot rate had increased to $1.56.
COMMERCIAL
Increased sales across all lines of Commercial's businesses in 1994 benefited
premium growth, which was partially offset by higher than expected case
terminations. The 1994 benefit ratio was driven by favorable experience in the
special risk product line, offset by unfavorable claims experience in the
association group disability business within certain occupational groups and
geographical areas. Management is implementing rate increases and stronger
underwriting policies to mitigate this unfavorable claims experience. The
decrease in the benefit ratio in 1993 was primarily due to more favorable claims
experience in the association group disability business. Due to the nature of
the risks underwritten and relative size of the block of business, Commercial's
special risk products can exhibit claims variability.
REINSURANCE OPERATIONS
In 1994, Reinsurance Operations had unfavorable claims experience in certain
reinsurance pools and decreased fee income for D&H due to increased competition
and contract terminations. Fee income and operating expenses increased in the
Related Businesses segment in 1993 due to the full year inclusion of D&H, which
was acquired in third quarter 1992.
SUMMARY
Income before income taxes increased in 1994 for the Related Businesses segment,
primarily due to strong premium growth and favorable claims experience at UNUM
Limited, partially offset by unfavorable claims experience in Commercial's
association group disability business and in certain reinsurance pools. The
principal reason for the increase in income before income taxes for the Related
Businesses segment in 1993 was the inclusion of D&H results for a full year,
which was partially offset by less favorable earnings for UNUM Limited due to a
lower weighted average exchange rate.
COLONIAL COMPANIES SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 439.1 8.7% $ 403.9 10.8% $ 364.6
Investment income 30.9 3.7 29.8 (0.3) 29.9
Net realized investment gains 1.7 (85.3) 11.6 nm 5.5
Fees and other income 2.2 (37.1) 3.5 (52.1) 7.3
--------------------------------------------------------------------------------------------------------------------------
Total revenues 473.9 5.6 448.8 10.2 407.3
BENEFITS AND EXPENSES
Benefits to policyholders 221.1 6.6 207.5 10.4 187.9
Interest credited 5.0 19.0 4.2 16.7 3.6
Operating expenses 107.1 13.7 94.2 1.0 93.3
Commissions 96.7 4.3 92.7 8.0 85.8
Increase in deferred policy acquisition costs (18.7) (7.9) (20.3) (15.1) (23.9)
Interest expense -- (100.0) 0.1 -- 0.1
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 411.2 8.7 378.4 9.1 346.8
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 62.7 (10.9)% $ 70.4 16.4% $ 60.5
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized first month's premiums) $ 183.1 $ 171.4 $ 179.7
Benefit ratio (% of premiums) 50.4% 51.4% 51.5%
Operating expense ratio (% of premiums) 24.4% 23.3% 25.6%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
COLONIAL COMPANIES SEGMENT
The Colonial Companies segment includes Colonial Life & Accident Insurance
Company and affiliates, which offer payroll-deducted, voluntary employee
benefits to employees at their worksites. The Colonial Companies segment
("Colonial") markets accident and sickness, cancer, and life insurance products
primarily through independent sales representatives.
In 1994, Colonial experienced an increase in sales, which was attributed to
increased productivity from the sales organization and the offering of a number
of new products. In 1993, Colonial experienced a slight decrease in sales,
which management attributed to uncertainty in the marketplace as to the types of
coverage that would be included in health care reform proposals. Management
does not feel that 1994 sales were as negatively affected by health care reform
fears, as the focus shifted away from legislative health care restructuring
toward private market restructuring. Additionally, management views health care
reform as an opportunity for UNUM by allowing Colonial to leverage its expertise
in worksite marketing, since the workplace is considered to be a primary means
of access to insurance benefits in the developing healthcare environment. While
premium growth slowed in 1994, enhanced customer conservation programs have
partially offset the weaker sales levels in 1993 and 1992 by improving
persistency.
Realized investment gains for 1993 include approximately $8.5 million of gains
associated with Colonial's sales of higher yielding but callable investments to
realign its investment portfolio with UNUM's investment philosophy. Fees and
other income for 1992 reflect $4.0 million received from the settlement of a
lawsuit against a competitor.
Colonial's benefit ratio improved to 50.4% in 1994 from 51.4% in 1993. The
lower 1994 benefit ratio was driven by favorable claims experience and improved
incidence rates in most product lines, particularly in the cancer product line.
Management expects the benefit ratio to increase in the future as Colonial
continues to shift its product mix toward products with higher benefit ratios,
lower expense ratios and better persistency.
During 1994, the expense ratio increased because of higher than expected costs
associated with a sales organization realignment and litigation expenses, which
were partially offset by continued expense control efforts. The decline in
1993's expense ratio reflected management's efforts to control expenditures and
improve operational efficiencies.
Income before income taxes decreased in 1994 primarily because of reduced
realized investment gains and increased expenses, partially offset by favorable
claims experience. For 1993, Colonial's income before income taxes increased
primarily through continued expense control and a higher level of realized
investment gains attributed to the investment portfolio realignment.
INDIVIDUAL DISABILITY SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 346.8 11.2% $ 312.0 10.6% $ 282.2
Investment income 77.0 3.2 74.6 5.5 70.7
Net realized investment gains 7.6 (3.8) 7.9 83.7 4.3
Fees and other income 10.7 1.9 10.5 (1.9) 10.7
--------------------------------------------------------------------------------------------------------------------------
Total revenues 442.1 9.2 405.0 10.1 367.9
BENEFITS AND EXPENSES
Benefits to policyholders 487.2 nm 212.0 3.7 204.4
Operating expenses 122.3 18.2 103.5 3.5 100.0
Commissions 82.5 9.1 75.6 6.0 71.3
Increase in deferred policy acquisition costs (61.7) 12.0 (55.1) 5.2 (52.4)
--------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 630.3 87.6 336.0 3.9 323.3
--------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ (188.2) nm% $ 69.0 54.7% $ 44.6
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Sales (annualized new premiums) $ 65.8 $ 63.2 $ 60.1
Persistency (premiums) 92.4% 92.1% 91.7%
Benefit ratio (% of premiums) 140.5% 67.9% 72.4%
Operating expense ratio (% of premiums) 35.3% 33.2% 35.4%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
INDIVIDUAL DISABILITY SEGMENT
The Individual Disability segment includes disability income products sold in
the United States and Canada through UNUM America and First UNUM, as well as
private label agreements through these companies.
The loss before income taxes of $(188.2) million for the Individual Disability
segment for 1994 is primarily due to the $192.4 million reserve strengthening
recorded in the third quarter of 1994 and a $12.3 million restructuring charge
incurred in the fourth quarter as a result of the decision to stop selling non-
cancellable disability income policies in the United States. During 1994, the
Individual Disability segment experienced a higher incidence of new claims and a
disproportionate number of large claims that management has attributed to
certain geographic and occupational segments of the business, particularly
physicians. Management believes that changes in and consolidation of the health
care delivery system in the United States and the increased prevalence of
emerging and often subjective types of disabilities have contributed to
increased benefit costs.
During the third quarter of 1994, management concluded that the deterioration of
claims experience was not a temporary fluctuation in certain segments of the
business, but was indicative of expected claim trends for the future. Unlike
the group long term disability product, management has limited ability to manage
the claims risk associated with non-cancellable individual disability business,
since UNUM is contractually unable to reprice or cancel inforce policies that
have become unprofitable because of changes in claims experience that were
unforeseen when the policy was sold. The combination of these factors prompted
UNUM to assess the adequacy of future premiums to provide for future benefits
and expenses and the assumptions used in the existing claim reserves for the
Individual Disability segment. As a result, in third quarter 1994, UNUM
increased reserves for existing claims by $83.3 million and established a
reserve for estimated future losses of $109.1 million. These increased reserves
reflect management's current expectations for morbidity trends and record the
estimated future losses for the existing individual disability business, as
reported in the Individual Disability segment.
It is not possible to predict whether future morbidity trends will be consistent
with UNUM's current assumptions. During the fourth quarter of 1994, excess-of-
loss reinsurance totaling $60 million over three years was purchased through a
Lloyd's of London syndicate to cover UNUM's exposure to claims exceeding levels
assumed in the strengthened reserves. Management continues to evaluate its
financial options for this business, including reinsurance opportunities.
UNUM announced in November 1994 that it will discontinue sales of the
traditional, fixed price, non-cancellable product in the United States upon
introduction of new disability products in each state. Subject to state
regulatory approval, UNUM expects to introduce the new disability products to
most states during the second quarter of 1995. In connection with these product
changes, management expects to incur costs during 1995 to develop and market the
new individual disability products.
UNUM has further tightened underwriting rules and practices, and made other
product design limitations for the interim sales of the existing product. As a
result of the tightened underwriting of the existing product and the time needed
to develop the new products, management expects that sales of the Individual
Disability segment will decrease significantly in 1995 from levels in 1994.
UNUM is in continuing discussions with its private label partners as it develops
the new disability products to determine the future course of its private label
agreements. Private label agreements allow other insurance companies to market
UNUM's individual disability product under their own names.
In the fourth quarter of 1994, UNUM recorded a pretax charge of $12.3 million
related to the restructuring of the individual disability business and resulting
consolidation of home office operations in UNUM America, which was comprised of
$7.1 million for severance costs for 150 field and 150 home office employees and
$5.2 million for exit costs of certain leased facilities and equipment, expiring
through 1998. The severance costs are expected to be paid by the end of 1995.
The increase in income before income taxes for the Individual Disability segment
in 1993 from 1992 was primarily due to more favorable claims experience and
continued expense management.
RETIREMENT SECURITY SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums $ 56.0 75.0% $ 32.0 17.6% $ 27.2
Investment income 225.4 (3.6) 233.8 0.3 233.0
Net realized investment gains (losses) 1.5 (11.8) 1.7 nm (4.2)
Fees and other income 6.5 51.2 4.3 (15.7) 5.1
-----------------------------------------------------------------------------------------------------------------------------
Total revenues 289.4 6.5 271.8 4.1 261.1
BENEFITS AND EXPENSES
Benefits to policyholders 53.7 69.4 31.7 -- 31.7
Interest credited 158.4 (3.9) 164.9 (8.4) 180.0
Operating expenses 47.1 (11.5) 53.2 43.4 37.1
Commissions 14.5 15.1 12.6 41.6 8.9
Increase in deferred policy acquisition costs (10.0) (14.5) (11.7) nm (3.3)
-----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 263.7 5.2 250.7 (1.5) 254.4
-----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 25.7 21.8% $ 21.1 nm% $ 6.7
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Invested assets under management, at end of period $3,065.0 $3,033.0 $2,929.9
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
nm = not meaningful or in excess of 100%
RETIREMENT SECURITY SEGMENT
The Retirement Security segment includes tax sheltered annuities ("TSAs"), long
term care insurance, and beginning in 1993, lifestyle security protection
products, all of which are marketed by UNUM America and First UNUM.
During 1994 and 1993, UNUM offered the holders of certain types of TSA contracts
the opportunity to modify such contracts. The proposed contract amendments
provide for UNUM to increase the minimum guaranteed credited rates in return for
contractholders relinquishing the right to make lump-sum withdrawals without an
associated fee. As expected, certain contractholders elected to withdraw their
funds rather than convert to the modified contract provisions, which affected
the overall growth of invested assets under management. Management expects
these types of withdrawals to continue, which may affect future growth of
invested assets under management for TSAs.
During 1994, UNUM implemented an investment strategy to increase investments in
tax-exempt securities which has reduced income before income taxes for the
segment. Although investments in tax-exempt securities resulted in increased
consolidated net income, this investment strategy reduced the Retirement
Security segment's income before income taxes by approximately $6.7 million in
1994. In addition, the low interest rate environment during the past two years
has reduced the investment yields on TSA assets. As a result of these factors,
investment income decreased by $8.4 million and increased by only $0.8 million,
during 1994 and 1993, respectively.
As interest rates declined in 1993, the rate and level of interest credited to
TSA contractholders declined as well. Despite a rising interest rate
environment in 1994, the level of interest credited to TSA contractholders
continued to decline. As a result, the TSA business experienced unusually
favorable interest spread margins in 1994 and 1993. In 1994, 1993 and 1992, the
amount of interest credited to funds on deposit amounted to 70.3%, 70.5%, and
77.3% of investment income, respectively. Management does not expect interest
spread margins experienced by TSAs in 1994 and 1993 to continue at the same
level, which may reduce future earnings for the Retirement Security segment.
Management believes the failure of the last Congress to pass health care reform
legislation positively affected long term care insurance products, which
experienced premium and sales growth during 1994 after lower than expected
growth in 1993 due to the announcement of President Clinton's health care reform
proposal that included long term care coverage. During 1994, block acquisitions
generated one-time net premiums for long term care insurance products of $15.0
million. Management may pursue additional block acquisitions in the future.
Long term care insurance products experienced an increased incidence of new
claims during 1994, which management has addressed by implementing new
underwriting guidelines.
Income before income taxes increased in 1994 reflecting continued premium growth
and expense reductions in the long term care insurance products partially offset
by unfavorable claims experience. Additionally, during 1994 UNUM continued its
investment in the development of long term care and lifestyle security
protection products, and in a TSA business initiative which management expects
will improve customer acquisition and service functions as well as reduce future
operating expenses. Unusually favorable interest spread margins on tax
sheltered annuities were the primary reason for increased income before income
taxes in 1993.
OTHER OPERATIONS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
REVENUES $131.3 (27.0)% $179.9 (14.7)% $210.9
BENEFITS AND EXPENSES
Benefits to policyholders 35.9 (4.3) 37.5 (1.1) 37.9
Interest credited 79.3 (29.1) 111.9 (22.7) 144.8
Operating expenses 5.7 (5.0) 6.0 (11.8) 6.8
Commissions 1.1 (8.3) 1.2 (25.0) 1.6
Decrease in deferred policy acquisition costs 0.8 (68.0) 2.5 (24.2) 3.3
----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 122.8 (22.8) 159.1 (18.2) 194.4
----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 8.5 (59.1)% $ 20.8 26.1% $ 16.5
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
OTHER OPERATIONS SEGMENT
The Other Operations segment includes individual life insurance business of UNUM
Life Insurance Company of America, group medical insurance, guaranteed
investment contracts ("GICs"), deposit administration accounts ("DAs"), and
401(k) plans, all of which are no longer actively marketed by UNUM.
The reduced invested asset base under management for GICs, DAs and 401(k) plans
resulted in lower revenues from investment income and reduced amounts of
interest credited. Management expects continued decreases in the amounts of
investment income and interest credited as the related GIC, DA and 401(k)
contracts mature or terminate. Management expects future earnings in the Other
Operations segment to decline, reflecting the run-off nature of these closed
blocks of businesses.
During 1992, UNUM released the remaining restructuring reserve for the costs of
withdrawal from the 401(k) business since actual costs were less than expected,
resulting in increased pretax income of $5.3 million. The gain associated with
the release of this restructuring reserve reduced operating expenses in the 1992
Consolidated Statement of Income.
