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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission file number 1-9254
UNUM Corporation
(Exact name of registrant as specified in its charter)
Delaware 01-0405657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2211 Congress Street, Portland, Maine 04122
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 770-2211
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common stock, $0.10 par value New York Stock Exchange
Pacific Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ______
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 11, 1994, was approximately $4,246,100,000.
As of March 11, 1994, 75,529,100 shares of the registrant's common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information from the Registrant's proxy statement dated March 28, 1994,
is incorporated by reference into Part III.
Exhibit Index appears on page 105.
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TABLE OF CONTENTS
PART I
Item Page
1. Business
A. Description of Business 3
B. Employee Benefits Segment 4
C. Related Businesses Segment 5
D. Colonial Companies Segment 6
E. Individual Disability Segment 7
F. Retirement Security Segment 8
G. Other Operations Segment 9
H. Investments 10
I. Risk Management and Reinsurance 12
J. Reserves 14
K. Employees 14
L. Competition 14
M. Regulation 14
N. Participation Fund Account 16
2. Properties 16
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security Holders 17
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters 18
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
8. Financial Statements and Supplementary Data 49
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 87
PART III
10. Directors and Executive Officers of the Registrant
A. Directors of the Registrant 88
B. Executive Officers of the Registrant 88
11. Executive Compensation 90
12. Security Ownership of Certain Beneficial Owners
and Management 90
13. Certain Relationships and Related Transactions 90
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 91
Signatures 92
Report of Independent Accountants 94
Report of Independent Auditors 95
Index to Financial Statement Schedules 96
Index to Exhibits 105
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PART I
Item 1. BUSINESS
A. Description of Business
UNUM Corporation is a Delaware corporation organized in 1985 as an
insurance holding company. UNUM Corporation and subsidiaries ("UNUM") are
the leading provider of group long term disability insurance ("group LTD")
in the United States and the United Kingdom. UNUM is also a major provider
of employee benefits, individual disability insurance and specialty
accident and health reinsurance. UNUM also markets long term care and
retirement income products. The operations of the following subsidiaries
account for substantially all of UNUM's consolidated assets and revenues.
UNUM Corporation is based in Portland, Maine and through its affiliates
has offices in North America, the United Kingdom and the Pacific Rim.
UNUM conducts its operations in the United States through a number of
wholly owned subsidiaries: UNUM Life Insurance Company of America ("UNUM
America"), a Maine life insurance company licensed in 49 states and Canada,
the leading provider of group disability insurance in the nation, and a
provider of employee benefits, long term care and retirement products;
First UNUM Life Insurance Company ("First UNUM"), a New York life insurance
company; Commercial Life Insurance Company, a Wisconsin life insurance
company and a leader in special risk insurance and professional association
insurance marketing; Duncanson & Holt, Inc., a New York corporation and a
leading accident and health reinsurance underwriting manager; Colonial
Companies, Inc., a Delaware holding company; and UNUM Holding Company, a
Delaware corporation. Colonial Life & Accident Insurance Company, a
wholly owned subsidiary of Colonial Companies, Inc., is the leader in
payroll-deducted voluntary employee benefits offered to employees at
their worksites. Through UNUM Holding Company, UNUM Corporation also
owns UNUM Sales Corporation, a licensed broker-dealer incorporated in
Delaware, and Claims Service International, Inc., a Delaware corporation,
which provides claims administration services.
UNUM Corporation also holds all of the outstanding capital stock of UNUM
European Holding Company, which is incorporated in the United Kingdom.
UNUM's United Kingdom operations are conducted by UNUM Limited, which is
the United Kingdom's leader in group disability insurance and a wholly
owned subsidiary of UNUM European Holding Company, and Duncanson & Holt
Europe Ltd., a wholly owned subsidiary of Duncanson & Holt, Inc.
