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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to

Commission file number 1-9254

UNUM Corporation

(Exact name of registrant as specified in its charter)

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Delaware 01-0405657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

2211 Congress Street, Portland, Maine 04122
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (207) 770-2211

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
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Common stock, $0.10 par value New York Stock Exchange
Pacific Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Pacific Stock Exchange
8.8% Junior Subordinated Deferrable Interest New York Stock Exchange
Debentures, Series A, Due 2025

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 7, 1997, was approximately $5,384,300,000.

As of March 7, 1997, 70,832,485 shares of the registrant's common stock were
outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Information from the Registrant's proxy statement for the Annual Meeting of
Shareholders on May 9, 1997, is incorporated by reference into Part III.

Exhibit Index appears on page 76.

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TABLE OF CONTENTS

PART I

Item Page
- ---- ----

1. Business .............................................................................. 1
A. Description of Business ............................................................ 1
B. Disability Insurance Segment ....................................................... 2
C. Special Risk Insurance Segment .................................................... 4
D. Colonial Products Segment ......................................................... 5
E. Retirement Products Segment ....................................................... 5
F. Investments ......................................................................... 6
G. Risk Management and Reinsurance ................................................... 7
H. Reserves ........................................................................... 8
I. Employees ......................................................................... 8
J. Competition ......................................................................... 8
K. Regulation ........................................................................ 8
L. Participation Fund Account .......................................................... 9
2. Properties ........................................................................... 10
3. Legal Proceedings ..................................................................... 10
4. Submission of Matters to a Vote of Security Holders .................................... 10
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters ............ 10
6. Selected Financial Data ............................................................... 11
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
8. Financial Statements and Supplementary Data .......................................... 33
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... 66
PART III
10. Directors and Executive Officers of the Registrant .................................... 66
A. Directors of the Registrant ......................................................... 66
B. Executive Officers of the Registrant ................................................ 66
11. Executive Compensation ............................................................... 67
12. Security Ownership of Certain Beneficial Owners and Management ........................ 67
13. Certain Relationships and Related Transactions ....................................... 67
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 68
Signatures ........................................................................... 69
Index to Exhibits ..................................................................... 76

PART I

Item 1--Business

A. Description of Business

UNUM Corporation is a Delaware corporation organized in 1985 as an
insurance holding company. UNUM Corporation and subsidiaries ("UNUM") are the
leading providers of group long term disability insurance ("group LTD") in the
United States and the United Kingdom. UNUM is also a major provider of employee
benefits, individual disability insurance and special risk reinsurance. UNUM
also markets long term care insurance. The operations of the subsidiaries, as
described below, account for substantially all of UNUM's consolidated assets and
revenues. UNUM Corporation is based in Portland, Maine, and through its
affiliates has operations in North America, the United Kingdom and the Pacific
Rim.

Effective December 31, 1996, UNUM merged Commercial Life Insurance Company
("Commercial Life") into UNUM Life Insurance Company of America ("UNUM America")
to accelerate growth of its special risk business, increase its commitment to
the Association Group disability business, and to improve operating and capital
efficiencies. Following the merger, UNUM America is a leader in special risk
insurance and professional association insurance marketing.

UNUM conducts its operations in the United States through a number of
wholly-owned subsidiaries including: UNUM America, a Maine life insurance
company licensed in 49 states and Canada, the leading provider of group
disability insurance in the nation and a provider of employee benefits and long
term care insurance; First UNUM Life Insurance Company ("First UNUM"), a New
York life insurance company; Duncanson & Holt, Inc. ("D&H"), a New York
corporation and a leading accident and health reinsurance underwriting manager;
Colonial Companies, Inc. ("Colonial Companies"), a Delaware holding company
whose wholly-owned subsidiary, Colonial Life & Accident Insurance Company
("Colonial"), is a leader in payroll-deducted voluntary employee benefits
offered to employees at their worksites; and UNUM Holding Company, a Delaware
corporation. Through UNUM Holding Company, UNUM Corporation also owns Claims
Service International, Inc., a Delaware corporation, which provides claims
administration services, and UNUM Sales Corporation, a Delaware corporation. As
of December 31, 1996, UNUM Sales Corporation is no longer registered as a
licensed broker-dealer coinciding with the sale of UNUM America and First UNUM's
respective group tax-sheltered annuity ("TSA") businesses as discussed below.

UNUM Corporation also holds all of the outstanding capital stock of UNUM
European Holding Company, which is incorporated in the United Kingdom. UNUM's
United Kingdom operations are conducted by UNUM Limited, which is the United
Kingdom's leader in group disability insurance and a wholly-owned subsidiary of
UNUM European Holding Company, and by Duncanson & Holt Europe Ltd., a
wholly-owned subsidiary of D&H.

UNUM's Japanese operations are conducted through a wholly-owned subsidiary,
UNUM Japan Accident Insurance Company Limited, a Japanese non-life insurance
company, which was established in 1994.

On March 26, 1993, UNUM merged with Colonial Companies. Under the merger
agreement, UNUM exchanged 0.731 shares of its common stock for each share of
Colonial Companies Class A and Class B common stock outstanding on March 26,
1993. UNUM issued approximately 11.4 million shares of common stock from
treasury in connection with the merger. In addition, outstanding options to
acquire shares of Colonial Companies Class B common stock were converted into
options to acquire shares of UNUM common stock. The merger was accounted for as
a pooling of interests.

Disability Insurance, Special Risk Insurance, Colonial Products and Retirement
Products. Corporate includes transactions that are generally non-insurance
related and interest expense on corporate borrowings. For comparative purposes,
1994 information was previously restated to reflect reporting in these segments.

Refer to Item 7 and Item 8 (Note 16) for more information.

B. Disability Insurance Segment

The Disability Insurance segment, which in 1996 accounted for 59.0% of
UNUM's revenues and 63.0% of its income before income taxes, includes disability
products offered in North America, the United Kingdom and Japan including: group
LTD, group short term disability ("group STD"), individual disability,
Association Group disability, disability reinsurance operations and long term
care insurance.

UNUM America and First UNUM:

UNUM America and First UNUM market their group and individual insurance
products, which are included in the Disability Insurance and Special Risk
Insurance segments, through a network of 35 offices in the United States and
Canada which utilize brokers to distribute these products. As of December 31,
1996, these branch offices were organized into five regions and were staffed
with approximately 870 management, sales, service and administrative personnel.

Group Long Term Disability

UNUM America and First UNUM's group LTD product is the Disability Insurance
segment's principal product. UNUM America and First UNUM target sales of group
LTD to executive, administrative and management personnel, and other
professionals, such as doctors, attorneys, accountants and engineers. Since
1976, UNUM America and First UNUM combined have been the United States' leading
provider of group LTD according to EMPLOYEE BENEFIT PLAN REVIEW, a recognized
industry publication.

Group LTD provides employees with insurance coverage for loss of income in
the event of inability to work due to sickness or injury. Most 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 investment
income.

The group LTD product is sold primarily on a basis that permits annual
repricing. This enables UNUM to adjust the pricing of its products to more
closely match the underlying claim experience and interest rate environment.

Individual Disability

Individual disability products provide coverage for loss of income for
professionals, corporate executives, business owners and administrative support
personnel in the event of disability. As reported in the Life Insurance
Marketing Research Association's 1995 INDIVIDUAL HEALTH ISSUES AND INFORCE
SURVEY for the United States and Canada, the most recent available data, UNUM
America and First UNUM combined were the fourth largest provider of individual
disability income policies measured by inforce premium.

On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage
of the active life reserves of UNUM America's existing United States
non-cancellable individual disability ("ID") block of business. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM's announcement in late 1994, as discussed below, that it would no
longer market the non-cancellable form of ID coverage in the United States. The
agreement was effective December 31, 1996. For a detailed discussion of the
reinsurance agreement refer to Item 8 (Note 6).

UNUM announced in November 1994 that it would discontinue sales of the
traditional, fixed price, non-cancellable individual disability product
("non-cancellable product") in the United States upon introduction of a new
disability product in each state. During the second quarter of 1995, UNUM
introduced the Lifelong Disability Protection ("LDP") product, which replaces
the non-cancellable product. LDP policies are issued on a "guaranteed renewable"
basis, which means that UNUM cannot refuse to renew any policy, but it does
reserve the right to

increase premiums for inforce policies. This right to change premiums is or may
be subject to various state insurance department rules, regulations, and
approvals.

The LDP product provides benefits and transitional support for moderate
disabilities, while providing richer benefits for severe disabilities. Various
options are available that permit tailoring of insurance coverage to the
specific client's needs. The most common options include up to 60% base income
replacement coverage, an option to purchase up to 40% further coverage in the
event of catastrophic injury or illness involving the loss of two or more
Activities of Daily Living, and an automatic option to convert to a long term
care policy at retirement age. Following the approval of the LDP product, sales
of the non-cancellable product have been discontinued in the United States. UNUM
also markets buy/sell and key person coverage and policies that provide
reimbursement for business overhead expenses incurred during a period of
disability.

Individual disability insurance premium rates are based on expected
mortality, morbidity and persistency, as well as assumptions concerning policy
related expenses, inflation and investment income.

Following the completion of its merger with Commercial Life, UNUM America
is a leading provider of disability insurance in the association marketplace,
offering disability income coverage to members of professional associations.
UNUM expects to introduce new conditionally renewable products for sale through
its association channel in the first quarter of 1997, subject to regulatory
approvals. As a result of the merger, UNUM now reports the operations of the
Association Group disability business with the individual disability business.

Group Short Term Disability

Group STD provides employees with insurance coverage for loss of income in
the event of inability to work due to sickness or injury. Most of these policies
begin providing benefits immediately for accidents, or following a one-week
waiting period for sickness, and continue providing benefits for up to 26 weeks.
Group STD benefits are paid weekly and generally are limited to 60% of the
employee's earned income up to a specified maximum benefit. As reported by
EMPLOYEE BENEFIT PLAN REVIEW, UNUM America and First UNUM combined were the top
provider of group STD for 1995, based on premium and number of inforce lives.

Long Term Care

UNUM America and First UNUM market long term care ("LTC") insurance to
employer groups and individuals. The group LTC product is offered on an employer
or employee-paid basis, and employer groups may offer coverage to retirees,
spouses, parents and grandparents, in addition to the employee. LTC provides
insurance coverage for nursing home and home care costs when the insured
sustains the loss of two or more Activities of Daily Living or sustains
cognitive impairment.

LTD Reinsurance

UNUM America assumes certain insurance risks through long term disability
reinsurance operations managed by Duncanson & Holt Services Inc., a leading
manager of group LTD reinsurance in the United States and wholly-owned
subsidiary of D&H.

UNUM Limited:

UNUM Limited was the leading provider for 1995 of group LTD insurance in
the United Kingdom, as reported by EMPLOYERS RE. INTERNATIONAL. UNUM Limited
targets group LTD sales to executive, administrative and management personnel,
and other professionals. These products are marketed through a network of
independent brokers. UNUM Limited's group LTD 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
through brokers and agents to self-employed individuals and those not covered
under group policies. Premiums for group LTD and individual disability insurance
are based upon the expected mortality, morbidity and persistency of the insured
group, as well as assumptions concerning operating expenses and investment
income.

In May 1994, UNUM Limited assumed the management of the group risk
portfolio of Windsor Life Assurance Company Limited ("Windsor Life"), which
included group LTD and group life products. Windsor Life was the third largest
group LTD provider in the United Kingdom in 1993, as reported by EMPLOYERS RE.
INTERNATIONAL.

UNUM Japan:

On June 20, 1994, the Japanese Ministry of Finance granted UNUM a
provisional license that allowed UNUM to establish a non-life insurance company,
UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), to market
disability and other accident products in Japan. UNUM Japan has subsequently
received an official license.

UNUM Japan targets sales of group and individual long term disability
products ("LTD products") to executive, administrative and management personnel,
and other professionals. These products are marketed through contracted
independent agents and brokers. The LTD products provide employees with
insurance coverage for loss of income in the event of inability to work due to
sickness or injury. Most of these policies begin providing benefits following
90- or 365-day waiting periods and continue providing benefits until the
employee reaches age 65-70. The benefits of the LTD products are paid monthly
and generally are limited to 60% of the employee's earned income up to a
specified maximum benefit. Premiums for LTD insurance are based upon the
expected mortality, morbidity and persistency of the insured group, as well as
assumptions concerning operating expenses and investment income.

UNUM Japan also acquires premiums as a reinsurer of LTD products in Japan
and Hong Kong. These reinsurance treaty arrangements are mostly quota share
coinsurance. The direct insurer is subject to compliance with UNUM Japan's risk
management standards for pricing, underwriting, and claims management.

Refer to Item 7 and Item 8 (Note 16) under the caption "Disability
Insurance Segment" for more information.

C. Special Risk Insurance Segment

The Special Risk Insurance segment in 1996 accounted for 20.1% of UNUM's
revenues and 23.2% of its income before income taxes. The Special Risk Insurance
segment includes group life, special risk accident insurance, non-disability
reinsurance operations, reinsurance underwriting management operations and other
special risk insurance products.

The Special Risk Insurance segment's group insurance products are sold
primarily on a basis that permits annual repricing. This enables UNUM to adjust
the pricing of its products to more closely match the underlying claim
experience and interest rate environment.

UNUM America and First UNUM's group life insurance products provide term
insurance to a broad range of employees. As reported by EMPLOYEE BENEFIT PLAN
REVIEW for 1995, UNUM America and First UNUM combined were the seventh largest
writer of group life insurance in the United States, based on number of inforce
contracts. UNUM America and First UNUM also offer group universal life insurance
on a payroll deduction basis through a network of independent brokers and
specialty agents, and group accidental death and dismemberment riders. In
addition, term life insurance is sold through the association group channel.

Following the completion of its merger with Commercial Life, UNUM America
is a leading provider of group special risk accident products, including group
travel and voluntary accident insurance. UNUM America markets special risk
products, which are offered on an employer or employee-paid basis, through a
network of independent brokers and specialty agents.

On July 30, 1992, UNUM purchased D&H, a leading accident and health
reinsurance underwriting manager. As a reinsurance underwriting manager, D&H is
authorized to conduct reinsurance business on behalf of the member companies
participating in its reinsurance facilities. D&H provides pool management
services that may include marketing, underwriting, administration, claims
payment and actuarial services for client companies. D&H and its subsidiaries do
not bear any insurance risk, with the exception of Duncanson & Holt Underwriters
Ltd., a wholly- owned subsidiary of Duncanson & Holt Europe Ltd. On May 3, 1996,
D&H acquired three associated reinsurance underwriting managers specializing in
accident and health business. D&H has offices throughout the United States and
in London, Toronto, Bermuda and Singapore.

During 1995, Duncanson & Holt Europe Ltd., an affiliate of D&H based in the
United Kingdom, was authorized by Lloyd's of London to establish two new Lloyd's
Managing Agents and to acquire a third existing Lloyd's Managing Agent. Each
manages a syndicate that underwrites primarily personal accident and other
"non-marine" classes of business at Lloyd's of London.

The non-disability reinsurance operations include UNUM America's
participation in reinsurance facilities managed by D&H, facilities managed by
non-related companies and direct reinsurance arrangements primarily for

accident and health, long term care and special risks. As a member company in
reinsurance facilities, UNUM America assumes a share of the insurance risk of
the facility.

Refer to Item 7 and Item 8 (Note 16) under the caption "Special Risk
Insurance Segment" for more information.

D. Colonial Products Segment

The Colonial Products segment in 1996 accounted for 13.5% of UNUM's
revenues and 27.0% of its income before income taxes. The Colonial Products
segment includes Colonial and affiliates. Colonial markets a broad line of
payroll-deducted, voluntary benefits to employees at their worksites, while
focusing on accident and sickness, cancer and life products. Colonial markets
its products nationwide primarily through a 7,900-member independent contractor
sales force.

Colonial's accident policies generally provide benefit payments for
disability income, death, dismemberment or major injury. Accident policies are
designed to supplement other benefits available through Social Security,
workers' compensation, and other insurance plans. Colonial offers a wide range
of life insurance products, with universal life and whole life accounting for
most of the life insurance sold. Colonial's cancer policies are designed to
provide payments for hospitalization and scheduled medical benefits. All of
Colonial's insurance policies are issued on a nonparticipating basis.

More than 98% of Colonial's premiums for 1996 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" basis, which means that Colonial cannot refuse to renew any policy,
but it does reserve the right on a product-by-product basis to increase premiums
for inforce policies. This right to change premiums is or may be subject to
various state insurance department rules, regulations, and approvals.

Colonial markets its accident and health products as qualified fringe
benefits that can be purchased with pretax dollars as part of a flexible
benefits program pursuant to Section 125 of the Internal Revenue Code. In 1996,
premiums from sales to employees participating in such programs accounted for
approximately 50% of total premiums. A flexible benefits program assists
employers in managing their benefits and compensation packages and provides
policyholders with the ability to choose the benefits that best meet their
needs. Although Congress 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's ability to continue marketing its products in this way, Colonial
believes its products provide policyholders value, which will remain even if the
tax advantages offered by flexible benefit programs are eliminated.

Colonial Companies' subsidiary, BenefitAmerica, Inc. ("BenefitAmerica"),
offers employers administrative services for their employee benefit programs.
The services offered by BenefitAmerica include administration of flexible
spending accounts, which are offered under an employer's flexible benefits plan
pursuant to Section 125 of the Internal Revenue Code, as well as other
administrative services to those plans. The services offered by BenefitAmerica
complement the services and products offered to employers by Colonial.

Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial Products
Segment" for more information.

E. Retirement Products Segment

The Retirement Products segment accounted for 7.0% of UNUM's revenues and
0.4% of its income before income taxes in 1996. This segment includes UNUM
America and First UNUM's tax-sheltered annuities ("TSA"), guaranteed investment
contracts, deposit administration accounts, 401(k) plans, individual life and
group medical insurance, all of which are no longer actively marketed.

Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement Products
Segment" for more information.

F. Investments

Refer to Item 7 under the caption "Investments" for more information.
Additional information about UNUM's mortgage loan portfolio is provided below.

Effective January 1, 1996, UNUM began using the categories for geographic
region and property type established by the American Council of Life Insurance.
For comparative purposes, 1995 information has been restated in the tables below
to reflect this change.

UNUM management believes that its mortgage loan portfolio is well
diversified geographically and among property types. The mortgage loan portfolio
percentages by geographic region and property type at December 31, 1996, and
1995, were as follows:

Geographic Region

1996 1995
---- ----
New England ............ 12.4% 12.3%
Mid-Atlantic ............ 12.7 11.3
South Atlantic ......... 16.1 16.6
Mountain ............... 7.5 7.9
Pacific .................. 15.7 14.1
West South Central ...... 6.8 7.8
East South Central ...... 5.4 5.6
West North Central ...... 11.3 10.1
East North Central ...... 12.0 14.2
Other .................. 0.1 0.1
------ ------
Total .................. 100.0% 100.0%
====== ======

Property Type

1996 1995
---- ----
Office Building ......... 26.1% 28.2%
Retail ............... 33.0 33.5
Industrial ............ 27.1 23.3
Apartment ............ 8.2 7.1
Hotel/Motel ............ 3.8 5.6
1-4 Family ............ 0.1 0.1
Other Commercial ...... 1.7 2.2
------ ------
Total ............... 100% 100%
====== ======

Mortgage loans delinquent 60 days or more on a contract delinquency basis
by geographic region and property type were as follows at December 31, 1996, and
1995 (dollars in millions):

Geographic Region

1996 1995
---- ----
Mid-Atlantic ............ $3.5 $--
East North Central ...... 2.1 2.8
----- ----
Total .................. $5.6 $2.8
===== ====

Property Type

1996 1995
---- ----
Office Building ...... $-- $2.8
Retail ............... 5.6 --
---- -----
Total ............... $5.6 $2.8
==== =====

Effective January 1, 1995, UNUM adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan," which
defined the principles to measure and record a loan when it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement.

Impaired loans by geographic region and property type were as follows at
December 31, 1996, and 1995 (dollars in millions):

Geographic Region

1996 1995
---- ----
New England ............ $14.6 $14.9
Mid-Atlantic ............ 8.4 3.6
South Atlantic ......... 9.1 11.7
Mountain ............... 8.8 12.3
West South Central ...... 4.8 4.8
West North Central ...... 2.6 --
East North Central ...... 2.1 2.8
------ ------
Total .................. $50.4 $50.1
====== ======

Property Type

1996 1995
---- ----
Office Building ...... $22.0 $28.7
Retail ............... 18.2 16.0
Industrial ............ 10.2 5.4
------ ------
Total ............... $50.4 $50.1
====== ======

Mortgage loans that were restructured prior to the adoption of FAS 114, by
geographic region and property type were as follows at December 31, 1996, and
1995 (dollars in millions):

Geographic Region

1996 1995
---- ----
New England ............ $0.7 $3.3
South Atlantic ......... 13.3 13.5
Mountain ............... 7.7 7.8
Pacific .................. 7.9 9.6
West South Central ...... 2.5 2.6
West North Central ...... 8.7 8.7
East North Central ...... 14.0 14.4
----- -----
Total .................. $54.8 $59.9
===== =====

Property Type

1996 1995
---- ----
Office Building ...... $24.3 $25.0
Retail ............... 12.5 12.6
Industrial ............ 5.8 5.8
Apartment ............ 4.4 7.0
Hotel/Motel ............ 7.8 7.9
Other Commercial ...... -- 1.6
------ ------
Total ............... $54.8 $59.9
====== ======

G. Risk Management and Reinsurance

Risk management, which includes product design, pricing, underwriting,
reserving and benefits management, involves a determination of the type and
amount of risk that an insurer is willing to accept, administration and
evaluation of business inforce, and control of claims. UNUM has underwriters
organized within business segments who evaluate policy applications on the basis
of information provided by the applicant and other sources.

UNUM reinsures with other companies portions of the insurance risk it has
underwritten. Reinsurance allows UNUM to sell policies with higher benefits than
the entire risk that UNUM is willing to assume. UNUM remains liable to the
insured for the payment of policy benefits if the reinsurers cannot meet their
obligations under the reinsurance agreements.

Within the Disability Insurance and Special Risk Insurance segments, UNUM
America and First UNUM have underwriters for group disability, individual
disability, Association Group disability, group life, long term care, and
accidental death and dismemberment products. These underwriting functions are
aligned geographically with UNUM America and First UNUM's five sales regions.
Quotes for prospective customers are based upon UNUM America and First UNUM's
experience with profitability and persistency of the respective employer's risk
category. The maximum group LTD, group STD, Association Group disability and LTC
monthly benefit varies, but the usual maximum monthly amount available is
$35,000, $10,000, $10,000 and $6,000, respectively. For group life insurance
products, UNUM retains up to $750,000 per individual life and reinsures the
balance with other insurance carriers. In addition, UNUM America reinsures the
risk on its accidental death and dismemberment contracts that exceeds $400,000
on any one life.

During 1996, UNUM America entered into an agreement for reinsurance
coverage of the active life reserves of UNUM America's existing United States
non-cancellable individual disability block of business. For more information on
the reinsurance agreement refer to Item 1B under the caption "Individual
Disability."

During 1995, UNUM America and First UNUM introduced the guaranteed
renewable Lifelong Disability Protection product ("LDP"), following the decision
in late 1994 to discontinue sales of the traditional fixed price,
non-cancellable individual disability insurance product in the United States. At
the end of 1996, the LDP product has been approved in all 50 states and the
District of Columbia. UNUM requires medical examinations, financial data, and
other information to make a decision on the acceptability of the individual risk
and to appropriately classify an applicant for individual disability insurance
products. On new sales of the LDP product, UNUM retains up to $8,000 basic
monthly indemnity per life for personal disability coverages. UNUM also retains
up to $20,000 per life for business overhead expense coverages and $500,000 per
life for buy/sell coverages.

The financial and medical underwriting areas of UNUM Limited handle the
underwriting of group and individual disability policies and group life
policies. The maximum yearly initial benefit for group LTD is 326,000 pounds
sterling. UNUM Limited retains 75,000 pounds sterling of this risk and reinsures
the balance. The maximum yearly initial benefit for individual disability
insurance is 125,000 pounds sterling, and amounts over 40,000 pounds sterling
per annum are reinsured. On group life business, UNUM Limited retains 60% of the
risk up to a maximum of 225,000 pounds sterling per individual life.