CORPORATE
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Loss before income taxes $(28.2) $(17.4) $(5.7)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Corporate includes transactions that are generally non-insurance related,
expenses incurred in conjunction with UNUM's long-term strategic investment in
Japan and interest expense on corporate borrowings. The increased loss before
income taxes in 1994 in Corporate was primarily due to increased interest
expense and increased costs related to the investment in Japan. The increased
loss before income taxes in 1993 was primarily due to the expenses incurred in
connection with the March 26, 1993, merger of UNUM Corporation and Colonial
Companies, Inc., decreased interest income and increased investment in Japan.
UNUM JAPAN
On June 20, 1994, the Japanese Ministry of Finance granted UNUM a provisional
operating license which allowed UNUM to establish a non-life insurance company,
UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), to market
disability and other accident products in Japan. UNUM Japan has subsequently
received an official license and began selling group long term disability
products in the fourth quarter of 1994, with the first policies effective
January 1, 1995.
UNUM Japan formed a cooperative relationship with Japan's leading short term
disability insurer, Yasuda Fire & Marine Insurance Co., Ltd. to develop the new
long term disability products and introduce them in Japan. The two companies
continue to work together on market and product development and will also market
their own separate long term disability products. UNUM expects to continue
incurring costs to develop UNUM Japan's distribution network, advertising and
risk management programs.
INVESTMENTS
UNUM has a fairly conservative investment philosophy, with a portfolio that is
concentrated in investment grade bonds. UNUM evaluates total expected return
after consideration of all associated expenses and losses, within criteria
established for each product line. Product line investment strategies are
developed to complement business risks by meeting the liquidity and solvency
requirements of each product. UNUM purchases assets whose maturities, expected
cash flows and prepayment conditions are consistent with these strategies. The
nature and quality of the types of investments comply with policies established
by management, which are more stringent overall than the statutes and
regulations imposed by the jurisdictions in which UNUM's insurance subsidiaries
are licensed.
UNUM's investments are reported in the consolidated financial statements net of
any allowances for probable losses. Allowances are established based on a
review of specific assets as well as the overall portfolio, considering the
carrying value of the underlying assets. If a decline in market value is
considered to be other than temporary, 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.
At December 31, 1994, the composition of UNUM's $10,433.8 million of invested
assets was 75.4% fixed maturities, 11.7% mortgage loans, 6.0% equity securities,
1.8% real estate and 5.1% other invested assets. Gross realized investment
gains were $117.0 million, $85.2 million and $94.4 million, and gross realized
investment losses were $71.4 million, $35.8 million and $52.9 million for the
years ended December 31, 1994, 1993 and 1992, respectively.
FIXED MATURITIES:
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after January
1, 1994, which are classified and accounted for as follows:
- Fixed maturities that UNUM has the positive intent and ability to hold to
maturity are classified as "held to maturity" and are reported at amortized
cost, less an allowance for probable losses. The majority of UNUM's
insurance reserve liabilities are generally long-term in nature and not
subject to withdrawal. Since UNUM purchases assets whose maturities,
expected cash flows, and prepayment conditions complement business risks
by meeting the liquidity and solvency requirements of each product, the
majority of UNUM's fixed maturities have been classified as "held to
maturity" to match the longer term nature of UNUM's products.
- Fixed maturities and equity securities classified as "available for sale"
are reported at fair value. Related unrealized holding gains and losses,
net of deferred taxes, are reported in a separate component of
stockholders' equity. Fair values of fixed maturities are generally
obtained from external quoted market sources, and if not externally quoted,
are determined by UNUM primarily by using discounted cash flow models.
Upon the adoption of FAS 115, UNUM increased unrealized gains on available for
sale securities included in stockholders' equity on January 1, 1994, by $41.8
million (net of deferred taxes of $22.5 million) to reflect the unrealized
holding gains on fixed maturities classified as available for sale which were
previously carried at amortized cost. In accordance with FAS 115, prior year
consolidated financial statements have not been restated to reflect the change
in accounting principle. UNUM reclassified certain fixed maturities from held
to maturity to available for sale on January 1, 1994, in connection with the
adoption of FAS 115. The increasing interest rate environment during 1994
resulted in depressed fair values for available for sale fixed maturities, which
has decreased the initial $41.8 million increase in stockholders' equity to an
unrealized loss of $42.8 million at December 31, 1994.
At December 31, 1994, and 1993, the fixed maturity portfolio included $193.8
million and $263.3 million of below investment grade bonds (below "Baa"), which
represented 2.5% and 3.5% of the fixed maturity portfolio, respectively. These
bonds had associated market values of $193.4 million and $279.1 million,
respectively. Virtually all of the nonconvertible, below investment grade bonds
were purchased at investment grade, but were subsequently downgraded. UNUM's
investment policy is to invest primarily in fixed maturities of investment grade
quality. Selected purchases of convertible subordinated debentures, which UNUM
considers to be part of its investment strategy for equity securities, have
contributed to the amount of below investment grade bonds. Fixed maturity
ratings are obtained from external rating agencies, and if not externally rated,
are rated by UNUM internally using similar methods. Management does not expect
any risks or uncertainties associated with below investment grade bonds to have
a significant affect on UNUM's consolidated financial position or results of
operations. The percentage of fixed maturities delinquent 60 days or more
compared to total fixed maturities was 0.25% at December 31, 1994, and 0.24% at
December 31, 1993.
During fourth quarter 1994, UNUM sold fixed maturities of five issuers
classified as held to maturity with an amortized cost of $49.8 million due to
evidence of significant unexpected deterioration of the issuers'
creditworthiness. These sales resulted in a net realized loss of $3.0 million.
MORTGAGES:
At December 31, 1994, and 1993, UNUM's mortgage loans were $1,216.3 million and
$1,432.2 million, respectively. The mortgage loan portfolio, as a percentage of
total invested assets, has decreased to 11.7% as of December 31, 1994, from
14.1% as of December 31, 1993. It is anticipated that mortgages as a percentage
of total invested assets will decline further, but at a slower rate, as new
mortgage investments and refinances in selected markets will partially offset
prepayments and scheduled maturities. Management establishes allowances for
mortgage loans based upon a review of individual loans and the overall loan
portfolio, considering the value of the underlying collateral. UNUM uses a
comprehensive rating system to evaluate the investment and credit risk of each
mortgage loan and to target specific properties for inspection and reevaluation.
Overall, management believes that its mortgage loan portfolio is well
diversified geographically and among property types. UNUM's incidence of new
problem mortgage loans declined in 1994 as overall economic activity improved
modestly, and many of the real estate markets in which UNUM has mortgage loans
stabilized. Foreclosure activity and new reserve additions remained modest in
1994; however, management continues to expect additional delinquencies and
problem loans in the future. Management believes the allowance provided on
mortgage loans as of December 31, 1994, is adequate to cover probable losses.
Restructured loans are defined by UNUM as loans whose terms have been modified
to interest rates less than market at the time of restructure and are currently
expected to perform pursuant to such modified terms. UNUM modifies loans to
protect its investment and only when it is anticipated that the borrower will be
able to meet the modified terms. As of December 31, 1994, restructured mortgage
loans totaled $73.6 million, as compared with $65.9 million at December 31,
1993. Interest lost on restructured loans was not material in 1994, 1993 or
1992.
Problem loans are defined as mortgage loans that were delinquent 60 days or more
on a contract delinquency basis. Mortgage loans in the amount of $22.3 million
and $26.1 million, both representing 1.8% of the mortgage loan portfolio, were
delinquent 60 days or more on a contract delinquency basis, and were accounted
for on a nonaccrual basis at December 31, 1994, and 1993, respectively.
Interest lost on problem loans was not material in 1994, 1993 or 1992.
Potential problem loans are defined by UNUM as current and performing loans with
which management has some concerns about the ability of the borrower to comply
with present loan terms and whose book value exceeds the market value of the
underlying collateral. Loans in this category amounted to $36.2 million at
December 31, 1994, versus $92.7 million at December 31, 1993. Active asset
management contributed to the decline in this category during 1994.
Realized investment losses related to restructured and problem mortgage loans in
1994 amounted to $8.5 million, compared with $4.8 million and $26.5 million for
1993 and 1992, respectively. Problem and potential problem mortgage loans as of
December 31, 1994, are not expected to have a significant impact on UNUM's
results of operations, liquidity, or capital resources.
REAL ESTATE:
At December 31, 1994, investment real estate and real estate held for sale
amounted to $190.8 million and $31.0 million, respectively. This compares with
$193.5 million of investment real estate and $24.7 million of real estate held
for sale at December 31, 1993. UNUM has limited the growth of its real estate
exposure, as a percentage of invested assets, through an active sales program.
UNUM sold $25.4 million and $40.5 million of real estate at 103% and 105% of
carrying value during 1994 and 1993, respectively.
Real estate which meets certain investment criteria and is intended to be held
long-term is carried at cost less accumulated depreciation. Real estate that
has been acquired through foreclosure is valued at fair value at the date of
foreclosure. Real estate held for sale is included in other assets in the
Consolidated Balance Sheets and is valued net of an allowance which reduces the
carrying value to the lower of fair value less estimated costs to sell, or cost.
Occasionally, investment real estate is reclassified and revalued as real estate
held for sale when it no longer meets UNUM's investment criteria. Additions to
allowances for probable losses related to real estate held for sale resulted in
realized investment losses of $0.8 million, $18.8 million and $7.2 million for
the years ended December 31, 1994, 1993 and 1992, respectively.
Given the current real estate environment, additional foreclosures are
anticipated, but at a reduced level from the early 1990s. Current and
anticipated real estate acquired through foreclosure is not expected to have a
significant affect on UNUM's results of operations, liquidity, or capital
resources.
LIQUIDITY AND CAPITAL RESOURCES
UNUM's businesses produce positive cash flows, which are invested primarily in
intermediate, fixed maturity investments intended to reflect the nature of
anticipated cash obligations of insurance benefit payments and insurance
contract maturities and to optimize investment returns at appropriate risk
levels. To meet unexpected cash requirements and liquidity needs, UNUM maintains
part of its investment portfolio in fixed maturities classified as available for
sale, equity securities, cash and short-term investments.
From time to time, dividend payments, which may be subject to approval by
insurance regulatory authorities, are made from UNUM's affiliates and insurance
subsidiaries to UNUM Corporation. These dividends, along with other funds, are
used to service the needs of UNUM Corporation including: debt service, common
stock dividends, stock repurchase, administrative costs and corporate
development. Income determined using statutory accounting is one of the major
determinants of an insurance company's dividend capacity to its parent in the
following fiscal year. Statutory accounting rules and practices, which differ
in certain respects from generally accepted accounting principles, are mandated
by regulators in an insurance company's state of domicile.
In 1994, UNUM America's disability businesses were adversely affected by
unfavorable claims experience as discussed in the Employee Benefits and
Individual Disability segments. As described in the Individual Disability
segment, UNUM America strengthened reserves for existing claims related to the
traditional non-cancellable individual disability products. As a result, UNUM
America recognized a statutory after-tax charge of $69.6 million in third
quarter 1994. These factors caused the 1994 statutory income of UNUM America to
be significantly reduced to $39.2 million, as compared with $165.2 million in
1993.
As a result of this reduction in UNUM America's statutory earnings, the amount
available under current law for payment of dividends to UNUM Corporation from
all U.S. domiciled insurance subsidiaries during 1995, without state insurance
regulatory approval, decreased to approximately $81.3 million, as compared with
$176.8 million for 1994. UNUM Corporation also has the ability to draw a
dividend of approximately $30 million from its United Kingdom based affiliate,
UNUM Limited, subject to certain U.S. tax consequences.
Effective December 13, 1994, management expanded UNUM Corporation's lines of
credit with a new committed revolving credit facility totaling $500 million,
expiring on October 1, 1999, which replaced previously existing facilities
totaling $300 million. UNUM Corporation'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
level of debt.
In September 1993, UNUM announced the filing of an omnibus shelf registration
statement with the Securities and Exchange Commission which became effective on
October 8, 1993, relating to $450 million of securities (including debt
securities, preferred stock, common stock and other securities). On October 8,
1993, UNUM filed a prospectus supplement to establish a $250 million medium-term
note program under the shelf registration. The medium-term note program and the
unsold portion of the shelf registration carry ratings of "A1" (Medium Quality)
and "(P)A1" (Medium Quality), respectively, from Moody's Investors Service, and
"A+" (Strong) from Standard & Poor's Corporation. The unsold portion of the
shelf registration relating to subordinated debt and preferred stock carries
ratings of "(P)A2" (Medium Quality) and "(P)"a1"" (Upper-Medium Quality),
respectively, from Moody's Investors Service.
At December 31, 1994, UNUM had short-term and long-term debt totaling $246.6
million and $182.1 million, respectively. At December 31, 1994, approximately
$280 million was available for additional financing under the existing revolving
credit facility and approximately $390 million of investment grade debt
instruments was available for issuance under the shelf registration. On
February 28, 1995, UNUM borrowed $100 million under the revolving credit
facility, which was infused into UNUM America in exchange for surplus
debentures. Repayment of principal and interest on the surplus debentures is
subject to state insurance regulatory approval. Contingent upon market
conditions and corporate needs, management may refinance short-term notes
payable with longer term securities.
In September 1993, UNUM announced the resumption of a program to repurchase its
common stock pursuant to an existing Board of Directors' resolution. On
February 11, 1994, UNUM's Board of Directors voted to expand UNUM's
authorization to repurchase an additional 5.0 million shares, bringing the total
number of shares authorized for repurchase to 44.0 million shares. Since the
resumption of the stock repurchase program, UNUM has acquired 7.6 million shares
through December 31, 1994, in the open market at an aggregate cost of $375.8
million that was primarily funded through additional borrowings. This share
repurchase contributed to the decrease in the number of shares outstanding at
December 31, 1994, to 72.4 million, from 76.0 million at December 31, 1993.
Prior to the resumption of this repurchase program, UNUM had not acquired any
shares in the open market since 1990. At December 31, 1994, approximately 2.7
million outstanding shares remained authorized for repurchase.
During 1994 and 1993, withdrawals of contracts reported in the Other Operations
segment, including contract terminations, payments to participants and transfers
to other carriers, were approximately $130 million and $309 million,
respectively. Withdrawals during 1994 and 1993 were at levels expected by
management and reflect the run-off nature of these closed blocks of businesses.
UNUM manages liquidity objectives by including certain conditions in pension
contracts which prohibit or restrict availability of funds.
UNUM was committed at December 31, 1994, to purchase fixed maturities and other
invested assets in the amount of $37.5 million. Independent of the cash flows
of UNUM Corporation, management anticipates that the operating cash flows of the
subsidiaries of UNUM Corporation will be sufficient to meet benefit obligations,
planned investment commitments and operational needs of those companies.
EFFECT OF INFLATION
Inflation is one of the factors that has increased the need for insurance. Many
policyholders who once had adequate insurance programs at lower coverage levels
have increased their disability insurance coverage to provide the same relative
financial benefits and protection.
Changing interest rates, which are traditionally linked to changes in inflation,
affect UNUM's level of discounted reserves. While rising interest rates are
beneficial when investing current cash flows, they can also reduce the fair
value of existing fixed rate long-term investments. In addition, lower interest
rates can lead to early payoffs and refinancing of some of UNUM's fixed rate
investments. Management generally invests in fixed rate instruments that are
structured to limit the exposure to such reinvestment risk.
RATINGS
A.M. Best Company ("Best's"), Moody's Investors Service ("Moody's") and Standard
& Poor's Corporation ("S&P") 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
United States domiciled insurance company subsidiaries rather than on a
consolidated basis, since the financial information used to develop the ratings
is based on statutory accounting practices in the United States.