On December 3, 1992, UNUM and Colonial Companies, Inc. ("Colonial"),
signed a definitive merger agreement. On March 26, 1993, Colonial Class A
common stock shareholders voted to approve the merger. Under the
agreement, UNUM exchanged 0.731 shares of its common stock for each share
of Colonial Class A and Class B common stock outstanding on March 26, 1993.
UNUM issued approximately 11.4 million shares of common stock from treasury
in connection with the merger. In addition, outstanding options to acquire
shares of Colonial Class B common stock were converted into options to
acquire shares of UNUM common stock. The merger qualified as a tax-free
reorganization. The merger has been accounted for as a pooling of
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interests, and, accordingly, UNUM's consolidated financial statements
have been restated to include the accounts of Colonial for all
periods presented. As a result of the merger, UNUM formed a new business
segment called "Colonial Companies," which exclusively reports the
historical results of Colonial for all periods presented.
UNUM reports its operations principally in six business segments:
Employee Benefits, Related Businesses, Colonial Companies, Individual
Disability, Retirement Security and Other Operations. Corporate includes
transactions which are generally non-insurance related, expenses incurred
in connection with UNUM's long-term strategic investment in Japan, and
interest expense on corporate borrowings.
Refer to Item 7 and Item 8 (Note 16) for more information.
B. Employee Benefits Segment
The Employee Benefits segment, which in 1993 accounted for 47.0% of
UNUM's revenues and 51.9% of its income before income taxes, markets a
range of group disability, group life and other specialty insurance
products to employers.
Group LTD is the Employee Benefits segment's principal product. UNUM
targets sales of group LTD to executive, administrative and management
personnel and other professionals. Since 1976, UNUM has been the nation's
leading provider of group LTD according to Employee Benefit Plan Review, a
recognized industry publication.
Group LTD provides employees with insurance coverage for loss of income
in the event of inability to work due to sickness or injury. Most of these
policies begin providing benefits following 90 or 180 day waiting periods
and continue providing benefits until the employee reaches age 65-70.
Group LTD benefits are paid monthly and generally are limited to two-thirds
of the employee's earned income up to a specified maximum benefit.
Premiums for group LTD insurance are based upon the expected mortality,
morbidity and persistency of the insured group as well as assumptions
concerning operating expenses and future interest rates.
UNUM's group life insurance product provides term insurance for
employees. It is marketed primarily to executive, administrative and
management personnel. As reported by Employee Benefit Plan Review in 1992,
the most recent available data, UNUM was one of the nation's ten largest
writers of group life insurance, based on number of contracts inforce.
UNUM markets other employee benefits products including short term
disability, accidental death and dismemberment, and dental insurance.
UNUM's flexible benefits product provides employees with the opportunity to
allocate benefit dollars among the various combinations of employee
benefits products.
Employee Benefits' group insurance is sold primarily on a basis that
permits annual repricing. This enables UNUM to adjust the pricing of its
products to more closely match the underlying claim experience and interest
rate environment.
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UNUM markets its Employee Benefits' insurance products through a network
of 33 offices in the United States and Canada, which distribute these
products as well as the products offered by the Retirement Security
segment, through brokers. As of December 31, 1993, these branch offices
were organized into four regions and were staffed with approximately 615
management, sales, service and administrative personnel.
Refer to Item 7 and Item 8 (Note 16) under the caption "Employee
Benefits Segment" for more information.
C. Related Businesses Segment
The Related Businesses segment in 1993 accounted for 14.4% of UNUM's
revenues and 12.5% of its income before income taxes. The Related
Businesses segment supports UNUM's growth strategy by focusing on the
development, acquisition and operation of related businesses outside UNUM's
existing product lines and distribution channels. The Related Businesses
segment includes UNUM Limited in the United Kingdom, Commercial Life
Insurance Company ("Commercial Life"), and reinsurance operations including
Duncanson & Holt, Inc.
