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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1994
Commission File Number 1-9254
UNUM Corporation
(Exact name of registrant as specified in its charter)
Delaware 01-0405657
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2211 Congress Street, Portland, Maine 04122
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (207) 770-2211
NONE
(Former name, former address, and former fiscal year, if changed since last
report)
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 ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1994
Common stock, $0.10 par value 75,567,762 shares
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UNUM Corporation and Subsidiaries
Form 10-Q
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 1994 and 1993 (Unaudited) 3
Consolidated Balance Sheets as of March 31, 1994
(Unaudited) and December 31, 1993 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1994 and 1993 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 8
Independent Accountant's Review Report 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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UNUM Corporation and Subsidiaries
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
Three Months Ended
March 31,
(Unaudited - Dollars in millions, except
per common share data) 1994 1993
Revenues
Premiums $655.0 $578.9
Investment income 191.1 200.5
Net realized investment gains 11.9 20.5
Fees and other income 19.4 22.7
Total revenues 877.4 822.6
Benefits and expenses
Benefits to policyholders 481.4 418.5
Interest credited 61.0 74.0
Operating expenses 163.6 165.8
Commissions 87.9 78.2
Increase in unamortized deferred policy
acquisition costs (30.6) (27.9)
Interest expense 3.3 3.0
Total benefits and expenses 766.6 711.6
Income before income taxes and cumulative
effects of accounting changes 110.8 111.0
Income taxes
Current 15.6 26.8
Deferred 18.1 8.2
Total income taxes 33.7 35.0
Income before cumulative effects of accounting
changes 77.1 76.0
Cumulative effects of accounting changes
Income taxes -- 20.0
Postretirement benefits other than pensions,
net of tax -- (32.1)
Net income $ 77.1 $ 63.9
Per common share
Income before cumulative effects of accounting
changes $ 1.02 $ 0.96
Cumulative effects of accounting changes
Income taxes -- 0.25
Postretirement benefits other than pensions,
net of tax -- (0.40)
Net income $ 1.02 $ 0.81
See notes to consolidated financial statements.
3
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UNUM Corporation and Subsidiaries
C O N S O L I D A T E D B A L A N C E S H E E T S
March 31, 1994 December 31,
(Dollars in millions) (Unaudited) 1993
Assets
Investments
Fixed maturities:
Held to maturity-principally at amortized cost
(fair value: 1994-$6,497.2; 1993-$7,149.9) $ 6,267.6 $ 6,560.7
Available for sale-at fair value
(amortized cost: $1,357.3) 1,362.3 --
Available for sale-principally at amortized cost
(fair value: $929.9) -- 872.0
Equity securities available for sale-at fair value
(cost: 1994-$516.3; 1993-$508.3) 697.1 730.0
Mortgage loans 1,362.5 1,423.2
Real estate, net 193.0 193.5
Policy loans 189.9 187.9
Other long-term investments 57.8 59.0
Short-term investments 35.4 69.6
Total investments 10,165.6 10,095.9
Cash 23.1 20.8
Accrued investment income 183.2 184.0
Premiums due 180.4 165.5
Unamortized deferred policy acquisition costs 909.8 879.1
Property and equipment, net 143.0 143.5
Other assets 709.5 681.8
Separate account assets 282.4 266.7
Total assets $12,597.0 $12,437.3
(Continued on next page)
4
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UNUM Corporation and Subsidiaries
C O N S O L I D A T E D B A L A N C E S H E E T S
March 31, 1994 December 31,
(Dollars in millions) (Unaudited) 1993
Liabilities and Stockholders' Equity
Liabilities
Future policy benefits $ 4,081.6 $ 4,009.6
Unpaid claims and claim expenses 716.1 676.3
Other policyholder funds 4,229.2 4,268.8
Federal income taxes
Current 42.1 31.5
Deferred 376.5 376.7
Notes payable 277.2 238.6
Other liabilities 483.3 466.4
Separate account liabilities 282.4 266.7
Total liabilities 10,488.4 10,334.6
Stockholders' Equity
Preferred stock, par value $0.10 per share,
authorized 10,000,000 shares, none issued
Common stock, par value $0.10 per share, authorized
120,000,000 shares, issued 99,987,958 shares 10.0 10.0
Additional paid-in capital 1,081.1 1,078.4
Unrealized gains on available for sale securities,
net of deferred taxes 125.5 149.1
Unrealized foreign currency translation adjustment (31.7) (24.1)
Retained earnings 1,482.8 1,420.8
2,667.7 2,634.2
Less:
Treasury stock, at cost (1994-24,420,196 shares;
1993-24,006,816 shares) 555.9 529.8
Restricted stock deferred compensation 3.2 1.7
Total stockholders' equity 2,108.6 2,102.7
Total liabilities and stockholders' equity $12,597.0 $12,437.3
See notes to consolidated financial statements.