UNUM's largest affiliate, UNUM Life Insurance Company of America ("UNUM
America"), had its Best's financial strength rating affirmed at "A++"
(Superior), the highest rating assigned by Best's, in May 1994. Best's again
affirmed UNUM America's "A++" rating in November 1994. In January 1995, S&P
completed its review of UNUM America and lowered its claims-paying ability
rating to "AA" (Excellent) from "AA+" (Excellent). According to S&P, the
downgrade was a result of pressures on risk-adjusted capitalization and higher
financial leverage, due in part to lower profitability. In March 1995, Moody's
completed its review of UNUM America and lowered its financial strength
rating to "Aa2" (Excellent) from "Aa1" (Excellent) citing the outlook for UNUM's
group long term disability business as well as UNUM's increasing leverage and
moderately reduced financial flexibility.
First UNUM Life Insurance Company ("First UNUM") also had its financial strength
rating reaffirmed by Best's in May 1994, at "A+" (Superior). In January 1995,
S&P lowered First UNUM's claims-paying ability rating to "AA" (Excellent) from
"AA+" (Excellent). In March 1995, Moody's confirmed First UNUM's "Aa2"
(Excellent) financial strength rating.
Colonial Life & Accident Insurance Company ("Colonial Life") had its Best's
financial strength rating affirmed as "A+" (Superior) in May 1994. In March
1994, S&P assigned an "AA-" (Excellent) claims-paying ability rating to
Colonial. Subsequently, in January 1995, S&P affirmed Colonial's "AA-"
(Excellent) rating. In March 1995, Moody's lowered Colonial's financial
strength rating to "Aa3" (Excellent) from "Aa2" (Excellent).
Commercial Life Insurance Company had its Best's financial strength rating
upgraded to "A" (Excellent) in July 1994.
UNUM Corporation has the following debt ratings based on consolidated financial
information under generally accepted accounting principles. In January 1995,
S&P lowered the senior debt rating of UNUM Corporation to "A+" (Strong) from
"AA" (Very Strong), and lowered the commercial paper rating to "A-1" (Strong)
from "A-1+" (Extremely Strong). In March 1995, Moody's lowered UNUM
Corporation's senior debt rating to "A1" (Medium Quality) from "Aa3" (High
Quality) and confirmed the commercial paper rating of "P-1" (Superior Ability).
INSURANCE REGULATION
The National Association of Insurance Commissioners adopted a set of Risk-Based
Capital standards for the life and health insurance industry, which became
effective in 1993. These Risk-Based Capital standards are one way to measure
the risk that insurance companies assume in the course of conducting insurance
and investment activities.
The Risk-Based Capital standards for life insurance companies are based on a
formula that establishes capital requirements relating to existing asset default
risk, insurance risk, interest rate (asset/liability mismatch) risk and business
risk. A company's Total Adjusted Capital (statutory capital, surplus, and Asset
Valuation Reserve plus certain other adjustments) is compared to the Authorized
Control Level ("ACL") of Risk-Based Capital produced by the formula. Subject to
certain trend tests to determine the change in the ACL ratio from year to year,
companies with Total Adjusted Capital above 200% of ACL are assumed to be
adequately capitalized. Companies below 200% of ACL are identified as requiring
various levels of regulatory action ranging from increased information
requirements for companies between 150% and 200% of ACL, to mandatory control by
the domiciliary insurance department for companies below 70% of ACL.
At December 31, 1994, the ACL ratios for UNUM America, First UNUM, Colonial Life
and Commercial Life were approximately 305%, 355%, 440% and 380%, respectively.
This compares with ACL ratios at December 31, 1993, of approximately 350%, 390%,
450% and 380%, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments such as options,
futures and forward exchange contracts to hedge certain risks associated with
future investments and certain payments denominated in foreign currencies,
primarily British pound sterling, Canadian dollar and Japanese yen. These
derivative financial instruments are used to protect UNUM from the effect of
market fluctuations in interest and exchange rates between the contract date and
the date on which the hedged transaction occurs. UNUM does not intend to hold
derivative financial instruments for the purpose of trading.
At December 31, 1994, UNUM had no open derivative financial instruments. At
December 31, 1993, UNUM held interest rate futures contracts with commitments to
purchase government securities with total par values of $207.0 million. In
using these instruments, UNUM is subject to the off-balance-sheet risk that the
counterparties to the transactions will fail to completely perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges.
NEW ACCOUNTING PRONOUNCEMENT
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 114 "Accounting by Creditors for Impairment of a
Loan," which defines the principles to measure and record a loan when it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement.
In October 1994, the FASB issued FAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which amends FAS 114
to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan. UNUM will adopt FAS 114 and FAS
118 effective January 1, 1995. Adoption of FAS 114 and FAS 118 is not expected
to have a material effect on UNUM's results of operations or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1994 1993 1992
----------------------------------------------------------------------------------------------
REVENUES
Premiums $2,732.4 $2,474.1 $2,142.4
Investment income 770.2 790.4 809.2
Net realized investment gains 45.6 49.4 41.5
Fees and other income 75.5 83.1 55.4
----------------------------------------------------------------------------------------------
Total revenues 3,623.7 3,397.0 3,048.5
BENEFITS AND EXPENSES
Benefits to policyholders 2,248.1 1,775.7 1,532.6
Interest credited 242.7 281.0 328.4
Operating expenses 715.0 675.6 590.9
Commissions 355.9 326.8 298.9
Increase in deferred policy acquisition costs (155.3) (135.1) (111.7)
Interest expense 18.7 12.7 10.9
----------------------------------------------------------------------------------------------
Total benefits and expenses 3,425.1 2,936.7 2,650.0
----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECTS
OF ACCOUNTING CHANGES 198.6 460.3 398.5
INCOME TAXES
Current 30.4 73.4 68.0
Deferred 13.5 74.9 39.3
----------------------------------------------------------------------------------------------
Total income taxes 43.9 148.3 107.3
----------------------------------------------------------------------------------------------
Income before cumulative effects of accounting changes 154.7 312.0 291.2
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 20.0 --
Postretirement benefits other than pensions, net of tax -- (32.1) --
----------------------------------------------------------------------------------------------
NET INCOME $ 154.7 $ 299.9 $ 291.2
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before cumulative effects of accounting changes $ 2.09 $ 3.96 $ 3.71
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income taxes -- 0.25 --
Postretirement benefits other than pensions, net of tax -- (0.40) --
----------------------------------------------------------------------------------------------
NET INCOME $ 2.09 $ 3.81 $ 3.71
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities:
Held to maturity-principally at amortized cost
(fair value: 1994-$6,168.6; 1993-$7,149.9) $ 6,227.2 $ 6,560.7
Available for sale-at fair value (amortized
cost: $1,701.4) 1,640.6 --
Available for sale-principally at amortized
cost (fair value: $929.9) -- 872.0
Equity securities available for sale-at fair value
(cost: 1994-$492.2; 1993-$508.3) 627.9 730.0
Mortgage loans 1,216.3 1,423.2
Real estate, net 190.8 193.5
Policy loans 201.0 187.9
Other long-term investments 38.1 59.0
Short-term investments 291.9 69.6
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Total investments 10,433.8 10,095.9
Cash 36.1 20.8
Accrued investment income 195.9 184.0
Premiums due 189.7 165.5
Deferred policy acquisition costs 1,035.2 879.1
Property and equipment, net 153.4 143.5
Other assets 737.2 681.8
Separate account assets 345.9 266.7
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Total assets $13,127.2 $12,437.3
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(Continued on next page)
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits $ 1,591.6 $ 1,362.5
Unpaid claims and claim expenses 3,853.9 3,341.5
Other policyholder funds 4,058.8 4,250.7
Income taxes
Current 12.4 31.5
Deferred 348.6 376.7
Notes payable 428.7 238.6
Other liabilities 571.9 466.4
Separate account liabilities 345.9 266.7
-------------------------------------------------------------------------------------------------------
Total liabilities 11,211.8 10,334.6
Stockholders' equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000 shares, issued 99,987,958 shares 10.0 10.0
Additional paid-in capital 1,080.5 1,078.4
Unrealized gains on available for sale securities, net of deferred taxes 49.6 149.1
Unrealized foreign currency translation adjustment (23.7) (24.1)
Retained earnings 1,507.2 1,420.8
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2,623.6 2,634.2
Less:
Treasury stock, at cost (1994-27,575,430 shares;
1993-24,006,816 shares) 706.6 529.8
Restricted stock deferred compensation 1.6 1.7
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Total stockholders' equity 1,915.4 2,102.7
-------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $13,127.2 $12,437.3
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Gains (Losses)
On Available Unrealized
Common for Sale Foreign Restricted
Stock Additional Securities, Net Currency Stock
(DOLLARS IN MILLIONS, $0.10 Par Paid-in Of Deferred Translation Retained Treasury Deferred
EXCEPT PER COMMON SHARE DATA) Value Capital Taxes Adjustment Earnings Stock Compensation Total
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1992 $ 5.0 $ 1,061.1 $ 98.7 $ 7.1 $ 945.9 $ (360.1) $ (2.2) $1,755.5
1992 Transactions:
Net income 291.2 291.2
Unrealized gains on equity
securities, net of deferred taxes 22.4 22.4
Unrealized foreign currency
translation adjustment (28.0) (28.0)
Two-for-one stock split 5.0 (5.0) --
Dividends to stockholders
($0.62 1/2 per common share) (53.1) (53.1)
Employee stock option and
other transactions 10.5 (1.7) 14.6 (0.5) 22.9
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BALANCE AT DECEMBER 31, 1992 10.0 1,066.6 121.1 (20.9) 1,182.3 (345.5) (2.7) 2,010.9
1993 Transactions:
Net income 299.9 299.9
Unrealized gains on equity
securities, net of deferred taxes 28.0 28.0
Unrealized foreign currency
translation adjustment (3.2) (3.2)
Dividends to stockholders
($0.76 1/2 per common share) (61.4) (61.4)
Treasury stock acquired (192.5) (192.5)
Employee stock option and
other transactions 11.8 8.2 1.0 21.0
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BALANCE AT DECEMBER 31, 1993 10.0 1,078.4 149.1 (24.1) 1,420.8 (529.8) (1.7) 2,102.7
1994 Transactions:
Net income 154.7 154.7
Unrealized losses on available for sale
securities, net of deferred taxes (99.5) (99.5)
Unrealized foreign currency
translation adjustment 0.4 0.4
Dividends to stockholders
($0.92 per common share) (68.3) (68.3)
Treasury stock acquired (183.3) (183.3)
Employee stock option and
other transactions 2.1 6.5 0.1 8.7
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BALANCE AT DECEMBER 31, 1994 $10.0 $ 1,080.5 $ 49.6 $(23.7) $1,507.2 $ (706.6) $ (1.6) $1,915.4
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- --------------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
--------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 154.7 $ 299.9 $ 291.2
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effects of accounting changes, net of tax -- 12.1 --
Increase in future policy benefits and unpaid
claims and claim expenses 720.1 412.9 335.7
(Increase) decrease in amounts receivable under
reinsurance agreements (18.6) (129.1) 6.1
Increase (decrease) in income tax liability (3.3) 109.8 51.6
Increase in deferred policy acquisition costs (155.4) (125.5) (111.7)
Other 3.3 (22.8) 26.5
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 700.8 557.3 599.4
--------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Maturities of fixed maturities -- 924.6 783.7
Maturities of fixed maturities held to maturity 754.8 -- --
Maturities of fixed maturities available for sale 41.2 -- --
Sales of fixed maturities held to maturity 46.8 45.7 122.4
Sales of fixed maturities available for sale 407.6 218.2 477.2
Sales of equity securities available for sale 314.1 -- --
Sales and maturities of other investments 414.9 550.2 825.0
Purchases of investments -- (1,832.2) (2,700.7)
Purchases of fixed maturities held to maturity (795.2) -- --
Purchases of fixed maturities available for sale (943.9) -- --
Purchases of equity securities available for sale (216.6) -- --
Purchases of other investments (211.5) -- --
Net (increase) decrease in short-term investments (221.7) 38.8 21.8
Net additions to property and equipment (29.9) (18.2) (23.1)
Investments in subsidiaries, net -- 0.9 (49.3)
--------------------------------------------------------------------------------------------------------
Net cash used in investing activities (439.4) (72.0) (543.0)
--------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Deposits and interest credited to investment contracts 608.6 735.2 835.7
Maturities and withdrawals from investment contracts (800.5) (1,022.4) (871.3)
Dividends to stockholders (68.3) (61.4) (53.1)
Treasury stock acquired (183.3) (192.5) --
Proceeds from notes payable 54.7 51.5 74.6
Repayment of notes payable (1.2) (50.1) (34.6)
Net increase (decrease) in short-term debt 136.6 37.3 (42.9)
Other 7.2 15.1 21.2
--------------------------------------------------------------------------------------------------------
Net cash used in financing activities (246.2) (487.3) (70.4)
--------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 0.1 2.4 0.1
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 15.3 0.4 (13.9)
Cash at beginning of year 20.8 20.4 34.3
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Cash at end of year $ 36.1 $ 20.8 $ 20.4
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(Continued on next page)
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------------------------------
DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 48.8 $ 67.3 $ 41.6
Interest $ 20.4 $ 13.3 $ 11.7
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of UNUM Corporation and
subsidiaries ("UNUM") have been prepared on the basis of generally accepted
accounting principles for stock life insurance companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of UNUM Corporation
and subsidiaries. Significant intercompany accounts and transactions have been
eliminated.
RECLASSIFICATION
Certain December 31, 1993, and 1992 amounts have been reclassified in 1994 for
comparative purposes.
INVESTMENTS
Investments are reported as follows:
- Fixed maturities held to maturity (certain bonds and redeemable preferred
stocks) - principally at amortized cost, less an allowance for probable
losses.
- Fixed maturities available for sale (certain bonds and redeemable
preferred stocks) - commencing January 1, 1994, at fair value. Prior to
January 1, 1994, at lower of aggregate amortized cost less an allowance
for probable losses, or fair value. See Note 3 "Investments" for a
discussion of the adoption of Financial Accounting Standard No. 115.
- Equity securities available for sale (common stocks and non-redeemable
preferred stocks) - at fair value.
- Mortgage loans - at amortized cost less an allowance for probable losses.
- Real estate - at cost less accumulated depreciation.
- Policy loans - at unpaid principal balance.
- Other long-term investments - at cost plus UNUM's equity in undistributed
net earnings since acquisition.
- Short-term investments - at cost.
Fixed maturities that UNUM has the positive intent and ability to hold to
maturity are classified as held to maturity.
Certain fixed maturities and equity securities are classified as available for
sale as they may be sold in response to changes in interest rates, resultant
prepayment risk, liquidity and capital needs, or other similar economic
factors. Related unrealized holding gains and losses, net of deferred taxes,
are reported in a separate component of stockholders' equity.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENTS (Continued)
Real estate held for sale, which is included in other assets in the
Consolidated Balance Sheets, is valued at the lower of fair value less
estimated costs to sell, or cost. UNUM has provided an allowance for probable
losses on real estate held for sale which reduces the carrying value of the
asset to fair value.