On July 2, 1990, UNUM acquired all of the outstanding shares of National
Employers' Life Assurance Company Limited ("NEL"). On August 1, 1990, UNUM
acquired certain remaining policyholder interests of a NEL subsidiary,
N.E.L. Permanent Health Insurances Limited (now known as UNUM Limited). In
the third quarter of 1990, UNUM announced plans to restructure the
operations of its United Kingdom acquisition by continuing to develop the
permanent health (long term disability) business through UNUM Limited and
by divesting the life, pension and mortgage businesses of NEL. On January
6, 1992, the NEL businesses were sold.
UNUM Limited is the leading provider of group long term disability
insurance in the United Kingdom. UNUM Limited targets group long term
disability sales to management personnel, other professionals and technical
and skilled artisans. These products are marketed through a network of
independent brokers. UNUM Limited's long term disability products provide
employees with insurance coverage for loss of income in the event of
inability to work due to sickness or injury. UNUM Limited also markets
individual disability insurance to self-employed individuals and those not
covered under group policies through brokers and agents.
Commercial Life markets group special risk accident products, term life,
group universal life and long term disability, along with payroll deduction
programs for employees through a network of independent brokers and
specialty agents. Commercial Life is a leader in voluntary group accident
insurance. Commercial Life sells to specialty markets, which include
professional groups such as physicians, certified public accountants,
dentists and attorneys.
On July 30, 1992, UNUM purchased Duncanson & Holt, Inc. ("D&H"), a
leading accident and health reinsurance underwriting manager. As a
reinsurance manager, D&H provides pool management as well as marketing,
underwriting, administration, claims payment and actuarial services for
client companies, but does not bear any insurance risk. D&H has offices
throughout the United States and in London, Toronto, and Singapore.
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Refer to Item 7 and Item 8 (Note 16) under the caption "Related
Businesses Segment" for more information.
D. Colonial Companies Segment
The Colonial Companies segment in 1993 accounted for 13.2% of UNUM's
revenues and 15.3% of its income before income taxes. Colonial Companies'
principal subsidiary, Colonial Life & Accident Insurance Company ("Colonial
Life"), markets a broad line of payroll-deducted, voluntary benefits to
employees at their worksites. Colonial Life focuses on personal accident
and sickness, life and cancer insurance plans and, in 1993, introduced
annuity and medicare supplement insurance policies to its product line.
Colonial Life's accident policies generally provide benefit payments for
disability income, death, dismemberment or major injury. Accident policies
are designed to supplement other benefits available through Social
Security, workers' compensation, and other insurance plans. Colonial Life
offers a wide range of life insurance products, with universal life and
whole life accounting for most of the life insurance sold. Colonial Life's
cancer policies are designed to provide payments for hospitalization and
scheduled medical benefits, with the amounts and duration of such payments
established by the policies. All of Colonial Life's insurance policies are
issued on a nonparticipating basis.
More than 95% of Colonial Life's premiums for 1993 were derived from
policies marketed to employees at their worksites, with premiums in most
cases to be collected through payroll deduction. Such policies are issued
on a "guaranteed renewable for life" basis, which means that Colonial Life
cannot refuse to renew any policy, but it does reserve the right on a
product-by-product basis to increase premiums for inforce policies. This
right to change premiums is or may be subject to various state insurance
department rules, regulations and approvals.
Since 1985, Colonial Life has marketed its accident and health products
as qualified fringe benefits that can be purchased with pretax dollars as
part of a flexible benefits program pursuant to Section 125 of the Internal
Revenue Code. In 1993, premiums from sales to employees participating in
such programs accounted for approximately 46% of total premiums. A
flexible benefits program allows employers to manage their benefits and
compensation packages and provides policyholders with the ability to choose
the benefits that best meet their needs. Although Congress might change
the tax laws to limit or eliminate fringe benefits available on a pretax
basis, and such a change could limit or eliminate Colonial Life's
ability to continue marketing its products in this way, Colonial Life
believes its products provide policyholders value, which will remain even
if the tax advantages offered by flexible benefit programs are eliminated.
Colonial Life markets its products nationwide primarily through a 5,200-
member independent contractor sales force. Approximately 1,150 home office
employees provide corporate administration, sales support, internal
services and systems, policyholder claims and services, and employer
services.