UNUM (except for Colonial) reinsures the risk of individual life insurance
contracts that exceed $425,000 on any one life. Colonial limits its risk for
death and dismemberment benefits to $100,000 per life. During 1996,

Colonial entered into an agreement to reinsure a majority of the mortality risk
on new and inforce universal life business, for which Colonial retains 20% of
the risk under $100,000 per individual life. Colonial also has reinsurance on
its cancer insurance products that provides coverage for claim payments in
excess of $55,000 in any one year, per claimant, up to a lifetime maximum of $1
million per claimant.

In addition to the reinsurance arrangements above, UNUM is covered by
catastrophe reinsurance, which provides additional protection against aggregate
losses in excess of $1 million up to a maximum of $250 million. This protection
is activated whenever one catastrophic event causes the disability and/or death
of three or more lives insured under UNUM's disability, life, or personal
accident contracts.

Reinsurance premiums assumed and ceded for the year ended December 31,
1996, were $252.9 million and $106.4 million, respectively. No current or
planned reinsurance activity is expected to have a significant impact on the
ability of UNUM to underwrite additional insurance.

H. Reserves

The reserves reported in the consolidated financial statements have been
computed in accordance with generally accepted accounting principles ("GAAP").
These reserve balances generally differ from those specified by the laws of the
various states and carried in the statutory financial statements. The
differences between GAAP and statutory reserves arise from the use of different
mortality, morbidity, interest, expense and lapse assumptions.

Pursuant to insurance laws of the states of Maine, New York, and South
Carolina, the United Kingdom and Japan, UNUM's insurance subsidiaries (UNUM
America, First UNUM, Colonial 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 that, together with
premiums to be received and interest on such reserves at assumed rates, are
calculated to be sufficient to meet the policy and contract obligations of
UNUM's insurance subsidiaries. Pursuant to federal insurance laws of Canada,
UNUM America has established regulatory reserves to meet the obligations of
policies written in its Canadian branch.

Statutory, GAAP and regulatory reserves are based on 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.

I. Employees

At December 31, 1996, UNUM had approximately 6,700 full-time employees.
UNUM does not have collective bargaining agreements with employees.

J. Competition

The principal competitive factors affecting UNUM's business are reputation,
financial strength, quality of service, risk management expertise, distribution,
product design, and price. There is competition among insurance companies for
the types of group and individual insurance products sold by UNUM. At the end of
1996, there were more than 1,700 legal reserve life insurance companies in the
United States and Canada and life assurance offices in the United Kingdom. These
companies may offer insurance products similar to those marketed by UNUM. Group
insurance is highly competitive because of the large number of insurance
companies and other entities offering these products.

K. Regulation

UNUM's insurance subsidiaries are subject to regulation and supervision in
the jurisdictions in which they do business. Although the extent of such
regulation varies, U.S. state, Canadian, United Kingdom 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, 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 from Maine, New
York and South Carolina, and from other states (on an "association" or "zone"
basis) in which they are licensed to do business. UNUM's insurance branch
operation in Canada is periodically examined by Canadian insurance regulatory
authorities and is required to file annual reports that comply with the
insurance laws of Canada and with the rules of the OSFI of the Canadian Federal
government and each of the provinces. UNUM's United Kingdom subsidiary is
required to file financial statements annually with the DTI, in accordance with
United Kingdom laws and regulations. UNUM Japan is required to file financial
statements annually with the MOF, in accordance with Japanese laws and
regulations.

UNUM's insurance subsidiaries operate under insurance laws, which require
that they establish and carry, as liabilities, actuarial reserves to meet their
obligations on their disability, life, accident and health policies, and
annuities. These reserves are verified periodically by various regulators.

UNUM's reinsurance underwriting manager, D&H, is a licensed reinsurance
intermediary in New York. It is subject to regulation in New York and other
states where it does business. Duncanson & Holt Underwriters, Ltd., a subsidiary
of D&H, is a corporate member of Lloyd's of London and is subject to rules
applicable to such members.

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, and South
Carolina, which is the domiciliary state of Colonial, have similar laws.
Accordingly, the UNUM insurance subsidiaries are registered as members of the
UNUM holding company system in the states of Maine, New York and South Carolina.
The statutes of these states require periodic disclosure concerning the ultimate
controlling person and intercorporate transactions within the holding company
system, some of which require prior approval.

Effective December 31, 1991, UNUM America merged with two of UNUM
Corporation's wholly-owned Maine life insurance subsidiaries, UNUM Life
Insurance Company ("UNUM Life") and UNUM Pension and Insurance Company ("UPIC"),
with UNUM America remaining as the surviving corporation. In connection with the
merger of UNUM Life and UPIC into UNUM America, UNUM Life ceased to maintain its
licensing status in the State of New York effective December 31, 1991, with all
future New York business being transacted by First UNUM. As a condition of New
York regulatory approval, UNUM America agreed to maintain a security deposit in
the State of New York equal to 102% of outstanding statutory liabilities to New
York policyholders, insureds and claimants of UNUM Life. The security deposit
consists of certain cash and invested assets. An initial deposit was made in
February 1992 and, at December 31, 1996, the required deposit was $313.5
million. UNUM America has the ability to withdraw assets from this account and
to substitute other assets at its discretion. The balance of the security
deposit will be reviewed and adjusted at least annually based upon the
outstanding liabilities described above.

L. Participation Fund Account

Participating policies issued prior to November 14, 1986, by the former
Union Mutual Life Insurance Company ("Union Mutual") will remain participating
as long as they remain in force. A Participation Fund Account ("PFA") has been
established for the sole benefit of all of Union Mutual's individual
participating life and annuity policies and contracts. At December 31, 1996, the
PFA had $354.0 million in assets, which were held by UNUM America. UNUM agreed
to pay certain expenses associated with the PFA and at December 31, 1996, the
reserve for the present value of such expenses was $13.9 million.

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 six 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, located in Columbia, South
Carolina, is also owned by UNUM. In addition, UNUM leases, on periods
principally from three to six years, office space for use by its home office,
affiliates, and sales forces.

Item 3--Legal Proceedings

In the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1996. In some instances, these
proceedings include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position or the consolidated operating results of UNUM.

On December 29, 1993, UNUM filed a suit in the United States District Court
for the District of Maine, seeking a federal income tax refund. The suit is
based on a claim for a deduction in certain prior tax years, for $652 million in
cash and stock distributed to policyholders in connection with the 1986
conversion of Union Mutual Life Insurance Company to a stock company. UNUM has
fully paid, and provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure.
UNUM believes its claims are meritorious, and has appealed the decision to the
United States Court of Appeals for the First Circuit. The ultimate recovery, if
any, cannot be determined at this time.

Item 4--Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of shareholders, through solicitation of
proxies or otherwise, during the fourth quarter of 1996.

PART II

Item 5--Market for the Registrant's Common Equity and Related Stockholder
Matters

The principal markets in which UNUM's common stock is traded are the New
York Stock Exchange and the Pacific Stock Exchange. UNUM's ticker symbol is
"UNM." As of December 31, 1996, there were 23,303 shareholders of record of
common stock. Information concerning restrictions on the ability of UNUM's
subsidiaries to transfer funds to UNUM in the form of cash dividends is
described in Item 8 (Note 13).

The market price (as quoted by the New York Stock Exchange) and cash
dividends paid, per share of UNUM's common stock, by calendar quarter for the
past two years were as follows:

1996 1995
--------------------------------------------------- ------------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------

High ............... $73.500 $66.000 $63.000 $61.875 $56.500 $54.000 $48.000 $46.000
Low ............... $61.000 $56.750 $55.500 $54.750 $50.625 $45.375 $39.875 $37.750
Close ............... $72.250 $64.125 $62.250 $59.500 $55.000 $52.750 $46.875 $45.250
Dividend Paid ...... $ 0.275 $ 0.275 $ 0.275 $ 0.265 $ 0.265 $ 0.265 $ 0.265 $ 0.240

Item 6--Selected Financial Data

The following should be read in conjunction with UNUM's Consolidated
Financial Statements and related notes reported in Item 8.

UNUM CORPORATION AND SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in millions, except per common share data)

Year Ended December 31,
----------------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- ----------------

Income Statement Data
Revenues:
Premiums and other income
(expense):
Disability Insurance Segment ...... $1,917.7 $1,879.9 $1,716.2 $ 1,547.9
Special Risk Insurance Segment ... 755.4 702.3 607.1 559.4
Colonial Products Segment ......... 498.2 475.1 441.3 407.4
Retirement Products Segment ...... 65.8 34.1 31.4 42.5
Corporate ........................ -- 0.1 0.8 --
-------- -------- -------- ---------
Total premiums and other income ... 3,237.1 3,091.5 2,796.8 2,557.2
-------- -------- -------- ---------
Net investment income (expense): (a)
Disability Insurance Segment ...... 468.5 592.9 400.3 369.8
Special Risk Insurance Segment ... 56.5 48.4 40.7 34.8
Colonial Products Segment ......... 47.3 52.2 32.6 41.4
Retirement Products Segment ...... 217.2 323.7 338.0 387.6
Corporate ........................ 16.1 14.2 4.2 6.2
-------- -------- -------- ---------
Total net investment income ...... 805.6 1,031.4 815.8 839.8
-------- -------- -------- ---------
Total revenues ..................... 4,042.7 4,122.9 3,612.6 3,397.0
-------- -------- -------- ---------
Benefits and expenses:
Disability Insurance Segment ...... 2,170.9 2,255.8 2,060.3 1,603.6
Special Risk Insurance Segment ... 732.7 690.4 581.9 555.3
Colonial Products Segment ......... 453.1 439.6 411.2 378.4
Retirement Products Segment ...... 281.6 312.3 327.4 375.8
Corporate ........................ 62.8 42.9 33.2 23.6
-------- -------- -------- ---------
Total benefits and expenses ...... 3,701.1 3,741.0 3,414.0 2,936.7
-------- -------- -------- ---------
Income (loss) before income taxes
and cumulative effects of
accounting changes:
Disability Insurance Segment ...... 215.3 217.0 56.2 314.1
Special Risk Insurance Segment ... 79.2 60.3 65.9 38.9
Colonial Products Segment ......... 92.4 87.7 62.7 70.4
Retirement Products Segment ...... 1.4 45.5 42.0 54.3
Corporate ........................ (46.7) (28.6) (28.2) (17.4)
-------- -------- -------- ---------
Total income before income taxes and
cumulative effects of accounting
changes ........................... 341.6 381.9 198.6 460.3
-------- -------- -------- ---------
Income taxes (credit) ............... 103.6 100.8 43.9 148.3
-------- -------- -------- ---------
Cumulative effects of accounting
changes ........................... -- -- -- (12.1)(b)
-------- -------- -------- ---------
Net income ........................ $ 238.0 $ 281.1 $ 154.7 $ 299.9
======== ======== ======== =========
Per common share:
Net income ........................ $ 3.26 $ 3.87 $ 2.09 $ 3.81(b)
Dividends paid ..................... $ 1.09 $ 1.035 $ 0.92 $ 0.765
======== ======== ======== =========

Year Ended December 31,
--------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
----------- ----------- ----------- ---------- --------- -----------

Income Statement Data
Revenues:
Premiums and other income
(expense):
Disability Insurance Segment ...... $1,339.8 $1,214.6 $1,004.7 $ 803.8 $ 681.7 $ 630.8
Special Risk Insurance Segment ... 432.8 368.5 347.0 306.2 176.3 165.7
Colonial Products Segment ......... 371.9 325.4 281.1 241.0 216.7 192.1
Retirement Products Segment ...... 52.5 64.4 92.8 130.2 180.0 238.5
Corporate ........................ 0.8 -- (0.1) 0.2 -- 0.9
-------- -------- -------- ------- -------- -------
Total premiums and other income ... 2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0
-------- -------- -------- ------- -------- -------
Net investment income (expense): (a)
Disability Insurance Segment ...... 370.5 333.8 285.4 239.4 193.1 167.8
Special Risk Insurance Segment ... 32.2 26.5 23.4 24.5 12.5 12.1
Colonial Products Segment ......... 35.4 38.5 25.2 26.7 22.3 19.0
Retirement Products Segment ...... 408.7 411.3 426.1 424.0 413.2 418.2
Corporate ........................ 3.9 1.5 (9.0) 5.9 20.3 19.1
-------- -------- -------- ------- -------- -------
Total net investment income ...... 850.7 811.6 751.1 720.5 661.4 636.2
-------- -------- -------- ------- -------- -------
Total revenues ..................... 3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2
-------- -------- -------- ------- -------- -------
Benefits and expenses:
Disability Insurance Segment ...... 1,446.6 1,306.4 1,093.7 878.8 756.0 701.4
Special Risk Insurance Segment ... 418.7 355.2 342.2 312.9 180.4 172.0
Colonial Products Segment ......... 346.8 306.4 259.6 225.5 201.1 178.6
Retirement Products Segment ...... 427.5 484.4 491.6 535.9 580.1 685.0
Corporate ........................ 10.4 12.5 10.8 12.3 9.5 15.7
-------- -------- -------- ------- -------- -------
Total benefits and expenses ...... 2,650.0 2,464.9 2,197.9 1,965.4 1,727.1 1,752.7
-------- -------- -------- ------- -------- -------
Income (loss) before income taxes
and cumulative effects of
accounting changes:
Disability Insurance Segment ...... 263.7 242.0 196.4 164.4 118.8 97.2
Special Risk Insurance Segment ... 46.3 39.8 28.2 17.8 8.4 5.8
Colonial Products Segment ......... 60.5 57.5 46.7 42.2 37.9 32.5
Retirement Products Segment ...... 33.7 (8.7) 27.3 18.3 13.1 (28.3)
Corporate ........................ (5.7) (11.0) (19.9) (6.2) 10.8 4.3
-------- -------- -------- ------- -------- -------
Total income before income taxes and
cumulative effects of accounting
changes ........................... 398.5 319.6 278.7 236.5 189.0 111.5
-------- -------- -------- ------- -------- -------
Income taxes (credit) ............... 107.3 74.3 60.9 51.1 30.1 (4.7)
-------- -------- -------- ------- -------- -------
Cumulative effects of accounting
changes ........................... -- -- -- -- -- --
-------- -------- -------- ------- -------- -------
Net income ........................ $ 291.2 $ 245.3 $ 217.8 $ 185.4 $ 158.9 $ 116.2
======== ======== ======== ======= ======== =======
Per common share:
Net income ........................ $ 3.71 $ 3.15 $ 2.73 $ 2.03 $ 1.57 $ 1.06
Dividends paid ..................... $ 0.625 $ 0.49 $ 0.375 $ 0.285 $ 0.23 $ 0.20
======== ======== ======== ======= ======== =======

- --------

(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
(Dollars and shares in millions)

December 31,
---------------------------------------------------
Balance Sheet Data 1996 1995 1994 1993
------------ ------------ ------------ ------------
Assets ............... $15,467.5 $14,787.8 $13,127.2 $12,437.3
Long-term debt ......... $ 409.2 $ 457.3 $ 182.1 $ 128.6
Stockholders' equity ... $ 2,263.1 $ 2,302.9 $ 1,915.4 $ 2,102.7
Shares outstanding ... 71.8 73.0 72.4 76.0
Weighted average shares
outstanding during the
year .................. 73.0 72.7 74.2 78.8

December 31,
----------------------------------------------------------------------------
Balance Sheet Data 1992 1991 1990 1989 1988 1987
------------ ------------ ------------ ------------ ------------ -----------

Assets ............... $11,959.8 $11,310.9 $10,063.4 $ 9,045.7 $ 8,592.3 $ 7,783.0
Long-term debt ......... $ 77.2 $ 51.5 $ 77.2 $ 1.5 $ 1.5 $ 1.7
Stockholders' equity ... $ 2,010.9 $ 1,755.5 $ 1,490.1 $ 1,445.0 $ 1,512.3 $ 1,463.8
Shares outstanding ... 79.1 78.2 77.4 82.0 96.8 104.2
Weighted average shares
outstanding during the
year .................. 78.5 77.8 79.9 91.4 101.3 109.1

Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations

This management's discussion and analysis reviews the consolidated
financial condition of UNUM at December 31, 1996, the consolidated results of
operations for the past three years and, where appropriate, factors that may
affect future financial performance are identified and discussed. Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements, Notes to
Consolidated Financial Statements, and Selected Consolidated Financial Data.

To more clearly reflect UNUM's management of its businesses and to more
appropriately group its product portfolios, UNUM began reporting its operations,
effective January 1, 1995, principally in four business segments: Disability
Insurance, Special Risk Insurance, Colonial Products and Retirement Products.
Corporate includes transactions that are generally non-insurance related. For
comparative purposes, 1994 information was previously restated to reflect the
new reporting segments.

CONSOLIDATED OVERVIEW

(Dollars and shares in millions, except per
common share amounts, and percentage
increase (decrease) over prior year) 1996 1995 1994
- --------------------------------------------- ----------------------------- ------------------------- -----------

Income Data
Revenues
Premiums ................................. $3,120.4 3.4% $3,018.2 10.9% $2,721.3
Investment income ........................ 802.2 (0.5) 806.3 4.7 770.2
Net realized investment gains ............ 3.4 nm 225.1 nm 45.6
Fees and other income ..................... 116.7 59.2 73.3 (2.9) 75.5
-------- --------- -------- ------ --------
Total revenues ........................... 4,042.7 (1.9) 4,122.9 14.1 3,612.6
Benefits and expenses ..................... 3,701.1 (1.1) 3,741.0 9.6 3,414.0
-------- --------- -------- ------ --------
Income before income taxes .................. 341.6 (10.6) 381.9 92.3 198.6
Income taxes .............................. 103.6 2.8 100.8 nm 43.9
-------- --------- -------- ------ --------
Net income .............................. $ 238.0 (15.3)% $ 281.1 81.7% $ 154.7
======== ========= ======== ====== ========
Net income per common share ............... $ 3.26 $ 3.87 $ 2.09
======== ======== ========
Summary of income (loss)
before income taxes
Disability Insurance Segment ............... $ 215.3 (0.8)% $ 217.0 nm% $ 56.2
Special Risk Insurance Segment ............ 79.2 31.3 60.3 (8.5) 65.9
Colonial Products Segment .................. 92.4 5.4 87.7 39.9 62.7
Retirement Products Segment ............... 1.4 (96.9) 45.5 8.3 42.0
Corporate ................................. (46.7) 63.3 (28.6) 1.4 (28.2)
-------- --------- -------- ------ --------
Total income before income taxes ......... $ 341.6 (10.6)% $ 381.9 92.3% $ 198.6
======== ========= ======== ====== ========
Balance Sheet Data
Assets .................................... $15,467.5 $14,787.8 $13,127.2
Notes Payable .............................. $ 526.9 $ 583.8 $ 428.7
Stockholders' equity ........................ $2,263.1 $2,302.9 $1,915.4
Shares outstanding ........................ 71.8 73.0 72.4
Weighted average shares outstanding
during the year ........................... 73.0 72.7 74.2

- --------
nm = not meaningful or in excess of 100%

CONSOLIDATED OVERVIEW

In 1996, net income decreased by $43.1 million to $238.0 million, or $3.26
per share, from $281.1 million, or $3.87 per share, in 1995. Net income was
$154.7 million, or $2.09 per share, for the year ended December 31, 1994. A
comparison of net income is impacted by the inclusion of realized investment
gains, which were significantly higher in 1995, and several special items that
occurred in 1996, 1995 and 1994. This management's discussion and analysis
discusses the results of operations on a pretax operating income basis, which is
defined as income (loss) before income taxes exclusive of realized investment
gains (losses) and certain special items. Special items are excluded from pretax
operating income as management considers them to be unusual, and also believes a
discussion of the results on a pretax operating income basis provides a better
understanding of the results of operations. The following table summarizes
pretax operating income (loss) for the four business segments and Corporate for
the years ended December 31, 1996, 1995 and 1994, and is followed by a
discussion of the special items for those periods and a reconciliation of income
(loss) before income taxes to pretax operating income (loss).

(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
- ---------------------------------------------- ------------------------ -------------------- ---------

Summary of pretax operating
income (loss)
Disability Insurance Segment ............... $278.4 28.2% $217.2 (1.7)% $220.9
Special Risk Insurance Segment ............ 90.2 50.8 59.8 (9.0) 65.7
Colonial Products Segment .................. 92.7 20.7 76.8 25.9 61.0
Retirement Products Segment ............... 13.6 (37.3) 21.7 (45.5) 39.8
Corporate ................................. (37.5) 29.8 (28.9) 4.7 (27.6)
------ ------ ------ ---- ------
Total pretax operating income ............ $437.4 26.2% $346.6 (3.7)% $ 359.8
====== ====== ====== ==== ======

UNUM reported increased pretax operating income for the year ended December
31, 1996, as compared with the same period in 1995. The increase was primarily
attributable to improved claims experience and management's continued focus on
risk management programs, both of which lowered the benefit ratios for certain
product lines. In particular, group long term disability ("group LTD") and UNUM
Limited, reported in the Disability Insurance segment, and the group life
business, reported in the Special Risk Insurance segment, were favorably
affected by lower benefit ratios. Increased investment income also favorably
affected pretax operating income in the Disability Insurance and Special Risk
Insurance segments. Partially offsetting these favorable items were increased
operating expenses in the Disability Insurance segment, in the group life
business reported in the Special Risk Insurance segment and in Corporate. In
addition, certain other disability products were negatively affected by higher
benefit ratios.

The decrease in pretax operating income in 1995 was primarily attributable
to higher benefit ratios at UNUM Limited and in the group LTD and group life
businesses, increased interest expense, and lower interest spread margins on the
tax sheltered annuity business. Partially offsetting these items were increased
investment income, a lower benefit ratio in the individual disability business,
and lower expenses.

Realized Investment Gains

During the second quarter of 1995, UNUM sold virtually all of the common
stock portfolio of its United States subsidiaries, primarily due to
consideration of statutory capital requirements associated with investment in
common stocks and to increase future investment income. The sale of the common
stock portfolio contributed to significantly higher pretax realized investment
gains for the year ended December 31, 1995, as compared with 1996 and 1994. UNUM
reinvested the proceeds from the sale of the common stock portfolio primarily in
investment grade fixed income assets, which decreased the required amount of
statutory capital for regulatory purposes and increased investment income.
Dependent on capital considerations and market conditions, UNUM may invest in
equity securities in the future.

Special Items in 1996

Individual Disability Reinsurance Fees

During the fourth quarter of 1996, UNUM executed a definitive reinsurance
agreement between UNUM Life Insurance Company of America ("UNUM America") and
Centre Life Reinsurance Limited ("Centre Re"), a

Bermuda based reinsurance specialist, for reinsurance coverage of the active
life reserves of UNUM America's existing United States non-cancellable
individual disability block of business. As a result, UNUM recognized a pretax
charge of $49.7 million in the Disability Insurance segment, which represents
the present value of the anticipated minimum amount of fees to be paid to Centre
Re under the agreement. For additional information see the Disability Insurance
segment discussion.

Intangible Asset Write-offs and Future Loss Reserves

In connection with the merger of Commercial Life Insurance Company
("Commercial Life") into UNUM America, the sale of UNUM America's tax sheltered
annuity business, as well as UNUM's continued efforts to strengthen its focus on
its core products, the company initiated a review of certain products, which
resulted in the recognition of pretax charges totaling $39.4 million during
third quarter 1996. These charges reduced income before income taxes by $13.1
million in the Disability Insurance segment, $11.3 million in the Special Risk
Insurance segment, and $15.0 million in the Retirement Products segment, for the
year ended December 31, 1996.

The charges include the write-off of certain intangible assets, primarily
deferred acquisition costs, totaling $17.0 million. These intangible assets have
been deemed unrecoverable primarily due to the expectation of continued losses
in the Association Group disability business. Additionally, in conjunction with
the completion of a review of UNUM's discontinued product portfolio, a $22.4
million charge was taken to establish a reserve for the present value of
expected future losses on certain discontinued products. Future losses for these
products will be charged to the reserve at the time the losses are realized. The
products incorporated in the charge consist of certain discontinued special
risk, retirement and medical products. UNUM is pursuing the sale of some of
these discontinued product lines.

Commercial Life Merger and Integration Costs

During the third quarter of 1996, actions related to the merger of
Commercial Life into UNUM America resulted in a $10.1 million increase in
operating expenses for Corporate. The $10.1 million charge consisted of $2.9
million of direct costs incurred and the recording of a $7.2 million
restructuring charge to recognize $2.8 million of future severance costs for 120
employees and $4.4 million of lease exit costs, primarily related to the merger.