If a decline in fair value of an invested asset is considered to be other than
temporary, the investment is reduced to its net realizable value and the
reduction is accounted for as a realized investment loss. Subsequent increases
and decreases in fair value, if not an other than temporary impairment, of
available for sale securities are reported in a separate component of
stockholders' equity, net of deferred taxes.
UNUM discontinues the accrual of investment income on invested assets when it
is determined that collectability is doubtful.
Realized investment gains and losses, which are determined on the basis of
specific identification and include adjustments for allowances for probable
losses, are reported separately in the Consolidated Statements of Income.
Purchases and sales of short-term financial instruments are part of investing
activities and not necessarily a part of the cash management program.
Therefore, short-term financial instruments are classified as investments in
the Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.
DERIVATIVE FINANCIAL INSTRUMENTS
Gains or losses on hedges of existing assets or liabilities are deferred and
included in the carrying amounts of those assets or liabilities. Gains or
losses related to qualifying hedges of firm commitments or anticipated
transactions are also deferred and recognized in the carrying amount of the
underlying asset or liability when the hedged transaction occurs.
RECOGNITION OF PREMIUM REVENUES AND RELATED EXPENSES
Group insurance premiums are recognized as income over the period to which the
premiums relate. Individual disability premiums are recognized as income when
due. Benefits and expenses are associated with earned premiums to result in
recognition of profits over the life of the contracts. This association is
accomplished by recording a provision for future policy benefits and unpaid
claims and claim expenses, and amortizing deferred policy acquisition costs.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECOGNITION OF PREMIUM REVENUES AND RELATED EXPENSES (Continued):
For retirement and universal life products, premium and other policy fee
revenue consists of charges for the cost of insurance, policy administration,
and surrenders assessed during the period. Charges related to services to be
performed in the future are deferred until earned. The amounts received in
excess of premium and fees are recorded as deposits and included in other
policyholder funds in the Consolidated Balance Sheets. Benefits and expenses
include benefit claims in excess of related account balances, interest credited
at various rates and amortization of deferred policy acquisition costs.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business that vary with and are related primarily to
the production of new business, have been deferred to the extent such costs are
deemed recoverable from future profits. Such costs include commissions, certain
costs of policy issue and underwriting, and certain variable field office
expenses.
For individual disability, group disability, and group life and health
business, the costs are amortized in proportion to expected future premiums.
For universal life and certain retirement products, the costs are amortized in
proportion to estimated gross profits from interest margins, mortality and
other elements of performance under the contracts. Amortization is adjusted
periodically to reflect differences between actual experience and original
assumptions, with any resulting changes reflected in current operating
results. The amounts deferred and amortized were as follows:
Year Ended December 31,
----------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
----------------------------------------------------------------------------
Deferred $308.1 $282.8 $237.6
Less amortized (152.8) (147.7) (125.9)
----------------------------------------------------------------------------
Increase in deferred policy acquisition
costs $155.3 $135.1 $111.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR FUTURE POLICY BENEFITS
Reserves for future policy benefits are calculated by the net-level premium
method, and are based on UNUM's expected morbidity, mortality and interest
rate assumptions at the time a policy is issued. These reserves represent the
portion of premiums received, accumulated with interest and held to provide
for claims that have not yet been incurred. Reserves for group insurance
policies consist primarily of unearned premiums.
The interest rates used in the calculation of reserves for future policy
benefits at December 31, 1994, and 1993, principally ranged from:
1994 1993
------------------------------------------------------------------------------
Individual disability 5.5% to 9.5% 7.0% to 9.5%
Individual life 5.0% to 9.0% 5.0% to 9.0%
Individual accident and health 5.0% to 9.0% 6.0% to 11.8%
Individual and group annuities 5.0% to 9.0% 5.0% to 9.0%
-------------------------------------------------------------------------------
Certain reserve calculations are based on interest rates within these ranges
graded down over periods from 15 to 20 years.
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES
Unpaid claims and claim expense reserves represent the amount estimated to
fund claims that have been reported but not settled and claims incurred but
not reported. Reserves for unpaid claims are estimated based on UNUM's
historical experience and other actuarial assumptions which consider the
effects of current developments, anticipated trends, risk management programs
and renewal actions. Many factors affect actuarial calculations of claim
reserves, including but not limited to interest rates, and current and
anticipated incidence rates, recovery rates, and economic and societal
conditions. Reserve estimates and assumptions are periodically reviewed
and updated with any resulting adjustments to reserves reflected in current
operating results. Given the complexity of the reserving process, the
ultimate liability may be more or less than such estimates indicate.
The interest rates used in the calculation of disability product reserves at
December 31, 1994, and 1993, were principally as follows:
1994 1993
----------------------------------------------------------------------------
Group long term disability (North America) 9.18% 9.34%
Group long term disability (United Kingdom) 9.9% 10.5%
Individual disability 6.75% to 9.9% 8.0% to 10.0%
-----------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES (Continued)
The interest rate used to discount the disability reserves is a composite of
the yields on assets specifically matched with each block of business.
For other accident and health business, reserves are based on projections of
historical claims run-out patterns.
Activity in the liability for unpaid claims and claim expenses is summarized
as follows:
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Balance at January 1 $3,341.5 $2,983.6 $2,808.0
Less reinsurance recoverables (68.0) -- --
------------------------------------------------------------------------------
Net Balance at January 1 3,273.5 2,983.6 2,808.0
Incurred related to:
Current year 1,609.3 1,417.8 1,253.6
Prior years 436.0 238.0 126.8
------------------------------------------------------------------------------
Total incurred 2,045.3 1,655.8 1,380.4
Paid related to:
Current year 517.6 471.0 405.3
Prior years 1,030.0 894.9 799.5
-------------------------------------------------------------------------------
Total paid 1,547.6 1,365.9 1,204.8
Net Balance at December 31 3,771.2 3,273.5 2,983.6
Plus reinsurance recoverables 82.7 68.0 --
-------------------------------------------------------------------------------
Balance at December 31 $3,853.9 $3,341.5 $2,983.6
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The increase in incurrals related to prior years was $436.0 million, $238.0
million, and $126.8 million (net of reinsurance), for 1994, 1993 and 1992,
respectively. These increases were primarily the result of interest accrued
on reserves, changes in reserve estimates and assumptions, and changes in
foreign exchange rates. Due to the long-term claims payment pattern of some
of UNUM's businesses, certain reserves, particularly disability, are
discounted for interest.
Interest accrued on reserves increased prior years' incurrals by approximately
$267 million, $237 million and $225 million in 1994, 1993 and 1992,
respectively. Approximately $154 million of the increase in prior years'
incurrals in 1994 was primarily related to changes in reserve estimates and
assumptions of morbidity, mortality and expense costs of the group long term
and individual disability reserves, which were affected by the third quarter
1994 reserve strengthening. Changes in estimates of morbidity, mortality and
expense costs caused an increase in prior years' incurrals of approximately
$6 million in 1993 and a decrease of approximately $46 million in 1992.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES (Continued)
Foreign exchange translations, primarily related to the disability reserves of
UNUM's United Kingdom based affiliate, UNUM Limited, caused prior years'
incurrals to increase by approximately $15 million in 1994, and decrease by
approximately $5 million and $52 million in 1993 and 1992, respectively.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard ("FAS")
No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," which eliminated the practice by insurance
enterprises of reporting assets and liabilities relating to reinsured
contracts net of the effects of reinsurance. Since UNUM did not restate its
financial statements upon adoption of FAS 113, reserve balances prior to
December 31, 1993, are shown net of reinsurance recoverables.
CHANGE IN ACCOUNTING ESTIMATE
During 1994, UNUM increased reserves for existing claims by $83.3 million and
established a reserve for estimated future losses of $109.1 million. These
increased reserves reflect management's current expectations of morbidity
trends for the existing individual disability business, as reported in the
Individual Disability segment. This change in accounting estimate resulted in
an increase to benefits to policyholders in the Consolidated Statement of
Income of $192.4 million, and a decrease to net income of $125.1 million, or
$1.69 per share.
OTHER POLICYHOLDER FUNDS
Other policyholder funds are liabilities for investment-type contracts and
represent customer deposits plus interest credited to those deposits at
various rates.
SEPARATE ACCOUNTS
Certain assets of UNUM's defined benefit plans, 401(k) contracts and tax
sheltered annuity contracts are in separate accounts that are pooled
investment funds of securities. Investment income and realized gains and
losses on these accounts accrue directly to the contractholders. Assets,
carried at market value, and liabilities of the separate accounts are shown
separately in the Consolidated Balance Sheets. The assets of the separate
accounts are legally segregated and are not subject to claims which arise out
of any other business of UNUM.
ACCOUNTING FOR PARTICIPATING INDIVIDUAL LIFE INSURANCE
Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to UNUM's conversion to a stock life insurance
company on November 14, 1986, will remain participating as long as they remain
in force. A Participation Fund Account ("PFA") has been established for the
sole benefit of all of Union Mutual's individual participating life and
annuity policies and contracts.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTING FOR PARTICIPATING INDIVIDUAL LIFE INSURANCE (Continued)
The assets of the PFA are to provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies
and annuity contracts. This line of business participates in the experience of
the PFA and its operations have been excluded from the Consolidated Statements
of Income. The PFA represents approximately 2.5% and 3.0% of total assets and
3.0% and 3.5% of total liabilities at December 31, 1994, and 1993,
respectively.
INCOME TAXES
The provision for income taxes includes amounts currently payable and deferred
income taxes, which result from differences between financial reporting and
tax bases of assets and liabilities, and are measured using enacted tax rates
and laws. Deferred U.S. income taxes have not been provided on accumulated
earnings of UNUM's foreign subsidiaries. These earnings would become subject
to U.S. tax if remitted to UNUM Corporation.
EARNINGS PER SHARE
The weighted average number of shares outstanding used to calculate earnings
per share was approximately 74,158,000, 78,779,000 and 78,542,000 in 1994,
1993 and 1992, respectively. The assumed exercise of outstanding stock
options does not result in a material dilution of earnings per share.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values are based on quoted market prices, when available. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. These valuation techniques
require management to develop a significant number of assumptions, including
discount rates and estimates of future cash flow. Derived fair value
estimates cannot be substantiated by comparison to independent markets or to
disclosures by other companies with similar financial instruments. These fair
value disclosures do not purport to be the amount which could be realized in
immediate settlement of the financial instrument.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The following table summarizes the carrying amounts and fair values of UNUM's
financial instruments at December 31, 1994, and 1993:
1994 1993
----------------------- ---------------------------
Carrying Fair Carrying Fair
(DOLLARS IN MILLIONS) Amount Value Amount Value
---------------------------------------------------------------------------------------------------------
Financial assets:
Fixed maturities:
Held to maturity $6,227.2 $6,168.6 $6,560.7 $7,149.9
Available for sale 1,640.6 1,640.6 872.0 929.9
Equity securities available for sale 627.9 627.9 730.0 730.0
Mortgage loans 1,216.3 1,265.4 1,423.2 1,558.4
Policy loans 201.0 201.0 187.9 187.9
Short-term investments 291.9 291.9 69.6 69.6
Cash 36.1 36.1 20.8 20.8
Accrued investment income 195.9 195.9 184.0 184.0
Financial liabilities:
Other policyholder funds:
Investment-type insurance contracts:
With defined maturities $ 667.0 $ 685.0 $ 847.0 $ 956.0
With no defined maturities 3,013.0 2,948.0 3,044.0 2,952.0
Individual annuities and
supplementary contracts not
involving life contingencies 84.6 84.6 89.0 89.0
Notes payable 428.7 414.5 238.6 241.9
Off-balance sheet financial instruments:
Interest rate futures contracts -- -- -- 0.3
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
FIXED MATURITIES: Fair values for fixed maturities are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are estimated using values obtained from independent pricing services
or, in the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the yield, credit
quality and maturity of the investments.
EQUITY SECURITIES AVAILABLE FOR SALE: Fair values for equity securities
available for sale are based on quoted market prices and are reported in the
Consolidated Balance Sheets at these values.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
MORTGAGE LOANS: Fair values for mortgage loans are estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar mortgage loans to borrowers with similar credit ratings and
maturities. Mortgage loans with similar characteristics are aggregated for
purposes of the calculations.
POLICY LOANS: Fair values for policy loans approximate the carrying amounts
reported in the Consolidated Balance Sheets.
SHORT-TERM INVESTMENTS, CASH AND ACCRUED INVESTMENT INCOME: Fair values for
these instruments approximate the carrying amounts reported in the
Consolidated Balance Sheets.
INVESTMENT-TYPE INSURANCE CONTRACTS: Fair values for liabilities under
investment-type insurance contracts with no defined maturities are the amounts
payable on demand after surrender charges at the balance sheet date. Fair
values for liabilities under investment-type insurance contracts with defined
maturities are estimated using discounted cash flow calculations based on
interest rates that would be offered currently for similar contracts with
maturities consistent with those remaining for the contracts being valued.
The estimated fair values of liabilities under all insurance contracts
(investment-type and other than investment-type) are taken into consideration
in UNUM's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
INDIVIDUAL ANNUITIES AND SUPPLEMENTARY CONTRACTS NOT INVOLVING LIFE
CONTINGENCIES: Fair values approximate the carrying amounts reported in other
policyholder funds in the Consolidated Balance Sheets.
NOTES PAYABLE: Fair values of short-term borrowings approximate the carrying
amount. Fair values of long-term notes are estimated using discounted cash
flow analyses based on UNUM's current incremental borrowing rates for similar
types of borrowing arrangements.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: Fair values for off-balance-sheet
financial instruments are based on current settlement values.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENT
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" which defines the principles to measure and record a
loan when it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
In October 1994, the FASB issued FAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which amends FAS
114 to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan. UNUM will adopt FAS 114 and
FAS 118 effective January 1, 1995. Adoption of FAS 114 and FAS 118 is not
expected to have a material effect on UNUM's results of operations or
financial position.
NOTE 2. COLONIAL MERGER
On December 3, 1992, UNUM and Colonial Companies, Inc. ("Colonial"), signed a
definitive merger agreement. On March 26, 1993, Colonial Class A common stock
shareholders voted to approve the merger. Under the agreement, UNUM exchanged
0.731 shares of its common stock for each share of Colonial Class A and
Class B common stock outstanding on March 26, 1993. UNUM issued approximately
11.4 million shares of common stock from treasury in connection with the
merger. In addition, outstanding options to acquire shares of Colonial
Class B common stock were converted into options to acquire shares of UNUM
common stock. The merger was accounted for as a pooling of interests.
Net income for the year ended December 31, 1993, included a $9.6 million
charge, or $0.12 per share, for expenses incurred to effect the merger.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which specified the accounting and reporting for certain investments in equity
securities and for all investments in debt securities. UNUM adopted the
provisions of FAS 115 for these investments held as of or acquired after
January 1, 1994, which are classified and accounted for as follows:
- Fixed maturities that UNUM has the positive intent and ability to hold to
maturity are classified as "held to maturity" and are reported at
amortized cost, less an allowance for probable losses.
- Fixed maturities and equity securities classified as "available for sale"
are reported at fair value. Related unrealized holding gains and losses,
net of deferred taxes, are reported in a separate component of
stockholders' equity.