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Colonial Companies' subsidiary, BenefitAmerica, Inc. ("BenefitAmerica"),
offers employers administrative services for their employee benefit
programs. The services offered by BenefitAmerica include claims
adjudication and payment for reimbursement plans, which are offered under
an employer's flexible benefits plan pursuant to Section 125 of the
Internal Revenue Code, as well as other administrative services to those
plans. The services offered by BenefitAmerica complement the services and
products offered to employers by Colonial Life.
Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial
Companies Segment" for more information.
E. Individual Disability Segment
The Individual Disability segment accounted for 11.9% of UNUM's revenues
and 15.0% of its income before income taxes in 1993. This segment
provides business owners, corporate executives, professionals and
administrative support personnel with coverage through its CUSTOMAX
(registered trademark) products for loss of income in the event of
disability. In addition to marketing the CUSTOMAX (registered
trademark) portfolio under the UNUM name, UNUM has private labeling
agreements with insurance companies under which the CUSTOMAX (registered
trademark) products are distributed.
The basic individual disability policy provides the insured with a
portion of the earned income which is lost as a result of sickness or
injury. Monthly benefits available range from 30% to 70% of the insured's
earned income up to a specified maximum benefit. Various options are
available that permit tailoring of an insurance policy to the specific
client's needs. The most common options include payments for partial
disability, length of benefit period, cost-of-living adjustments, college
benefits and retirement benefits. Various waiting periods are offered
before payment begins ranging from 30 to 180 days. 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 products are sold on a non-cancellable
basis, with a fixed premium for the duration of the policy. Some policies
written in Canada are sold on a guaranteed renewable basis, which allows
for future rate increases. As reported in the Life Insurance Marketing
Research Association's 1992 Individual Health Issues and Inforce Survey,
the most recent available data, UNUM was the third largest writer of
individual disability income policies as measured by premium on both new
sales and premium inforce. Premium rates are based on expected mortality,
morbidity and persistency as well as assumptions concerning policy related
expenses and investment income. Due to the non-cancellable, fixed premium
nature of the policies, profitability of the individual disability business
is largely dependent upon proper risk evaluation of potential insureds and
sound benefits management. UNUM evaluates the medical and financial
condition of the prospective insured prior to policy issuance.
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UNUM currently distributes this segment's products in the United States
and Canada through a branch office system of Individual Disability sales
consultants, who distribute these products as well as products offered by
the Retirement Security Segment, through brokers and agents. UNUM has a
network of 52 Individual Disability offices in the United States that are
staffed with approximately 360 management, sales, service and
administrative employees. Another 11 sales offices, staffed by
approximately 39 employees, are located throughout Canada.
Refer to Item 7 and Item 8 (Note 16) under the caption "Individual
Disability Segment" for more information.
F. Retirement Security Segment
The Retirement Security segment accounted for 8.0% of UNUM's revenues and
4.6% of its income before income taxes in 1993. This segment markets and
services tax-sheltered annuities ("TSA") and long term care products. In
1992, the Retirement Security Segment introduced Lifestyle Security
Protection (service mark) ("LSP") to its product line.
TSA products (Section 403(b) plans under the Internal Revenue Code) are
marketed to non-profit hospitals and organizations. These contracts offer
a fixed fund which provides for annual renewable guarantees of principal
and interest. In addition, some TSA contracts offer variable annuity
investment alternatives. These investment alternatives are mutual funds
offered as subaccounts in a UNUM separate account. The mutual funds,
managed by nationally recognized investment managers, include a variety of
choices such as growth, balanced and stock index funds. UNUM also offers
recordkeeping and reporting services to TSA contract holders.
LSP products are marketed to employers to supplement their employees'
retirement planning needs. It provides plan participants with insurance
coverage for retirement savings in the event of the inability to continue
retirement contributions due to death or disability.