Special Items in 1995

Disability Reserve Increase from Portfolio Rate Adjustment

Reserves for certain disability products are discounted using an interest
rate which is a composite yield of assets identified with each product. As a
result of the sale of the common stock portfolio, which had partially supported
these disability reserves, and the subsequent reinvestment of the proceeds
primarily in investment grade fixed income assets at yields below the average
portfolio yield, certain reserve discount rates were lowered during second
quarter 1995. For the year ended December 31, 1995, the effect of lowering these
discount rates was an increase to the reserve liabilities and benefits to
policyholders reported in the Disability Insurance segment of $128.6 million.

Group LTD IBNR Increase

During the second quarter of 1995, UNUM increased the group LTD reserves
for incurred but not reported ("IBNR") claims and benefits to policyholders
reported in the Disability Insurance segment by $38.4 million. IBNR reserves,
which are established to fund anticipated case reserves for claims which have
been incurred but not reported to UNUM, are actuarially established based on
various factors, including incidence levels and claims severity. The increased
IBNR reserves were based on management's judgment that claims incurred but not
yet reported would reflect increased levels of claims incidence and severity.

Association Group Disability Reserve Strengthening

In 1995, the Association Group disability business was negatively affected
by unfavorable claims experience, which management attributed to certain
geographical and occupational segments, particularly dentists and physicians.
During the fourth quarter of 1995, UNUM increased reserves for unpaid claims
related to the Association Group disability business by $15.0 million reported
in the Disability Insurance segment. These increased reserves were based on
management's expectations of slower than expected claim recoveries.

Other Charges

To strengthen its focus on its core products, UNUM recognized a charge in
the third quarter of 1995 for costs associated with the sale of its dental
business reported in the Special Risk Insurance segment. The charge, which
primarily consisted of the write-off of deferred acquisition costs, reduced
income before income taxes by $2.8 million.

During the second quarter of 1995, UNUM recorded an additional charge for
costs associated with the previously announced decision to discontinue the
individual disability non-cancellable product and organizational changes within
UNUM America, which increased operating expenses by $5.0 million. This charge
reduced income before income taxes by $2.9 million in the Disability Insurance
segment, $1.1 million in the Special Risk Insurance segment, and $1.0 million in
the Retirement Products segment for the year ended December 31, 1995.

Special Items in 1994

Individual Disability Reserve Strengthening

Throughout 1994, UNUM's individual disability business experienced a higher
incidence of new claims and a disproportionate number of large claims, which
management attributed to certain geographic and occupational segments of the
business, particularly physicians. During the third quarter of 1994, management
concluded that the deterioration of claims experience was not a temporary
fluctuation in certain segments of the business, but was indicative of expected
claim trends for the future. As a result, in third quarter 1994, UNUM increased
reserves for existing claims by $83.3 million and strengthened reserves for
estimated future losses by $109.1 million, resulting in an increase to benefits
to policyholders reported in the Disability Insurance segment of $192.4 million.
These increased reserves reflected management's expectations of morbidity trends
for the existing non-cancellable individual disability business. It is not
possible to predict whether morbidity trends will be consistent with UNUM's
assumptions; however, as of December 31, 1996, management believes that the
strengthened reserve levels continue to be adequate.

Restructuring Charges

In the fourth quarter of 1994, UNUM recorded a pretax charge of $14.4
million related to the decision to discontinue the individual disability
non-cancellable product and the acceleration of organizational changes within
UNUM America, which increased operating expenses in the Disability Insurance
segment for the year ended December 31, 1994. The charge consisted of $9.2
million for severance costs for 379 employees and $5.2 million for exit costs of
certain leased facilities and equipment.

Reconciliation of Income (Loss) Before Income Taxes to Pretax Operating Income
(Loss)

The following table reconciles income (loss) before income taxes to pretax
operating income (loss) for the four business segments and Corporate for the
years ended December 31, 1996, 1995 and 1994:

Disability Special Risk Colonial Retirement Consolidated
(Dollars in millions) Insurance Insurance Products Products Corporate UNUM
- -------------------------------------------- ------------- --------------- ----------- ---------- --------- ------------

Year Ended December 31, 1996:
Income (loss) before income taxes ......... $ 215.3 $ 79.2 $ 92.4 $ 1.4 $ (46.7) $ 341.6
Exclude realized investment (gains) losses 0.3 (0.3) 0.3 (2.8) (0.9) (3.4)
------- ---- ------ ------ -------- -------
215.6 78.9 92.7 (1.4) (47.6) 338.2
Special items:
ID reinsurance fees ..................... 49.7 -- -- -- -- 49.7
Write-offs and future loss reserves ...... 13.1 11.3 -- 15.0 -- 39.4
Merger and integration costs ............ -- -- -- -- 10.1 10.1
------- ---- ------ ------ -------- -------
Pretax operating income (loss) ............ $ 278.4 $ 90.2 $ 92.7 $ 13.6 $ (37.5) $ 437.4
======= ==== ====== ======= ======== =======
Year Ended December 31, 1995:
Income (loss) before income taxes ......... $ 217.0 $ 60.3 $ 87.7 $ 45.5 $ (28.6) $ 381.9
Exclude realized investment gains ......... (184.7) (4.4) (10.9) (24.8) (0.3) (225.1)
------- ---- ------ ------ -------- -------
32.3 55.9 76.8 20.7 (28.9) 156.8
Special items:
Disability reserve increases ............ 128.6 -- -- -- -- 128.6
Group LTD IBNR increase .................. 38.4 -- -- -- -- 38.4
Association Group reserves ............... 15.0 -- -- -- -- 15.0
Other charges ........................... 2.9 3.9 -- 1.0 -- 7.8
------- ---- ------ ------ -------- -------
Pretax operating income (loss) ............ $ 217.2 $ 59.8 $ 76.8 $ 21.7 $ (28.9) $ 346.6
======= ==== ====== ======= ======== =======
Year Ended December 31, 1994:
Income (loss) before income taxes ......... $ 56.2 $ 65.9 $ 62.7 $ 42.0 $ (28.2) $ 198.6
Exclude realized investment (gains) losses (42.1) (0.2) (1.7) (2.2) 0.6 (45.6)
------- ---- ------ ------ -------- -------
14.1 65.7 61.0 39.8 (27.6) 153.0
Special items:
ID reserve strengthening .................. 192.4 -- -- -- -- 192.4
Restructuring charges ..................... 14.4 -- -- -- -- 14.4
------- ---- ------ ------ -------- -------
Pretax operating income (loss) ............ $ 220.9 $ 65.7 $ 61.0 $ 39.8 $ (27.6) $ 359.8
======= ==== ====== ======= ======== =======

Pretax Operating Income (Loss) by Segment

The following sections discuss the results of the four business segments
and Corporate for the years ended December 31, 1996, 1995 and 1994. These
business segment discussions are based on pretax operating income (loss), which
excludes realized investment gains (losses) and the special items noted above.

DISABILITY INSURANCE SEGMENT

(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
- ---------------------------------------------- ------------------------- --------------------------- -----------

Revenues
Premiums
Group LTD ................................. $1,094.6 0.6% $ 1,088.6 14.0% $ 955.0
Group STD ................................. 158.1 19.0 132.9 23.5 107.6
UNUM Limited .............................. 132.7 6.0 125.2 (11.2) 141.0
Individual disability ..................... 420.8 (0.5) 423.0 3.3 409.5
Other disability insurance .................. 83.7 (2.2) 85.6 5.9 80.8
-------- ------ --------- -------- -------
Total premiums ........................... 1,889.9 1.9 1,855.3 9.5 1,693.9
Investment income 468.8 14.8 408.2 14.0 358.2
Net realized investment gains (losses) ...... (0.3) nm 184.7 nm 42.1
Fees and other income ........................ 27.8 13.0 24.6 10.3 22.3
-------- ------ --------- -------- -------
Total revenues ........................... 2,386.2 (3.5) 2,472.8 16.8 2,116.5
Benefits and expenses
Benefits to policyholders .................. 1,514.9 (11.5) 1,711.2 8.8 1,572.1
Operating expenses ........................... 511.0 21.3 421.3 1.5 415.0
Commissions ................................. 184.2 (4.8) 193.5 (0.9) 195.3
Increase in deferred policy acquisition costs (39.2) (44.2) (70.2) (42.5) (122.1)
-------- ------ --------- -------- -------
Total benefits and expenses ............... 2,170.9 (3.8) 2,255.8 9.5 2,060.3
-------- ------ --------- -------- -------
Income before income taxes .................. 215.3 (0.8) 217.0 nm 56.2
Exclude realized investment (gains) losses 0.3 (184.7) (42.1)
Special items (a) ........................... 62.8 184.9 206.8
-------- --------- -------
Pretax operating income (a) .................. $ 278.4 28.2% $ 217.2 (1.7)% $ 220.9
======== ====== ========= ======== =======
Sales (annualized new premiums)
Group LTD ................................. $ 218.7 $ 197.9 $ 215.4
Group STD ................................. $ 74.0 $ 52.4 $ 47.8
UNUM Limited .............................. $ 14.3 $ 14.2 $ 15.5
Individual disability ..................... $ 26.4 $ 35.6 $ 74.0
Persistency (premiums)
Group LTD ................................. 83.6% 82.8% 84.0%
Group STD ................................. 84.5% 84.8% 83.8%
UNUM Limited .............................. 85.6% 89.1% 89.9%
Individual disability ..................... 92.5% 91.8% 92.4%
Benefit ratio (% of premiums) ............... 80.2% 92.2% 92.8%
Operating expense ratio
(% of premiums) ........................... 27.0% 22.7% 24.5%

- --------
nm = not meaningful or in excess of 100%

(a) For the definition of pretax operating income and a detailed description of
special items see the Consolidated Overview.

The Disability Insurance segment includes disability products offered
through: UNUM Life Insurance Company of America ("UNUM America") and First UNUM
Life Insurance Company ("First UNUM") in North America; UNUM Limited in the
United Kingdom; and UNUM Japan Accident Insurance Company Limited ("UNUM
Japan"). The products included in this segment are group LTD, group short term
disability ("group STD"), individual disability, Association Group disability,
disability reinsurance operations and long term care insurance.

Summary

The Disability Insurance segment's pretax operating income increased in
1996, as compared with 1995. The increase was primarily attributable to
increased investment income and lower benefit ratios in group LTD and at UNUM
Limited, partially offset by increased operating expenses for the segment and
higher benefit ratios in certain other disability businesses including
individual disability, disability reinsurance operations and Association Group
disability.

On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage
of the active life reserves of UNUM America's existing United States
non-cancellable individual disability ("ID") block of business. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM's announcement in late 1994 that it would no longer market the
non-cancellable form of ID coverage in the United States.

The agreement is a finite reinsurance arrangement that transfers
liabilities to Centre Re based on the level of statutory reserves. At December
31, 1996, active life reserves of $427 million and reserves established for
claims in 1996 of $137 million were ceded to Centre Re. Under the agreement,
Centre Re has an obligation to fund a defined risk layer, while UNUM will retain
the earnings risk related to potential adverse claims experience up to a certain
threshold. This threshold amount represents the existence of an experience layer
with a value of $195 million at December 31, 1996. UNUM has recorded the value
of the experience layer on its Consolidated Balance Sheet as a deposit asset.
UNUM funded its obligation under the agreement by transferring assets totaling
approximately $403 million into a trust account in late December 1996. The
assets transferred were equal to the experience layer plus reserves, determined
under generally accepted accounting principles, net of related deferred
acquisition costs. Future net cash flows of the block will be transferred
to/from the trust account and, together with changes in reserve levels, will
determine the value of UNUM's deposit asset. Changes in the deposit asset will
flow through UNUM's results of operations. The agreement generated slightly more
than $200 million of statutory capital, which will be available to repurchase
UNUM common stock.

Increased investment income in the Disability Insurance segment for 1996
and 1995 was primarily a result of the reinvestment of the proceeds from the
sale of the common stock portfolio into investment grade fixed income assets.
During second quarter 1995, UNUM sold virtually all of the common stock
portfolio of its United States subsidiaries, primarily due to consideration of
statutory capital requirements associated with investment in common stocks and
to increase future investment income. As a result of the sale of the common
stock portfolio and the subsequent reinvestment of the proceeds, certain reserve
discount rates were lowered during the second quarter 1995. The discount rate
used to determine group LTD reserves was reduced to 8.00% at June 30, 1995, as
compared with 9.18% at December 31, 1994. Since that time the reserve discount
rates for certain disability products have continued to decline. Management
expects further declines, since current cash flows are invested in high quality
assets at current yields, which are below the composite yield of the existing
assets purchased in prior years. The group LTD discount rate was 7.88% and 7.94%
at December 31, 1996, and 1995, respectively. The impact of increased investment
income was partially offset by the effects of these lower discount rates for
certain disability products in 1996 and 1995. UNUM periodically adjusts prices
on both existing and new business in an effort to mitigate the impact of the
current interest rate environment.

Reserves for unpaid claims are estimates based on UNUM's historical
experience and other actuarial assumptions that consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to interest rates and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. Management continuously monitors
claim trends and responds by periodically adjusting prices on selected new and
inforce business, refining underwriting guidelines, and strengthening risk
management programs. In addition, reserve estimates and assumptions are
periodically reviewed and updated with any resulting adjustments to reserves

reflected in benefits to policyholders of the current operating period. Given
the complexity of the reserving process, the ultimate liability may be more or
less than such estimates indicate.

Deferrals of policy acquisition costs decreased in 1996 and 1995 primarily
due to lower sales of the traditional, fixed price, non-cancellable individual
disability product, as it was discontinued in each state during 1996 and 1995
following regulatory approval of the Lifelong Disability Protection product.

Pretax operating income decreased slightly in 1995, as compared with 1994,
primarily attributable to higher benefit ratios at UNUM Limited and in group
LTD, and the inclusion of the results of UNUM Japan's operations in the
Disability Insurance segment effective January 1, 1995. Partially offsetting
these decreases were increased investment income, a lower benefit ratio in the
individual disability business, and decreased operating expenses for the
segment.

Claim block acquisitions, which generated one-time premium in the
Disability Insurance segment in 1996, 1995 and 1994, are summarized in the table
below. Management intends to pursue additional claim block acquisitions in the
future. Additionally, premium for individual disability includes the recapture
of reinsurance premium totaling $10.6 million in 1996.

Year Ended December 31,
-----------------------------
(Dollars in millions) 1996 1995 1994
- ----------------------------------------- -------- -------- -------
Group LTD .............................. $10.0 $63.8 $17.4
UNUM Limited ........................... 1.3 -- 40.2
Long Term Care Insurance ............... -- 4.9 14.7
Disability Reinsurance Operations ...... -- 3.6 --
------ ------ ------
Total ................................. $11.3 $72.3 $72.3
====== ====== ======

Group Long Term Disability

During 1996, pretax operating income for group LTD was favorably affected
by increased investment income and a lower benefit ratio, partially offset by
increased operating expenses primarily from continued investment in benefit
management practices and product distribution. The lower benefit ratio was
primarily the result of lower claims incidence and higher claim recoveries,
which management primarily attributes to the continued success of its risk
management programs.

Excluding the effects of claim block acquisitions, group LTD reported
premium growth of 5.8% in 1996, reflecting increased new sales and selected
price increases. Group LTD experienced improved sales and persistency in 1996,
as compared with 1995, when prices were significantly increased in certain
segments of the business resulting in a high level of case terminations for
1995. In general, case terminations from price increases have occurred in less
profitable segments of the business. Management continues to take actions to
increase premium and sales growth, including a focus on improving premium
persistency and strengthening the product distribution channel.

During 1995 and 1994, management implemented and strengthened various risk
management programs to address the unfavorable claims experience in group LTD
during those periods. In addition to the selected price increases on new and
inforce business, more stringent underwriting practices, and the reduction of
benefit options for certain segments of the business, management established
special claims units for both its group LTD and individual disability businesses
to address specific aspects of disability claims, including complex and
fraudulent claims. Additionally, management implemented new group LTD contract
provisions that provide risk management features and claimant rehabilitation
incentives. Management continually reviews the benefits management process to
identify and strengthen risk management policies and procedures.

UNUM Limited

For the year ended December 31, 1996, UNUM Limited's pretax operating
income was favorably affected by a lower benefit ratio and increased investment
income, as compared with the corresponding period in 1995. The lower benefit
ratio was primarily the result of a focus on strengthening risk management
programs and improved new claims experience. Management believes that the level
of future earnings for UNUM Limited will be a function of various factors,
including but not limited to, the effectiveness of these continuing risk
management actions over

time. Additionally, UNUM Limited incurred increased operating expenses in 1996,
which were primarily the result of increased investments in information systems
technology and risk management programs. Due to the relative size of UNUM
Limited's block of business, operating results can exhibit claims variability.

In general, UNUM Limited's earnings expressed in British pound sterling are
affected by fluctuations in the exchange rates used in the translation of
earnings into U.S. dollars. The weighted average exchange rate was approximately
$1.56, $1.58 and $1.53 for the years ended December 31, 1996, 1995 and 1994,
respectively. At December 31, 1996, the spot rate was approximately $1.71.

Individual Disability

As a result of the merger of Commercial Life into UNUM America, which was
effective December 31, 1996, UNUM now reports the operations of the Association
Group disability business with the individual disability business. Current and
prior period information for individual disability has been restated to reflect
this change.

For the year ended December 31, 1996, pretax operating income for
individual disability was favorably affected by increased investment income,
partially offset by a higher benefit ratio as compared with the same period in
1995. The higher benefit ratio was primarily attributable to a decrease in
premium growth and the inclusion of the Association Group disability business,
which was affected by unfavorable claims experience. Premium growth continued to
decline as a result of the transition to the guaranteed renewable Lifelong
Disability Protection ("LDP") product as a result of management's decision in
late 1994 to discontinue sales of the traditional, fixed price, non-
cancellable product in the United States. Following the approval of the LDP
product, sales of the non-cancellable individual disability product have been
discontinued in the United States.

Group Short Term Disability

Group STD's contribution to the Disability Insurance segment's pretax
operating income continued to increase in 1996, primarily due to strong premium
growth, reflecting management's continuing efforts to cross-sell the group STD
products with group LTD and group life products. Partially offsetting the
effects of strong premium growth were higher operating expenses primarily
relating to investments in risk management programs and the inclusion of certain
office relocation expenses in 1996.

Disability Reinsurance Operations

Pretax operating income for the disability reinsurance operations was
adversely affected by unfavorable claims experience and decreased premium, for
the year ended December 31, 1996, as compared with the same period in 1995.
Management continues to focus on improving risk management programs and
strengthening underwriting standards to address this claims experience.

SPECIAL RISK INSURANCE SEGMENT

(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
- ---------------------------------------------- ------------------------ ------------------------ ---------

Revenues
Premiums
Group life insurance ........................ $439.6 14.2% $384.8 12.1% $ 343.3
Other special risk products ............... 277.5 (0.1) 277.8 26.4 219.8
------ ------ ------ --------- -------
Total premiums ........................... 717.1 8.2 662.6 17.7 563.1
Investment income ........................... 56.2 27.7 44.0 8.6 40.5
Net realized investment gains ............... 0.3 (93.2) 4.4 nm 0.2
Fees and other income ........................ 38.3 (3.5) 39.7 (9.8) 44.0
------ ------ ------ --------- -------
Total revenues ........................... 811.9 8.2 750.7 15.9 647.8
Benefits and expenses
Benefits to policyholders .................. 506.5 2.9 492.3 24.8 394.4
Operating expenses ........................... 184.8 20.7 153.1 4.8 146.1
Commissions ................................. 67.0 10.0 60.9 11.7 54.5
Increase in deferred policy acquisition costs (25.6) 61.0 (15.9) 20.5 (13.2)
Interest expense ........................... -- nm -- (100.0) 0.1
------ ------ ------ --------- -------
Total benefits and expenses ............... 732.7 6.1 690.4 18.6 581.9
------ ------ ------ --------- -------
Income before income taxes .................. 79.2 31.3 60.3 (8.5) 65.9
Exclude realized investment gains ............ (0.3) (4.4) (0.2)
Special items (a) ........................... 11.3 3.9 --
------ ------ -------
Pretax operating income (a) .................. $ 90.2 50.8% $ 59.8 (9.0)% $ 65.7
====== ====== ====== ========= =======
Sales (annualized new premiums)
Group life insurance ........................ $150.0 $106.1 $ 90.8
Persistency (premiums)
Group life insurance ........................ 85.6% 83.0% 84.8%
Benefit ratio (% of premiums) ............... 70.6% 74.3% 70.0%
Operating expense ratio (% of
premiums) ................................. 25.8% 23.1% 25.9%

- --------

nm = not meaningful or in excess of 100%

(a) For the definition of pretax operating income and a detailed description of
special items see the Consolidated Overview.

The Special Risk Insurance segment includes group life products sold by
UNUM America and First UNUM, special risk accident insurance previously sold by
Commercial Life, which has been merged with UNUM America, and other special risk
insurance products. The segment also includes non-disability reinsurance
operations, which represent UNUM's participation in various reinsurance pools,
and the reinsurance underwriting management operations of Duncanson & Holt, Inc.

For the year ended December 31, 1996, as compared with 1995, the Special
Risk Insurance segment reported an increase in pretax operating income. The
increase was primarily due to an improved benefit ratio in the group life
business, increased investment income, and premium growth driven by strong
sales. These favorable factors were partially offset by a higher operating
expense ratio in group life, a higher benefit ratio in certain reinsurance
pools, and increased expenses in the reinsurance underwriting management
operations. Due to the nature of the risks underwritten and the relative size of
the blocks of businesses, several of the Special Risk Insurance segment's
products can exhibit claims variability.

The improved benefit ratio for group life was primarily attributable to
favorable claims experience, coupled with pricing and risk management actions
implemented in 1995. Solid sales results, improved persistency trends,

and continued renewal efforts contributed to the group life premium growth of
14.2%. Claim block acquisitions generated one-time premiums for group life and
reinsurance operations of $3.6 million and $16.3 million, respectively, for
1996, and $1.3 million and $38.3 million, respectively, for 1995.

The decrease in pretax operating income for 1995, as compared with 1994,
was primarily attributable to increased claims in the group life and special
risk accident insurance businesses, combined with reduced fee income from the
reinsurance underwriting management operations. Partially offsetting these
decreases were continued premium growth, and favorable claims experience in
certain reinsurance pools.

COLONIAL PRODUCTS SEGMENT

(Dollars in millions and percentage increase
(decrease) over prior year) 1996 1995 1994
- ---------------------------------------------- ----------------------- ----------------------- --------

Revenues
Premiums .................................... $493.7 4.4% $472.7 7.7% $439.1
Investment income ........................... 47.6 15.3 41.3 33.7 30.9
Net realized investment gains (losses) ...... (0.3) nm 10.9 nm 1.7
Fees and other income ........................ 4.5 87.5 2.4 9.1 2.2
------ ----- ------ ----- ------
Total revenues ........................... 545.5 3.5 527.3 11.3 473.9
Benefits and expenses
Benefits to policyholders .................. 239.3 1.8 235.1 6.3 221.1
Interest credited ........................... 7.5 15.4 6.5 30.0 5.0
Operating expenses ........................... 122.6 6.9 114.7 7.1 107.1
Commissions ................................. 107.8 (1.0) 108.9 12.6 96.7
Increase in deferred policy acquisition costs (24.1) (5.9) (25.6) 36.9 (18.7)
------ ----- ------ ----- ------
Total benefits and expenses ............... 453.1 3.1 439.6 6.9 411.2
------ ----- ------ ----- ------
Income before income taxes .................. 92.4 5.4 87.7 39.9 62.7
Exclude realized investment (gains) losses 0.3 (10.9) (1.7)
------ ------ ------
Pretax operating income (a) .................. $ 92.7 20.7% $ 76.8 25.9% $ 61.0
====== ===== ====== ===== ======
Sales (annualized first month's
premiums) ................................. $213.6 $200.4 $183.1
Benefit ratio (% of premiums) ............... 48.5% 49.7% 50.4%
Operating expense ratio (% of
premiums) ................................. 24.8% 24.3% 24.4%

- --------

nm = not meaningful or in excess of 100%

(a) For the definition of pretax operating income see the Consolidated Overview.