Upon the adoption of FAS 115, UNUM increased unrealized gains on available for
sale securities included in stockholders' equity on January 1, 1994, by $41.8
million (net of deferred taxes of $22.5 million) to reflect the unrealized
holding gains on fixed maturities classified as available for sale which were
previously carried at amortized cost. In accordance with FAS 115, prior year
consolidated financial statements and disclosures have not been restated to
reflect the change in accounting principle. UNUM reclassified certain
fixed maturities from held to maturity to available for sale on January 1,
1994, in connection with the adoption of FAS 115.
The following tables summarize the components of investment income, realized
investment gains (losses) and changes in unrealized investment gains (losses):
INVESTMENT INCOME
Year Ended December 31,
--------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Fixed maturities:
Held to maturity $548.1 $570.1 $568.2
Available for sale 87.9 59.5 56.9
Equity securities available for sale 10.4 12.6 14.7
Mortgage loans 137.4 165.2 187.2
Real estate 15.8 12.8 14.1
Policy loans 10.2 10.4 10.6
Other long-term investments 0.9 4.5 2.1
Short-term investments 8.5 7.1 7.1
-------------------------------------------------------------------------------
Gross investment income 819.2 842.2 860.9
Less investment expenses (23.9) (26.6) (25.8)
Less investment income on participating
individual life insurance policies and
annuity contracts (25.1) (25.2) (25.9)
-------------------------------------------------------------------------------
Investment income $770.2 $790.4 $809.2
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
GROSS REALIZED INVESTMENT GAINS (LOSSES)
Year Ended
December 31, 1994
--------------------
(DOLLARS IN MILLIONS) Gains Losses
---------------------------------------------------------------------------
Fixed maturities:
Held to maturity $ 0.2 $ (6.8)
Available for sale 10.2 (28.8)
Equity securities available for sale 93.1 (12.2)
Mortgage loans, real estate and other 13.5 (23.6)
----------------------------------------------------------------------------
Gross realized investment gains (losses) $ 117.0 $ (71.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET REALIZED INVESTMENT GAINS (LOSSES)
Year Ended
December 31,
-------------------
(DOLLARS IN MILLIONS) 1993 1992
-----------------------------------------------------------------------------
Fixed maturities:
Held to maturity $ 9.5 $ 7.6
Available for sale 7.8 9.1
Equity securities available for sale 48.3 38.3
Mortgage loans, real estate and other (16.2) (13.5)
------------------------------------------------------------------------------
Net realized investment gains $49.4 $41.5
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
CHANGE IN UNREALIZED INVESTMENT GAINS (LOSSES)
Year Ended December 31,
----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Fixed maturities available for sale $(60.8) $ -- $ --
Equity securities available for sale (86.0) 43.2 34.0
Deferred taxes 47.3 (15.2) (11.6)
-------------------------------------------------------------------------------
Total change in unrealized
investment gains on available
for sale securities, as included
in stockholders' equity $(99.5) $28.0 $22.4
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The following changes in unrealized investment gains (losses) were not
reflected in the consolidated financial statements as these securities
are carried at amortized cost:
Year Ended December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
------------------------------------------------------------------------------
Fixed maturities:
Held to maturity $(647.8) $154.2 $ 14.2
Available for sale -- 30.9 (1.3)
-------------------------------------------------------------------------------
Total $(647.8) $185.1 $ 12.9
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES
The amortized cost and estimated fair values of fixed maturities at December
31, 1994, were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(DOLLARS IN MILLIONS) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
Held to maturity:
U. S. Government $ 10.9 $ -- $ -- $ 10.9
States and municipalities 631.8 9.1 (31.3) 609.6
Foreign governments 176.1 12.4 (1.4) 187.1
Public utilities 1,375.5 12.8 (46.8) 1,341.5
Corporate bonds 4,014.3 92.7 (106.8) 4,000.2
Mortgage-backed securities 10.8 0.5 -- 11.3
Other debt securities 7.8 0.2 -- 8.0
----------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,227.2 $ 127.7 $ (186.3) $ 6,168.6
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Available for sale:
U. S. Government $ 353.2 $ 0.8 $ (7.5) $ 346.5
States and municipalities 433.2 2.3 (13.9) 421.6
Foreign governments 58.9 0.2 (1.5) 57.6
Public utilities 229.4 3.8 (9.6) 223.6
Corporate bonds 552.1 0.8 (31.8) 521.1
Redeemable preferred stocks 63.2 2.9 (7.0) 59.1
Mortgage-backed securities 11.4 0.1 (0.4) 11.1
----------------------------------------------------------------------------------------------------------
Total available for sale $ 1,701.4 $ 10.9 $ (71.7) $ 1,640.6
----------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
The amortized cost and estimated fair values of fixed maturities at December
31, 1993, were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(DOLLARS IN MILLIONS) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
Held to maturity:
U. S. Government $ 10.0 $ 0.6 $ -- $ 10.6
States and municipalities 718.7 64.5 (0.2) 783.0
Foreign governments 255.3 50.3 (0.2) 305.4
Public utilities 1,333.7 98.6 (1.6) 1,430.7
Corporate bonds 4,186.8 377.7 (5.0) 4,559.5
Certificates of deposit 36.4 1.1 -- 37.5
Mortgage-backed securities 15.2 2.6 -- 17.8
Other debt securities 4.6 0.8 -- 5.4
----------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,560.7 $ 596.2 $ (7.0) $ 7,149.9
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Available for sale:
U. S. Government $ 388.9 $ 27.7 $ (0.3) $ 416.3
States and municipalities 73.5 5.1 -- 78.6
Foreign governments 13.7 1.3 -- 15.0
Public utilities 107.3 6.5 -- 113.8
Corporate bonds 166.0 10.1 (0.6) 175.5
Redeemable preferred stocks 105.8 7.7 (1.0) 112.5
Mortgage-backed securities 16.8 1.4 -- 18.2
----------------------------------------------------------------------------------------------------------
Total available for sale $ 872.0 $ 59.8 $ (1.9) $ 929.9
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
The amortized cost and estimated fair value of fixed maturities at December
31, 1994, by contractual maturity date, are shown below. Expected maturities
will differ from contractual maturities since certain borrowers have the right
to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(DOLLARS IN MILLIONS) Cost Fair Value
-------------------------------------------------------------------------------------------------------
Held to maturity:
Due in one year or less $ 619.6 $ 622.3
Due after one year through five years 2,555.2 2,551.3
Due after five years through ten years 2,465.5 2,387.1
Due after ten years 576.1 596.6
-------------------------------------------------------------------------------------------------------
6,216.4 6,157.3
Mortgage-backed securities (primarily due after 10 years) 10.8 11.3
--------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,227.2 $ 6,168.6
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Available for sale:
Due in one year or less $ 46.8 $ 47.3
Due after one year through five years 845.2 816.3
Due after five years through ten years 500.8 482.0
Due after ten years 297.2 283.9
--------------------------------------------------------------------------------------------------------
1,690.0 1,629.5
Mortgage-backed securities (primarily due after 10 years) 11.4 11.1
--------------------------------------------------------------------------------------------------------
Total available for sale $ 1,701.4 $1,640.6
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Gross gains of $12.4 million and $18.9 million, and gross losses of $1.3
million and $3.5 million, were realized on sales of fixed maturities in 1993
and 1992, respectively.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
During fourth quarter 1994, UNUM sold fixed maturities of five issuers
classified as held to maturity with an amortized cost of $49.8 million
due to evidence of significant unexpected deterioration of the issuers'
creditworthiness. These sales resulted in a net realized loss of $3.0 million.
EQUITY SECURITIES
The fair values, which also represent carrying amounts, and the cost of equity
securities available for sale were as follows at December 31, 1994:
Fair
(DOLLARS IN MILLIONS) Cost Value
-----------------------------------------------------------------------------
Common stocks:
Public utilities $ 57.5 $ 53.1
Industrial, miscellaneous and all other 434.7 574.8
------------------------------------------------------------------------------
Total $ 492.2 $ 627.9
------------------------------------------------------------------------------
------------------------------------------------------------------------------
At December 31, 1994, cumulative gross unrealized investment gains on equity
securities available for sale totaled $158.7 million and losses totaled
$(23.0) million.
MORTGAGE LOANS
Restructured mortgage loans at amortized cost amounted to $73.6 million and
$65.9 million at December 31, 1994, and 1993, respectively. Troubled debt
restructurings represent loans that are refinanced with terms more favorable
to the borrower. Interest foregone on these loans was not material for the
years ended December 31, 1994, 1993 or 1992.
OTHER
Real estate acquired in satisfaction of debt cumulatively amounts to $119.3
million at December 31, 1994. Real estate held for sale amounted to $31.0
million at December 31, 1994, and $24.7 million at December 31, 1993.
At December 31, 1994, bonds with an amortized cost of $16.1 million, real
estate with a depreciated cost of $4.7 million and no mortgage loans were
non-income producing for the twelve months ended December 31, 1994. Interest
lost on these investments was not material in 1994, 1993 or 1992.
UNUM was committed at December 31, 1994, to purchase fixed maturities and
other invested assets in the amount of $37.5 million.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND
REAL ESTATE HELD FOR SALE
Changes in the allowance for probable losses on invested assets and real
estate held for sale were as follows:
Balance at Balance
beginning Addi- Deduc- at end
(DOLLARS IN MILLIONS) of year tions tions of year
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994
Fixed maturities held to maturity and
available for sale $ 0.3 $ 4.1 $ -- $ 4.4
Mortgage loans 48.6 8.5 (13.9) 43.2
Real estate held for sale 20.9 0.8 (8.5) 13.2
---------------------------------------------------------------------------------------------------------
Total $ 69.8 $13.4 $ (22.4) $ 60.8
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1993
Fixed maturities held to maturity and
available for sale $ 4.1 $(3.8) $ -- $ 0.3
Mortgage loans 51.5 4.8 (7.7) 48.6
Real estate held for sale 13.6 18.8 (11.5) 20.9
---------------------------------------------------------------------------------------------------------
Total $ 69.2 $19.8 $ (19.2) $ 69.8
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1992
Fixed maturities held to maturity $ 5.5 $(1.0) $ (0.4) $ 4.1
Mortgage loans 43.1 26.5 (18.1) 51.5
Real estate held for sale 15.9 7.2 (9.5) 13.6
---------------------------------------------------------------------------------------------------------
Total $ 64.5 $32.7 $ (28.0) $ 69.2
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Additions represent charges to net realized investment gains less recoveries,
and deductions represent reserves released upon disposal or restructuring of
the related asset.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses common derivative financial instruments such as options,
futures and forward exchange contracts to hedge certain risks associated with
future investments and certain payments denominated in foreign currencies,
primarily British pound sterling, Canadian dollar and Japanese yen. These
derivative financial instruments are used to protect UNUM from the effect of
market fluctuations in interest and exchange rates between the contract date
and the date on which the hedged transaction occurs. UNUM does not intend
to hold derivative financial instruments for the purpose of trading.
At December 31, 1994, UNUM had no open derivative financial instruments. At
December 31, 1993, UNUM held interest rate futures contracts with commitments
to purchase government securities with total par values of $207.0 million. In
using these instruments, UNUM is subject to the off-balance-sheet risk that the
counterparties to the transactions will fail to completely perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges.
NOTE 6. REINSURANCE
UNUM, through its life insurance subsidiaries, is involved in both the cession
and assumption of reinsurance with other companies. Risks are reinsured with
other companies to reduce UNUM's exposure to large losses and permit recovery
of a portion of direct losses. UNUM remains liable to the insured for the
payment of policy benefits if the reinsurers cannot meet their obligations
under the reinsurance agreements. Deferred policy acquisition costs,
premiums and expenses are stated net of reinsurance ceded to other companies.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," which eliminated the practice by insurance enterprises of reporting
assets and liabilities relating to reinsured contracts net of the effects of
reinsurance. The standard required prepaid reinsurance premiums and
reinsurance receivables, for amounts to be recovered, to be reported as
assets. It also prescribed conditions required for a contract with a
reinsurer to be accounted for as reinsurance and defined accounting standards
for short-duration and long-duration reinsurance contracts. As permitted,
consolidated financial statements prior to adoption have not been restated.
The effect of the adoption on the Consolidated Balance Sheet was an increase
in other assets of $80.0 million and a corresponding increase in future policy
benefits and unpaid claims and claim expenses.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. REINSURANCE (continued)
The effect of reinsurance on premiums earned and written for the years ended
December 31, 1994, and 1993, was as follows:
1994 1993
-------------------- --------------------
(DOLLARS IN MILLIONS) Earned Written Earned Written
-------------------------------------------------------------------------------
Direct $2,674.2 $2,702.7 $2,331.5 $2,335.6
Assumed 170.7 170.9 192.6 196.2
Ceded (112.5) (112.6) (50.0) (50.5)
-------------------------------------------------------------------------------
Premiums $2,732.4 $2,761.0 $2,474.1 $2,481.3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
For the years ended December 31, 1994, and 1993, recoveries recognized under
reinsurance agreements reduced benefits to policyholders by $53.3 million and
$28.9 million, respectively.
Reinsurance premiums ceded and assumed were $51.5 million and $136.2 million,
respectively, for 1992.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1994, UNUM recorded pretax charges totaling $14.4
million, or $0.13 per share, which were reflected as operating expenses in the
Consolidated Statement of Income. Of this total, the Individual Disability
segment recorded $12.3 million related to the restructuring of the individual
disability business and resulting consolidation of home office operations in
UNUM America, which was comprised of $7.1 million for severance costs for 150
field and 150 home office employees and $5.2 million for exit costs of certain
leased facilities and equipment, expiring through 1998. The remaining $2.1
million, recorded in the Employee Benefits segment, was for termination
benefits for approximately 100 employees related to the acceleration of
organizational changes within UNUM America. All employee related costs are
expected to be paid by the end of 1995.
During 1992, UNUM released the restructuring reserve remaining for the costs of
withdrawal and reassignment of employees associated with the 401(k) business in
excess of amounts incurred, since actual costs were less than expected, which
resulted in a pretax gain of $5.3 million. The gain associated with the
release of this restructuring reserve reduced operating expenses in the 1992
Consolidated Statement of Income.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS
PENSION PLANS
UNUM has a noncontributory defined benefit pension plan covering substantially
all domestic employees, excluding employees of Colonial Companies, Inc., and
Duncanson & Holt, Inc. The plan provides benefits based on the employee's
years of service and compensation during the highest five consecutive years
out of the last ten years of employment. UNUM funds the plan in accordance
with the requirements of the Employee Retirement Income Security Act of 1974,
as amended. Plan assets consist primarily of group annuity contracts and
include approximately 224,392 shares of UNUM Corporation common stock.