UNUM markets its retirement products through a network of 30 offices in
the United States, which distribute these products as well as the products
offered by the Employee Benefits segment, primarily through brokers.
UNUM markets long term care insurance to employer groups, continuing care
retirement communities and individuals. The group product is offered on an
employer or employee paid basis, and employer groups may offer coverage to
spouses, parents and grandparents, in addition to the employee. UNUM
distributes long term care products in the United States through brokers
and agents from the branch office system as described in the Employee
Benefits and Individual Disability Segments.
Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement
Security Segment" for more information.
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G. Other Operations Segment
The Other Operations segment accounted for 5.3% of UNUM's revenues and
4.5% of its income before income taxes in 1993. This segment includes
401(k) plans, guaranteed investment contracts ("GICs"), deposit
administration contracts ("DAs"), group medical insurance, and the
individual life insurance business of UNUM America, all of which are no
longer actively marketed by UNUM.
In the fourth quarter of 1991, UNUM announced plans to withdraw from
the 401(k) market by the end of 1992. UNUM has transferred 401(k) service
responsibilities to its formerly wholly owned subsidiary, Preferred
Benefits Corporation, which was sold in the second quarter of 1992.
UNUM discontinued active marketing of GICs and DAs primarily due to the
lack of demand and the level of investment risk. UNUM discontinued new
sales of universal life and other individual life policies as of January 1,
1988. UNUM began exiting the group medical product line in 1987 with the
discontinuance of new sales on the traditional group medical product. In
1990, management announced its intention to exit the group medical product
entirely. Beginning with the February 1991 renewals, policyholders had the
option of transferring their group medical product to another insurer.
UNUM services commitments to inforce policyholders, which include
conversions of group life and group medical insurance.
Refer to Item 7 and Item 8 (Note 16) under the caption "Other Operations
Segment" for more information.
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H. Investments
Refer to Item 7 under the caption "Investments" for more information.
Additional information about UNUM's mortgage loan portfolio is provided
below:
Overall, UNUM management believes that its mortgage loan portfolio is
well diversified geographically and among property types. The mortgage
loan portfolio percentages by geographic region and property type at
December 31, 1993, and 1992, were as follows:
Geographic Region
1993 1992
New England 10.5% 9.3%
Mid-Atlantic 16.6 17.6
Southeast 16.4 17.0
Southwest 7.7 7.1
North Central 15.1 14.4
Farm Belt 9.9 10.5
Pacific 16.2 16.0
Oil Patch 7.6 8.1
Total 100.0% 100.0%
Property Type
1993 1992
Office Building 28.1% 26.4%
Retail 29.5 29.1
Industrial 19.1 19.5
Residential 6.4 6.6
Medical 6.5 6.8
Nursing Home 3.6 4.6
Hotel/Motel 5.5 5.1
Other 1.3 1.9
Total 100.0% 100.0%
Mortgage loans delinquent sixty days or more on a contract delinquency
basis by geographic region and property type were as follows at December
31, 1993, and 1992 (Dollars in millions):
Geographic Region
1993 1992
New England $15.7 $15.7
Mid-Atlantic 4.6 5.1
Southwest 2.7 2.7
Farm Belt -- 1.8
Pacific 3.1 6.1
North Central -- 1.5
Total $26.1 $32.9
Property Type
1993 1992
Office Building $23.4 $26.2
Retail 2.7 2.7
Industrial -- 3.9
Other -- 0.1
Total $26.1 $32.9
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Restructured mortgage loans by geographic region and property type were
as follows at December 31, 1993, and 1992 (Dollars in millions):
Geographic Region
1993 1992
New England $ 3.4 $ 3.4
Mid-Atlantic 2.2 8.0
Southeast 12.2 10.8
North Central 13.9 14.0
Farm Belt 8.8 9.6
Oil Patch 16.3 24.6
Other 9.1 10.5
Total $65.9 $80.9
Property Type
1993 1992
Office Building $31.5 $34.7
Retail 8.5 8.5
Industrial 7.6 7.7
Residential 6.2 18.0
Other 12.1 12.0