The Colonial Products segment includes Colonial Life & Accident Insurance
Company ("Colonial") and affiliates. Colonial offers payroll-deducted, voluntary
employee benefits to employees at their worksites. Accident and sickness, cancer
and life insurance products are marketed by Colonial primarily through
independent sales representatives.

The Colonial Products segment reported increased pretax operating income
for the year ended December 31, 1996, as compared with 1995. The increase in
pretax operating income was primarily attributable to favorable benefit ratios
in the life, and accident and sickness product lines, and increased investment
income, partially offset by an increased operating expense ratio. During 1996,
Colonial entered into an agreement to reinsure a majority of the mortality risk
on new and inforce universal life business. The reinsurance agreement negatively
affects reported premium growth and related expense ratios while positively
affecting reported benefit ratios. Colonial's pretax operating income increased
in 1995 as compared to 1994, primarily because of increased investment income
and an improved benefit ratio.

Colonial's benefit ratio improved again in 1996 to 48.5%, as compared with
49.7% in 1995 and 50.4% in 1994, primarily driven by the effect of the universal
life reinsurance agreement, continued favorable claims experience, and improved
incidence rates in the life, and accident and sickness product lines.

Investment income increased during 1996, primarily because of increased
cash flows resulting from a product mix shift and a change in asset mix to
higher yielding securities. Investment income increased during 1995, primarily
because of increased cash flows and additional income realized from the
reinvestment of the proceeds from the second quarter 1995 sale of Colonial's
equity portfolio into investment grade fixed income assets.

The expense ratio increased in 1996 primarily due to the impact of the
universal life reinsurance agreement. Excluding the impact of the universal life
reinsurance agreement, the expense ratio declined slightly compared to 1995 as a
result of continuing expense management efforts.

During 1996, Colonial experienced slower growth in sales and premium as
compared with 1995, reflecting the effects of weaker sales growth during the
third and fourth quarters of the year. Management is focusing on increasing
sales and premium at Colonial by enhancing collaborative sales across the UNUM
enterprise, introducing several new products and developing alternative
distribution channels.

RETIREMENT PRODUCTS SEGMENT

Revenues
Premiums .................................... $ 19.7 (28.6)% $ 27.6 9.5% $ 25.2
Investment income ........................... 214.4 (28.3) 298.9 (11.0) 335.8
Net realized investment gains ............... 2.8 (88.7) 24.8 nm 2.2
Fees and other income ........................ 46.1 nm 6.5 4.8 6.2
------ ---------- ------- --------- -------
Total revenues ........................... 283.0 (20.9) 357.8 (3.1) 369.4
Benefits and expenses
Benefits to policyholders .................. 64.0 17.6 54.4 5.8 51.4
Interest credited ........................... 193.1 (12.6) 220.9 (7.1) 237.7
Operating expenses ........................... 22.1 (33.8) 33.4 10.6 30.2
Commissions ................................. 5.2 (21.2) 6.6 (29.8) 9.4
Increase in deferred policy acquisition costs (2.8) (6.7) (3.0) nm (1.3)
------ ---------- ------- --------- -------
Total benefits and expenses ............... 281.6 (9.8) 312.3 (4.6) 327.4
------ ---------- ------- --------- -------
Income before income taxes .................. 1.4 (96.9) 45.5 8.3 42.0
Exclude realized investment gains ............ (2.8) (24.8) (2.2)
Special items (a) ........................... 15.0 1.0 --
------ ------- -------
Pretax operating income (a) .................. $ 13.6 (37.3)% $ 21.7 (45.5)% $ 39.8
====== ========== ======= ========= =======
Invested assets under management for
tax sheltered annuities, at end of
period .................................... $ 305.3 $3,074.3 $3,065.0
====== ======= =======

- --------
nm = not meaningful or in excess of 100%

(a) For the definition of pretax operating income and a detailed description of
special items see the Consolidated Overview.

The Retirement Products segment includes tax sheltered annuities ("TSA") in
UNUM America and First UNUM, guaranteed investment contracts ("GICs"), deposit
administration accounts ("DAs"), 401(k) plans, individual life and group medical
insurance, all of which are no longer actively marketed by UNUM.

On October 1, 1996, UNUM America and First UNUM closed the sale of their
respective TSA businesses to The Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
purchase price (ceding commission) paid upon closing was approximately $71
million, and the transaction generated statutory capital of approximately $160
million. The contracts have initially been reinsured on an indemnity basis. Upon
consent of the TSA contractholders and/or participants, the contracts will be
considered reinsured on an assumption basis, legally releasing UNUM America and
First UNUM from future contractual obligation to the respective contractholders
and/or participants. The sale resulted in a deferred pretax gain of $80.8
million, which will be recognized in income as a special item in proportion to
contractholder and/or participant consents for assumption reinsurance, the
majority of which management believes will occur during 1997. Through March 1,
1997, consent for assumption reinsurance has been provided by TSA
contractholders and/or participants owning approximately 60% of assets under
management.

Fees and other income reported by the TSA business increased in 1996,
reflecting a $38.2 million reimbursement of interest credited from Lincoln under
the reinsurance agreement. UNUM will continue to report the amount of interest
credited to TSA contracts for which the consent to transfer from indemnity
reinsurance to assumption reinsurance has not been received, with an equivalent
amount being reported in fees and other income for the reimbursement from
Lincoln. The group TSA businesses accounted for $13.5 million, $16.4 million and
$31.6 million of the Retirement Products segment's pretax operating income in
1996, 1995 and 1994, respectively.

For the year ended December 31, 1996, the Retirement Products segment
reported decreased pretax operating income as compared with the same period in
1995. The decrease was primarily due to reduced earnings from the runoff of
GICs, DAs and 401(k) plans during the year and lower interest spread margins on
tax sheltered annuities through October 1, 1996, the effective date of the TSA
sale. For 1995, the decrease in pretax operating income was primarily
attributable to lower interest spread margins on tax sheltered annuities, as
compared with the unusually favorable levels experienced during 1994.

During 1996, investment income declined reflecting the transfer of $2,690
million of assets to Lincoln on October 1, 1996, to effect the sale of the TSA
business, and the shifting of assets to lower yielding, highly liquid,
instruments during the year in anticipation of the transfer. During 1995,
investment income decreased primarily due to investments in lower yielding
tax-exempt securities and a reduced average investment yield caused by the low
interest rate environment. In addition, the reduced asset base under management
for GICs, DAs and 401(k) plans has resulted in lower investment income and
reduced amounts of interest credited during 1996 and 1995. Management expects
continued decreases in the amounts of investment income and interest credited as
the related GICs, DAs and 401(k) contracts mature or terminate.

CORPORATE

(Dollars in millions) 1996 1995 1994
- -------------------------------------------------- ---------------- ---------------- ---------

Loss before income taxes ........................ $ (46.7) $ (28.6) $ (28.2)
Exclude realized investment (gains) losses ...... (0.9) (0.3) 0.6
Special items (a) .............................. 10.1 -- --
----- ----- -------
Pretax operating loss (a) ........................ $ (37.5) $ (28.9) $ (27.6)
===== ===== =======

- --------

(a) For the definition of pretax operating loss and a detailed description of
special items see the Consolidated Overview.

Corporate includes transactions that are generally non-insurance related.
The increased pretax operating loss in Corporate for the year ended December 31,
1996, as compared with 1995, was primarily the result of increased international
development costs and interest expense on corporate borrowings, partially offset
by increased investment income.

The increased pretax operating loss in 1995, compared with 1994, was
primarily attributable to increased interest expense, partially offset by
reduced operating expenses. Effective January 1, 1995, the operations of UNUM
Japan are reported in the Disability Insurance segment. Costs related to UNUM's
investment in Japan prior to January 1, 1995, were reported as operating
expenses in Corporate.

INCOME TAXES

Effective tax rates, which reflect income tax expense as a percentage of
income before income taxes, were 30.3%, 26.4% and 22.1% for 1996, 1995 and 1994,
respectively. Reported income tax expense was below the federal statutory tax
rate of 35% primarily due to tax savings from investments in tax-exempt
securities. The increase in the effective tax rate over the three year period
was primarily due to reduced tax-exempt income, both in amount and as a
percentage of income before income taxes. Beginning in late 1996, UNUM commenced
a plan to increase purchases of tax-exempt bonds and mortgages.

INVESTMENTS

UNUM's long term investment strategy is to invest primarily in investment
grade bonds and commercial mortgages. UNUM evaluates total expected return after
consideration of associated expenses and losses, within criteria established for
each product line. Product line investment strategies are developed to
complement business risks by meeting the liquidity and solvency requirements of
each product. UNUM purchases assets with maturities, expected cash flows and
prepayment conditions that are consistent with these strategies. The nature and
quality of the types of investments comply with policies established by
management, which are more stringent overall than the statutes and regulations
imposed by the jurisdictions in which UNUM's insurance subsidiaries are
licensed.

UNUM's investments are reported in the consolidated financial statements at
net realizable value or net of applicable allowances for probable losses.
Allowances for real estate held for sale and mortgages are established based on
a review of specific assets as well as the overall portfolio, considering the
carrying value of the underlying assets. If a decline in fair value is
considered to be other than temporary or if a long-lived asset is deemed
permanently impaired, the investment is reduced to estimated net realizable
value and the reduction is recorded as a realized investment loss. UNUM
discontinues the accrual of investment income on invested assets when it is
determined that collectability is doubtful. Management monitors the risk
associated with the invested asset portfolio and regularly reviews and adjusts
the allowance for probable losses.

UNUM's invested assets were $8.7 billion and $11.7 billion at December 31,
1996, and 1995, respectively. The decrease from 1995 reflects asset transfers
that occurred in the fourth quarter of 1996, as discussed below. The composition
of UNUM's invested assets at December 31, 1996, was 79.6% fixed maturities,
13.0% mortgage loans, 2.8% real estate and 4.6% other invested assets.

In late December 1996, UNUM transferred approximately $403 million in cash
into a trust account held for the benefit of Centre Life Reinsurance Limited
("Centre Re"), in accordance with the reinsurance agreement between UNUM America
and Centre Re, which became effective December 31, 1996 (see Note 6 in Item 8).
On October 1, 1996, UNUM transferred approximately $2,690 million of assets into
a trust account held for the benefit of Lincoln to effect the sale of the TSA
business (see Note 5 in Item 8). The assets transferred consisted of
approximately $1,826 million of short-term investments, $589 million of fixed
maturities and $275 million of cash.

Gross realized investment gains were $40.2 million, $287.0 million and
$117.0 million, and gross realized investment losses were $36.8 million, $61.9
million and $71.4 million for the years ended December 31, 1996, 1995 and 1994,
respectively.

Fixed Maturities

UNUM's fixed maturity portfolio is concentrated in high quality
intermediate term bonds, which management believes are well diversified by
company and industry sector. At December 31, 1996, over 80% of the bond
portfolio was rated "A" or better. Fixed maturity ratings are obtained from
external rating agencies or are determined by UNUM internally using similar
methods if external ratings are not available. The bond portfolio is primarily
composed of taxable corporate bonds. In late 1996, UNUM commenced a plan to
increase purchases of tax-exempt bonds and mortgages due to after-tax yield
considerations. Dependent on market conditions and tax considerations, these
tax-exempt securities can provide attractive after-tax yields as compared with
similarly rated taxable securities.

The table below summarizes fixed maturity holdings by credit quality as of
December 31, 1996, and 1995.

Bond Credit Quality Ratings 1996 1995
- ----------------------------- ---------- ----------
AAA ........................ 10.6% 12.0%
AA ........................ 12.2 12.4
A ........................... 57.3 57.1
BAA ........................ 18.4 17.0
Below BAA .................. 1.5 1.5
------ ------
Total ..................... 100.0% 100.0%
====== ======

Bond credit quality ratings are based on the capacity of the borrower to
meet interest and principal payments as they come due. Capacity is considered
extremely strong for AAA rated issues; AA very strong; A strong; and BAA
adequate. Bonds rated below BAA are considered to have a vulnerability to
default.

At December 31, 1996, and 1995, the fixed maturity portfolio included
$102.0 million and $139.4 million, respectively, of below investment grade bonds
(below "BAA") recorded at fair value. These bonds had an associated amortized
cost of $101.7 million and $133.8 million, respectively. Virtually all of the
below investment grade bonds were purchased at investment grade, but were
subsequently downgraded. Management does not expect any risks or uncertainties
associated with below investment grade bonds to have a significant affect on
UNUM's consolidated financial position or results of operations. The amount of
fixed maturities delinquent 60 days or more was zero at December 31, 1996, and
1995.

In November 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," which provided a one-time opportunity to reassess the
appropriateness of the classifications of securities described in Financial
Accounting Standard ("FAS") No. 115, and to reclassify fixed maturities from the
held to maturity category without calling into question the intent to hold other
debt securities to maturity in the future. On December 31, 1995, UNUM reassessed
its fixed maturity portfolio, and as allowed under the implementation guidance,
reclassified fixed maturities with an amortized cost of $6,082.8 million and a
related unrealized gain of $393.0 million from the held to maturity category to
available for sale. The unrealized gain on the total available for sale fixed
maturity portfolio was $551.9 million at December 31, 1995. In connection with
the reclassification of the held to maturity fixed maturities to available for
sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to
reflect the changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized. At December 31, 1996, the unrealized gain on available for sale fixed
maturities was $286.0 million and the related unpaid claims adjustment was
$168.7 million.

Mortgages

At December 31, 1996, and 1995, UNUM's mortgage loans were $1,132.1 million
and $1,163.4 million, respectively. UNUM invests new funds in commercial
properties in targeted geographical areas that meet UNUM's underwriting
standards. Management uses a comprehensive rating system to evaluate the
investment and credit risk of each mortgage loan and to identify specific
properties for inspection and reevaluation. Management establishes allowances
for mortgage loans based on a review of individual loans and the overall loan
portfolio, considering the value of the underlying collateral.

Management believes that its mortgage loan portfolio is well diversified
geographically and among property types, as summarized in Item 1 F. Investments.
UNUM's incidence of new problem mortgage loans and foreclosure activity has
remained very low in 1996, reflecting improvements in overall economic activity
and improving real estate markets in the geographic areas where UNUM has
mortgage loans. Management expects a modest level of delinquencies and problem
loans in the future. The percentage of mortgage loans delinquent 60 days or more
on a contract delinquency basis was 0.5% and 0.2% at December 31, 1996, and
1995, respectively.

Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors
for Impairment of a Loan," and FAS 118, "Accounting by Creditors for Impairment
of a Loan-- Income Recognition and Disclosures," which defined the principles to
measure and record a loan when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The adoption of FAS 114 and FAS 118 did not have a material affect on
UNUM's results of operations or financial position.

At December 31, 1996, and 1995, impaired loans totaled $50.4 million and
$50.1 million, respectively. Included in the $50.4 million of impaired loans at
December 31, 1996, were $38.9 million of loans which had a related allowance for
probable losses of $5.7 million, and a loan of $11.5 million which had no
related allowance for probable losses. Interest lost on impaired loans in 1996,
1995 and 1994, was not material.

Realized investment losses related to impaired mortgage loans amounted to
$1.0 million, $9.2 million and $8.5 million for 1996, 1995 and 1994,
respectively. Impaired mortgage loans as of December 31, 1996, are not expected
to have a significant impact on UNUM's results of operations, liquidity, or
capital resources.

Mortgage loans that were restructured prior to the adoption of FAS 114 are
defined by UNUM as loans whose terms have been modified to interest rates less
than market at the time of restructure and are currently expected to perform
pursuant to such modified terms. UNUM modifies loans to protect its investment
and only when it is anticipated that the borrower will be able to meet the
modified terms. As of December 31, 1996, restructured mortgage loans totaled
$54.8 million, as compared with $59.9 million at December 31, 1995. Interest
lost on restructured loans was not material in 1996, 1995 or 1994.

Real Estate

At December 31, 1996, investment real estate amounted to $248.1 million,
compared with $222.2 million at December 31, 1995. UNUM purchases investment
real estate in selected markets when certain investment criteria are met.
Investment real estate is intended to be held long-term and is carried at cost
less accumulated depreciation. If investment real estate is determined to be
permanently impaired, the carrying amount of the asset is reduced to fair value.
Occasionally, investment real estate is reclassified and revalued as real estate
held for sale when it no longer meets UNUM's investment criteria.

At December 31, 1996, and 1995, real estate held for sale amounted to $9.4
million and $35.5 million, respectively. Real estate acquired through
foreclosure is valued at fair value at the date of foreclosure and may be
classified as investment real estate, if it meets UNUM's investment criteria.
Real estate held for sale is included in other assets in the Consolidated
Balance Sheets and is valued net of a valuation allowance which reduces the
carrying value to the lower of fair value less estimated costs to sell, or cost.
This valuation allowance is periodically adjusted based on subsequent changes in
UNUM's estimate of fair value less costs to sell.

Additions to the allowance for probable losses related to real estate held
for sale resulted in a realized investment gain of $0.4 million and realized
investment losses of $6.3 million and $0.8 million for the years ended December
31, 1996, 1995 and 1994, respectively. Additions to the allowance represent
charges to net realized investment gains less recoveries. Current and
anticipated real estate acquired through foreclosure is not expected to have a
significant affect on UNUM's results of operations, liquidity, or capital
resources.

Effective January 1, 1996, UNUM adopted FAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long- lived assets and certain identifiable intangibles to
be disposed of. FAS 121 applies to both real estate held for investment and real
estate held for sale. The adoption of FAS 121 did not have a material affect on
UNUM's results of operations or financial position.

LIQUIDITY AND CAPITAL RESOURCES

UNUM's businesses produce positive cash flows that are invested primarily
in intermediate, fixed maturity investments intended to reflect the anticipated
cash obligations of insurance benefit payments and insurance contract maturities
and to optimize investment returns at appropriate risk levels. Unexpected cash
requirements and liquidity needs can be met through UNUM's investment portfolio
of fixed maturities classified as available for sale, equity securities, cash
and short-term investments.

From time to time, dividend payments, which may be subject to approval by
insurance regulatory authorities, are made from UNUM's affiliates and insurance
subsidiaries to UNUM Corporation. These dividends, along with other funds, are
used to service the needs of UNUM Corporation including: debt service, common
stock dividends, stock repurchase, administrative costs and corporate
development. Net statutory operating income, which excludes realized investment
gains net of tax, is one of the major determinants of an insurance company's
dividend capacity to its parent in the following fiscal year. Statutory
accounting rules and practices, which differ in certain respects

from generally accepted accounting principles, are mandated by regulators in an
insurance company's state of domicile.

In 1996, UNUM's United States insurance subsidiaries reported net statutory
operating income of approximately $167 million, compared with approximately $143
million in 1995. The amount available under current law for payment of dividends
during 1997 to UNUM Corporation from all U.S. domiciled insurance subsidiaries
without state insurance regulatory approval is approximately $153 million, as
compared with approximately $135 million for 1996. UNUM Corporation also has the
ability to draw a dividend from its United Kingdom-based affiliate, UNUM
Limited, subject to certain U.S. tax consequences.

In connection with the closing of the TSA sale on October 1, 1996, as
described in the Retirement Products segment, UNUM America paid an extraordinary
dividend of $123 million to UNUM Corporation during the fourth quarter of 1996.
As a result of the reinsurance of the individual disability business, discussed
in the Disability Insurance segment, UNUM America and First UNUM intend to pay
extraordinary dividends to UNUM Corporation during 1997, subject to regulatory
approval and certain capital considerations.

Cash flow requirements are also supported by a committed revolving credit
facility totaling $500 million. On October 29, 1996, a new committed revolving
credit facility became effective, expiring on October 1, 2001, which replaced a
previously existing facility of the same amount. UNUM's commercial paper program
is supported by the revolving credit facility and is available for general
liquidity needs, capital expansion, acquisitions and stock repurchase. The
committed revolving credit facility contains certain covenants that, among other
provisions, require maintenance of certain levels of stockholders' equity and
limits on debt levels.

On July 16, 1996, UNUM filed an omnibus shelf registration with the
Securities and Exchange Commission, which became effective August 2, 1996,
relating to $500 million of securities (including debt securities, preferred
stock, common stock and other securities). On August 15, 1996, UNUM filed a
prospectus supplement to establish a $250 million medium-term note program under
the shelf registration.

At December 31, 1996, UNUM had short-term and long-term debt totaling
$117.7 million and $409.2 million, respectively. At December 31, 1996,
approximately $439 million was available for additional financing under the
existing revolving credit facility and $500 million of investment grade debt
instruments was available for issuance under the shelf registration. Contingent
upon market conditions and corporate needs, management may refinance short-term
notes payable for longer term securities.

In the normal course of business, UNUM enters into letters of credit,
primarily to satisfy capital requirements related to certain subsidiary
transactions. UNUM had outstanding letters of credit of $56.7 million and $12.3
million at December 31, 1996, and 1995, respectively.

Effective October 23, 1996, UNUM's Board of Directors approved an expansion
of the Company's stock repurchase program to 6.0 million shares by authorizing
an additional 3.7 million shares. At December 31, 1996, approximately 4.5
million shares of common stock remained authorized for repurchase. During 1996,
UNUM acquired approximately 1.9 million shares of its common stock in the open
market at an aggregate cost of $119.1 million. UNUM did not acquire any shares
in the open market in 1995. During 1994, UNUM repurchased 3.9 million shares in
the open market at an aggregate cost of $183.3 million.

UNUM was committed at December 31, 1996, to purchase fixed maturities and
other invested assets in the amount of $104.3 million. Independent of the cash
flows of UNUM Corporation, management anticipates that the operating cash flows
of the subsidiaries of UNUM Corporation will be sufficient to meet benefit
obligations, planned investment commitments and operational needs of those
companies.

RATINGS

Standard & Poor's Corporation ("Standard & Poor's"), Moody's Investors
Service ("Moody's") and A.M. Best Company ("A.M. Best") are among the third
parties that provide UNUM independent assessments of its overall financial
position. Ratings from these agencies for financial strength and claims paying
ability are available for the individual United States domiciled insurance
company subsidiaries rather than on a consolidated basis, since the financial
information used to develop the ratings is based on statutory accounting
practices in the United States. Debt ratings for UNUM Corporation are based on
consolidated financial information prepared using generally accepted accounting
principles.

The table below reflects the debt ratings for UNUM Corporation and the
claims paying ability and financial strength ratings for UNUM's United States
domiciled insurance company subsidiaries at March 7, 1997:

Standard &
Poor's Moody's A.M. Best
----------------- ---------------------- ------------

UNUM Corporation Ratings:
Senior Debt (MTN program) A+ A1
(Strong) (Upper Medium Grade)
Commercial Paper A-1 P-1
(Strong) (Superior Ability)
Subordinated Debt (MIDS) A A2
(Strong) (Upper Medium Grade)

Claims Paying
United States Subsidiaries' Ratings: Ability Rating Financial Strength Rating
UNUM America AA Aa2 A++
(Excellent) (Excellent) (Superior)
First UNUM AA Aa2 A+
(Excellent) (Excellent) (Superior)
Colonial AA Aa3 A+
(Excellent) (Excellent) (Superior)

At March 7, 1997, the unsold portion of the shelf registration related to
preferred stock carried a rating of "(P)"a1" " (Upper-Medium Quality) from
Moody's.

INSURANCE REGULATION

The Risk-Based Capital standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, are based on
a formula that establishes capital requirements relating to existing asset
default risk, insurance risk, interest rate (asset/liability mismatch) risk, and
business risk. A company's Total Adjusted Capital (statutory capital, surplus
and Asset Valuation Reserve plus certain other adjustments) is compared to the
Authorized Control Level ("ACL") of Risk-Based Capital produced by the formula.
Subject to certain trend tests to determine the change in the ACL ratio from
year to year, companies with Total Adjusted Capital above 200% of ACL are
assumed to be adequately capitalized. Companies below 200% of ACL are identified
as requiring various levels of regulatory action ranging from increased
information requirements for companies between 150% and 200% of ACL, to
mandatory control by the domiciliary insurance department for companies below
70% of ACL.

At December 31, 1996, the ACL ratios for UNUM America, First UNUM, and
Colonial were 406%, 467%, and 389%, respectively. This compares with ACL ratios
at December 31, 1995, of 382%, 382%, and 436%, respectively. For 1996, UNUM
America's ACL ratio reflects the merger of Commercial Life into UNUM America as
of December 31, 1996. At December 31, 1995, Commercial Life had an ACL ratio of
329% that is not included in the UNUM America 1995 ACL ratio.