Net pension cost included the following components:
Year Ended December 31,
----------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 9.2 $ 8.6 $ 7.5
Interest cost on projected benefit obligation 11.6 10.9 9.4
Actual return on plan assets 3.3 (16.5) (14.5)
Net amortization and deferral (16.5) 5.2 4.1
-------------------------------------------------------------------------------
Net pension cost $ 7.6 $ 8.2 $ 6.5
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The funded status of the plan and amounts recognized in UNUM's Consolidated
Balance Sheets, as determined by the plan's actuaries, were as follows:
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefit obligation $ 96.2 $ 102.3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Accumulated benefit obligation $ 99.1 $ 104.8
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date $(141.9) $(147.6)
Plan assets at fair value 153.5 156.7
-------------------------------------------------------------------------------
Projected benefit obligation less than plan assets 11.6 9.1
Unrecognized net gain (26.2) (21.6)
Unrecognized prior service cost (3.3) (6.1)
Unamortized net obligation 2.7 3.1
-------------------------------------------------------------------------------
Accrued pension cost $ (15.2) $ (15.5)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
PENSION PLANS (Continued)
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 8.25% and 5.20%, respectively, at December 31, 1994, and 7.25%
and 4.70%, respectively, at December 31, 1993. The expected long-term rate of
return on plan assets was 9.0% in 1994 and 8.25% in 1993 and 1992. Prior year
service costs are being amortized on a straight-line basis over expected
employment periods for active employees.
UNUM also administers certain supplemental retirement plans for eligible
employees and officers and certain other pension plans. The cost of these
plans was not significant for the years ended December 31, 1994, 1993 and 1992.
RETIREMENT SAVINGS PLANS
UNUM has several retirement savings and profit sharing plans for substantially
all full-time and part-time employees who work 1,000 hours a year and have been
employed for at least one year. Dependent upon which plan the employee
participates in, eligible employees may contribute primarily up to 10% of their
annual salary, and UNUM matches a portion of each employee's contribution up to
6% of the employee's bi-weekly compensation. Participants may become 100%
vested immediately upon becoming eligible to participate, or incrementally over
a five year period. In 1994, 1993 and 1992, expense for these plans amounted
to $8.4 million, $8.3 million and $6.5 million, respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
UNUM provides certain health care and life insurance benefits for retired
employees and covered dependents. Substantially all domestic employees of UNUM
may become eligible for these benefits if they meet minimum age and service
requirements, if they are eligible for retirement benefits and if they agree to
contribute a portion of the cost. UNUM has the right to modify or terminate
these benefits. The underlying plans are not currently funded.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard ("FAS")
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," which changed the method for recognition of the cost of these
benefits from a cash basis to an accrual basis over the years in which the
employees render the related services. UNUM elected to immediately recognize
the FAS 106 liability at January 1, 1993, of $48.8 million as a cumulative
effect of an accounting change, which decreased net income by $32.1 million, or
$0.40 per share, during 1993.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (Continued)
Postretirement benefits expense included the following components:
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Service cost $ 3.8 $ 3.4
Interest cost 4.4 4.0
-------------------------------------------------------------------------------
Postretirement benefits expense $ 8.2 $ 7.4
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The following represents the unfunded accumulated postretirement benefits
obligation as determined by the plans' actuaries:
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Retirees $21.3 $19.6
Active employees fully eligible 4.5 6.5
Other active participants 38.9 29.7
-------------------------------------------------------------------------------
Accumulated postretirement benefits obligation 64.7 55.8
Unrecognized other amounts (1.0) 1.2
-------------------------------------------------------------------------------
Accrued postretirement benefits cost $63.7 $57.0
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Under UNUM's plans, the cost of covered health care benefits is assumed to
increase 10.00% and 10.75% for retirees less than 65 years old, and 7.50% and
8.25% for retirees 65 years and older for 1995. These rates are assumed to
decrease incrementally to 5.50% and 6.25% by 2001, and remain at that level
thereafter. The weighted average discount rates used in determining the
accumulated postretirement benefits obligation were 8.00% and 8.25%, at
December 31, 1994, and 7.25% and 7.50%, at December 31, 1993. The rates of
increase in future compensation levels used in determining the accumulated
postretirement benefits obligation were 5.2% and 4.7%, at December 31, 1994
and 1993, respectively.
At December 31, 1994, a 1% increase in the trend rate for health care costs
would increase the accumulated postretirement benefits obligation by $13.4
million and postretirement benefits expense by $1.8 million.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPTION AND INCENTIVE PLANS
LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for
granting of restricted shares of UNUM Corporation common stock to key officers.
The Incentive Plan also provides for granting of options to officers,
non-employee directors of UNUM Corporation and key employees, to purchase UNUM
Corporation common stock over ten years at a price not less than 100% of the
fair market value on the date of grant. The maximum number of shares reserved
for issuance under the Incentive Plan was 6,800,000 in 1994 and 1993, and
3,500,000 in 1992. At December 31, 1994, 1993 and 1992, 2,511,145 shares,
3,316,734 shares, and 1,006,684 shares, respectively, were available for grant
under the Incentive Plan.
The restriction period for each restricted stock award under the Incentive Plan
is in excess of three years, with the restrictions lapsing as a result of the
achievement of prescribed financial performance objectives during each three
year period, with the exception of 10,000 shares of restricted stock granted in
1994 on which restrictions will lapse on January 6, 1998, provided the grantee
remains continuously in the employ of UNUM. Plan participants are entitled to
cash dividends and voting rights on their respective shares. In 1994,
restrictions lapsed on 80,800 shares granted for the 1991 - 1993 performance
period. All other restricted stock shares issued remained subject to
restrictions.
The market value of the restricted shares issued under the Incentive Plan has
been recorded as deferred compensation and is included as a reduction of
stockholders' equity in the Consolidated Balance Sheets.
The 1987 Executive Stock Option Plan ("Option Plan") provided for granting to
officers and key employees options to purchase UNUM Corporation common stock
over ten years at a price not less than 100% of the fair market value on the
date of grant. Options outstanding under the Option Plan are included in the
summary of stock options.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPTION AND INCENTIVE PLANS (Continued)
LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN (Continued)
Beginning in 1991, certain officers were granted limited stock appreciation
rights ("LSARs") in tandem with their outstanding options. LSARs afford the
optionee the right to receive payment upon a change in control as defined in
the plans equal to the higher of the excess of the highest price per share
paid in connection with such change in control or the fair market value per
share, over the option price per share. As an underlying stock option is
exercised, the LSARs are automatically canceled. At December 31, 1994, 1993
and 1992, there were 590,275 LSARs, 556,500 LSARs, and 685,550 LSARs
outstanding, respectively.
The following is a summary of stock options and restricted stock information:
Restricted
Options Stock
-------------------------------------------------------------------------------
Outstanding at January 1, 1992 3,085,014 80,800
1992 Activity:
Granted at $33.17 to $40.70 per share 1,043,969 --
Granted for restricted stock -- 34,600
Exercised at $7.13 to $54.00 per share (860,147) --
Canceled/reissued (141,954) --
-------------------------------------------------------------------------------
Outstanding at December 31, 1992 3,126,882 115,400
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1993 Activity:
Granted at $52.88 to $57.75 per share 1,031,650 --
Granted for restricted stock -- 32,525
Exercised at $9.03 to $36.75 per share (655,300) --
Canceled/reissued (100,278) (1,500)
-------------------------------------------------------------------------------
Outstanding at December 31, 1993 3,402,954 146,425
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1994 Activity:
Granted at $38.00 to $51.31 per share 884,375 --
Granted for restricted stock -- 46,850
Lapse of restrictions on restricted stock -- (80,800)
Exercised at $9.03 to $47.88 per share (282,729) --
Canceled/reissued (151,578) (2,525)
-------------------------------------------------------------------------------
Outstanding at December 31, 1994 3,853,022 109,950
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The number of exercisable shares as of December 31, 1994, 1993 and 1992, were
1,975,219 shares, 1,396,182 shares, and 1,305,720 shares, respectively.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPTION AND INCENTIVE PLANS (Continued)
LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN (Continued)
In connection with the March 26, 1993, merger with Colonial Companies, Inc.
("Colonial"), outstanding options to acquire shares of Colonial Class B common
stock were converted into options to acquire shares of UNUM common stock, and
are included in the preceding summary of stock options. Pursuant to the
merger, no further options will be granted under the Colonial stock option
plans.
THE 1998 GOALS STOCK OPTION PLAN
The 1998 Goals Stock Option Plan ("1998 Option Plan") was introduced in January
1995. The 1998 Option Plan provides for granting to all eligible employees up
to 150 options to purchase UNUM Corporation common stock at a price not less
than 100% of the fair market value on the date of the grant. The options will
vest to the employee in January 2004; however, if UNUM achieves its 1998 goals,
vesting will be accelerated to early 1999.
ANNUAL INCENTIVE PLANS
UNUM has several annual incentive plans for certain employees and executive
officers, which provide additional compensation based on achievement of
predetermined annual corporate and affiliate financial and non-financial
goals. In 1994, 1993 and 1992, expense for these plans was $7.5 million,
$27.9 million and $24.6 million, respectively.
NOTE 10. INCOME TAXES
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 109,
"Accounting for Income Taxes," which changed the method for calculating and
reporting deferred income taxes in the financial statements from the deferred
method to the liability method. The liability method of accounting for income
taxes requires that deferred tax liabilities or assets at the end of each
period be determined using the tax rate expected to be in effect when taxes are
actually paid or recovered. Under this method, income tax will increase or
decrease in the same period in which a change in tax rate is enacted. The
cumulative effect of this accounting change amounted to a $20.0 million
increase in net income, or $0.25 per share, for the year ended December 31,
1993.
On August 10, 1993, legislation was enacted to increase the federal corporate
income tax rate of 34% to 35%, retroactive to January 1, 1993. The tax rate
increase resulted in a charge to net income totaling $11.4 million, or $0.15
per share, which included $3.6 million, or $0.05 per share, related to 1993
pretax income, and a $7.8 million, or $0.10 per share, adjustment to the
deferred income tax liability.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES (Continued)
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
Year Ended December 31,
-----------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Tax at federal statutory rate (35% for 1994 and 1993,
34% for 1992) $ 69.5 $161.1 $135.5
Tax-exempt income (32.0) (29.4) (31.8)
Prior years' taxes -- (2.0) (2.0)
State income tax 2.2 3.9 3.7
Tax on foreign operations -- 0.1 0.1
Adjustment to deferred tax liability due to
tax rate increase -- 7.8 --
Other 4.2 6.8 1.8
-------------------------------------------------------------------------------
Income taxes $ 43.9 $148.3 $107.3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Deferred income tax liabilities and assets were comprised of the following:
December 31,
--------------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs $298.9 $257.8
Policy reserve adjustments 59.3 69.6
Net unrealized gains 27.1 79.4
Value of business acquired 17.9 19.0
Invested assets 28.9 10.5
Other 10.6 7.4
-------------------------------------------------------------------------------
Total deferred tax liabilities 442.7 443.7
-------------------------------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit carryforwards 45.3 20.2
Net realized losses 15.0 17.3
Postretirement benefits 20.3 19.7
Loss carryforward 5.9 8.0
Other 7.6 1.8
-------------------------------------------------------------------------------
Total deferred tax assets 94.1 67.0
------------------------------------------------------------------------------
Net deferred tax liability $348.6 $376.7
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES (Continued)
Deferred income taxes relating to cumulative net unrealized gains on available
for sale securities were $27.1 million, $79.4 million and $57.4 million at
December 31, 1994, 1993 and 1992, respectively. At December 31, 1994, $5.0
million of the $27.1 million deferred income taxes was reflected in retained
earnings, while the remaining $22.1 million was netted against the unrealized
gains component of stockholders' equity.
As of December 31, 1994, deferred U.S. income taxes have not been provided on
the accumulated earnings of UNUM's foreign subsidiaries. These earnings would
become subject to U.S. tax if remitted to UNUM Corporation.
Prior to the Tax Reform Act of 1984 ("1984 Act"), half the excess of the tax
basis gain from operations of a life insurance company over its taxable
investment income was currently taxable. The other half was set aside in a
Policyholders Surplus Account, together with certain special life insurance
company deductions. The cumulative amount in the Policyholders Surplus Account
as of December 31, 1983, was frozen by the 1984 Act and amounted to $31.8
million at December 31, 1994. Any direct or indirect distributions from this
account would be taxed at current tax rates; however, no provision has been
made for related taxes. If the amount set aside in this account were taxed at
the current rate at December 31, 1994, for all life insurance subsidiaries,
the tax would have amounted to $11.1 million.
UNUM's Consolidated Statements of Income for 1994, 1993 and 1992, included the
following amounts of foreign income and related income tax expense:
Year Ended December 31,
------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Foreign income $24.2 $ 20.9 $32.7
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Income tax expense (credit):
Current $ 0.7 $(12.5) $ 1.6
Deferred 9.7 20.2 10.4
-------------------------------------------------------------------------------
Total $10.4 $ 7.7 $12.0
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM subsidiaries had operating loss carryforwards totaling $16.5 million and
alternative minimum tax ("AMT") credit carryforwards totaling $45.3 million as
of December 31, 1994. Substantially all of the operating loss carryforwards
relate to foreign operations and can be carried forward indefinitely. The AMT
credits can also be carried forward indefinitely.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1994, and 1993:
December 31,
-----------------
(DOLLARS IN MILLIONS) 1994 1993
-------------------------------------------------------------------------------
Short-term debt:
Commercial paper $216.5 $109.9
Other notes payable, with weighted average interest
rate of 2.7% 30.1 0.1
-------------------------------------------------------------------------------
Total short-term debt 246.6 110.0
-------------------------------------------------------------------------------
Long-term debt:
Medium-term notes payable due 1996 to 2024
with interest rates ranging from 5.1% to 7.5% 180.8 126.1
Other notes payable 1.3 2.5
-------------------------------------------------------------------------------
Total long-term debt 182.1 128.6
-------------------------------------------------------------------------------
Total notes payable $428.7 $238.6
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
At December 31, 1994, UNUM Corporation had a $500 million committed revolving
credit facility which expires on October 1, 1999. UNUM's commercial paper
program is supported by the revolving credit facility and is available for
general liquidity needs, capital expansion, acquisitions or stock repurchase.
The committed revolving credit facility contains certain covenants which, among
other provisions, require maintenance of certain levels of stockholders' equity
and limits on level of debt. The commercial paper outstanding at December 31,
1994, and 1993, had a weighted average interest rate of approximately 6.34% and
3.41%, respectively.
Aggregate maturities of long-term debt are as follows: 1995-$0; 1996-$16.2
million; 1997-$48.2 million; 1998-$29.8 million; 1999-$21.4 million;
thereafter-$66.5 million.
On February 28, 1995, UNUM borrowed $100 million under the revolving credit
facility, which was infused into UNUM America in exchange for surplus
debentures. Repayment of principal and interest on the surplus debentures is
subject to state insurance regulatory approval.
NOTE 12. CAPITAL STOCK
In September 1993, UNUM announced the resumption of a program to repurchase its
common stock pursuant to an existing Board of Directors' resolution. On
February 11, 1994, UNUM's Board of Directors voted to expand UNUM's
authorization to repurchase an additional 5.0 million shares, bringing the
total number of shares authorized for repurchase to 44.0 million shares. Since
the resumption of the stock repurchase program, UNUM has acquired approximately
7.6 million shares of its common stock through December 31, 1994, in the open
market at an aggregate cost of $375.8 million. No shares were acquired in the
open market during 1992 or 1991. At December 31, 1994, approximately 2.7
million shares remained authorized for repurchase.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. CAPITAL STOCK (Continued)
Under the Long-Term Stock Incentive Plan and Executive Stock Option Plan and
the plans of Colonial Companies, Inc. (see Note 9 "Option and Incentive
Plans"), 329,579 shares, 687,825 shares, and 894,747 shares were issued in
1994, 1993 and 1992, respectively.