5
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UNUM Corporation and Subsidiaries
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
Three Months Ended
March 31,
(Unaudited - Dollars in millions) 1994 1993
Operating activities:
Net income $ 77.1 $ 63.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effects of accounting changes, net of tax -- 12.1
Increase in future policy benefits and unpaid
claims and claim expenses 111.9 104.3
(Increase) decrease in amounts receivable under
reinsurance agreements (5.3) 3.4
Increase in federal income tax liability 23.7 41.3
Increase in unamortized deferred policy
acquisition costs (30.6) (27.9)
Other (23.3) (30.0)
Net cash provided by operating activities 153.5 167.1
Investing activities:
Maturities of fixed maturities -- 242.7
Maturities of fixed maturities held to maturity 235.7 --
Maturities of fixed maturities available for sale 10.5 --
Sales of fixed maturities held to maturity -- 1.3
Sales of fixed maturities available for sale 133.6 91.4
Sales of equity securities available for sale 65.8 --
Sales of other investments 42.0 278.9
Purchases of investments -- (645.1)
Purchases of fixed maturities held to maturity (292.3) --
Purchases of fixed maturities available for sale (259.3) --
Purchases of equity securities available for sale (62.2) --
Purchases of other investments (7.0) --
Net (increase) decrease in short-term investments 34.4 (85.9)
Net additions to property and equipment (4.6) (7.5)
Net cash used in investing activities (103.4) (124.2)
Financing activities:
Deposits and interest credited to investment contracts 157.0 233.4
Maturities and withdrawals from investment contracts (196.6) (263.3)
Dividends to stockholders (15.1) (14.0)
Treasury stock acquired (29.2) --
Proceeds from notes payable 9.9 --
Net increase (decrease) in short-term debt 28.7 (7.7)
Other (3.1) 3.3
Net cash used in financing activities $ (48.4) $ (48.3)
(Continued on next page)
6
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UNUM Corporation and Subsidiaries
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
Three Months Ended
March 31,
(Unaudited - Dollars in millions) 1994 1993
Effect of exchange rate changes on cash $ 0.6 $ 0.7
Net increase (decrease) in cash 2.3 (4.7)
Cash at beginning of year 20.8 20.4
Cash at end of period $ 23.1 $ 15.7
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 9.0 $ 6.5
Interest $ 1.3 $ 0.9
See notes to consolidated financial statements.
7
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UNUM Corporation and Subsidiaries
Form 10-Q
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1994
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
applicable to stock life insurance companies for interim financial
information and with the requirements of Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles applicable to stock life
insurance companies for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been
included. Interim results for the three month period ended March 31,
1994, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1994. For further
information, refer to the audited consolidated financial statements
and footnotes included in the 1993 annual report to stockholders of
UNUM Corporation and subsidiaries ("UNUM").
Note 2. Accounting Changes
Effective January 1, 1994, UNUM adopted Financial Accounting Standard
("FAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," which specified the accounting and reporting for certain
investments in equity securities and for all investments in debt
securities. UNUM adopted the provisions of FAS 115 for these investments
held as of or acquired after January 1, 1994, which are classified and
accounted for as follows:
- Fixed maturities that UNUM has the positive intent and ability to hold
to maturity are classified as "held to maturity" and are reported at
amortized cost, less an allowance for probable losses.
- Fixed maturities and equity securities classified as "available for
sale" are reported at fair value. Related unrealized holding gains and
losses, net of deferred taxes, are reported in a separate component of
stockholders' equity.
Upon the adoption of FAS 115, UNUM increased unrealized gains on available
for sale securities included in stockholders' equity on January 1, 1994, by
$41.8 million (net of deferred taxes of $22.5 million) to reflect the
unrealized holding gains on fixed maturities classified as available for
sale which were previously carried at amortized cost. In accordance with
FAS 115, prior year consolidated financial statements have not been
restated to reflect the change in accounting principle. UNUM reclassified
certain fixed maturities from held to maturity to available for sale on
January 1, 1994, in connection with the adoption of FAS 115.
8
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UNUM Corporation and Subsidiaries
Note 2. Accounting Changes (Continued)
Effective January 1, 1993, UNUM adopted FAS No. 109, "Accounting for
Income Taxes," which changed the method for calculating and reporting
deferred income taxes in the financial statements from the deferred
method to the liability method. The cumulative effect of this
accounting change as of January 1, 1993, amounted to a $20.0 million
increase in net income, or $0.25 per share, for the three months ended
March 31, 1993.