DERIVATIVE FINANCIAL INSTRUMENTS

UNUM periodically uses common derivative financial instruments such as
options, futures and forward exchange contracts to hedge certain risks
associated with anticipated purchases and sales of investments and certain
payments denominated in foreign currencies, primarily British pound sterling,
Canadian dollar and Japanese yen. These derivative financial instruments are
used to protect UNUM from the effect of market fluctuations in interest and
exchange rates between the contract date and the date on which the hedged
transaction occurs. In using these instruments, UNUM is subject to the
off-balance-sheet risk that the counterparties of the transactions will fail to
perform as contracted. UNUM manages this risk by only entering into contracts
with highly rated institutions and listed exchanges. UNUM does not hold
derivative financial instruments for the purpose of trading.

At December 31, 1996, UNUM had open interest rate futures contracts with
notional amounts of $178.2 million to hedge anticipated sales of investments in
1997. These contracts had a related net unrealized gain of $1.6 million. At
December 31, 1995, UNUM had no open derivative financial instruments.

LITIGATION

On December 29, 1993, UNUM filed suit in the United States District Court
for the District of Maine, seeking a federal income tax refund. The suit is
based on a claim for a deduction in certain prior tax years, for $652 million in
cash and stock distributed to policyholders in connection with the 1986
conversion of Union Mutual Life Insurance Company to a stock company. UNUM has
fully paid, and provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure.
UNUM believes its claims are meritorious, and has appealed the decision to the
United States Court of Appeals for the First Circuit. The ultimate recovery, if
any, cannot be determined at this time.

EFFECT OF INFLATION

Inflation is one of the factors that has increased the need for insurance.
Many policyholders who once had adequate insurance programs at lower coverage
levels have increased their disability insurance coverage to provide the same
relative financial benefits and protection.

Changing interest rates, which are traditionally linked to changes in
inflation, affect UNUM's level of discounted reserves. While rising interest
rates are beneficial when the company is investing current cash flows, they can
also reduce the fair value of existing fixed rate long-term investments. In
addition, lower interest rates can lead to early payoffs and refinancing of some
of UNUM's fixed rate investments. Management generally invests in fixed rate
instruments that are structured to limit the exposure to such reinvestment risk.

ACCOUNTING CHANGES

Effective January 1, 1996, UNUM adopted Financial Accounting Standard
("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which established accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. The adoption of FAS 121
did not have a material effect on UNUM's results of operations or financial
position.

Effective January 1, 1996, UNUM adopted FAS 123, "Accounting for
Stock-Based Compensation." FAS 123 established financial accounting and
reporting standards for stock-based employee compensation plans. The statement
defines a new method of accounting for employee stock compensation plans using a
fair value based method, under which compensation cost is measured and
recognized in results of operations. Alternatively, FAS 123 allows an entity to
retain the accounting for employee stock compensation plans defined under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." UNUM retained the accounting defined under APB No. 25, and as
required, will disclose in a footnote the pro forma effects of stock-
based compensation using the fair value based method defined under FAS 123.
Refer to Note 9 in Item 8 for the related disclosures.

Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors
for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures," which defined the
principles to measure and record a loan when it is probable that a creditor will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. The adoption of FAS 114 and FAS 118 did not have a material
effect on UNUM's results of operations or financial position.

Effective January 1, 1994, UNUM adopted FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," which specified the accounting and
reporting for certain investments in equity securities and for all investments
in debt securities. In November 1995, the Financial Accounting Standards Board
("FASB") issued "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," which provided a one-time
opportunity to reassess the appropriateness of the classifications of securities
described in FAS 115, and to reclassify fixed maturities from the held to
maturity category without calling into question the

intent to hold other debt securities to maturity in the future. On December 31,
1995, UNUM reassessed its fixed maturity portfolio and, as allowed under the
implementation guidance, reclassified fixed maturities with an amortized cost of
$6,082.8 million and a related unrealized gain of $393.0 million from the held
to maturity category to available for sale. In connection with the
reclassification of the held to maturity fixed maturities to available for sale,
on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to
reflect the changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1996, the FASB issued FAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The statement provides
guidance for recognition or derecognition of assets and liabilities, focusing on
the concepts of control and extinguishment. UNUM is required to adopt FAS 125
effective January 1, 1997. The adoption of FAS 125 is not expected to have a
material effect on UNUM's results of operations or financial position.

In March 1997, the FASB issued FAS No. 128, "Earnings Per Share," which is
intended to simplify the computation and presentation of earnings per share
("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." FAS 128 will eliminate the concept of "primary" EPS and
require dual presentation of "basic" and "diluted" EPS. Diluted EPS under FAS
128 is similar to "fully diluted" EPS as defined by APB 15. UNUM is required to
adopt FAS 128 effective December 31, 1997. As stated in Note 1 in Item 8, under
the caption "Earnings Per Share," the assumed exercise of UNUM's outstanding
stock options does not result in a material dilution of earnings per share.

In March 1997, the FASB issued FAS No. 129, "Disclosures of Information
About Capital Structure," which clarifies disclosure requirements related to the
type, and nature, of securities contained in an entity's capital structure. UNUM
is required to adopt FAS 129 effective December 31, 1997.

Item 8--Financial Statements and Supplementary Data

INDEX Page
- ------------------------------------------------------------------------------------------ ------

Report of Independent Accountants ...................................................... 34
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 35
Consolidated Balance Sheets as of December 31, 1996, and 1995 ........................ 36
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996,
1995 and 1994 ........................................................................ 38
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 39
1994
Notes to Consolidated Financial Statements ............................................. 40

REPORT OF INDEPENDENT ACCOUNTANTS

To the Directors and Stockholders

UNUM Corporation

We have audited the consolidated financial statements of UNUM Corporation and
subsidiaries as listed in Item 8 and the financial statement schedules as listed
in Item 14(a) of this Form 10-K. These consolidated financial statements and
financial statement schedules are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of UNUM
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.

/s/COOPERS & LYBRAND L.L.P.

Portland, Maine

February 5, 1997,

except for Note 5 for which the date is March 1, 1997,

and Note 18 for which the date is March 14, 1997

UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,
--------------------------------------
(Dollars in millions, except per common share data) 1996 1995 1994
- ----------------------------------------------------- ----------- ----------- ----------

Revenues
Premiums $3,120.4 $3,018.2 $2,721.3
Investment income ................................. 802.2 806.3 770.2
Net realized investment gains ..................... 3.4 225.1 45.6
Fees and other income .............................. 116.7 73.3 75.5
-------- -------- --------
Total revenues .................................... 4,042.7 4,122.9 3,612.6
Benefits and expenses
Benefits to policyholders ........................... 2,324.7 2,493.0 2,239.0
Interest credited ................................. 200.6 227.4 242.7
Operating expenses ................................. 862.6 728.2 713.0
Commissions ....................................... 364.2 369.9 355.9
Increase in deferred policy acquisition costs ...... (91.7) (114.7) (155.3)
Interest expense .................................... 40.7 37.2 18.7
-------- -------- --------
Total benefits and expenses ..................... 3,701.1 3,741.0 3,414.0
-------- -------- --------
Income before income taxes ........................ 341.6 381.9 198.6
Income taxes
Current ............................................. 122.3 98.6 30.4
Deferred .......................................... (18.7) 2.2 13.5
-------- -------- --------
Total income taxes .............................. 103.6 100.8 43.9
-------- -------- --------
Net income .......................................... $ 238.0 $ 281.1 $ 154.7
======== ======== ========
Net income per common share ........................ $ 3.26 $ 3.87 $ 2.09
======== ======== ========

See notes to consolidated financial statements.

UNUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,
--------------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------- ------------ -----------

ASSETS
Investments
Fixed maturities available for sale--at fair value
(amortized cost: 1996--$6,656.7; 1995--$8,583.5) ...... $6,942.7 $9,135.4
Equity securities available for sale--at fair value
(cost: 1996--$23.8; 1995--$21.1) ..................... 31.3 25.2
Mortgage loans ....................................... 1,132.1 1,163.4
Real estate, net ....................................... 248.1 222.2
Policy loans .......................................... 232.9 219.2
Other long-term investments ........................... 14.2 30.4
Short-term investments ................................. 123.4 896.7
--------- ---------
Total investments .................................... 8,724.7 11,692.5
Cash ................................................... 77.0 42.5
Accrued investment income .............................. 166.1 208.5
Premiums due .......................................... 252.4 224.3
Deferred policy acquisition costs ..................... 844.2 1,142.3
Property and equipment, net ........................... 181.0 153.7
Reinsurance receivables ................................. 1,113.8 420.9
Deposit assets .......................................... 2,846.6 --
Other assets .......................................... 518.0 370.9
Separate account assets ................................. 743.7 532.2
--------- ---------
Total assets .......................................... $15,467.5 $14,787.8
========= =========

See notes to consolidated financial statements.

UNUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,
--------------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------------- ------------ -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits ....................................... $1,881.1 $1,718.7
Unpaid claims and claim expenses ........................... 5,289.3 4,856.4
Other policyholder funds .................................... 3,533.6 3,840.3
Income taxes
Current ................................................... 61.3 20.7
Deferred ................................................... 341.8 392.0
Notes payable ................................................ 526.9 583.8
Other liabilities .......................................... 826.7 540.8
Separate account liabilities ................................. 743.7 532.2
-------- --------
Total liabilities .......................................... 13,204.4 12,484.9
Stockholders' equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000 shares, issued 99,987,958 shares ............... 10.0 10.0
Additional paid-in capital ................................. 1,103.4 1,088.2
Unrealized gains on available for sale securities, net ...... 82.3 213.1
Unrealized foreign currency translation adjustment ......... (1.2) (23.1)
Retained earnings .......................................... 1,871.4 1,713.2
-------- --------
3,065.9 3,001.4
Less:
Treasury stock, at cost (1996--28,165,594 shares;
1995--26,980,331 shares) .................................... 792.2 691.6
Restricted stock deferred compensation ..................... 10.6 6.9
-------- --------
Total stockholders' equity ................................. 2,263.1 2,302.9
-------- --------
Total liabilities and stockholders' equity .................. $15,467.5 $14,787.8
======== ========

See notes to consolidated financial statements.

UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Unrealized
Gains (Losses) Unrealized
Common On Available Foreign Restricted
Stock Additional for Sale Currency Stock
(Dollars in millions, $0.10 Par Paid-in Securities, Translation Retained Treasury Deferred
except per common share data) Value Capital Net Adjustment Earnings Stock Compensation Total
- -------------------------------- --------- ----------- ------------- ----------- -------- -------- ------------ -----

Balance at January 1, 1994 .... $10.0 $1,078.4 $ 149.1 $ (24.1) $1,420.8 $ (529.8) $ (1.7) $2,102.7
1994 Transactions:
Net income ................... 154.7 154.7
Unrealized losses on available
for sale securities, net .... (99.5) (99.5)
Unrealized foreign currency
translation adjustment ....... 0.4 0.4
Dividends to stockholders
($0.92 per common share) ..... (68.3) (68.3)
Treasury stock acquired ....... (183.3) (183.3)
Employee stock option and
other transactions .......... 2.1 6.5 0.1 8.7
----- --------- ------- -------- -------- -------- ------ --------
Balance at December 31, 1994 .. 10.0 1,080.5 49.6 (23.7) 1,507.2 (706.6) (1.6) 1,915.4
1995 Transactions:
Net income ................... 281.1 281.1
Unrealized gains on available
for sale securities, net .... 163.5 163.5
Unrealized foreign currency
translation adjustment ....... 0.6 0.6
Dividends to stockholders
($1.035 per common share) .... (75.1) (75.1)
Employee stock option and
other transactions .......... 7.7 15.0 (5.3) 17.4
----- --------- ------- -------- -------- -------- ------ --------
Balance at December 31, 1995 .. 10.0 1,088.2 213.1 (23.1) 1,713.2 (691.6) (6.9) 2,302.9
1996 Transactions:
Net income ................... 238.0 238.0
Unrealized losses on available
for sale securities, net .... (130.8) (130.8)
Unrealized foreign currency
translation adjustment ....... 21.9 21.9
Dividends to stockholders
($1.09 per common share) ..... (79.8) (79.8)
Treasury stock acquired ....... (119.1) (119.1)
Employee stock option and other
transactions ................ 15.2 18.5 (3.7) 30.0
----- --------- ------- -------- -------- -------- ------ --------
Balance at December 31, 1996 .. $10.0 $1,103.4 $ 82.3 $ (1.2) $1,871.4 $ (792.2) $(10.6) $2,263.1
====== ========= ======= ======= ======== ======== ====== ========

See notes to consolidated financial statements.

UNUM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
-----------------------------------------
(Dollars in millions) 1996 1995 1994
- ----------------------------------------------------------------- ------------- ------------- ---------

Operating activities:
Net income ...................................................... $ 238.0 $ 281.1 $ 154.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in future policy benefits and unpaid claims and
claim expenses ................................................ 630.1 905.3 720.1
Increase in amounts receivable under reinsurance agreements . (686.7) (61.0) (18.6)
Increase (decrease) in income tax liability .................. 20.4 (3.5) (3.3)
(Increase) decrease in deferred policy acquisition costs ...... 299.2 (114.9) (155.4)
Increase in deposit assets .................................... (432.1) -- --
Deferred gain on sale of tax sheltered annuities ............... 80.8 -- --
Charge for individual disability reinsurance fees ............ 49.7 -- --
Realized investment (gains) losses ........................... 4.0 (242.0) (59.0)
Other ......................................................... 76.4 (8.9) 62.3
--------- --------- -------
Net cash provided by operating activities .................. 279.8 756.1 700.8
--------- --------- -------
Investing activities:
Maturities of fixed maturities held to maturity ............... -- 835.7 754.8
Maturities of fixed maturities available for sale ............... 775.2 99.3 41.2
Sales of fixed maturities held to maturity ..................... -- 2.8 46.8
Sales of fixed maturities available for sale .................. 2,514.4 577.3 407.6
Sales of equity securities available for sale .................. -- 836.7 314.1
Sales and maturities of other investments ..................... 269.5 312.0 414.9
Purchases of fixed maturities held to maturity .................. -- (230.2) (795.2)
Purchases of fixed maturities available for sale ............... (1,890.9) (1,971.9) (943.9)
Purchases of equity securities available for sale ............... -- (131.3) (216.6)
Purchases of other investments ................................. (263.0) (322.4) (211.5)
Net increase in short-term investments ........................ (1,051.9) (604.8) (221.7)
Net additions to property and equipment ........................ (54.3) (28.9) (29.9)
--------- --------- -------
Net cash provided by (used in) investing activities ......... 299.0 (625.7) (439.4)
--------- --------- -------
Financing activities:
Deposits and interest credited to investment contracts ......... 597.1 669.6 608.6
Maturities and withdrawals from investment contracts ............ (903.8) (888.1) (800.5)
Dividends to stockholders ....................................... (79.8) (75.1) (68.3)
Treasury stock acquired ....................................... (119.1) -- (183.3)
Proceeds from notes payable .................................... -- 291.5 54.7
Repayment of notes payable .................................... (15.0) (1.3) (1.2)
Net increase (decrease) in short-term debt ..................... (42.3) (135.1) 136.6
Other ......................................................... 18.9 13.8 7.2
--------- --------- -------
Net cash used in financing activities ........................ (544.0) (124.7) (246.2)
--------- --------- -------
Effect of exchange rate changes on cash ........................ (0.3) 0.7 0.1
--------- --------- -------
Net increase in cash .......................................... 34.5 6.4 15.3
Cash at beginning of year ....................................... 42.5 36.1 20.8
--------- --------- -------
Cash at end of year ............................................. $ 77.0 $ 42.5 $ 36.1
========= ========= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes ................................................... $ 76.4 $ 82.6 $ 48.8
Interest ...................................................... $ 40.8 $ 44.7 $ 20.4

Supplemental disclosure of noncash operating and investing activities:

In conjunction with the sale of UNUM's tax sheltered annuity business, as
discussed in Note 5, fixed maturities available for sale of $588.6 million and
short-term investments of $1,825.9 million were transferred to the buyer on
October 1, 1996. Upon transfer, there was a corresponding increase in UNUM's
deposit assets.

See notes to consolidated 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. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of UNUM
Corporation and subsidiaries. Significant intercompany accounts and transactions
have been eliminated.

Reclassification

Certain 1995 and 1994 amounts have been reclassified in 1996 for
comparative purposes.

Investments

Investments are reported as follows:

[bullet] Fixed maturities available for sale (certain bonds and redeemable
preferred stocks)--at fair value.

[bullet] Equity securities available for sale (common stocks and
non-redeemable preferred stocks)--at fair value.

[bullet] Mortgage loans--at amortized cost less an allowance for probable
losses.

[bullet] Real estate--at cost less accumulated depreciation.

[bullet] Policy loans--at unpaid principal balance.

[bullet] Other long-term investments--at cost plus UNUM's equity in
undistributed net earnings since acquisition.

[bullet] Short-term investments--are considered available for sale and are
carried at cost which approximates fair value.

Fixed maturities and equity securities are classified as available for sale
as they may be sold in response to changes in interest rates, resultant
prepayment risk, liquidity and capital needs, or other similar economic factors.
Unrealized gains and losses related to securities classified as available for
sale are excluded from net income and reported in a separate component of
stockholders' equity, net of applicable deferred taxes and related adjustments
to unpaid claims and claim expenses. The unrealized gains and losses are
determined based on estimated market values at the balance sheet date and are
not necessarily the amounts which would be realized upon sale of the securities
or representative of future market values. Changing interest rates affect the
level of unrealized gains and losses related to securities classified as
available for sale. While rising interest rates are beneficial when investing
current cash flows, they can also reduce the fair value of existing fixed rate
long-term investments. In addition, lower interest rates can lead to early
payoffs and refinancing of some of UNUM's fixed rate investments. Management
generally invests in fixed rate instruments that are structured to limit the
exposure to such reinvestment risk.

Realized investment gains and losses, which are determined on the basis of
specific identification and include adjustments for allowances for probable
losses, are reported separately in the Consolidated Statements of Income.

If a decline in fair value of an invested asset is considered to be other
than temporary or if a long-lived asset is deemed to be permanently impaired,
the investment is reduced to its net realizable value and the reduction is
accounted for as a realized investment loss.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

UNUM discontinues the accrual of investment income on invested assets when
it is determined that collectability is doubtful. UNUM recognizes investment
income on impaired loans when the income is received.

Real estate held for sale is included in other assets in the Consolidated
Balance Sheets and is valued net of a valuation allowance which reduces the
carrying value to the lower of fair value less estimated costs to sell, or cost.
This valuation allowance is periodically adjusted based on subsequent changes in
UNUM's estimate of fair value less costs to sell.

Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management program.
Therefore, short-term financial instruments are classified as investments in the
Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.

Derivative Financial Instruments

Gains or losses on hedges of existing assets or liabilities are deferred
and included in the carrying amounts of those assets or liabilities. Gains or
losses related to qualifying hedges of firm commitments or anticipated
transactions are also deferred and recognized in the carrying amount of the
underlying asset or liability when the hedged transaction occurs.

Recognition of Premium Revenues and Related Expenses

Group insurance premiums are recognized as income over the period to which
the premiums relate. Individual disability premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums to result in
recognition of profits over the life of the contracts. This association is
accomplished by recording a provision for future policy benefits and unpaid
claims and claim expenses, and by amortizing deferred policy acquisition costs.

For retirement and universal life products, premium and other policy fee
revenue consist of charges for the cost of insurance, policy administration and
surrenders assessed during the period. Charges related to services to be
performed in the future are deferred until earned. The amounts received in
excess of premium and fees are recorded as deposits and included in other
policyholder funds in the Consolidated Balance Sheets. Benefits and expenses
include benefit claims in excess of related account balances, interest credited
at various rates, and amortization of deferred policy acquisition costs.

Deferred Policy Acquisition Costs

The costs of acquiring new business that vary with and are related
primarily to the production of new business have been deferred to the extent
such costs are deemed recoverable from future profits. Such costs include
commissions, certain costs of policy issue and underwriting, and certain
variable field office expenses.

For individual disability, group disability, and group life and health
business, the costs are amortized in proportion to expected future premiums. For
universal life products, the costs are amortized in proportion to estimated
gross profits from interest margins, mortality and other elements of performance
under the contracts. Amortization is adjusted periodically to reflect
differences between actual experience and original assumptions, with any
resulting changes reflected in current operating results. The amounts deferred
and amortized were as follows:

Year Ended December 31,
-------------------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------- ---------- ---------- -----------

Deferred ............................................. $ 305.6 $ 308.3 $ 308.1
Less amortized ....................................... (213.9) (193.6) (152.8)
------- ------- -------
Increase in deferred policy acquisition costs ...... $ 91.7 $ 114.7 $ 155.3
======= ======= =======

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reserves for Future Policy Benefits

Reserves for future policy benefits are calculated by the net-level premium
method, and are based on UNUM's expected morbidity, mortality and interest rate
assumptions at the time a policy is issued. These reserves represent the portion
of premiums received, accumulated with interest and held to provide for claims
that have not yet been incurred. The reserve assumptions are periodically
reviewed and compared to actual experience and are revised if it is determined
that future expected experience is different from the reserve assumptions.
Reserves for group insurance policies consist primarily of unearned premiums.

The interest rates used in the calculation of reserves for future policy
benefits at December 31, 1996, and 1995, principally ranged from:

1996 1995
--------------- --------------
Individual disability ............... 6.0% to 9.5% 5.5% to 9.5%
Individual life ..................... 5.0% to 9.0% 5.0% to 9.0%
Individual accident and health ...... 5.0% to 9.0% 5.0% to 9.0%
Individual and group annuities ...... 5.0% to 9.0% 5.0% to 9.0%

Certain reserve calculations are based on interest rates within these
ranges graded down over periods from 15 to 20 years.

Reserves for Unpaid Claims and Claim Expenses

Unpaid claims and claim expense reserves represent the amount estimated to
fund claims that have been reported but not settled and claims incurred but not
reported. Reserves for unpaid claims are estimated based on UNUM's historical
experience and other actuarial assumptions that consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to interest rates and current and anticipated incidence rates, recovery
rates, and economic and societal conditions. Reserve estimates and assumptions
are periodically reviewed and updated with any resulting adjustments to reserves
reflected in current operating results. Given the complexity of the reserving
process, the ultimate liability may be more or less than such estimates
indicate.

The interest rates used in the calculation of disability claims reserves at
December 31, 1996, and 1995, were principally as follows:

1996 1995
----------------- ----------------

Group long term disability (North America) ......... 7.88% 7.94%
Group long term disability (United Kingdom) ...... 9.46% 9.67%
Individual disability .............................. 6.75% to 9.46% 6.75% to 9.67%

The interest rate used to discount the disability reserves is a composite
of the yields on assets specifically identified with each block of business.
Management expects the reserve discount rate for certain disability products
will further decline, since current cash flows are invested in high quality
assets at current yields, which are below the composite yield of the existing
assets purchased in prior years. UNUM periodically adjusts prices on both
existing and new business in an effort to mitigate the impact of the current
interest rate environment.

For other accident and health business, reserves are based on projections
of historical claims run-out patterns.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Activity in the liability for unpaid claims and claim expenses is
summarized as follows:

(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------- ------------------- ------------------ ------------------

Balance at January 1 ................................. $4,856.4 $3,853.9 $3,341.5
Less reinsurance recoverables ..................... (115.4) (82.7) (68.0)
Effect of unrealized gains on fixed maturities ...... (261.2) -- --
---- ----- -----
Net Balance at January 1 ........................... 4,479.8 3,771.2 3,273.5
Incurred related to:
Current year ....................................... 1,673.9 1,825.0 1,609.3
Prior years ....................................... 366.0 507.0 436.0
---- ----- -----
Total incurred ....................................... 2,039.9 2,332.0 2,045.3
Paid related to:
Current year ....................................... 532.8 523.9 517.6
Prior years ....................................... 1,214.5 1,099.5 1,030.0
---- ----- -----
Total paid .......................................... 1,747.3 1,623.4 1,547.6

Net Balance at December 31 ........................... 4,772.4 4,479.8 3,771.2
Plus reinsurance recoverables ..................... 346.8 115.4 82.7
Effect of unrealized gains on fixed maturities ...... 170.1 261.2 --
---- ----- -----
Balance at December 31 .............................. $5,289.3 $4,856.4 $3,853.9
==== ===== =====

The components of the increase in unpaid claims and claims expenses
incurred and related to prior years were as follows:

(Dollars in millions) 1996 1995 1994
- ----------------------------------------------------- --------- --------- --------

Interest accrued on reserves ..................... $292.9 $270.0 $267.0
Changes in reserve estimates and assumptions ...... 36.2 239.0 154.0
Changes in foreign exchange rates .................. 36.9 (2.0) 15.0
------- ------ -------
Increase in incurrals related to prior years ...... $366.0 $507.0 $436.0
======= ====== =======

The increases in incurrals related to prior years were primarily the result
of interest accrued on reserves, changes in reserve estimates and assumptions of
interest rates, morbidity, mortality and expense costs, and changes in foreign
exchange rates, primarily related to the disability reserves of UNUM's United
Kingdom-based affiliate, UNUM Limited. Due to the long-term claims payment
pattern of some of UNUM's businesses, certain reserves, particularly disability,
are discounted for interest.