NOTE 13. PREFERRED STOCK PURCHASE RIGHTS
On March 13, 1992, UNUM's Board of Directors ordered redemption of the 1988
Rights Agreement and adopted a new Shareholder Rights Plan. Shareholders of
record on March 23, 1992, received $0.05 for every two shares of common stock
held, which was distributed April 2, 1992. The total amount of the redemption
was $1.7 million.
As a result of the adoption of a new Shareholder Rights Plan, a dividend
distribution was declared of one Right for each share of outstanding Common
Stock to stockholders of record at the close of business on March 23, 1992.
Each Right under certain specific circumstances entitles the holder to purchase
one one-hundredth of a share of Series A Junior Participating Preferred Stock
at a purchase price of $150.
The Rights become exercisable at a specified time after (1) a person or group
acquires 10% or more of UNUM's Common Stock or (2) a tender or exchange offer
for 10% or more of UNUM's Common Stock.
The Rights expire at the close of business on March 13, 2002, unless earlier
redeemed by the Company under certain circumstances at a price of $0.01 per
Right.
NOTE 14. DIVIDEND RESTRICTIONS
UNUM is subject to various state insurance regulatory restrictions that limit
the maximum amount of dividends available from its United States domiciled
insurance subsidiaries without prior approval. Under current law, during 1995
approximately $81.3 million will be available for payment of dividends to UNUM
Corporation without state insurance regulatory approval. Dividends in excess
of this amount may only be paid with state insurance regulatory approval. The
aggregate statutory capital and surplus of the United States domiciled
insurance subsidiaries of UNUM Corporation was approximately $840.1 million
and $953.9 million, at December 31, 1994, and 1993, respectively. The
aggregate statutory net income of UNUM Corporation's United States domiciled
insurance subsidiaries was approximately $70.4 million, $216.0 million and
$154.1 million for 1994, 1993 and 1992, respectively. State insurance
regulatory authorities prescribe statutory accounting practices that differ in
certain respects from generally accepted accounting principles. The
significant differences relate to deferred acquisition costs, deferred income
taxes, non-admitted asset balances, required investment risk reserves and
reserve calculation assumptions.
UNUM Corporation also has the ability to draw a dividend of approximately $30
million from its United Kingdom based affiliate, UNUM Limited, subject to
certain U.S. tax consequences.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. LITIGATION
In the normal course of its business operations, UNUM is involved in litigation
from time to time with claimants, beneficiaries and others, and a number of
lawsuits were pending at December 31, 1994. In the opinion of management, the
ultimate liability, if any, arising from this litigation is not expected to
have a material adverse effect on the consolidated financial position or the
consolidated operating results of UNUM.
NOTE 16. SEGMENT INFORMATION
UNUM reports its operations principally in six business segments: Employee
Benefits, Related Businesses, Colonial Companies, Individual Disability,
Retirement Security and Other Operations.
Investment income and net realized investment gains are allocated to the
segments based on designation of ownership of assets identified to the
segments. Operating expenses are allocated to the segments based on direct
association with a product whenever possible. If, however, the expense cannot
be readily associated with a particular product, the costs are allocated based
on ratios of the relative time spent, extent of usage or varying volume of
work performed for each segment.
The Employee Benefits segment includes group long term disability, group life
and other employee benefits products, including short term disability,
accidental death and dismemberment and dental insurance. The Related
Businesses segment includes UNUM Limited in the United Kingdom, Commercial
Life Insurance Company, and reinsurance operations including Duncanson & Holt,
Inc. The Colonial Companies segment includes Colonial Companies, Inc. and
subsidiaries, which offer payroll-deducted, voluntary employee benefits to
employees at their worksites. The Individual Disability segment includes
disability income products. The Retirement Security segment includes tax
sheltered annuities, long term care insurance and lifestyle security protection
products. The Other Operations segment includes individual life insurance
business of UNUM Life Insurance Company of America, group medical operations,
guaranteed investment contracts, deposit administration accounts, and 401(k)
plans, all of which are no longer actively marketed by UNUM. Corporate
includes transactions which are generally non-insurance related and expenses
incurred to effect the March 26, 1993, merger of UNUM and Colonial.
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. SEGMENT INFORMATION (Continued)
Summarized financial information for the six business segments and Corporate is
as follows:
Year Ended December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Revenues:
Employee Benefits $ 1,714.9 $ 1,597.3 $ 1,350.6
Related Businesses 567.1 488.0 446.0
Colonial Companies 473.9 448.8 407.3
Individual Disability 442.1 405.0 367.9
Retirement Security 289.4 271.8 261.1
Other Operations 131.3 179.9 210.9
Corporate 5.0 6.2 4.7
-------------------------------------------------------------------------------
Total revenues $ 3,623.7 $ 3,397.0 $ 3,048.5
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effects of accounting changes:
Employee Benefits $ 257.8 $ 239.1 $ 222.5
Related Businesses 60.3 57.3 53.4
Colonial Companies 62.7 70.4 60.5
Individual Disability (188.2) 69.0 44.6
Retirement Security 25.7 21.1 6.7
Other Operations 8.5 20.8 16.5
Corporate (28.2) (17.4) (5.7)
-------------------------------------------------------------------------------
Income before income taxes and cumulative
effects of accounting changes 198.6 460.3 398.5
Income taxes 43.9 148.3 107.3
-------------------------------------------------------------------------------
Income before cumulative effects of accounting
changes 154.7 312.0 291.2
Cumulative effects of accounting changes -- (12.1) --
-------------------------------------------------------------------------------
Net income $ 154.7 $ 299.9 $ 291.2
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
December 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------
Identifiable Assets:
Employee Benefits $ 3,660.6 $ 3,294.5 $ 2,936.4
Related Businesses 1,467.2 1,269.0 1,113.2
Colonial Companies 846.2 819.2 745.9
Individual Disability 1,756.5 1,516.3 1,349.1
Retirement Security 3,384.8 3,249.3 3,051.7
Other Operations 1,213.6 1,493.9 1,982.7
Corporate 451.3 452.3 442.8
Individual Participating
Life and Annuity 347.0 342.8 338.0
-------------------------------------------------------------------------------
Total assets $13,127.2 $12,437.3 $11,959.8
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
1994 and 1993:
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
-------------------------------------------------------------------------------
1994
-------------------------------------------------------------------------------
4th 3rd 2nd 1st
-------------------------------------------------------------------------------
Premiums $705.7 $670.3 $701.4 $655.0
Investment income 194.4 192.3 192.4 191.1
Net realized investment gains 9.6 11.6 12.5 11.9
Benefits to policyholders 539.8 708.2 518.7 481.4
Net income (loss) $ 54.0 $(61.7) $ 85.3 $ 77.1
-------------------------------------------------------------------------------
Net income (loss) per common share $ 0.75 $(0.84) $ 1.14 $ 1.02
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1993
-------------------------------------------------------------------------------
4th 3rd 2nd 1st
-------------------------------------------------------------------------------
Premiums $647.7 $622.9 $624.6 $578.9
Investment income 193.2 196.4 200.3 200.5
Net realized investment gains 8.5 10.6 9.8 20.5
Benefits to policyholders 460.5 446.9 449.8 418.5
Net income $ 83.1 $ 72.1 $ 80.8 $ 63.9
-------------------------------------------------------------------------------
Net income per common share $ 1.08 $ 0.91 $ 1.02 $ 0.81
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 2, 1993, the Registrant determined not to reappoint Ernst & Young
L.L.P. as the Registrant's independent auditors for 1993. Also on August 2,
1993, the Registrant engaged Coopers & Lybrand L.L.P. as the Registrant's
independent auditors. In connection with the audit of the fiscal year ended
December 31, 1992, and for the interim period dating from January 1, 1993, until
August 2, 1993, there were no disagreements between Ernst & Young L.L.P. and the
Registrant on any matter of accounting principles or practices, financial
statements disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of Ernst & Young L.L.P., would have resulted in reference or
disclosure in Ernst & Young L.L.P.'s reports.
Ernst & Young L.L.P.'s report for the fiscal year ended December 31, 1992,
contained no adverse opinion, no disclaimer of opinion and no qualification or
modification of opinion as to uncertainty, audit scope, or accounting
principles.
The change of independent auditors was recommended by the Audit Committee of
the Registrant's Board of Directors and approved by the Board of Directors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS OF THE REGISTRANT
The information under the caption "Election of Directors" included in UNUM's
proxy statement dated March 28, 1995, is incorporated by reference.
B. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of UNUM are as follows:
AGE (AS OF AN OFFICER
NAME MARCH 24, 1995) POSITION HELD WITH UNUM SINCE
----------------------- ------------------- ------------------------------------------------------------------ ----------
James F. Orr III 52 Chairman, President and Chief Executive Officer 1986
Thomas G. Brown 50 Executive Vice President 1992
Stephen B. Center 57 Executive Vice President 1972
Robert W. Crispin 48 Executive Vice President 1995
Rodney N. Hook 48 Senior Vice President and Chief Financial Officer 1989
Peter J. Moynihan 51 Senior Vice President 1979
Kevin P. O'Connell* 49 Senior Vice President, UNUM America 1987
Elaine D. Rosen* 42 Senior Vice President, UNUM America 1983
Robert E. Staton* 48 Chairman, Colonial Life 1984
------------
*Denotes an executive of UNUM America or Colonial Life who is not an officer of
the Corporation but who is considered an "executive officer" under regulations
of the Securities and Exchange Commission.
The officers are elected annually and hold office until their respective
successors have been chosen and qualified, or until death, resignation or
removal. The UNUM Board may also appoint or delegate the appointment of
officers, assistant officers and agents as it may deem necessary for such
periods as the President, the By-Laws or the UNUM Board may prescribe.
Mr. Orr was elected Chairman of the Board of UNUM in February 1988. He has
served as President and Chief Executive Officer since September 1987. He joined
UNUM in 1986.
Mr. Brown was elected Executive Vice President of UNUM in January 1995. In
addition, he continues to serve as President and Chief Executive Officer of
Duncanson & Holt, Inc. ("D&H"), a post he has held since 1987. D&H became a
wholly-owned subsidiary of UNUM in July 1992.
Mr. Center was elected President of UNUM America and Executive Vice
President of UNUM in September 1992. Previously, he served as Group Executive
Vice President of UNUM America from May 1990 to August 1992, Executive Vice
President for the Employee Benefits Division from September 1989 to May 1990,
and Senior Vice President for the Employee Benefits Division from October 1985
to September 1989. He joined UNUM America in 1963.
Mr. Crispin was elected Executive Vice President of UNUM in January 1995.
Prior to joining UNUM, Mr. Crispin served as Vice Chairman and Chief Investment
Officer of The Travelers Insurance Companies, from July 1991 to January 1995 and
as Executive Vice President of Lincoln National Corporation from 1986 to 1991.
Mr. Hook was elected Senior Vice President and Chief Financial Officer in
April 1989. He served additionally as Treasurer from May 1989 to September 1992.
Prior to joining UNUM in April 1989, Mr. Hook served as a consultant to The
Equitable Life Assurance Society of New York from September 1988 to April 1989.
Mr. Moynihan was elected Senior Vice President of UNUM in September 1993 and
Senior Vice President for Investments of UNUM America in October 1987. He joined
UNUM America in 1973.
Mr. O'Connell was elected Senior Vice President of UNUM America in January
1992. Previously, he served as Senior Vice President for Group Life and Health
from November 1988 to January 1992 and additionally for Group Retirement
Products from May 1990 to January 1992. He joined UNUM America in 1968.
Ms. Rosen was elected Senior Vice President of UNUM America in January 1991.
Previously, she served as Senior Vice President for Long Term Disability from
November 1988 to January 1991. She joined UNUM America in 1975.
Mr. Staton was elected Chairman of Colonial Life in December 1993.
Previously, he served as Senior Vice President from February 1990 to December
1993 and Vice President from August 1985 to February 1990; and additionally as
General Counsel from August 1985 to November 1993, and Corporate Secretary from
February 1992 to August 1993. He joined Colonial Life in 1984.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Compensation of Directors" and
"Executive Compensation" included in UNUM's proxy statement dated March 28,
1995, is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership" included in UNUM's
proxy statement dated March 28, 1995, is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Executive Compensation" included in
UNUM's proxy statement dated March 28, 1995, is incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)Documents filed:
1.The following Consolidated Financial Statements of UNUM Corporation
and subsidiaries are included in Item 8.
Consolidated Statements of Income for the Years Ended December 31, 1994, 1993 and 1992............................
Consolidated Balance Sheets as of December 31, 1994, and 1993.....................................................
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1993 and 1992..............
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992........................
Notes to Consolidated Financial Statements........................................................................
2.Financial Statement Schedules. See Index to Financial Statement
Schedules on page of this report.
3. Exhibits. See Index to Exhibits on page of this report.
(b)Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 1994.
Schedules and exhibits required by Article 7 of Regulation S-X other than
those listed are omitted because they are not required, are not applicable, or
equivalent information has been included in the financial statements, and notes
thereto, or elsewhere herein.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
PORTLAND, STATE OF MAINE, ON MARCH 24, 1995.
UNUM Corporation
By /s/ JAMES F. ORR III
------------------------------------
James F. Orr III (Chairman, President
and Chief Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
--------------------------------------------------------- --------------------------------------------------------- --------------
/s/ JAMES F. ORR III Chairman, President and Chief Executive Officer March 24, 1995
-------------------------------------------
(James F. Orr III)
/s/ RODNEY N. HOOK Senior Vice President and Chief Financial Officer March 24, 1995
-------------------------------------------
(Rodney N. Hook)
/s/ STEPHEN D. ROBERTS Vice President and Corporate Controller March 24, 1995
-------------------------------------------
(Stephen D. Roberts)
* Director March 24, 1995
-------------------------------------------
(Gayle O. Averyt)
* Director March 24, 1995
-------------------------------------------
(Kenneth S. Axelson)
* Director March 24, 1995
-------------------------------------------
(Robert E. Dillon, Jr.)
* Director March 24, 1995
-------------------------------------------
(Gwain H. Gillespie)
* Director March 24, 1995
-------------------------------------------
(Ronald E. Goldsberry)
* Director March 24, 1995
-------------------------------------------
(Donald W. Harward)
* Director March 24, 1995
-------------------------------------------
(George J. Mitchell)
* Director March 24, 1995
-------------------------------------------
(Cynthia A. Montgomery)
Director March 24, 1995
-------------------------------------------
(James L. Moody, Jr.)
* Director March 24, 1995
-------------------------------------------
(Lawrence R. Pugh)
* Director March 24, 1995
-------------------------------------------
(Lois Dickson Rice)
* Director March 24, 1995
-------------------------------------------
(John W. Rowe)
*/s/ JOHN-PAUL DEROSA
-------------------------------------------
(John-Paul DeRosa, as Attorney-in-fact
for each of the persons indicated)
(Assistant Secretary)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
UNUM Corporation
We have audited the consolidated financial statements and the financial
statement schedules of UNUM Corporation and subsidiaries listed in Item 14(a) of
this Form 10-K as of and for the years ended December 31, 1994 and 1993. These
consolidated financial statements and financial statement schedules are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 1994 and 1993 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of UNUM Corporation and subsidiaries as of December 31, 1994 and 1993,
and the consolidated results of their operations and their cash flows for the
two years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. In addition, in our opinion, the 1994 and 1993
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
As discussed in Notes 3, 8 and 10 of the consolidated financial statements,
the Corporation changed its method of accounting for certain investments in debt
securities in 1994 and its method of accounting for postretirement benefits
other than pensions, and accounting for income taxes in 1993.