Effective January 1, 1993, UNUM adopted FAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," which
changed the method for recognition of the cost of these benefits from
a cash basis to an accrual basis over the years in which employees
render the related services. UNUM elected to recognize the FAS 106
liability at January 1, 1993, of $48.8 million as a cumulative effect
of an accounting change. This charge decreased net income by $32.1
million, or $0.40 per share, for the three months ended March 31,
1993.
Note 3. Income Taxes
The effective tax rate for the three months ended March 31, 1994, was
30.4% compared with 31.5% for the same period in 1993. In both
periods the effective tax rates were lower than the federal income tax
rate of 35% and 34% for the first quarter 1994 and 1993, respectively,
primarily due to UNUM's investments in tax-exempt securities. On
August 10, 1993, legislation was enacted to increase the federal
income tax rate of 34% to 35%, retroactive to January 1, 1993. The
tax rate increase resulted in a charge to third quarter net income
totaling $9.7 million or $0.12 per share, which included $1.9 million
or $0.02 per share for first and second quarter 1993 net income and a
$7.8 million or $0.10 per share adjustment to the deferred income tax
liability.
Note 4. Earnings Per Share
The weighted average number of shares outstanding used to calculate
earnings per share was 75,607,972 and 79,208,559 for first quarter
1994 and 1993, respectively. The assumed exercise of outstanding
stock options would not result in a material dilution of earnings per
share.
Note 5. Dividends to Stockholders
On April 8, 1994, UNUM's Board of Directors declared a twenty-four
cents per share cash dividend. The dividend is payable on May 20,
1994, to common stockholders of record at the close of business on
April 25, 1994. During the first three months of 1994, a twenty cents
per share dividend was paid on February 18, 1994.
9
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UNUM Corporation and Subsidiaries
Note 6. Litigation
In the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others,
and a number of lawsuits were pending at March 31, 1994. In the
opinion of management, the ultimate liability, if any, arising from
this litigation is not expected to have a material adverse effect on
the consolidated financial position or the consolidated operating
results of UNUM.
Note 7. Segment Information
UNUM reports its operations principally in six business segments:
Employee Benefits, Related Businesses, Colonial Companies, Individual
Disability, Retirement Security and Other Operations.
The Employee Benefits segment includes group long term disability,
group life and other employee benefits products, including short term
disability, accidental death and dismemberment, and dental insurance.
The Related Businesses segment includes UNUM Limited in the United
Kingdom, Commercial Life Insurance Company, and reinsurance operations
including Duncanson & Holt, Inc. The Colonial Companies segment
includes Colonial Companies, Inc. and subsidiaries ("Colonial"), which
offer payroll-deducted, voluntary employee benefits to employees at
their worksites. The Individual Disability segment includes
disability income products. The Retirement Security segment includes
tax sheltered annuities, long term care insurance and lifestyle
security protection products. The Other Operations segment includes
individual life insurance business of UNUM Life Insurance Company of
America, group medical operations, guaranteed investment contracts,
deposit administration accounts, and 401(k) plans, all of which are no
longer actively marketed by UNUM. Corporate includes transactions
which are generally non-insurance related and expenses incurred to
effect the March 26, 1993, merger of UNUM and Colonial.
10
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UNUM Corporation and Subsidiaries
Note 7. Segment Information (continued)
Summarized financial information for the six business segments and
Corporate is as follows:
Three Months Ended
March 31,
(Dollars in millions) 1994 1993
Revenues
Employee Benefits $ 416.6 $ 370.9
Related Businesses 130.4 117.4
Colonial Companies 116.4 117.6
Individual Disability 106.8 99.1
Retirement Security 67.8 70.1
Other Operations 36.8 48.9
Corporate 2.6 (1.4)
Total revenues $ 877.4 $ 822.6
Income (loss) before income taxes and
cumulative effects of accounting changes
Employee Benefits $ 64.1 $ 59.5
Related Businesses 12.6 10.4
Colonial Companies 15.8 23.8
Individual Disability 10.3 16.2
Retirement Security 9.0 7.2
Other Operations 2.7 6.6
Corporate (3.7) (12.7)
Total income before income taxes and
cumulative effects of accounting changes 110.8 111.0
Income taxes 33.7 35.0
Income before cumulative effects of accounting
changes 77.1 76.0
Cumulative effects of accounting changes -- (12.1)
Net income $ 77.1 $ 63.9
March 31, December 31,
(Dollars in millions) 1994 1993
Identifiable Assets
Employee Benefits $ 3,371.8 $ 3,294.5
Related Businesses 1,306.5 1,269.0
Colonial Companies 859.0 819.2
Individual Disability 1,543.1 1,516.3
Retirement Security 3,254.1 3,249.3
Other Operations 1,466.7 1,493.9
Corporate 449.3 452.3
Individual Participating Life and Annuity 346.5 342.8
Total assets $12,597.0 $12,437.3
11
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INDEPENDENT ACCOUNTANT'S REVIEW REPORT
To the Board of Directors and Stockholders
UNUM Corporation
We have reviewed the accompanying consolidated balance sheet of UNUM
Corporation and subsidiaries as of March 31, 1994, and the related
consolidated statements of income and cash flows for the three-month period
then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements of UNUM Corporation
and subsidiaries as of March 31, 1994, and for the three-month period then
ended for them to be in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND
Portland, Maine
April 22, 1994
12
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UNUM Corporation and Subsidiaries
Form 10-Q
March 31, 1994
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Financial
Statements (Unaudited) and Notes to Consolidated Financial Statements
(Unaudited) included elsewhere in the Form 10-Q.