Total $65.9 $80.9
Other problem mortgage loans are defined by UNUM as those which are not
delinquent over 60 days and not restructured, but which are being accounted
for on a nonaccrual basis. Other problem loans by geographic region and
property type were as follows at December 31, 1993, and 1992 (Dollars in
millions):
Geographic Region
1993 1992
New England $ -- $14.5
Mid-Atlantic 3.4 13.3
Southeast 2.6 9.2
Oil Patch -- 10.8
Pacific 1.6 3.6
North Central 2.4 6.5
Other -- 0.8
Total $10.0 $58.7
Property Type
1993 1992
Office Building $ 0.5 $25.8
Industrial 2.8 16.2
Retail 6.7 12.4
Residential -- 4.3
Total $10.0 $58.7
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Potential problem mortgage loans are defined by UNUM as current and
performing loans, which management has doubts as to the ability of the
borrower to comply with present loan terms and whose book value exceeds the
market value of the underlying collateral. Potential problem loans by
geographic region and property type were as follows at December 31, 1993,
and 1992 (Dollars in millions):
Geographic Region
1993 1992
New England $ 6.2 $ 3.2
Mid-Atlantic 27.9 5.9
Southeast 4.6 13.7
Southwest 2.2 --
Oil Patch 3.5 4.9
Pacific 16.6 --
North Central 19.7 17.4
Farm Belt 6.9 7.0
Other -- 3.6
Total $87.6 $55.7
Property Type
1993 1992
Office Building $26.1 $16.6
Industrial 22.7 6.7
Retail 18.2 8.8
Residential -- 7.5
Hotel/Motel 18.3 16.1
Medical 2.3 --
Total $87.6 $55.7
I. Risk Management and Reinsurance
Risk management, which includes product design, pricing, underwriting,
reserving and benefits management, involves a determination of the type and
amount of risk that an insurer is willing to accept. UNUM has underwriters
organized within business segments who evaluate policy applications on the
basis of information provided by the applicant and other sources.
UNUM reinsures with other companies portions of the insurance policies it
has underwritten. Reinsurance allows UNUM to sell policies with a face
amount larger than the entire risk that UNUM is willing to assume. UNUM
remains liable to the insured for the payment of policy benefits if the
reinsurers cannot meet their obligations under the reinsurance agreements.
In the Employee Benefits segment, UNUM has underwriters for each major
product line. Quotes for prospective customers are based on UNUM's
experience with the profitability and persistency of the respective
employer's risk category. The maximum group LTD monthly benefit varies,
but the usual maximum monthly amount available is $35,000. For group life
insurance products, UNUM retains up to $750,000 per individual life and
reinsures the balance with other insurance carriers.
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Colonial Life has reinsurance on its cancer products that provides
coverage for claim payments in excess of $50,000 in any one year, per
claimant, up to a lifetime maximum of $1 million per claimant.
The financial and medical underwriting areas of UNUM Limited handle the
underwriting of group and individual disability policies. The maximum
yearly benefit for group LTD is 326,000 (British pound sterling). UNUM
Limited retains 55,000 (British pound sterling) of this risk and
reinsures the balance. The maximum yearly benefit for individual
disability insurance is 90,000 (British pound sterling) and amounts over
40,000 (British pound sterling) per annum are reinsured.
Commercial Life reinsures the risk on its voluntary accidental death and
dismemberment product in excess of $400,000 of coverage. Commercial Life
also reinsures the risk on individual, group, franchise life and accidental
death and dismemberment coverages in excess of the retention limit of
$250,000.
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, UNUM retains up to $8,000 basic monthly indemnity
per life for personal disability coverages, $20,000 per life for business
overhead expenses coverages and $500,000 per life for buy/sell coverages.
UNUM (except for Colonial Life) reinsures the risk of individual life
insurance contracts that exceed $425,000 on any one life. Colonial Life
limits its risk for death and dismemberment benefits to $100,000 per life.