The effects of changes in reserve estimates and assumptions were more
significant in 1995 and 1994, primarily as a result of increased reserves from
lower discount rates for certain disability products following the sale of the
common stock portfolio in 1995, and adjustments to strengthen certain disability
reserves in 1995 and 1994.

Beginning in 1995, as explained in Note 2, unpaid claims are adjusted to
reflect changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized. Where applicable, UNUM has reflected those adjustments in the
liability balances with corresponding credits or charges, net of related
deferred taxes, reported as a component of unrealized gains on available for
sale securities in stockholders' equity.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Changes in Accounting Estimates

During 1995, UNUM sold virtually all of the common stock portfolio of its
United States subsidiaries. The sale of the common stock portfolio, which
partially supported certain disability reserves, and the reinvestment of the
proceeds primarily in investment grade fixed income assets at yields below the
average portfolio yield, resulted in lower reserve discount rates for certain
disability products reported in the Disability Insurance segment. This change in
accounting estimate to lower certain discount rates resulted in an increase of
$128.6 million to benefits to policyholders in the Consolidated Statement of
Income, and a decrease to net income of $83.6 million, or $1.15 per share.

During 1995, UNUM increased the group long term disability reserves for
incurred but not reported ("IBNR") claims, as reported in the Disability
Insurance segment. The increased IBNR reserves were based on management's
judgment that claims incurred but not yet reported would reflect increased
levels of claims incidence and severity. This change in accounting estimate
resulted in an increase to benefits to policyholders in the Consolidated
Statement of Income of $38.4 million, and a decrease to net income of $25.0
million, or $0.34 per share.

During 1995, UNUM increased reserves for unpaid claims related to the
Association Group disability business by $15.0 million to reflect management's
expectations of slower than expected claim recoveries. This change in accounting
estimate, which was reflected in the Disability Insurance segment, decreased net
income by $9.8 million, or $0.14 per share.

During 1994, UNUM increased reserves for existing claims by $83.3 million
and strengthened reserves for estimated future losses by $109.1 million. These
increased reserves reflected management's expectations of morbidity trends for
the existing non-cancellable individual disability business, reported in the
Disability Insurance segment. This change in accounting estimate resulted in an
increase to benefits to policyholders in the Consolidated Statement of Income of
$192.4 million, and a decrease to net income of $125.1 million, or $1.69 per
share.

Other Policyholder Funds

Other policyholder funds are liabilities for investment-type contracts and
represent customer deposits plus interest credited to those deposits at various
rates.

Liabilities for Restructuring Activities

Liabilities for restructuring activities are recorded when management,
prior to the balance sheet date, commits to execute an exit plan that will
result in the incurral of costs that have no future economic benefit, or
approves a plan of termination and communicates sufficient detail of the plan to
employees. Liabilities for restructuring activities are included in other
liabilities in the Consolidated Balance Sheets.

Separate Accounts

Certain assets from tax sheltered annuity ("TSA") contracts and UNUM's
defined benefit plans are in separate accounts that are pooled investment funds
of securities. Investment income and realized gains and losses on these accounts
accrue directly to the contractholders. Assets, carried at market value, and
liabilities of the separate accounts are shown separately in the Consolidated
Balance Sheets. The assets of the separate accounts are legally segregated and
are not subject to claims that arise out of any other business of UNUM.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting for Participating Individual Life Insurance

Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to UNUM's conversion to a stock life insurance
company on November 14, 1986, will remain participating as long as they remain
in force. A Participation Fund Account ("PFA") was established for the sole
benefit of all of Union Mutual's individual participating life and annuity
policies and contracts.

The assets of the PFA are to provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies and
annuity contracts. This line of business participates in the experience of the
PFA and its operations have been excluded from the Consolidated Statements of
Income. The PFA represented approximately 2.3% and 2.5% of consolidated assets
and 2.7% and 2.8% of consolidated liabilities at December 31, 1996, and 1995,
respectively.

Income Taxes

The provision for income taxes includes amounts currently payable and
deferred income taxes, which result from differences between financial reporting
and tax bases of assets and liabilities, and are measured using enacted tax
rates and laws. Deferred U.S. income taxes have not been provided on accumulated
earnings of UNUM's foreign subsidiaries. These earnings could generate
additional U.S. tax if remitted to UNUM Corporation. A valuation allowance is
established for deferred tax assets when it is more likely than not that an
amount will not be realized.

Foreign Currency Translation

Foreign subsidiaries' balance sheet and income statement accounts expressed
in local functional currencies are translated into U.S. dollars using ending and
quarterly average exchange rates, respectively. The resulting translation
adjustments are reported in a separate component of stockholders' equity.

Earnings Per Share

The weighted average number of shares outstanding used to calculate
earnings per share was approximately 72,969,000, 72,677,000 and 74,158,000 in
1996, 1995 and 1994, respectively. The assumed exercise of outstanding stock
options does not result in a material dilution of earnings per share.

Reinsurance

UNUM, through its life insurance subsidiaries, is involved in both the
cession and assumption of reinsurance with other companies. Risks are reinsured
with other companies to reduce UNUM's exposure to large losses and permit
recovery of a portion of direct losses. UNUM remains liable to the insured for
the payment of policy benefits if the reinsurers cannot meet their obligations
under the reinsurance agreements. Deferred policy acquisition costs, premiums,
benefits and expenses are stated net of reinsurance ceded to other companies.
UNUM evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk to minimize exposure to significant losses from
reinsurer insolvencies.

Letters of Credit

New Accounting Pronouncements

In June 1996, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The statement provides
guidance for recognition or derecognition of assets and

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
liabilities, focusing on the concepts of control and extinguishment. UNUM is
required to adopt FAS 125 effective January 1, 1997. The adoption of FAS 125 is
not expected to have a material effect on UNUM's results of operations or
financial position.

In March 1997, the FASB issued FAS No. 128, "Earnings Per Share," which is
intended to simplify the computation and presentation of earnings per share
("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." FAS 128 will eliminate the concept of "primary" EPS and
require dual presentation of "basic" and "diluted" EPS. Diluted EPS under FAS
128 is similar to "fully diluted" EPS as defined by APB 15. UNUM is required to
adopt FAS 128 effective December 31, 1997. As stated in Note 1, under the
caption "Earnings Per Share," the assumed exercise of UNUM's outstanding stock
options does not result in a material dilution of earnings per share.

NOTE 2. INVESTMENTS

In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities," which
provided a one-time opportunity to reassess the appropriateness of the
classifications of securities described in FAS 115, and to reclassify fixed
maturities from the held to maturity category without calling into question the
intent to hold other debt securities to maturity in the future. On December 31,
1995, UNUM reassessed its fixed maturity portfolio and as allowed under the
implementation guidance, reclassified fixed maturities with an amortized cost of
$6,082.8 million and a related unrealized gain of $393.0 million from the held
to maturity category to available for sale. The unrealized gain on the total
available for sale fixed maturity portfolio was $551.9 million at December 31,
1995. In connection with the reclassification of the held to maturity fixed
maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid
claims by $261.2 million to reflect the changes that would have been necessary
if the unrealized gains and losses related to fixed maturities classified as
available for sale had been realized. At December 31, 1996, the unrealized gain
on available for sale fixed maturities was $286.0 million and the related unpaid
claims adjustment was $168.7 million.

The following tables summarize the components of investment income, net
realized investment gains, and changes in unrealized investment gains on
available for sale securities:

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. INVESTMENTS (Continued)

Investment Income

Year Ended December 31,
----------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------ --------- --------- ----------

Fixed maturities:
Available for sale ................................. $642.2 $182.2 $ 87.9
Held to maturity ................................. -- 488.0 548.1
Equity securities available for sale ............... -- 5.3 10.4
Mortgage loans .................................... 112.1 119.9 137.4
Real estate ....................................... 20.0 15.2 15.8
Policy loans ....................................... 10.2 8.6 10.2
Other long-term investments ........................ 7.3 1.6 0.9
Short-term investments .............................. 51.2 27.1 8.5
------ ------ ------
Gross investment income ........................... 843.0 847.9 819.2
Less investment expenses ........................... (16.3) (17.0) (23.9)
Less investment income on participating individual
life insurance policies and annuity contracts ...... (24.5) (24.6) (25.1)
------ ------ ------
Investment income ................................. $802.2 $806.3 $770.2
====== ====== ======

Net Realized Investment Gains

Year Ended December 31,
----------------------------------
(Dollars in millions) 1996 1995 1994
- ---------------------------------------------- --------- --------- ----------

Gross realized investment gains:
Fixed maturities:
Available for sale ........................ $ 22.0 $ 14.2 $ 10.2
Held to maturity ........................... -- 0.1 0.2
Equity securities available for sale ...... -- 253.3 93.1
Mortgage loans, real estate and other ...... 18.2 19.4 13.5
------ ------ ------
Gross realized investment gains ............ 40.2 287.0 117.0
------ ------ ------
Gross realized investment losses:
Fixed maturities:
Available for sale ........................ (29.2) (12.8) (28.8)
Held to maturity ........................... -- (0.7) (6.8)
Equity securities available for sale ...... -- (18.7) (12.2)
Mortgage loans, real estate and other ...... (7.6) (29.7) (23.6)
------ ------ ------
Gross realized investment losses ......... (36.8) (61.9) (71.4)
------ ------ ------
Net realized investment gains ............ $ 3.4 $225.1 $ 45.6
====== ====== ======

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. INVESTMENTS (Continued)

Change in Unrealized Gains on Available For Sale Securities

Year Ended December 31,
--------------------------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------- ----------- ---------- -----------------

Fixed maturities available for sale .................. $ (265.9) $ 612.7 $ (60.8)
Equity securities available for sale .................. 3.4 (131.6) (86.0)
Unpaid claims adjustment .............................. 92.5 (261.2) --
Deferred taxes ....................................... 39.2 (56.4) 47.3
-------- ------- -------
Total change in unrealized gains on available for sale
securities, as included in stockholders' equity ...... $ (130.8) $ 163.5 $ (99.5)
======== ======= =======

Fixed Maturities

The amortized cost and fair values of fixed maturities available for sale
at December 31, 1996, were as follows:

Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------ ------------ ------------- ------------- ----------

U.S. Government .................. $ 57.0 $ 3.6 $ -- $ 60.6
States and municipalities ......... 550.2 14.9 (0.8) 564.3
Foreign governments ............... 379.9 32.6 (0.7) 411.8
Public utilities .................. 1,354.7 60.4 (4.2) 1,410.9
Corporate bonds .................. 4,299.7 197.5 (17.1) 4,480.1
Redeemable preferred stocks ...... 3.6 -- (0.7) 2.9
Mortgage-backed securities ...... 11.6 0.5 -- 12.1
-------- ------ ------ --------
Total ........................... $6,656.7 $309.5 $(23.5) $6,942.7
======== ====== ====== ========

The amortized cost and fair values of fixed maturities available for sale
at December 31, 1995, were as follows:

Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ------------------------------------ ------------ ------------- ------------- ----------

U.S. Government .................. $ 402.6 $10.3 $ -- $ 412.9
States and municipalities ......... 670.5 23.7 (0.7) 693.5
Foreign governments ............... 229.4 26.1 (0.5) 255.0
Public utilities .................. 1,617.8 117.6 (0.6) 1,734.8
Corporate bonds .................. 5,617.9 377.3 (2.7) 5,992.5
Redeemable preferred stocks ...... 27.8 1.5 (1.2) 28.1
Mortgage-backed securities ...... 17.5 1.1 -- 18.6
-------- ------ ----- --------
Total ........................... $8,583.5 $557.6 $(5.7) $9,135.4
======== ====== ===== ========

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. INVESTMENTS (Continued)

The amortized cost and fair value of fixed maturities available for sale at
December 31, 1996, by contractual maturity date, are shown below. Expected
maturities will differ from contractual maturities since certain borrowers have
the right to call or prepay obligations with or without call or prepayment
penalties.

Amortized Fair
(Dollars in millions) Cost Value
- ------------------------------------------------------------------- ------------ ----------

Due in one year or less .......................................... $ 279.4 $ 288.9
Due after one year through five years ........................... 2,181.8 2,292.6
Due after five years through ten years ........................... 3,551.3 3,674.9
Due after ten years ............................................. 632.6 674.2
-------- --------
6,645.1 6,930.6
Mortgage-backed securities (primarily due after 10 years) ...... 11.6 12.1
-------- --------
Total ......................................................... $6,656.7 $6,942.7
======== ========

During 1995, UNUM sold fixed maturities of two issuers classified as held
to maturity with an amortized cost of $4.0 million due to evidence of
significant deterioration of the issuers' creditworthiness, as evidenced by
bankruptcy filings. These sales resulted in a net realized loss of $1.2 million
in 1995. During 1994, UNUM sold fixed maturities of five issuers classified as
held to maturity with an amortized cost of $49.8 million due to evidence of
significant deterioration of the issuers' creditworthiness. These sales resulted
in a net realized loss of $3.0 million in 1994.

Equity Securities

The fair values, which also represent carrying amounts, and the cost of
equity securities available for sale were as follows at December 31, 1996:

Fair
(Dollars in millions) Cost Value
- ------------------------------------------------- -------- -------

Common stocks:
Industrial, miscellaneous and all other ...... $23.8 $31.3
====== ======

Gross unrealized investment gains on equity securities available for sale
totaled $7.5 million and $5.5 million, at December 31, 1996, and 1995,
respectively. There were no gross unrealized investment losses at December 31,
1996, and gross unrealized investment losses totaled $1.4 million, at December
31, 1995.

Mortgages

Effective January 1, 1995, UNUM adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and FAS No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," which defined the principles to measure and record an impaired
loan. When it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of a loan agreement, the loan is deemed
impaired. Once a loan is determined to be impaired, an allowance for probable
losses is established for the difference between the carrying amount of the loan
and its estimated value. The estimated value is based on either the present
value of expected future cash flows discounted using the loan's effective
interest rate, the loan's observable market price, or the fair value of the
collateral. The adoption of FAS 114 and FAS 118 did not have a material effect
on UNUM's results of operations or financial position.

At December 31, 1996, and 1995, impaired loans totaled $50.4 million and
$50.1 million, respectively. Included in the $50.4 million were $38.9 million of
loans which had a related allowance for probable losses of $5.7 million, and a
loan of $11.5 million which had no related allowance for probable losses.
Included in the $50.1 million of impaired loans at December 31, 1995, were $38.4
million of loans which had a related allowance for probable losses of $7.1
million, and a loan of $11.7 million which had no related allowance for probable
losses.

Mortgage loans that were restructured prior to the adoption of FAS 114
amounted to $54.8 million and $59.9 million at December 31, 1996, and 1995,
respectively. Troubled debt restructurings represent loans that are

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. INVESTMENTS (Continued)
refinanced with terms more favorable to the borrower. Interest lost on
restructured loans was not material for the years ended December 31, 1996, 1995
or 1994.

Real Estate and Other

Effective January 1, 1996, UNUM adopted FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. FAS 121 applies to both real estate held for investment and real
estate held for sale. The adoption of FAS 121 did not have a material effect on
UNUM's results of operations or financial position.

Real estate acquired in satisfaction of debt cumulatively amounts to $86.4
million at December 31, 1996. Real estate held for sale amounted to $9.4 million
at December 31, 1996, and $35.5 million at December 31, 1995.

Real estate with a depreciated cost of $7.7 million and no bonds or
mortages were non-income producing for the twelve months ended December 31,
1996. Interest lost on these investments was not material in 1996, 1995 or 1994.

UNUM was committed at December 31, 1996, to purchase fixed maturities and
other invested assets in the amount of $104.3 million.

NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE HELD
FOR SALE

Changes in the allowance for probable losses on invested assets and real estate
held for sale were as follows:

Balance at Balance
beginning at end
(Dollars in millions) of year Additions Deductions of year
- ------------------------------------ ------------- ------------ ------------- ---------

Year Ended December 31, 1996
Mortgage loans .................. $39.2 $ 1.0 $ (2.5) $37.7
Real estate held for sale ...... 19.1 (0.4) (3.9) 14.8
------ ----- ------ ------
Total ........................... $58.3 $ 0.6 $ (6.4) $52.5
====== ===== ====== ======
Year Ended December 31, 1995
Mortgage loans .................. $43.2 $ 9.2 $(13.2) $39.2
Real estate held for sale ...... 13.2 6.3 (0.4) 19.1
------ ----- ------ ------
Total ........................... $56.4 $15.5 $(13.6) $58.3
====== ===== ====== ======
Year Ended December 31, 1994
Fixed maturities held to maturity
and available for sale ......... $ 0.3 $ -- $ (0.3) $ --
Mortgage loans .................. 48.6 8.5 (13.9) 43.2
Real estate held for sale ...... 20.9 0.8 (8.5) 13.2
------ ----- ------ ------
Total ........................... $69.8 $ 9.3 $(22.7) $56.4
====== ===== ====== ======

Additions represent charges to net realized investment gains less
recoveries, and deductions represent reserves released upon disposal or
restructuring of the related asset.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 5. SALE OF TAX SHELTERED ANNUITY BUSINESS

On October 1, 1996, UNUM Life Insurance Company of America ("UNUM America")
and First UNUM Life Insurance Company ("First UNUM") closed the sale of their
respective group tax-sheltered annuity ("TSA") businesses to The Lincoln
National Life Insurance Company and Lincoln Life & Annuity Company of New York
("Lincoln"), both subsidiaries of Lincoln National Corporation. The sale
involved approximately 1,700 group contractholders and assets under management
of approximately $3.3 billion. The contracts have initially been reinsured on an
indemnity basis. Upon consent of the TSA contractholders and/or participants,
the contracts will be considered reinsured on an assumption basis, legally
releasing UNUM America and First UNUM from future contractual obligation to the
respective contractholders and/or participants.

To effect the sale of the TSA business, UNUM transferred into a trust
account held for the benefit of Lincoln approximately $2,690 million of assets.
The assets transferred consisted of approximately $1,826 million of short-
term investments, $589 million of fixed maturities, and $275 million of cash.
The amount of assets in the trust will increase or decrease in conjunction with
the on-going activity in participant accounts, and assets will be released from
the trust to Lincoln upon consents for assumption reinsurance. UNUM has recorded
a deposit asset in its Consolidated Balance Sheet representing the assets
remaining in the trust, which supports the TSA contracts of those
contractholders and/or participants that have not given consent for assumption
reinsurance. At December 31, 1996, the deposit asset related to the TSA
transaction was approximately $2,651 million.

The sale resulted in a deferred pretax gain of $80.8 million, which will be
recognized in income in proportion to contractholder and/or participant consents
for assumption reinsurance, the majority of which management believes will occur
during 1997. The purchase price (ceding commission) paid upon closing was
approximately $71 million, and the transaction generated statutory capital of
approximately $160 million. As of March 1, 1997, consent for assumption
reinsurance has been provided by TSA contractholders and/or participants owning
approximately 60% of assets under management.

Historical results of the TSA business included in UNUM's Consolidated
Statements of Income were as follows:

Year Ended December 31,
--------------------------------
(Dollars in millions, except per common share data) 1996 1995 1994
- ------------------------------------------------------ --------- --------- --------

Revenues .......................................... $206.7 $247.6 $238.1
Net income .......................................... $ 12.8 $ 31.1 $ 29.9
Net income per common share ........................ $ 0.18 $ 0.43 $ 0.40

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. REINSURANCE

UNUM, through its life insurance subsidiaries, is involved in both the
cession and assumption of reinsurance with other companies.

On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage
of the active life reserves of UNUM America's existing United States
non-cancellable individual disability ("ID") block of business. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM's announcement in late 1994 that it would no longer market the
non-cancellable form of ID coverage in the United States.

In fourth quarter 1996, UNUM recognized a pretax charge of $49.7 million,
which represents the present value of the anticipated minimum amount of fees to
be paid to Centre Re under the agreement. UNUM has the right, but no obligation,
to recapture the business after five years, with certain penalties.

The effect of reinsurance on premiums earned and written for the years
ended December 31, 1996, 1995 and 1994 was as follows:

Year Ended December 31,
--------------------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------- ----------- ----------- ----------
Premiums earned:
Direct .................. $2,973.9 $2,842.9 $2,663.1
Assumed ............... 252.9 241.5 170.7
Ceded .................. (106.4) (66.2) (112.5)
-------- -------- --------
Premiums earned ...... $3,120.4 $3,018.2 $2,721.3
======== ======== ========
Premiums written:
Direct .................. $3,008.1 $2,877.2 $2,702.7
Assumed ............... 289.3 250.4 170.9
Ceded .................. (131.0) (64.4) (112.6)
-------- -------- --------
Premiums written ...... $3,166.4 $3,063.2 $2,761.0
======== ======== ========

For the years ended December 31, 1996, 1995 and 1994, recoveries recognized
under reinsurance agreements reduced benefits to policyholders by $90.8 million,
$58.9 million and $53.3 million, respectively.

NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES

Business Restructuring

Charges of $7.2 million, $8.4 million and $14.4 million were recorded in
1996, 1995 and 1994, respectively. The charge in 1996 was related to the merger
of Commercial Life Insurance Company ("Commercial Life") into

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES (Continued)
UNUM America, and consisted of $2.8 million of severance costs for 120 employees
and $4.4 million of lease exit costs. The charges in 1995 and 1994 relate to the
acceleration of organizational changes within UNUM America and the decision to
discontinue the individual disability non-cancellable product. Partially
offsetting the charge recorded in 1995 was a $3.4 million curtailment gain,
related to workforce reductions in UNUM Corporation's noncontributory defined
benefit pension plan. As of December 31, 1996, the liability carried in the
Consolidated Balance Sheet for all three charges was $5.3 million.

Intangible Asset Write-offs and Future Loss Reserves

In connection with the merger of Commercial Life into UNUM America, the
sale of the tax-sheltered annuity business (see Note 5), as well as UNUM's
continued efforts to strengthen its focus on its core products, the company
initiated a review of certain products, which resulted in the recognition of
pretax charges totaling $39.4 million during 1996. These charges reduced income
before income taxes by $13.1 million in the Disability Insurance segment, $11.3
million in the Special Risk Insurance segment, and $15.0 million in the
Retirement Products segment. On an after-tax basis the charges reduced net
income by $26.3 million, or $0.36 per share for 1996.

NOTE 8. EMPLOYEE BENEFIT PLANS

Pension Plans

At December 31, 1996, UNUM had a noncontributory defined benefit pension
plan covering substantially all domestic employees, excluding employees of
Colonial Companies, Inc. ("Colonial Companies") and Duncanson & Holt, Inc.
("D&H"), who were covered under separate plans through 1996. The plan provided
benefits based on the employee's years of service and compensation during the
highest five consecutive years out of the last ten years of employment. Plan
assets, which were held in UNUM's separate accounts, consisted primarily of
group annuity contracts and 224,392 shares of UNUM Corporation common stock.
UNUM funds its pension plan in accordance with the requirements of the Employee
Retirement Income Security Act of 1974, as amended.

Effective January 1, 1997, UNUM replaced its existing pension plans with a
new noncontributory defined benefit pension plan ("Lifecycle Plan") covering
substantially all domestic employees, including employees of Colonial Companies
and D&H. Under the Lifecycle Plan, a new benefit formula is used, resulting in
benefits being earned more consistently over an employee's career, and is based
on the employee's age at retirement, years of service, and earnings during the
highest five of the last ten years of employment. Beginning in 1997, plan assets
were transferred from UNUM's separate accounts into a trust for the exclusive
benefit of plan participants.