Revenues for UNUM for first quarter 1994 were $877.4 million as compared
with $822.6 million for first quarter 1993. Net income for the quarter
ended March 31, 1994, was $77.1 million or $1.02 per share as compared with
$63.9 million or $0.81 per share for the same quarter in 1993.
Net income for the three months ended March 31, 1993, included one time net
charges totaling $12.1 million or $0.15 per share for the cumulative
effects of the adoption of Financial Accounting Standards ("FAS") No. 106
and No. 109 relating to postretirement benefits other than pensions and
income taxes, respectively, as described in Note 2. Also included in net
income for the three months ended March 31, 1993, is a one time charge of
$9.5 million or $0.12 per share for expenses associated with the March 26,
1993, merger of UNUM and Colonial Companies, Inc. Excluding these one time
charges, net income for first quarter 1993 would have been $85.5 million or
$1.08 per share.
During first quarter 1994, UNUM's North American disability results were
adversely affected by an influx of claims late in the quarter and by
additional factors such as low interest rates and an increased number of
large claims. As further described in the Employee Benefits and
Individual Disability segments, management is analyzing the nature of the
claims received in first quarter 1994 and is taking remedial actions.
It is uncertain if the adverse claims experience seen in the first
quarter 1994 will continue or how long it will take for the remedial
measures to take effect. Additionally, these disability results were
affected by a decrease in the average rate used to discount claim
reserves, which resulted in increased claim reserve liabilities.
In response to the current claims environment and to mitigate the potential
impact of increasing reserve requirements due to a declining discount rate,
UNUM proactively reviews and adjusts investment strategies, increases
prices on both existing and new business, and continues to implement new
risk management programs and underwriting guidelines. The interest rate
environment during the past two years has also resulted in reduced investment
yields on new fixed income purchases, which has decreased the level of
investment income, despite a continued growth in invested assets.
Management anticipates that the average investment portfolio yield will
further decline, since UNUM invests its cash flows in high quality assets
that currently have yields below the existing average portfolio yields.
13
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UNUM Corporation and Subsidiaries
Income Before Income Taxes and Cumulative Effects of Accounting Changes:
Income before income taxes for the six business segments and Corporate for
the three months ended March 31, 1994, and 1993, was as follows:
Three Months Ended
March 31,
(Dollars in millions) 1994 1993 Change
Employee Benefits $ 64.1 $ 59.5 $ 4.6
Related Businesses 12.6 10.4 2.2
Colonial Companies 15.8 23.8 (8.0)
Individual Disability 10.3 16.2 (5.9)
Retirement Security 9.0 7.2 1.8
Other Operations 2.7 6.6 (3.9)
Corporate (3.7) (12.7) 9.0
Total $110.8 $111.0 $(0.2)
Employee Benefits Segment:
The Employee Benefits segment reported increased income before income taxes
for the three months ended March 31, 1994, as compared with the same period
in 1993. The increase is attributable to improved claims experience in the
group life business and continued expense control that was partially offset
by adverse claims experience in the group long term disability ("group
LTD") business. Benefits to policyholders increased significantly for the
group LTD business which is attributable to a higher incidence of new
claims and a disproportionate number of large claims, many of which were
received late in the quarter. Management has identified certain
geographical and occupational portions of the business which are
experiencing higher than expected claims. Management continues to pursue
these portions of the business for underwriting and pricing actions.