In addition to the reinsurance arrangements above, UNUM (except for
Colonial Life, UNUM Limited and Commercial Life) is covered by catastrophe
reinsurance, which provides additional protection against aggregate losses
in excess of $1 million up to a maximum of $100 million. This protection is
activated whenever one event causes the disability and/or death of five or
more people covered under UNUM's life or disability contracts. Colonial
Life is covered by catastrophe reinsurance for accidental deaths totaling
more than $300,000 from a single disaster, up to a limit of $5 million.
UNUM Limited's group disability business is partially covered by
catastrophe reinsurance of 3 million (British pound sterling) for losses
from one event involving more than twenty-five lives. Commercial Life is
covered by catastrophe reinsurance, which provides additional protection
against aggregate losses in excess of $1 million up to a maximum of
$54 million for losses involving three or more covered lives.
Reinsurance premiums assumed and ceded for the year ended December 31,
1993, were $192.6 million and $50.0 million, respectively. No current or
planned reinsurance activity is expected to have a significant impact on
the ability of UNUM to underwrite additional insurance.
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J. Reserves
The reserves reported in the consolidated financial statements of UNUM
Corporation and subsidiaries have been computed in accordance with
generally accepted accounting principles ("GAAP") for stock life insurance
companies. These reserve balances generally differ from those specified by
the laws of the various states and those carried in the statutory financial
statements. The differences between GAAP and statutory reserves arise from
the use of different mortality, morbidity, interest and lapse assumptions.
Pursuant to insurance laws of the states of Maine, New York, South
Carolina, and Wisconsin, and of the United Kingdom, UNUM's insurance
subsidiaries (UNUM America, First UNUM, Colonial Life, Commercial Life and
UNUM Limited, respectively) have set up statutory reserves, carried as
liabilities, to meet obligations on their various policies. These
statutory reserves are amounts which, together with premiums to be received
and interest on such reserves at assumed rates, are calculated to be
sufficient to meet the policy and contract obligations of UNUM's insurance
subsidiaries.
Statutory and GAAP reserves are based upon UNUM's insurance subsidiaries'
experience as adjusted to provide for possible adverse deviations. These
estimates are periodically reviewed and compared to actual experience. The
assumptions are revised when it is determined that future expected
experience differs from the assumed estimates.
K. Employees
At December 31, 1993, UNUM had approximately 7,200 full-time employees.
UNUM does not have collective bargaining agreements with employees.
L. Competition
The principal competitive factors affecting UNUM's business are
reputation, financial strength, quality of service, risk management,
product design and price. There is competition among insurance companies
for the types of individual and group insurance and retirement products
sold by UNUM. At the end of 1993, there were approximately 2,000 legal
reserve life insurance companies in the United States and Canada and life
assurance offices in the United Kingdom, which may offer insurance products
similar to those marketed by UNUM. UNUM also competes with banks,
investment advisors, mutual funds and other financial entities to provide
products and services. All areas of group insurance are highly competitive
because of the large number of insurance companies and other entities
offering these products.
M. Regulation
UNUM's insurance subsidiaries are subject to regulation and supervision
in the jurisdictions in which they do business. Although the extent of
such regulation varies, state, Canadian and United Kingdom insurance laws
generally establish supervisory agencies, such as state insurance
departments, the Office of the Superintendent of Financial Institutions
("OSFI") and The Department of Trade and Industry ("DTI"), respectively,
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<PAGE>
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. In the United States, such powers also include the
licensing of agents and the approval of policy forms. UNUM's insurance
operations and subsidiaries must meet the standards and tests for its
investments promulgated by insurance laws and regulations of Maine, New
York, South Carolina, Wisconsin, Canada and the United Kingdom, as
applicable.