The calculation of the December 31, 1996, benefit obligations shown below
is based on the Lifecycle Plan, reflecting the impacts of adding Colonial
Companies and D&H employees to the plan, merging Colonial Companies' previous
defined benefit plan, and changes in certain actuarial assumptions related to
the new benefit formula.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)

Net pension cost included the following components:

Year Ended December 31,
-----------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------ --------- ---------- ----------

Service cost--benefits earned during the year ...... $ 13.5 $ 7.7 $ 9.2
Interest cost on projected benefit obligation ...... 15.1 12.3 11.6
Actual return on plan assets ........................ (57.1) (42.5) 3.3
Net amortization and deferral ..................... 36.9 28.2 (16.5)
Curtailment gain .................................... -- (3.4) --
------ ------ ------
Net pension cost ................................. $ 8.4 $ 2.3 $ 7.6
====== ====== ======

The funded status of the plan and amounts recognized in UNUM's Consolidated
Balance Sheets, as determined by the plan's actuaries, were as follows:

December 31,
------------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------------------ ---------- -----------

Actuarial present value of benefit obligation:
Vested benefit obligation .................................... $ 166.9 $ 174.4
======= =======
Accumulated benefit obligation ................................. $ 189.3 $ 178.7
======= =======
Projected benefit obligation for service rendered to date ...... $(203.2) $(183.9)
Plan assets at fair value ....................................... 267.7 192.7
------- -------
Projected benefit obligation less than plan assets ............ 64.5 8.8
Unrecognized net gain .......................................... (54.7) (0.7)
Unrecognized prior service cost ................................. (28.4) (17.0)
Unamortized net obligation .................................... 1.8 2.1
------- -------
Accrued pension cost .......................................... $ (16.8) $ (6.8)
======= =======

The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.50% and 5.00%, respectively, at December 31,
1996, and 7.25% and 4.70%, respectively, at December 31, 1995. The expected
long-term rate of return on plan assets was 9.0% in 1996, 1995 and 1994. Prior
year service costs are being amortized on a straight-line basis over expected
employment periods for active employees.

UNUM also administers certain supplemental retirement plans for eligible
employees and officers and certain other pension plans. The cost of these plans
was not significant for the years ended December 31, 1996, 1995 and 1994.

Postretirement Health Care and Life Insurance Benefits

UNUM provides certain health care and life insurance benefits for retired
employees and covered dependents. Substantially all domestic employees of UNUM
may become eligible for these benefits if they meet minimum age and service
requirements, if they are eligible for retirement benefits and if they agree to
contribute a portion of the cost. UNUM has the right to modify or terminate
these benefits. The underlying plans are not currently funded. The cost of these
plans was $10.3 million, $10.0 million and $8.2 million for the years ended
December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, and 1995
the liability associated with these plans was $80.9 million and $72.4 million,
respectively.

Retirement Savings Plans

UNUM has several retirement savings and profit sharing plans for
substantially all full-time and part-time employees who work 1,000 hours a year
and have been employed for at least one year. Dependent upon which

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
plan the employee participates in, eligible employees may contribute primarily
up to 10% of their annual base salary, and UNUM matches a portion of each
employee's contribution up to 6% of the employee's compensation. Employees may
become 100% vested immediately upon becoming eligible to participate, or
incrementally over a five year period. Expense for these plans amounted to $8.4
million in 1996, 1995 and 1994, respectively.

Effective January 1, 1997, UNUM introduced a single retirement savings plan
for all domestic employees who meet the eligibility requirement of one year of
service, including all employees eligible under the former plans. Dependent upon
the employee's annual earnings, eligible employees may contribute up to 15% of
their annual compensation, including incentive payouts. UNUM will match 100% of
the employee's contribution up to 3% of the employee's compensation, plus 50% of
the employee's contribution on the next 2% of the employee's compensation, to a
maximum of 4%. Employees become 100% vested immediately upon becoming eligible
to participate.

NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS

Stock-Based Compensation Plans

Effective January 1, 1996, UNUM adopted FAS No. 123, "Accounting for
Stock-Based Compensation." FAS 123 established financial accounting and
reporting standards for stock-based employee compensation plans. The statement
defines a new method of accounting for employee stock compensation plans using a
fair value based method, under which compensation cost is measured and
recognized in results of operations. Alternatively, FAS 123 allows an entity to
retain the accounting for employee stock compensation plans defined under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." UNUM retained the accounting defined in APB No. 25, under which
no compensation expense is recognized for fixed stock option grants. As
required, UNUM will disclose the pro forma effects of stock-based compensation
using the fair value based method defined under FAS 123.

At December 31, 1996, UNUM had four stock-based compensation plans, which
are described below. Had compensation cost for options issued under UNUM's four
stock-based compensation plans been determined based on the fair value at the
grant dates consistent with the methods defined under FAS 123, UNUM's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:

(Dollars in millions, except per common share data) 1996 1995
- ------------------------------------------------------ --------- --------

Net income:
As reported ....................................... $238.0 $281.1
Pro forma .......................................... $231.9 $277.2
Earnings per common share:
As reported ....................................... $ 3.26 $ 3.87
Pro forma .......................................... $ 3.18 $ 3.81

The fair value of each option granted is estimated on the date of grant
using a modified Black-Scholes option-
pricing model with the following assumptions:

1996 1995
----------------- ----------------

Dividend yield ........................ 1.5% 1.9%
Expected stock price volatility ...... 23.1% to 24.8% 24.8% to 25.9%
Risk-free interest rate ............... 5.2% to 6.5% 5.4% to 7.9%
Expected option lives ............... 4 to 8 years 4 to 8 years

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)

Because some options vest over several years and additional awards
generally are made each year, the pro forma amounts above may not be
representative of the effects on net income for future years.

The 1987 Executive Stock Option Plan ("Option Plan") provided for granting
to officers and key employees options to purchase UNUM Corporation common stock
over ten years. Options were granted at the discretion of the Compensation
Committee of the Board of Directors ("the Committee") and had vesting schedules
of one to four years. The number of shares subject to options under the Option
Plan could not exceed 2.5 million. Grants are no longer made under this plan.

The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for
granting of options to officers, non-
employee directors of UNUM Corporation and key employees, to purchase UNUM
Corporation common stock over ten years. Options may be granted annually at the
discretion of the Committee and vest in one to five years.

The Incentive Plan also provides for granting to key officers restricted
stock awards whose vesting is contingent upon UNUM's achieving prescribed
financial performance objectives, with the exception of 5,800 shares granted in
1996, 20,200 shares granted in 1995 and 10,000 shares granted in 1994, which
will vest upon the grantee remaining in UNUM's employ for a specified period of
time. Plan participants are entitled to voting rights on their respective shares
at grant. The compensation cost related to restricted stock grants was not
material in 1996, 1995 and 1994.

The market value of the restricted shares issued under the Incentive Plan
has been recorded as deferred compensation and is included as a reduction of
stockholders' equity in the Consolidated Balance Sheets.

The number of shares subject to issuance under the Incentive Plan cannot
exceed 6.8 million, including both options and shares of restricted stock. At
December 31, 1996, 1995 and 1994, 692,518 shares, 1,680,235 shares and 2,511,145
shares, respectively, were available for grant under the Incentive Plan.

The 1996 Long-Term Stock Incentive Plan ("1996 Incentive Plan") provides
for granting of options to officers, non-employee directors of UNUM Corporation,
and key employees, to purchase UNUM Corporation common stock over ten years. The
1996 Incentive Plan also provides for granting to key officers restricted stock
awards whose vesting is contingent upon achieving prescribed financial
performance objectives or upon the grantee remaining in UNUM's employ for a
specified period of time. Options and restricted stock may be granted annually
at the discretion of the Committee. The number of shares subject to issuance
cannot exceed 3.5 million. At December 31, 1996, 3,495,000 shares were available
for grant under the 1996 Incentive Plan.

The 1998 Goals Stock Option Plan ("1998 Option Plan") provides for granting
to all eligible employees up to 150 options to purchase UNUM Corporation common
stock. The options will vest to the employee nine years from the date of grant.
Vesting may be accelerated to an earlier date if it is determined that UNUM has
attained the 1998 Goals. Grants of 102,500 shares and 1,105,350 shares were made
in 1996 and 1995, respectively. Additional grants will be made in 1997. The
number of shares subject to options under this plan cannot exceed 1.5 million.

For all of UNUM's stock based compensation plans, the exercise price of
each option is not less than 100% of the fair market value of UNUM's stock on
the date of grant.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)

A summary of the status of UNUM's four stock-based compensation plans as of
December 31, 1996, 1995 and 1994, and changes during the years then ended is
presented below:

Restricted
(Per share amounts are weighted-average) Options Stock
- -------------------------------------------------------- ------------ ------------

Outstanding at January 1, 1994 ........................ 3,402,954 146,425
1994 Activity:
Granted at $50.92 per share ........................... 884,375 --
Granted for restricted stock at $50.05 per share ...... -- 46,850
Lapse of restrictions on restricted stock ............ -- (80,800)
Exercised at $24.99 per share ........................ (282,729) --
Forfeited at $46.08 per share for options ............ (151,578) (2,525)
---------- --------
Outstanding at December 31, 1994 ..................... 3,853,022 109,950
---------- --------
1995 Activity
Granted at $41.06 per share ........................... 2,200,000 --
Granted for restricted stock at $42.99 per share ...... -- 70,950
Lapse of restrictions on restricted stock ............ -- (33,100)
Exercised at $25.75 per share ........................ (541,188) --
Forfeited at $46.85 per share for options ............ (314,200) (5,600)
---------- --------
Outstanding at December 31, 1995 ..................... 5,197,634 142,200
---------- --------
1996 Activity
Granted at $60.75 per share ........................... 1,080,690 --
Granted for restricted stock at $59.36 per share ...... -- 93,300
Exercised at $37.72 per share ........................ (637,261) --
Forfeited at $46.78 per share for options ............ (271,741) (32,600)
---------- --------
Outstanding at December 31, 1996 ..................... 5,369,322 202,900
========== ========

The weighted-average exercise price of options outstanding at December 31,
1996, 1995 and 1994, was $45.85, $41.81 and $40.32 per share, respectively.

The number and weighted-average exercise price of exercisable shares as of
December 31, 1996, 1995 and 1994 was 2,381,592 shares at $41.45 per share,
2,108,060 shares at $39.13 per share, and 1,975,219 shares at $32.54 per share,
respectively.

The weighted-average fair value of options granted during the years ended
December 31, 1996, and 1995 was $13.83 and $10.20, respectively.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued)

The following table summarizes information about stock options outstanding
at December 31, 1996:

Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ----------------------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ------------ -------------- ------------------- ------------------- -------------- ------------------

$10 to 30 487,086 3.49 $23.38 487,086 $23.38
31 to 48 2,414,512 7.35 39.43 970,009 38.78
49 to 72 2,467,724 7.81 56.57 924,497 53.76
---------- ---------- ------ ------- ---------- -------
$10 to 72 5,369,322 7.21 $45.85 2,381,592 $41.45
========== ==========

Between 1991 and 1994, certain officers were granted limited stock
appreciation rights ("LSARs") in conjunction with their options for those years.
If a change in control of UNUM Corporation, as defined in the plans, should
occur, the option holder can exercise the LSAR. An LSAR is meant to compensate
an officer if the associated options lose value due to a change in control by
allowing the officer to receive payment for the difference between the option
exercise price and the highest price paid per share in connection with the
change in control. As an underlying stock option is exercised, the LSARs are
automatically canceled. At December 31, 1996, 1995 and 1994, there were 398,300
LSARs, 480,825 LSARs and 590,275 LSARs outstanding, respectively.

Annual Incentive Plans

UNUM has several annual incentive plans for certain employees and executive
officers that provide additional compensation based on achievement of
predetermined annual corporate and affiliate financial and non-financial goals.
In 1996, 1995 and 1994, expense for these plans was $41.7 million, $19.9 million
and $7.5 million, respectively.

NOTE 10. INCOME TAXES

A reconciliation of income taxes computed by applying the federal income
tax rate to income before income taxes and the consolidated income tax expense
charged to operations follows:

Year Ended December 31,
-------------------------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------------------------- ---------- ----------------- ----------

Tax at federal statutory rate of 35% ...... $119.6 $ 133.7 $ 69.5
Tax-exempt income ........................ (18.8) (30.0) (32.0)
Prior years' taxes ........................ (1.2) (6.6) --
State income tax ........................... 2.5 3.8 2.2
Realized investment gains .................. -- (5.0) (1.3)
Other .................................... 1.5 4.9 5.5
------ ---- ------
Income taxes .............................. $103.6 $ 100.8 $ 43.9
====== ==== ======

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. INCOME TAXES (Continued)

Deferred income tax liabilities and assets consist of the following:

December 31,
--------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------ --------- --------
Deferred tax liabilities:
Deferred policy acquisition costs .................. $210.7 $321.6
Policy reserve adjustments ........................ 106.5 --
Net unrealized gains .............................. 101.7 174.0
Value of business acquired ........................ 19.8 17.7
Invested assets .................................... 9.6 10.9
Other ............................................. 11.0 16.0
------- -------
Gross deferred tax liabilities .................. 459.3 540.2
------- -------
Deferred tax assets:
Alternative minimum tax credit carryforwards ...... 1.1 29.0
Policy reserve adjustments ........................ -- 65.9
Net realized losses .............................. 17.4 25.1
Postretirement benefits ........................... 26.7 22.1
Deferred gains .................................... 28.5 --
Accrued liabilities .............................. 27.0 --
Other ............................................. 26.8 12.1
------- -------
Gross deferred tax assets ........................ 127.5 154.2
Less valuation allowance ........................... 10.0 6.0
------- -------
Net deferred tax assets ........................... 117.5 148.2
------- -------
Net deferred tax liability ........................ $341.8 $392.0
======= =======

Deferred income taxes relating to cumulative net unrealized gains on
available for sale fixed maturity and equity securities were $101.7 million,
$174.0 million and $27.1 million at December 31, 1996, 1995 and 1994,
respectively.

Prior to the Tax Reform Act of 1984 ("1984 Act"), half the excess of the
tax basis gain from operations of a life insurance company over its taxable
investment income was currently taxable. The other half was set aside in a
Policyholders Surplus Account, together with certain special life insurance
company deductions. The cumulative amount in the Policyholders Surplus Account
as of December 31, 1983, was frozen by the 1984 Act and amounted to $31.8
million at December 31, 1996. Any direct or indirect distributions from this
account would be taxed at current tax rates; however, no provision has been made
for related taxes. If the amount set aside in this account were taxed at the
current rate at December 31, 1996, for all life insurance subsidiaries, the tax
would have amounted to $11.1 million.

UNUM's Consolidated Statements of Income for 1996, 1995 and 1994, included
the following amounts of foreign income and related income tax expense:

Year Ended December 31,
------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------ -------- --------- -------
Foreign income ............ $27.4 $ (1.2) $24.2
====== ====== ======
Income tax expense (credit):
Current .................. $10.4 $ 1.4 $ 0.7
Deferred .................. 1.8 (0.2) 9.7
------ ------ ------
Total ..................... $12.2 $ 1.2 $10.4
====== ====== ======

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. INCOME TAXES (Continued)

UNUM subsidiaries had operating loss carryforwards totaling $3.6 million as
of December 31, 1996. The operating loss carryforward will expire, if not
utilized, in 1999 through 2002.

NOTE 11. NOTES PAYABLE

Notes payable consisted of the following at December 31, 1996, and 1995:

December 31,
--------------------
(Dollars in millions) 1996 1995
- --------------------------------------------------------------- --------- --------

Short-term debt:
Commercial paper, with weighted average interest rates of
5.5% in 1996 and 5.9% in 1995 .............................. $60.6 $82.4
Other notes payable, with weighted average interest rates of
0.7% in 1996 and 1.0% in 1995 .............................. 8.6 29.1
Medium-term notes payable, due 1997, with interest rates
ranging from 6.0% to 6.7% ................................. 48.5 15.0
------ ------
Total short-term debt .................................... 117.7 126.5
------ ------
Long-term debt:
Medium-term notes payable, due 1998 to 2024, with interest
rates ranging from 5.1% to 7.5% ........................... 242.1 290.4
Monthly income debt securities, due 2025, with interest rate
of 8.8%, $172.5 million issued net of unamortized offering
costs of $5.4 million in 1996 and $5.6 million in 1995 ...... 167.1 166.9
------ ------
Total long-term debt .................................... 409.2 457.3
------ ------
Total notes payable ....................................... $526.9 $583.8
====== ======

At December 31, 1996, UNUM Corporation had a $500 million committed
revolving credit facility that expires on October 1, 2001. UNUM's commercial
paper program is supported by the revolving credit facility and is available for
general liquidity needs, capital expansion, acquisitions or stock repurchase.
The committed revolving credit facility contains certain covenants which, among
other provisions, require maintenance of certain levels of stockholders' equity
and limits on debt levels.

Aggregate maturities of notes payable are as follows: 1997-$117.7 million;
1998-$68.0 million; 1999-$21.5 million; 2000-$60.0 million; thereafter-$259.7
million.

NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS

Effective October 23, 1996, UNUM's Board of Directors approved an expansion
of the Company's stock repurchase program to 6.0 million shares by authorizing
an additional 3.7 million shares. At December 31, 1996, approximately 4.5
million shares of common stock remained authorized for stock repurchase. During
1996, UNUM acquired approximately 1.9 million shares of its common stock in the
open market at an aggregate cost of $119.1 million. UNUM did not acquire any
shares in the open market in 1995. During 1994, UNUM repurchased 3.9 million
shares in the open market at an aggregate cost of $183.3 million.

Under UNUM's stock-based compensation plans and the plans of Colonial
Companies (see Note 9), 730,561 shares, 612,138 shares and 329,579 shares were
issued in 1996, 1995 and 1994, respectively.

UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan,
each Right, under certain specific circumstances, entitles the holder to
purchase one one-hundredth of a share of Series A Junior Participating

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS (Continued)
Preferred Stock at a purchase price of $150. The Rights become exercisable at a
specified time after (1) a person or group acquires 10% or more of UNUM
Corporation common stock or (2) a tender or exchange offer for 10% or more of
UNUM Corporation common stock. The Rights expire at the close of business on
March 13, 2002, unless earlier redeemed by the Company under certain
circumstances at a price of $0.01 per Right.

NOTE 13. DIVIDEND RESTRICTIONS

UNUM is subject to various state insurance regulatory restrictions that
limit the maximum amount of dividends available from its United States domiciled
insurance subsidiaries without prior approval. The amount available under
current law for payment of dividends during 1997 to UNUM Corporation from all
U.S. domiciled insurance subsidiaries without state insurance regulatory
approval is approximately $153 million. Dividends in excess of this amount may
only be paid with state insurance regulatory approval. The aggregate statutory
capital and surplus of the United States domiciled insurance subsidiaries of
UNUM Corporation was approximately $1,205 million and $1,149 million, at
December 31, 1996, and 1995, respectively. The aggregate statutory net operating
income, which excludes realized investment gains net of tax, of UNUM
Corporation's United States domiciled insurance subsidiaries was approximately
$167 million, $143 million and $33 million for 1996, 1995 and 1994,
respectively. State insurance regulatory authorities prescribe statutory
accounting practices that differ in certain respects from generally accepted
accounting principles. The significant differences relate to deferred
acquisition costs, deferred income taxes, non-admitted asset balances, required
investment risk reserves and reserve calculation assumptions.

UNUM Corporation also has the ability to draw a dividend from its United
Kingdom based affiliate, UNUM Limited, subject to certain U.S. tax consequences.

NOTE 14. LITIGATION

NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair values are based on quoted market prices, when available. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. These valuation techniques
require management to develop a significant number of assumptions, including
discount rates and estimates of future cash flow. Derived fair value estimates
cannot be substantiated by comparison to independent markets or to disclosures
by other companies with similar financial instruments. These fair value
disclosures do not purport to be the amount that could be realized in immediate
settlement of the financial instrument.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

The following table summarizes the carrying amounts and fair values of
UNUM's financial instruments at December 31, 1996, and 1995:

1996 1995
--------------------------- ------------------------
Carrying Fair Carrying Fair
(Dollars in millions) Amount Value Amount Value
- ----------------------------------------- ----------- ----------- ----------- ----------

Financial assets:
Fixed maturities available for sale ... $6,942.7 $6,942.7 $9,135.4 $9,135.4
Equity securities available for sale .. 31.3 31.3 25.2 25.2
Mortgage loans ........................ 1,132.1 1,213.4 1,163.4 1,274.9
Policy loans ........................ 232.9 232.9 219.2 219.2
Short-term investments ............... 123.4 123.4 896.7 896.7
Cash ................................. 77.0 77.0 42.5 42.5
Accrued investment income ............ 166.1 166.1 208.5 208.5
Deposit assets ..................... 2,846.6 2,846.6 -- --
Financial liabilities:
Other policyholder funds:
Investment-type insurance
contracts:
With defined maturities ............ $ 191.0 $ 216.0 $ 400.0 $ 440.0
With no defined maturities ......... 2,901.0 2,839.0 3,031.0 2,967.0
Individual annuities and
supplementary contracts not
involving life contingencies ........ 76.2 76.2 81.4 81.4
Notes payable ........................ 526.9 542.5 583.8 610.8

The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:

Fixed Maturities Available for Sale: Fair values for fixed maturities are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using values obtained from independent
pricing services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate applicable
to the yield, credit quality and maturity of the investments.

Equity Securities Available for Sale: Fair values for equity securities
available for sale are based on quoted market prices and are reported in the
Consolidated Balance Sheets at these values.

Mortgage Loans: Fair values for mortgage loans are estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar mortgage loans to borrowers with similar credit ratings and maturities.
Mortgage loans with similar characteristics are aggregated for purposes of the
calculations.

Policy Loans, Short-term Investments, Cash, Accrued Investment Income and
Deposit Assets: Fair values for these instruments approximate the carrying
amounts reported in the Consolidated Balance Sheets.

Investment-type Insurance Contracts: Fair values for liabilities under
investment-type insurance contracts with defined maturities are estimated using
discounted cash flow calculations based on interest rates that would be offered
currently for similar contracts with maturities consistent with those remaining
for the contracts being valued. Fair values for liabilities under
investment-type insurance contracts with no defined maturities are the amounts
payable on demand after surrender charges at the balance sheet date.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

The estimated fair values of liabilities under all insurance contracts
(investment-type and other than investment-type) are taken into consideration
in UNUM's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.

Individual Annuities and Supplementary Contracts not Involving Life
Contingencies: Fair values approximate the carrying amounts reported in other
policyholder funds in the Consolidated Balance Sheets.

Notes Payable: Fair values of short-term borrowings approximate the carrying
amount. Fair values of long-term notes are estimated using discounted cash flow
analyses based on UNUM's current incremental borrowing rates for similar types
of borrowing arrangements.

NOTE 16. SEGMENT INFORMATION

UNUM's markets for its insurance products are the United States, its
principal market, Canada, the United Kingdom and the Pacific Rim. Through its
affiliates, UNUM is the leading provider of group long term disability
insurance, its principal product, in the United States and the United Kingdom.
Products are marketed through sales personnel, independent contractors and
brokers, and specialty agents. UNUM targets sales of its disability products to
executive, administrative and management personnel, and other professionals such
as doctors, attorneys, accountants and engineers.

To more clearly reflect UNUM's management of its businesses and to more
appropriately group its product portfolios, UNUM began reporting its operations,
effective January 1, 1995, principally in four business segments: Disability
Insurance, Special Risk Insurance, Colonial Products and Retirement Products.
For comparative purposes, 1994 information was previously restated to reflect
reporting in these segments.

The Disability Insurance segment includes disability products offered in
North America, the United Kingdom and Japan including: group long term
disability, group short term disability, individual disability, Association
Group disability, disability reinsurance operations and long term care
insurance. The Special Risk Insurance segment includes group life, special risk
accident insurance, non-disability reinsurance operations, reinsurance
underwriting management operations and other special risk insurance products.
The Colonial Products segment includes Colonial Companies, Inc. and
subsidiaries, which offer payroll-deducted, voluntary employee benefits
including accident and sickness, cancer and life insurance products to employees
at their worksites. The Retirement Products segment includes tax sheltered
annuities, guaranteed investment contracts, deposit administration accounts,
401(k) plans, individual life and group medical products, all of which are no
longer actively marketed by UNUM. Corporate includes transactions that are
generally non-insurance related.