Compounding this unfavorable claims experience was a decrease in the
discount rate used to determine group LTD reserves, which resulted in an
increase to current claim reserves.
Although the group life business reported more favorable claims experience
in first quarter 1994, certain portions of the business continue to
experience unfavorable claims results, which management attributes to
antiselection and adverse mortality. Management continues to address the
antiselection that developed during 1993 by imposing more stringent
underwriting requirements and by targeting specific portions of the
business to pursue risk and pricing actions.
14
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UNUM Corporation and Subsidiaries
Related Businesses Segment:
UNUM Limited, in the United Kingdom, experienced improved claims experience
which contributed to the increase in income before income taxes for the
Related Businesses segment in first quarter 1994 as compared to the same
period in 1993. Unlike previous periods, the effect of the exchange rate
has had a negligible effect on UNUM Limited's earnings as reported in U.S.
dollars, since the U.S. dollar has remained relatively steady against the
British pound sterling throughout 1993 and into 1994. Also affecting the
increase in income before income taxes was favorable claims experience in
Commercial Life's specialty group accident product line and continued
earnings growth for Duncanson & Holt, which was partially offset by
unfavorable claims experience in Commerical Life's franchise disability
business. Due to the nature of the risks underwritten, the specialty group
accident product line can exhibit claims variability.
Colonial Companies Segment:
The Colonial Companies segment reported decreased income before income
taxes for the three months ended March 31, 1994, as compared with the same
period in 1993, primarily due to decreased realized investment gains.
During 1993, Colonial's investment portfolio was realigned to reflect
UNUM's investment philosophy. As a result, Colonial sold higher yielding
but callable investments, which resulted in more than $8.5 million in
realized investment gains in the first quarter of 1993.
In the first quarter of 1994, Colonial reported favorable claims experience
and improved incidence rates for all of its product lines. Colonial
continues to shift its product mix toward products which are designed to
have higher benefit ratios, lower expense ratios and better policyholder
retention. Premium growth in the first quarter 1994 continued to benefit
from improved persistency through enhanced customer conservation programs
that have offset the impact of the weaker level of sales for the past two
years.
Individual Disability Segment:
During the first quarter 1994, an increase in the cost of new claims
combined with lower investment returns resulted in decreased income before
income taxes as compared with the same period in 1993. Additionally, the
types and timing of the claims received by the Individual Disability
segment were similar to that experienced by the group LTD business, as
previously discussed. Management believes that increased benefit costs
were affected by uncertainty in the medical industry due to Health Care
Reform and the increased prevalence of newly emerging and often subjective
types of disabilities. Management continually develops risk and
underwriting tools and sales strategies to deal with these emerging issues.
The unfavorable claims experience in the first quarter 1994 was partially
offset by a continued decrease in the segment's expense ratio. Management
attributes the decrease in the expense ratio to focused expense management
and productivity gains as premium growth outpaced expense growth.
Management expects to invest for future business growth, which may reduce
the current rate of reduction of the expense ratio.
15
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UNUM Corporation and Subsidiaries
Retirement Security Segment:
Unusually favorable interest spread margins on tax sheltered annuities have
contributed to the level of income before income taxes for the first
quarter of 1994 and 1993. Management does not expect interest spread
margins on tax sheltered annuities to continue at the same level, which may
reduce future earnings for the Retirement Security segment. Partially
offsetting the increase in income before income taxes for the first quarter
1994 as compared with the same period in 1993, was lower realized
investment gains. UNUM continues its investment in the development of long
term care products.
Other Operations Segment:
The reduced invested asset base under management for guaranteed investment
contracts ("GICs"), deposit administration contracts ("DAs") and 401(k)
plans resulted in lower revenues from investment and fee income and reduced
amounts of interest credited. Management expects continued decreases in
the amounts of investment income and interest credited as the related GIC,
DA and 401(k) contracts mature or terminate. Management expects future
earnings in the Other Operations segment to decline, reflecting the run-off
nature of these closed blocks of businesses. Also contributing to the
decrease in income before income taxes was lower realized investment gains
for the first quarter 1994 as compared with the same period in 1993.
Corporate:
Decreased expenses as compared with first quarter 1993 contributed to the
decreased loss before income taxes in Corporate for first quarter 1994.
First quarter 1993 included the expenses incurred in connection with the
March 26, 1993, merger of UNUM Corporation and Colonial Companies, Inc.
Premiums:
As summarized by segment in the table below, premiums for first quarter
1994 increased $76.1 million or 13.1% to $655.0 million from $578.9 million
for first quarter 1993.