/s/ COOPERS & LYBRAND L.L.P.
Portland, Maine
February 7, 1995, except for Note 11 for
which the date is February 28, 1995
REPORT OF INDEPENDENT AUDITORS
To the Directors and Stockholders
UNUM Corporation
Portland, Maine
We have audited the consolidated statements of income, stockholders' equity,
and cash flows of UNUM Corporation and Subsidiaries for the year ended December
31, 1992. Our audit also included the financial statement schedules for 1992
listed in the Index at Item 14(a). These financial statements and schedules are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of UNUM Corporation and subsidiaries for the year ended December
31, 1992, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG L.L.P.
Boston, Massachusetts
March 26, 1993
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULES
The following financial statement schedules of UNUM Corporation and
subsidiaries are included in Item 14(a):
PAGE(S)
-------
II Condensed Financial Information of UNUM Corporation (Registrant)..
III Supplementary Insurance Information...............................
IV Reinsurance.......................................................
UNUM CORPORATION (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------
Revenues
Dividends from subsidiaries*........................................ $102.0 $131.8 $110.8
Investment income................................................... 0.1 0.2 0.8
Net realized investment gains....................................... -- -- 1.9
Fees and other income............................................... 0.8 -- --
------- ------- -------
Total revenues.................................................. 102.9 132.0 113.5
Expenses
Operating expenses.................................................. 8.7 11.6 9.2
Interest expense.................................................... 18.6 12.4 10.7
Interest expense on loans from subsidiaries*........................ 2.3 0.1 --
------- ------- -------
Total expenses.................................................. 29.6 24.1 19.9
------- ------- -------
Income before income taxes............................................ 73.3 107.9 93.6
Income tax expense (benefit).......................................... (6.2) (5.7) 3.5
------- ------- -------
Income before equity in undistributed net income of subsidiaries...... 79.5 113.6 90.1
Equity in undistributed net income of subsidiaries*................... 75.2 186.3 201.1
------- ------- -------
Net income............................................................ $154.7 $299.9 $291.2
------- ------- -------
------- ------- -------
<FN>
------------
*Eliminated in consolidation
See note to condensed financial statements.
UNUM CORPORATION (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(DOLLARS IN MILLIONS)
DECEMBER 31,
1994 1993
----------------------------------------------------------------------------------------------------
Assets
Investments
Investment in subsidiaries*................................................. $2,386.0 $2,376.9
Short-term investments...................................................... 0.5 4.4
-------- --------
Total investments......................................................... 2,386.5 2,381.3
Cash.......................................................................... 2.0 1.3
Amounts receivable from subsidiaries, net*.................................... 18.4 12.4
Property and equipment, net................................................... 16.7 17.3
-------- --------
Total assets.............................................................. $2,423.6 $2,412.3
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Liabilities
Notes payable............................................................... $ 427.4 $ 236.0
Notes payable to subsidiary*................................................ 60.0 60.0
Income taxes................................................................ 2.7 2.3
Other liabilities........................................................... 18.1 11.3
-------- --------
Total liabilities......................................................... 508.2 309.6
Stockholders' Equity
Preferred stock, par value $0.10 per share, authorized 10,000,000 shares,
none issued
Common stock, par value $0.10 per share, authorized 120,000,000 shares,
issued 99,987,958 shares................................................... 10.0 10.0
Additional paid-in capital.................................................. 1,062.4 1,062.3
Unrealized gains on available for sale securities of subsidiaries, net of
deferred taxes............................................................. 67.7 165.2
Unrealized foreign currency translation adjustment.......................... (23.7) (24.1)
Retained earnings (including undistributed earnings of subsidiaries of
$1,114.3 million and $1,039.1 million in 1994 and 1993, respectively)...... 1,507.2 1,420.8
-------- --------
2,623.6 2,634.2
Less:
Treasury stock, at cost (1994-27,575,430 shares; 1993-24,006,816 shares).... 706.6 529.8
Restricted stock deferred compensation...................................... 1.6 1.7
-------- --------
Total stockholders' equity................................................ 1,915.4 2,102.7
-------- --------
Total liabilities and stockholders' equity................................ $2,423.6 $2,412.3
-------- --------
-------- --------
<FN>
*Eliminated in consolidation
See note to condensed financial statements.
UNUM CORPORATION (Parent Company)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------------------
Operating activities:
Net income.................................................................... $ 154.7 $ 299.9 $ 291.2
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in income tax liability............................................ 0.4 2.3 3.2
(Increase) decrease in amounts due to/from subsidiaries..................... (6.0) 7.5 (1.2)
Other....................................................................... 11.1 4.6 (5.4)
Equity in undistributed net income of subsidiaries*........................... (75.2) (186.3) (201.1)
------- ------- -------
Net cash provided by operating activities................................. 85.0 128.0 86.7
------- ------- -------
Investing activities:
Sales of investments.......................................................... -- -- 86.2
Purchases of investments...................................................... -- 0.3 (89.9)
Investment in subsidiaries, net*.............................................. (30.6) 0.9 (43.8)
Net (increase) decrease in short-term investments............................. 3.9 (2.3) 1.4
Net additions to property and equipment....................................... (3.3) (2.4) (1.7)
------- ------- -------
Net cash used in investing activities..................................... (30.0) (3.5) (47.8)
------- ------- -------
Financing activities:
Dividends to stockholders..................................................... (68.3) (61.4) (41.9)
Treasury stock acquired....................................................... (183.3) (192.5) --
Proceeds from notes payable................................................... 54.7 51.5 74.6
Repayment of notes payable.................................................... -- (50.0) (25.0)
Increase (decrease) in short-term debt........................................ 136.7 58.1 (58.1)
Net proceeds from notes payable to subsidiaries*.............................. -- 60.0 1.3
Other......................................................................... 5.9 10.4 10.7
------- ------- -------
Net cash used in financing activities..................................... (54.3) (123.9) (38.4)
------- ------- -------
Net increase in cash............................................................ 0.7 0.6 0.5
Cash at beginning of year....................................................... 1.3 0.7 0.2
------- ------- -------
Cash at end of year............................................................. $ 2.0 $ 1.3 $ 0.7
------- ------- -------
------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Income taxes................................................................ $ (6.6) $ (8.1) $ (4.7)
Interest.................................................................... $ 18.1 $ 12.1 $ 11.0
Interest to subsidiaries*................................................... $ 2.2 $ -- $ --
*Eliminated in consolidation
See note to condensed financial statements.
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.
Certain December 31, 1993, and 1992 amounts have been reclassified in 1994
for comparative purposes.
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN MILLIONS)
(1)(2)
FUTURE
POLICY AMORTIZATION
BENEFITS, BENEFITS TO OF
DEFERRED AND UNPAID (4)(5) POLICYHOLDERS DEFERRED (5)
POLICY CLAIMS AND (3) NET AND POLICY OTHER (6)
ACQUISITION CLAIM PREMIUM INVESTMENT INTEREST ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES REVENUE INCOME CREDITED COSTS EXPENSES WRITTEN
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994
Employee Benefits...... $ 308.2 $2,301.1 $1,451.4 $263.5 $1,117.0 $ 39.6 $300.5 $1,108.8
Related Businesses..... 33.3 887.8 477.5 89.6 333.2 8.0 165.6 358.4
Colonial Companies..... 224.8 330.5 441.3 32.6 226.1 60.7 124.4 388.1
Individual Disability.. 409.9 1,289.1 357.5 84.6 487.2 39.5 103.6 346.6
Retirement Security.... 57.5 137.0 62.5 226.9 212.1 4.2 47.4 57.8
Other Operations....... 1.5 500.5 16.9 114.4 115.2 0.8 6.8 12.3
Corporate.............. -- (0.5) 0.8 4.2 -- -- 33.2 --
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
Total................ $1,035.2 $5,445.5 $2,807.9 $815.8 $2,490.8 $152.8 $781.5 $2,272.0
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
Year Ended December 31, 1993
Employee Benefits...... $ 249.4 $2,080.8 $1,362.6 $234.7 $1,018.3 $ 42.1 $297.8 $1,060.6
Related Businesses..... 25.6 795.4 402.5 85.5 268.7 1.1 160.9 282.2
Colonial Companies..... 206.0 282.2 407.4 41.4 211.7 56.1 110.6 365.4
Individual Disability.. 348.2 949.1 322.5 82.5 212.0 35.3 88.7 313.1
Retirement Security.... 47.5 106.4 36.3 235.5 196.6 10.6 43.5 34.4
Other Operations....... 2.4 490.6 25.9 154.0 149.4 2.5 7.2 14.0
Corporate.............. -- (0.5) -- 6.2 -- -- 23.6 --
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
Total................ $ 879.1 $4,704.0 $2,557.2 $839.8 $2,056.7 $147.7 $732.3 $2,069.7
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
Year Ended December 31, 1992
Employee Benefits...... $ 206.8 $1,865.6 $1,116.2 $234.4 $ 808.0 $ 34.4 $285.7 $ 895.1
Related Businesses..... 18.0 696.5 354.4 91.6 262.7 (2.9) 132.8 287.1
Colonial Companies..... 185.7 243.0 371.9 35.4 191.5 50.5 104.8 330.8
Individual Disability.. 293.1 827.7 292.9 75.0 204.4 31.2 87.7 283.5
Retirement Security.... 35.8 90.0 32.3 228.8 211.7 9.4 33.3 11.9
Other Operations....... 14.4 475.0 29.3 181.6 182.7 3.3 8.4 0.9
Corporate.............. -- -- 0.8 3.9 -- -- 10.4 --
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
Total................ $ 753.8 $4,197.8 $2,197.8 $850.7 $1,861.0 $125.9 $663.1 $1,809.3
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
----------- ------------ ---------- --------- ----------- ---------- --------- ----------
(1) Excludes other policyholder funds, as follows:
DECEMBER 31,
------------------------------------
SEGMENT 1994 1993 1992
--------------------------------------------------------------------
Employee Benefits............. $ 6.3 $ 6.8 $ 5.8
Related Businesses............ 4.2 4.0 8.9
Colonial Companies............ 100.1 76.0 57.0
Individual Disability......... -- -- --
Retirement Security........... 3,192.0 3,204.1 3,229.9
Other Operations.............. 756.2 959.8 1,236.3
---------- ---------- ----------
Total..................... $ 4,058.8 $ 4,250.7 $ 4,537.9
---------- ---------- ----------
---------- ---------- ----------
<FN>
(2) Includes unearned premiums, other policy claims and benefits payable.
(3) Includes fees and other income (expense).
(4) Includes investment income (expense) and net realized investment gains.
(5) Investment income and net realized investment gains are allocated to the
segments based on designation of ownership of assets identified to the
segments. Operating expenses are allocated to the segments based on direct
association with a product whenever possible. If, however, the expense
cannot be readily associated with a particular product, the costs are
allocated based on ratios of the relative time spent, extent of usage or
varying volume of work performed for each segment.
(6) Premiums written for health and disability income policies.
Certain December 31, 1993, and 1992 amounts have been reclassified in 1994
for comparative purposes.
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(DOLLARS IN MILLIONS)
-------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
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............. 2,135.0 96.8 169.1 2,207.3 7.7%
Group annuities........................... 21.3 -- -- 21.3 --
---------- --------- ------ ----------
Total premiums........................ $ 2,674.2 $ 112.5 $170.7 $ 2,732.4
---------- --------- ------ ----------
---------- --------- ------ ----------
Year Ended December 31, 1993
Life insurance in force................... $130,323.4 $2,247.9 $ -- $128,075.5 --
---------- --------- ------ ----------
---------- --------- ------ ----------
Premiums
Life insurance and individual annuities... $ 487.2 $ 11.9 $ 1.6 $ 476.9 0.3%
Accident and health insurance............. 1,818.6 38.1 191.0 1,971.5 9.7%
Group annuities........................... 25.7 -- -- 25.7 --
---------- --------- ------ ----------
Total premiums........................ $ 2,331.5 $ 50.0 $192.6 $ 2,474.1
---------- --------- ------ ----------
---------- --------- ------ ----------
Year Ended December 31, 1992
Life insurance in force..................... $105,361.0 $ 586.8 $ -- $104,774.2 --
---------- --------- ------ ----------
---------- --------- ------ ----------
Premiums
Life insurance and individual annuities... $ 409.9 $ 6.2 $ 0.5 $ 404.2 0.1%
Accident and health insurance............. 1,615.7 45.3 135.7 1,706.1 8.0%
Group annuities........................... 32.1 -- -- 32.1 --
---------- --------- ------ ----------
Total premiums........................ $ 2,057.7 $ 51.5 $136.2 $ 2,142.4
---------- --------- ------ ----------
---------- --------- ------ ----------
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
NUMBER DESCRIPTION METHOD OF FILING PAGE NO.
--------- -------------------------------------------------- -------------------------------------------------- --------
3.1 Certificate of Incorporation of UNUM Corporation, Filed as Exhibit 3.1 to the Registrant's Annual
as amended Report on Form 10-K dated March 25, 1992, and
incorporated herein by reference.
3.2 By-Laws of UNUM Corporation Filed as Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K dated March 25, 1992, and
incorporated herein by reference.
4 Rights Agreement Filed as Exhibit 1 to the Registrant's Current
Report on Form 8-K dated March 18, 1992, and
incorporated herein by reference.
10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K dated March 26, 1991, and
incorporated herein by reference.
10.2 Annual Incentive Plan Filed as Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K dated March 29, 1993, and
incorporated herein by reference.
10.2.1 Annual Incentive Plan-Summary of Significant Filed herewith.
Changes
10.3 Executive Stock Option Plan Filed as Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K dated March 29, 1993, and
incorporated herein by reference.
10.4 1990 Long-Term Stock Incentive Plan Filed as Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K dated March 29, 1993, and
incorporated herein by reference.
10.5 Supplemental Retirement Plan Filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-6571) dated June 18, 1986, and incorporated
herein by reference.
10.6 Supplemental Executive Retirement Plan Filed as Exhibit 10.6 to the Registrant's Annual
Report on Form 10-K dated March 26, 1991, and
incorporated herein by reference.
10.7 Form of Executive Severance Agreement Filed as Exhibit 10.7 to the Registrant's Annual
Report on Form 10-K dated March 25, 1992, and
incorporated herein by reference.
10.8 Colonial Life & Accident Insurance Co. Annual Filed herewith.
Incentive Plan
10.9 $500 Million Revolving Credit Agreement Filed herewith
12 Computation of Ratio of Earnings to Fixed Charges Filed herewith.
16 Letter Regarding Change in Certifying Accountant Filed as Exhibit 16 to the Registrant's Current
Report on Form 8-K dated August 9, 1993, and
incorporated herein by reference.
21 Subsidiaries of UNUM Corporation Filed herewith.
23.1 Consent of Independent Accountants Filed herewith.
23.2 Consent of Independent Auditors Filed herewith.
24 Power of Attorney Filed herewith.
27 Financial Data Schedule Filed herewith.