Investment income and net realized investment gains are allocated to the
segments based on designation of ownership of assets identified to the products
in each segment. Operating expenses are allocated to the segments based on
direct association with a product whenever possible. If the expense cannot be
readily associated with a particular product, the costs are allocated based on
ratios of the relative time spent, extent of usage or varying volume of work
performed for each segment.

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT INFORMATION (Continued)

Summarized financial information for the four business segments and
Corporate is as follows:

Year Ended December 31,
---------------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------ ----------- ----------- -----------
Revenues:
Disability Insurance ............ $2,386.2 $2,472.8 $2,116.5
Special Risk Insurance ......... 811.9 750.7 647.8
Colonial Products ............... 545.5 527.3 473.9
Retirement Products ............ 283.0 357.8 369.4
Corporate ........................ 16.1 14.3 5.0
-------- -------- --------
Total revenues .................. $4,042.7 $4,122.9 $3,612.6
======== ======== ========
Income (loss) before income taxes:
Disability Insurance ............ $ 215.3 $ 217.0 $ 56.2
Special Risk Insurance ......... 79.2 60.3 65.9
Colonial Products ............... 92.4 87.7 62.7
Retirement Products ............ 1.4 45.5 42.0
Corporate ........................ (46.7) (28.6) (28.2)
-------- -------- --------
Income before income taxes ...... 341.6 381.9 198.6
Income taxes ..................... 103.6 100.8 43.9
-------- -------- --------
Net income ..................... $ 238.0 $ 281.1 $ 154.7
======== ======== ========

December 31,
-----------------------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------------------------------- ------------ ------------ -----------

Identifiable Assets:
Disability Insurance ........................... $7,846.8 $7,280.3 $6,131.9
Special Risk Insurance ........................ 1,297.1 1,056.5 846.8
Colonial Products .............................. 1,094.1 996.5 846.2
Retirement Products ........................... 4,478.8 4,717.4 4,504.0
Corporate ....................................... 396.7 372.9 451.3
Individual Participating Life and Annuity ...... 354.0 364.2 347.0
--------- --------- ---------
Total assets ................................. $15,467.5 $14,787.8 $13,127.2
========= ========= =========

UNUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of unaudited quarterly results of operations for
1996 and 1995:

1996
--------------------------------------------
(Dollars in millions, except per common share data) 4th 3rd 2nd 1st
- ------------------------------------------------------ --------- --------- --------- --------

Premiums .......................................... $793.8 $796.2 $762.3 $768.1
Investment income ................................. 172.6 207.7 212.2 209.7
Net realized investment gains (losses) ............ 1.4 1.6 (3.1) 3.5
Benefits to policyholders ........................... 573.1 605.2 563.5 582.9
Net income .......................................... 48.0 44.0 73.9 72.1
Net income per common share ........................ 0.66 0.60 1.01 0.99

1995
--------------------------------------------
4th 3rd 2nd 1st
--------- --------- --------- --------

Premiums ........................... $817.0 $738.0 $729.2 $734.0
Investment income .................. 207.3 207.8 199.3 191.9
Net realized investment gains ...... 3.2 2.9 208.1 10.9
Benefits to policyholders ......... 634.8 568.7 717.7 571.8
Net income ........................ 62.1 66.7 88.9 63.4
Net income per common share ......... 0.85 0.92 1.22 0.87

NOTE 18. SUBSEQUENT EVENTS

On March 14, 1997, UNUM's Board of Directors authorized a two-for-one
common stock split. The split is subject to shareholder approval of a proposal
to increase the number of authorized shares of common stock to 240 million from
120 million. UNUM's shareholders will vote on the proposal to increase the
number of authorized shares at the Annual Meeting of Shareholders on May 9,
1997. Under the proposed split, on or about June 2, 1997, one additional share
would be distributed for each share of common stock already issued, to holders
of record on May 19, 1997. The financial information contained in this report
has not been adjusted to reflect the impact of the proposed common stock split.

On March 14, 1997, the Board of Directors also announced its intent to
increase the next regularly scheduled cash dividend, payable in May, to 28.5
cents from 27.5 cents per common share on a pre-split basis.

Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

No disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosure have been reported on a Form 8-K
during the past two years prior to the date of the most recent financial
statements.

PART III

Item 10--Directors and Executive Officers of the Registrant

A. Directors of the Registrant

The information under the caption "Election of Directors" included in
UNUM's proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is
incorporated by reference.

B. Executive Officers of the Registrant

The executive officers of UNUM are as follows:

Age (as of An Officer
Name March 25, 1997) Position held with UNUM Since
- --------------------- ------------------ ------------------------------ ------------

James F. Orr III 54 Chairman, President and 1986
Chief Executive Officer
Thomas G. Brown 52 Executive Vice President 1992
Stephen B. Center 59 Executive Vice President 1972
Robert W. Crispin 50 Executive Vice President 1995
and Chief Financial Officer
Peter J. Moynihan 53 Senior Vice President 1979
Kevin P. O'Connell 51 Executive Vice President 1987
Elaine D. Rosen* 44 President, UNUM America 1983
Robert E. Staton* 50 President, Colonial 1993

- --------

*Denotes an officer of a subsidiary who is not an officer of the Corporation but
who is considered an "executive officer" under regulations of the Securities and
Exchange Commission.

The officers are elected annually and hold office until their respective
successors have been chosen and qualified, or until death, resignation or
removal. The UNUM Board may also appoint or delegate the appointment of
officers, assistant officers and agents as it may deem necessary for such
periods as the By-Laws, the UNUM Board, or the delegatee may prescribe.

Mr. Orr was elected Chairman of the Board of UNUM in February 1988. In
addition, he has served as President and Chief Executive Officer since September
1987. He joined UNUM in 1986.

Mr. Brown was elected Executive Vice President of UNUM in January 1995. In
addition, he continues to serve as Chairman of the Board and Chief Executive
Officer of Duncanson & Holt, Inc. ("D&H"), a post he has held since 1987.
Additionally, he served as President of D&H from 1987 until May 1996. D&H became
a wholly-owned subsidiary of UNUM in July 1992.

Mr. Center was elected Executive Vice President of UNUM in September 1992.
Additionally, he served as President of UNUM America from September 1992 until
December 1996. Previously, he served as Group Executive Vice President of UNUM
America from May 1990 to August 1992. He joined UNUM America in 1963.

Mr. Crispin was elected Executive Vice President of UNUM in January 1995
and additionally as Chief Financial Officer in August 1995. Prior to joining
UNUM, Mr. Crispin served as Vice Chairman and Chief Investment Officer of The
Travelers Insurance Companies from July 1991 to January 1995.

Mr. Moynihan was elected Senior Vice President of UNUM in September 1993
and Senior Vice President of UNUM America in October 1987. He joined UNUM
America in 1973.

Mr. O'Connell was elected Executive Vice President of UNUM in February 1996
and Executive Vice President of UNUM America in May 1995. Previously, he served
as Senior Vice President of UNUM America from November 1988 to May 1995. He
joined UNUM America in 1968.

Ms. Rosen was elected President of UNUM America in January 1997.
Previously, she served as Executive Vice President of UNUM America from May 1995
to December 1996 and as Senior Vice President of UNUM America from November 1988
to May 1995. She joined UNUM America in 1975.

Mr. Staton was elected President of Colonial in January 1997. Previously he
served as Chairman of Colonial from December 1993 to December 1996, and
additionally as Chief Executive Officer from July 1995 to December 1996.
Previously, he served as Senior Vice President from February 1990 to December
1993; General Counsel from August 1985 to November 1993; and Corporate Secretary
from February 1992 to August 1993. Colonial's parent company merged with UNUM in
March 1993.

Item 11--Executive Compensation

The information under the captions "Compensation of Directors", "Board
Compensation Report on Executive Compensation", and "Executive Compensation"
included in UNUM's proxy statement for the Annual Meeting of Shareholders on May
9, 1997, is incorporated by reference.

Item 12--Security Ownership of Certain Beneficial Owners and Management

The information under the caption "Security Ownership" included in UNUM's
proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is
incorporated by reference.

Item 13--Certain Relationships and Related Transactions

The information under the captions "Executive Compensation" and "Other
Agreements and Transactions" included in UNUM's proxy statement for the Annual
Meeting of Shareholders on May 9, 1997, is incorporated by reference.

PART IV

Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Index of documents filed as part of this report:

1. The following Consolidated Financial Statements of UNUM Corporation and
subsidiaries are included in Item 8.

Page
------
Report of Independent Accountants ..................... 34
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 ..................... 35
Consolidated Balance Sheets as of December 31, 1996,
and 1995 ............................................. 36
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 ......... 38
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 ............... 39
Notes to Consolidated Financial Statements ............ 40

2. Financial Statement Schedules

II Condensed Financial Information of UNUM Corporation
(Registrant) 70

III Supplementary Insurance Information 74

IV Reinsurance 75

3. Exhibits. See Index to Exhibits on page 76 of this report.

(b) Reports on Form 8-K:

No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1996.

Schedules and exhibits required by Article 7 of Regulation S-X other than
those listed are omitted because they are not required, are not applicable, or
equivalent information has been included in the financial statements, and notes
thereto, or elsewhere herein.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Portland, State of Maine, on March 25, 1997.

UNUM Corporation

By /s/ JAMES F. ORR III
-------------------------------------
James F. Orr III (Chairman, President
and Chief Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

Name Title Date
- ----------------------------------------- ----------------------------- ----------------

/s/ JAMES F. ORR III Chairman, President and
- ------------------------------------- Chief Executive Officer March 25, 1997
(James F. Orr III)

/s/ ROBERT W. CRISPIN Executive Vice President
- ------------------------------------- and Chief Financial Officer March 25, 1997
(Robert W. Crispin)

/s/ STEPHEN D. ROBERTS Vice President and
- ------------------------------------- Corporate Controller March 25, 1997
(Stephen D. Roberts)

* Director March 25, 1997
- -------------------------------------
(Gayle O. Averyt)

* Director March 25, 1997
- -------------------------------------
(Robert E. Dillon, Jr.)

* Director March 25, 1997
- -------------------------------------
(Gwain H. Gillespie)

* Director March 25, 1997
- -------------------------------------
(Ronald E. Goldsberry)

* Director March 25, 1997
- -------------------------------------
(Donald W. Harward)

* Director March 25, 1997
- -------------------------------------
(George J. Mitchell)

* Director March 25, 1997
- -------------------------------------
(Cynthia A. Montgomery)

* Director March 25, 1997
- -------------------------------------
(James L. Moody, Jr.)

* Director March 25, 1997
- -------------------------------------
(Lawrence R. Pugh)

* Director March 25, 1997
- -------------------------------------
(Lois Dickson Rice)

* Director March 25, 1997
- -------------------------------------
(John W. Rowe)

*/s/ JOHN-PAUL DEROSA
- -------------------------------------
(John-Paul DeRosa, as Attorney-in-fact
for each of the persons indicated)
(Assistant Secretary)

UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF INCOME

Year Ended December 31,
--------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------------ --------- --------- --------

Revenues
Dividends from subsidiaries* ........................... $259.7 $ 23.6 $102.0
Investment income ....................................... 0.3 0.4 0.1
Interest income on loans to subsidiaries* ............... 2.5 5.5 --
Fees and other income .................................... -- 0.3 0.8
------- ------ -------
Total revenues .......................................... 262.5 29.8 102.9
Expenses
Operating expenses ....................................... 4.7 2.3 8.7
Interest expense ....................................... 40.7 37.2 18.6
Interest expense on loans from subsidiaries* ............ 0.1 3.9 2.3
------- ------ -------
Total expenses .......................................... 45.5 43.4 29.6
------- ------ -------
Income (loss) before income taxes ........................ 217.0 (13.6) 73.3
Income tax benefit ....................................... 15.1 13.1 6.2
------- ------ -------
Income (loss) before equity in undistributed net
income of subsidiaries .................................... 232.1 (0.5) 79.5
Equity in undistributed net income of subsidiaries* ...... 5.9 281.6 75.2
------- ------ -------
Net income ................................................ $238.0 $281.1 $154.7
======= ====== =======

- --------

*Eliminated in consolidation

See note to condensed financial statements.

UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

December 31,
------------------------
(Dollars in millions) 1996 1995
- ------------------------------------------------------------ ----------- ----------

Assets
Investments
Investment in subsidiaries* ........................... $2,749.8 $2,836.1
Short-term investments ................................. 0.6 0.6
-------- --------
Total investments .................................... 2,750.4 2,836.7
Amounts receivable from subsidiaries, net* ............... 15.0 6.6
Notes receivable from subsidiary* ........................ 32.5 50.0
Property and equipment, net .............................. 22.3 18.1
-------- --------
Total assets .......................................... $2,820.2 $2,911.4
======== ========
Liabilities and Stockholders' Equity
Liabilities
Notes payable .......................................... $ 526.9 $ 583.8
Notes payable to subsidiary* ........................... -- 10.0
Income taxes .......................................... 16.5 4.8
Other liabilities ....................................... 13.7 9.9
-------- --------
Total liabilities .................................... 557.1 608.5
Stockholders' Equity
Preferred stock, par value $0.10 per share, authorized
10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000 shares, issued 99,987,958 shares ............ 10.0 10.0
Additional paid-in capital .............................. 1,077.2 1,065.7
Unrealized gains on available for sale securities of
subsidiaries, net ....................................... 108.5 235.6
Unrealized foreign currency translation adjustment ...... (1.2) (23.1)
Retained earnings (including undistributed earnings of
subsidiaries of $1,401.8 million and $1,395.9 million in
1996 and 1995, respectively) .............................. 1,871.4 1,713.2
-------- --------
3,065.9 3,001.4
Less:
Treasury stock, at cost (1996--28,165,594 shares;
1995--26,980,331 shares) ................................. 792.2 691.6
Restricted stock deferred compensation .................. 10.6 6.9
-------- --------
Total stockholders' equity .............................. 2,263.1 2,302.9
-------- --------
Total liabilities and stockholders' equity ............ $2,820.2 $2,911.4
======== ========

- --------

*Eliminated in consolidation

See note to condensed financial statements.

UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF CASH FLOWS

Year Ended December 31,
-----------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------------- ---------- ---------- ---------

Operating activities:
Net income ................................................ $ 238.0 $ 281.1 $ 154.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in income tax liability ........................ 11.7 2.1 0.4
(Increase) decrease in amounts due to/from
subsidiaries* ............................................. (8.4) 11.8 (6.0)
Other ................................................... 16.1 (3.1) 11.1
Equity in undistributed net income of subsidiaries* ...... (5.9) (281.6) (75.2)
------- ------- -------
Net cash provided by operating activities ............... 251.5 10.3 85.0
------- ------- -------
Investing activities:
Investment in subsidiaries, net* ........................ (13.1) (1.1) (30.6)
Issuance of notes receivable from subsidiaries* ......... (32.5) (100.0) --
Repayment of notes receivable from subsidiaries* ......... 50.0 50.0 --
Net (increase) decrease in short-term investments ......... -- (0.1) 3.9
Net additions to property and equipment .................. (8.6) (5.4) (3.3)
------- ------- -------
Net cash used in investing activities .................. (4.2) (56.6) (30.0)
------- ------- -------
Financing activities:
Dividends to stockholders ................................. (79.8) (75.1) (68.3)
Treasury stock acquired ................................. (119.1) -- (183.3)
Proceeds from notes payable .............................. -- 291.5 54.7
Repayment of notes payable .............................. (15.0) -- --
Net increase (decrease) in short-term debt ............... (42.3) (135.1) 136.7
Repayment of notes payable to subsidiaries* ............... (10.0) (50.0) --
Other ................................................... 18.9 13.0 5.9
------- ------- -------
Net cash provided by (used in) financing
activities ............................................. (247.3) 44.3 (54.3)
------- ------- -------
Net increase (decrease) in cash ........................... -- (2.0) 0.7
Cash at beginning of year ................................. -- 2.0 1.3
------- ------- -------
Cash at end of year ....................................... $ -- $ -- $ 2.0
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Income taxes ............................................. $ (25.8) $ (15.1) $ (6.6)
Interest ................................................ $ 40.8 $ 36.2 $ 18.1
Interest to subsidiaries* .............................. $ 0.2 $ 4.0 $ 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.

UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION

(Dollars in millions)

(1)(2)
Future policy
Deferred benefits, and
policy unpaid claims (3)
acquisition and claim Premium
Segment costs expenses revenue
- ------------------------------ -------------- --------------- -----------
Year Ended December 31, 1996
Disability Insurance ...... $ 443.1 $5,526.0 $1,917.7
Special Risk Insurance ...... 125.6 615.0 755.4
Colonial Products ......... 274.6 410.8 498.2
Retirement Products ......... 0.9 618.6 65.8
Corporate .................. -- -- --
-------- ------- ---------
Total ..................... $ 844.2 $7,170.4 $3,237.1
======== ======= =========
Year Ended December 31, 1995
Disability Insurance ...... $ 758.3 $5,130.6 $1,879.9
Special Risk Insurance ...... 99.8 476.5 702.3
Colonial Products ......... 250.5 372.0 475.1
Retirement Products ......... 33.7 596.0 34.1
Corporate .................. -- -- 0.1
-------- ------- ---------
Total ..................... $1,142.3 $6,575.1 $3,091.5
======== ======= =========
Year Ended December 31, 1994
Disability Insurance ...... $ 695.6 $4,175.9 $1,716.2
Special Risk Insurance ...... 84.1 357.7 607.1
Colonial Products ......... 224.8 330.5 441.3
Retirement Products ......... 30.7 581.9 31.4
Corporate .................. -- (0.5) 0.8
-------- ------- ---------
Total ..................... $1,035.2 $5,445.5 $2,796.8
======== ======= =========

Amortization
(4)(5) Benefits to of deferred (5)
Net policyholders policy Other (6)
investment and interest acquisition operating Premiums
Segment income credited costs expenses written
- ------------------------------ ---------- ------------ ----------- --------- --------

Year Ended December 31, 1996
Disability Insurance ...... $ 468.5 $1,514.9 $99.0 $557.0 $1,893.0
Special Risk Insurance ...... 56.5 506.5 42.4 183.8 220.1
Colonial Products ......... 47.3 246.8 72.5 133.8 446.5
Retirement Products ......... 217.2 257.1 -- 24.5 15.0
Corporate .................. 16.1 -- -- 62.8 --
-------- --------- ------ ------- ---------
Total ..................... $ 805.6 $2,525.3 $213.9 $961.9 $2,574.6
======== ========= ====== ======= =========
Year Ended December 31, 1995
Disability Insurance ...... $ 592.9 $1,711.2 $90.6 $454.0 $1,853.2
Special Risk Insurance ...... 48.4 492.3 35.5 162.6 223.6
Colonial Products ......... 52.2 241.6 66.7 131.3 417.5
Retirement Products ......... 323.7 275.3 0.8 36.2 23.3
Corporate .................. 14.2 -- -- 42.9 --
-------- --------- ------ ------- ---------
Total ..................... $1,031.4 $2,720.4 $193.6 $827.0 $2,517.6
======== ========= ====== ======= =========
Year Ended December 31, 1994
Disability Insurance ...... $ 400.3 $1,572.1 $70.7 $417.5 $1,705.5
Special Risk Insurance ...... 40.7 394.4 19.2 168.3 156.8
Colonial Products ......... 32.6 226.1 60.6 124.5 388.1
Retirement Products ......... 338.0 289.1 2.3 36.0 21.6
Corporate .................. 4.2 -- -- 33.2 --
-------- --------- ------ ------- ---------
Total ..................... $ 815.8 $2,481.7 $152.8 $779.5 $2,272.0
======== ========= ====== ======= =========

(1) Excludes other policyholder funds, as follows:

December 31,
--------------------------------------
Segment 1996 1995 1994
- ------------------------------- ----------- ----------- ----------
Disability Insurance ......... $ 5.9 $ 3.1 $ 2.1
Special Risk Insurance ...... 12.7 14.6 8.4
Colonial Products ............ 156.6 128.0 100.1
Retirement Products ......... 3,358.4 3,694.6 3,948.2
-------- -------- --------
Total ........................ $3,533.6 $3,840.3 $4,058.8
======== ======== ========

(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 1994 amounts have been reclassified for comparative purposes.

UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE

Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
(Dollars in millions) Amount companies companies Amount to net
- ------------------------------------------------ ------------- ------------ ------------- ------------- ------------

Year Ended December 31, 1996
Life insurance in force ..................... $199,019.2 $11,476.5 $ -- $187,542.7 --
=========== ========== ====== ===========
Premiums
Life insurance and individual annuities . $ 552.0 $ 28.6 $ -- $ 523.4 --
Accident and health insurance ............ 2,406.9 77.8 252.9 2,582.0 9.8%
Group annuities ........................... 15.0 -- -- 15.0 --
----------- ---------- ------ -----------
Total premiums ........................... $ 2,973.9 $ 106.4 $252.9 $ 3,120.4
=========== ========== ====== ===========
Year Ended December 31, 1995
Life insurance in force ..................... $164,478.4 $ 4,119.5 $ -- $160,358.9 --
=========== ========== ====== ===========
Premiums
Life insurance and individual annuities . $ 571.4 $ 19.3 $ 2.0 $ 554.1 0.4%
Accident and health insurance ............ 2,248.4 46.9 239.5 2,441.0 9.8%
Group annuities ........................... 23.1 -- -- 23.1 --
----------- ---------- ------ -----------
Total premiums ........................... $ 2,842.9 $ 66.2 $241.5 $ 3,018.2
=========== ========== ====== ===========
Year Ended December 31, 1994
Life insurance in force ..................... $145,425.9 $ 4,425.3 $ -- $141,000.6 --
=========== ========== ====== ===========
Premiums
Life insurance and individual annuities ... $ 517.9 $ 15.7 $ 1.6 $ 503.8 0.3%
Accident and health insurance ............... 2,123.9 96.8 169.1 2,196.2 7.7%
Group annuities ........................... 21.3 -- -- 21.3 --
----------- ---------- ------ -----------
Total premiums ........................... $ 2,663.1 $ 112.5 $170.7 $ 2,721.3
=========== ========== ====== ===========

Certain 1994 amounts have been reclassified for comparative purposes.

UNUM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS

Number Description Method of Filing
- -------- ------------------------------- ---------------------------------------------------------------------

3.1 Certificate of Incorporation Filed herewith.
of UNUM Corporation, as
amended
3.2 By-Laws of UNUM Filed herewith.
Corporation
4 Rights Agreement Filed as Exhibit 1 to the Registrant's Current Report on Form 8-K
dated March 18, 1992, and incorporated herein by reference.
10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.2 Incentive Compensation Plan Filed herewith.
for Designated Executive
Officers
10.3 1987 Executive Stock Filed as Exhibit 10.3 to the Registrant's Annual Report on Form
Option Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.4 1990 Long-Term Stock Filed as Exhibit 10.4 to the Registrant's Annual Report on Form
Incentive Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.5 1996 Long-Term Stock Filed as Exhibit 10.5 to the Registrant's Annual Report on Form
Incentive Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.6 Supplementary Retirement Filed as Exhibit 10.4 to the Registrant's Registration Statement on
Plan Form S-1 (Registration No. 33-6571) dated June 18, 1986, and
incorporated herein by reference.
10.7 Supplemental Executive Filed as Exhibit 10.6 to the Registrant's Annual Report on Form
Retirement Plan 10-K dated March 26, 1991, and incorporated herein by reference.
10.8 Form of Executive Filed as Exhibit 10.7 to the Registrant's Annual Report on Form
Severance Agreement 10-K dated March 25, 1992, and incorporated herein by reference.
10.9 Employment Agreement Filed as Exhibit 10.9 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.10 Employment Letter Filed as Exhibit 10.10 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.11 $500 Million Revolving Filed as Exhibit 10.9 to the Registrant's Annual Report on Form
Credit Agreement 10-K dated March 24, 1995, and incorporated herein by reference.
10.12 Asset Transfer and Filed as Exhibit 10.12 to the Registrant's Annual Report on Form
Acquisition Agreement 10-K dated March 27, 1996, and incorporated herein by reference.
10.13 Non-Qualified 401(k) Plan Filed herewith.
12 Computation of Ratio of Filed herewith.
Earnings to Fixed Charges
21 Subsidiaries of UNUM Filed herewith.
Corporation
23 Consent of Independent Filed herewith.
Accountants
24 Power of Attorney Filed herewith.
27 Financial Data Schedule Filed herewith.

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