Three Months Ended
March 31,
(Dollars in millions) 1994 1993 Change
Employee Benefits
Group LTD $ 234.0 $ 211.1 10.8%
Group life 74.4 63.2 17.7
Other 41.5 36.4 14.0
Total 349.9 310.7 12.6
Related Businesses 97.8 81.3 20.3
Colonial Companies 108.3 99.8 8.5
Individual Disability 83.5 74.2 12.5
Retirement Security 9.8 8.6 14.0
Other Operations 5.7 4.3 32.6
Total premiums $ 655.0 $ 578.9 13.1%
16
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UNUM Corporation and Subsidiaries
Income Taxes:
The effective tax rate for the three months ended March 31, 1994, was 30.4%
compared with 31.5% for the same period in 1993. In both periods the
effective tax rates were lower than the federal income tax rate of 35% and
34% for the first quarter 1994 and 1993, respectively, primarily due to
UNUM's investments in tax-exempt securities.
FAS 109 requires that deferred tax balances be adjusted for the effect of a
change in tax laws or rates, and that the effect of such adjustment be
recognized in income from continuing operations in the period the new
legislation is enacted. On August 10, 1993, legislation was enacted to
increase the federal income tax rate of 34% to 35%, retroactive to January
1, 1993. The cumulative effect of this change was an increase to income
tax expense of $9.7 million in the third quarter 1993.
Investments:
UNUM's investment philosophy is to optimize "risk adjusted total return,"
which evaluates total expected return after consideration of all associated
expenses and losses, within criteria established for each product line.
Product line investment strategies are developed to complement the business
risks by meeting the liquidity and solvency requirements of each product.
UNUM purchases assets whose maturities, expected cash flows and prepayment
conditions are consistent with these strategies. The nature and quality of
the types of investments complies with policies established by management,
which are more stringent overall than the statutes and regulations imposed
by the jurisdictions in which UNUM's insurance subsidiaries are licensed.
UNUM's investments are reported in the consolidated financial statements
net of any allowances for probable losses. Allowances are established
based on a review of specific assets as well as the overall portfolio,
considering the carrying value of the underlying assets. If a decline in
market value is considered to be other than temporary, the investment is
reduced to estimated net realizable value and the reduction is recorded as
a realized investment loss. UNUM discontinues the accrual of investment
income on invested assets when it is determined that collectibility is
doubtful. Management monitors the risk associated with the invested asset
portfolio and regularly reviews and adjusts the allowance for probable
losses.
At March 31, 1994, the composition of UNUM's $10,165.6 million of invested
assets was 75.0% fixed maturities, 13.4% mortgage loans, 1.9% real estate,
6.9% equity securities and 2.8% other invested assets.
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UNUM Corporation and Subsidiaries
Fixed Maturities:
Effective January 1, 1994, UNUM adopted Financial Accounting Standard
("FAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," which specified the accounting and reporting for certain
investments in equity securities and for all investments in debt
securities. UNUM adopted the provisions of FAS 115 for these investments
held as of or acquired after January 1, 1994, which are classified and
accounted for as follows:
- Fixed maturities that UNUM has the positive intent and ability to hold
to maturity are classified as "held to maturity" and are reported at
amortized cost, less an allowance for probable losses. Sales of such
assets are infrequent and are generally in response to significant
deterioration in the issuers' credit worthiness. The majority of
UNUM's insurance reserve liabilities are generally longer term in
nature and not subject to withdrawal. Since UNUM purchases assets
whose maturities, expected cash flows and prepayment conditions will
complement the business risks by meeting the liquidity and solvency
requirements of each product, the majority of UNUM's fixed maturities
have been classified as "held to maturity" to match the longer term
nature of UNUM's products.
- Fixed maturities and equity securities classified as "available for
sale" are reported at fair value. Related unrealized holding gains
and losses, net of deferred taxes, are reported in a separate
component of stockholders' equity. Fair values of fixed maturities
are generally obtained by external quoted market sources, and if not
externally quoted, are determined by UNUM primarily by using
discounted cash flow models.
Upon the adoption of FAS 115, UNUM increased unrealized gains on available
for sale securities included in stockholders' equity on January 1, 1994, by
$41.8 million (net of deferred taxes of $22.5 million) to reflect the
unrealized holding gains on fixed maturities classified as available for
sale which were previously carried at amortized cost. In accordance with
FAS 115, prior year consolidated financial statements have not been
restated to reflect the change in accounting principle. UNUM reclassified
certain fixed maturities from held to maturity to available for sale on
January 1, 1994, in connection with the adoption of FAS 115.
18
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UNUM Corporation and Subsidiaries
Fixed Maturities: (continued)
At March 31, 1994, and December 31, 1993, the fixed maturity portfolio
included $268.7 million and $263.3 million of below investment grade bonds
(below "Baa"), which represented 3.5% and 3.5% of the fixed maturity
portfolio, respectively. These bonds had associated market values of
$273.4 million and $279.1 million, respectively. Virtually all of the
nonconvertible, below investment grade bonds were purchased at investment
grade, but were subsequently downgraded. UNUM's investment policy is to
invest in fixed maturities of investment grade quality. Selected purchases
of convertible subordinated debentures, which UNUM considers to be part of
its investment strategy for equity securities, have contributed to the
amount of below investment grade bonds. Ratings are obtained from external
rating agencies, and if not externally rated, are rated by UNUM internally
using similar methods. Management does not expect any risks or
uncertainties associated with below investment grade bonds to have a
significant impact on UNUM's consolidated financial position or results of
operations. The percentage of fixed maturities delinquent sixty days or
more compared to total fixed maturities was 0.28% at March 31, 1994, and
0.24% at December 31, 1993.
Mortgages:
At March 31, 1994, and December 31, 1993, UNUM's mortgage loans were
$1,362.5 million and $1,423.2 million, respectively. The percentage of
mortgage loans to total invested assets has decreased to 13.4% as of March
31, 1994, from 14.1% as of December 31, 1993, and is not anticipated to
change significantly since prepayments and scheduled maturities for
mortgages are expected to exceed the amount of new investments. Management
establishes allowances for mortgage loans based upon a review of individual
loans and the overall loan portfolio, considering the value of the
underlying collateral. UNUM uses a comprehensive rating system to evaluate
the investment and credit risk of each mortgage loan and to target specific
properties for inspection and reevaluation. The percentage of mortgage
loans delinquent sixty days or more on a contract delinquency basis was
2.3% and 1.8% at March 31, 1994, and December 31, 1993, respectively.
Overall, management believes that its mortgage loan portfolio is well
diversified geographically and among property types. Beginning in 1993,
UNUM's incidence of new problem mortgage loans has declined as overall
economic activity has improved modestly, and many of the real estate
markets in which UNUM has mortgage loans stabilized. Foreclosure activity
and new reserve additions declined in 1993 and continued to decline in
first quarter 1994 from the higher levels of recent years; however,
management continues to expect additional delinquencies and problem loans
in the future. Management believes the allowance provided on mortgage
loans is adequate to cover probable losses as of March 31, 1994.
19
<PAGE>
UNUM Corporation and Subsidiaries
Mortgages: (continued)
During the first three months of 1994, UNUM realized investment losses
related to delinquent, restructured and problem mortgage loans of $3.8
million, compared with $3.1 million for the same period in 1993.
Delinquent and problem mortgage loans as of March 31, 1994, are not
expected to have a significant impact on UNUM's liquidity and capital
resources.
Real Estate:
At March 31, 1994, investment real estate and real estate held for sale
amounted to $193.0 million and $26.1 million, respectively. This compares
with $193.5 million of investment real estate and $24.7 million of real
estate held for sale at December 31, 1993. UNUM continues to limit its
real estate exposure as a percentage of invested assets through an active
sales program.
Real estate which meets certain investment criteria and is intended to be
held long term is carried at cost less accumulated depreciation. Real
estate that has been acquired through foreclosure is valued at fair value
at the date of foreclosure. Real estate held for sale is included in other
assets in the Consolidated Balance Sheets and is valued net of an allowance
which reduces the carrying value to the lower of fair value less estimated
costs to sell, or cost. Occasionally, investment real estate is
reclassified and revalued as real estate held for sale when it no longer
meets UNUM's investment criteria. Additions to allowances for probable
losses related to real estate held for sale resulted in realized investment
losses of $0.3 million and $10.7 million for the quarters ended March 31,
1994, and 1993, respectively.
Given the current real estate environment, additional foreclosures are
anticipated, but at a reduced level from the early 1990s. Current and
anticipated real estate acquired through foreclosure is not expected to
have a significant impact on UNUM's investment income, liquidity and
capital resources.
20
<PAGE>
UNUM Corporation and Subsidiaries
Liquidity and Capital Resources:
UNUM's businesses produce positive cash flows which are invested primarily
in intermediate, fixed maturity investments intended to reflect the nature
of anticipated cash obligations of insurance benefit payments and insurance
contract maturities and to optimize investment returns at appropriate risk
levels. To meet unexpected cash requirements and liquidity needs, UNUM
maintains part of its investment portfolio in fixed maturities classified
as available for sale, equity securities, cash and short-term investments.
Cash flow requirements are also supported by committed revolving credit
facilities of $100 million and $200 million, which expire on February 17,
1995, and June 1, 1996, respectively. The commercial paper program is
supported by the revolving credit facilities and is available for general
liquidity needs, capital expansion, acquisitions and stock repurchase. The
committed revolving credit facilities contain certain covenants which,
among other provisions, require maintenance of certain levels of
stockholders' equity and limits on level of debt.
At March 31, 1994, UNUM had short-term and long-term debt totaling $138.7
million and $138.5 million, respectively, and approximately $161 million
available for additional financing under existing revolving credit
facilities. Management may decide to refinance the short-term notes
payable in the future.
In September 1993, UNUM announced the filing of an omnibus shelf
registration statement with the Securities and Exchange Commission which
became effective on October 8, 1993, relating to $450 million of securities
(including debt securities, preferred stock, common stock and other
securities). UNUM has no current intention of issuing equity securities
pursuant to this registration statement. On October 8, 1993, UNUM filed a
prospectus supplement to establish a $250 million medium-term note program
under the shelf registration. The medium-term note program and the unsold
portion of the shelf registration carry ratings of "Aa3" (Excellent) and
"(P)Aa3" (Excellent), respectively, from Moody's Investors Service, and
"AA" (Excellent) from Standard & Poor's.
In September 1993, UNUM announced the resumption of a program to repurchase
its common stock pursuant to an existing Board of Directors' resolution.
On February 11, 1994, UNUM's Board of Directors voted to expand UNUM's
authorization to repurchase an additional 5.0 million shares. Since the
resumption of the stock repurchase program, UNUM has acquired approximately
4.3 million shares of its common stock through March 31, 1994, in the open
market at an aggregate cost of $221.8 million that was primarily funded
through additional borrowings.
Ratings:
In March 1994, Standard & Poor's Corporation assigned Colonial Life &
Accident Insurance Company's claims-paying ability rating as "AA-"
(Excellent).
21
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
March 31, 1994
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Page
(a) Exhibit Index
12. Statement re: Computation of ratio of earnings to
fixed charges. 24
15. Letter re: Unaudited interim financial information. 25
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant with the Securities and
Exchange Commission during the quarter ended March 31, 1994.
22
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
March 31, 1994
SIGNATURES
Pursuant to the requirements 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.
Date May 11, 1994 /s/ RODNEY N. HOOK
Rodney N. Hook
Senior Vice President and
Chief Financial Officer
Date May 11, 1994 /s/ STEPHEN D. ROBERTS
Stephen D. Roberts
Vice President and
Corporate Controller
23
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
March 31, 1994
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
Three Months Ended
March 31,
(Unaudited - Dollars in millions) 1994 1993
Earnings:
Income from continuing operations before income
taxes $110.8 $111.0
Add: Fixed charges 5.9 5.8
Earnings as adjusted $116.7 $116.8
Fixed charges:
Interest expense $ 3.3 $ 3.0
Interest portion of rent expense 2.6 2.8
Total fixed charges $ 5.9 $ 5.8
Ratio of earnings to fixed charges 19.8 20.1
For purposes of computing the ratio of earnings to fixed charges, earnings
as adjusted consist of net income plus income taxes and fixed charges.
Fixed charges consist of interest expense and the estimated interest
portion of rent expense.
24
<PAGE>
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
We are aware that our report dated April 22, 1994 on our review
of interim financial information of UNUM Corporation for the
three month period ended March 31, 1994, and included in the
Company's quarterly report on Form 10-Q for the quarter then
ended is incorporated by reference in the following Registration
Statements:
- Form S-8 No. 33-31270 pertaining to the UNUM Employees
Retirement Savings Plan and Trust
- Form S-8 No. 33-19090 pertaining to the 1987 Executive Stock
Option Plan
- Form S-8 No. 33-38225 pertaining to the 1990 Long-Term Stock
Incentive Plan
- Form S-8 No. 33-52741 pertaining to the 1990 Long-Term Stock
Incentive Plan
- Form S-3 No. 33-36873
- Form S-3 No. 33-69132
- Form S-8 No. 33-60124 pertaining to the Colonial Companies,
Inc. Security Saver Plan
- Post-Effective Amendment No. 1 on Form S-8 to Registration
Statement on Form S-4 No. 33-55870
Pursuant to Rule 436 (c) under the Securities Act of 1933, this report
should not be considered a part of the registration statements prepared
or certified by accountants within the meaning of Sections 7 and 11
of that Act.
/s/ COOPERS & LYBRAND
25