UNUM's United States domiciled insurance subsidiaries are required to
file quarterly and annual statements with the various insurance departments
in state jurisdictions in which they do business. These statements comply
with the rules of the National Association of Insurance Commissioners
("NAIC"). UNUM's insurance subsidiaries are examined periodically by
examiners of the states of Maine, New York, South Carolina and Wisconsin
and of other states (on an "association" or "zone" basis) in which they are
licensed to do business. UNUM's insurance branch operation in Canada is
periodically examined by Canadian insurance regulatory authorities and is
required to file annual reports that comply with the insurance laws of
Canada and with the rules of the OSFI of the Canadian Federal government
and each of the provinces. UNUM's United Kingdom subsidiary is required to
file financial statements annually with the DTI, in accordance with United
Kingdom law and regulation.
UNUM's insurance subsidiaries operate under insurance laws, which require
that they establish and carry, as liabilities, actuarial reserves to meet
their obligations on their life, disability, accident and health policies
and annuities. These reserves are verified periodically by various
regulators.
UNUM's reinsurance underwriting manager, Duncanson & Holt, Inc., ("D&H")
is a licensed reinsurance intermediary in New York. It is subject to
regulation in New York and other states where it does business. Duncanson
& Holt Underwriters, Ltd., a subsidiary of D&H, is a corporate member of
Lloyds of London and is subject to all rules applicable to such members.
UNUM Sales Corporation, a registered broker-dealer, is regulated by the
National Association of Securities' Dealers and the Securities and Exchange
Commission. It is the principal underwriter for variable annuity contracts
offered by UNUM America and First UNUM.
The laws of the State of Maine require periodic registration and
reporting by insurance companies domiciled within its jurisdiction, which
control or are controlled by other corporations or persons. This
constitutes, by definition, a holding company system. UNUM America is
domiciled in Maine and is subject to these laws. New York, which is the
domiciliary state of First UNUM; South Carolina, which is the domiciliary
state of Colonial Life; and Wisconsin, which is the domiciliary state of
Commercial Life, have similar laws. Accordingly, the UNUM insurance
subsidiaries are registered as members of the UNUM holding company system
in the states of Maine, New York, South Carolina and Wisconsin. The
statutes of these states require periodic disclosure concerning the
ultimate controlling person and intercorporate transactions within the
holding company system, some of which require prior approval.
15
<PAGE>
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, 1993, the required deposit
approximated $879.8 million. UNUM America has the ability to withdraw
assets from this account and to substitute other assets at its discretion.
The balance of the security deposit will be reviewed and adjusted at least
annually based upon the outstanding liabilities described above.
N. Participation Fund Account
Participating policies issued prior to November 14, 1986, by the former
Union Mutual Life Insurance Company ("Union Mutual") will remain
participating as long as they remain inforce. 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, 1993, the PFA had $342.8 million in assets, which are held
by UNUM America. UNUM has agreed to pay certain expenses associated with
the PFA and in 1986 established a reserve of $26.0 million for the present
value of such expenses. At December 31, 1993, the PFA expense reserve was
$17.7 million.
PFA assets, investment earnings and income from operations are not
available to UNUM America or UNUM during the operation or upon the
termination of the PFA. In the unlikely event that the assets of the PFA
are not adequate to provide for policyholder benefits (exclusive of
dividends, which are not guaranteed), UNUM America would be required to
provide for any shortfall, and such amounts, if any, would reduce earnings
of UNUM America and UNUM.
All operating data of the individual participating life and annuity
contracts has been excluded from the Consolidated Statements of Income and
all other operating data included in this report unless otherwise noted.
The assets and liabilities associated with the participating business are
included in UNUM's Consolidated Balance Sheets.
Item 2. PROPERTIES
UNUM owns home office property consisting of five office buildings and
four service buildings located throughout the Portland, Maine area. UNUM
also owns an office building in the United Kingdom, which is the home
office of UNUM Limited. The home office of the Colonial Companies is
located in Columbia, South Carolina, and is also owned by UNUM. In
addition, UNUM leases, on periods from five to ten years, office and
warehouse space for use by its home office affiliates and sales forces.
16
<PAGE>
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, 1993. In the opinion of
management, the ultimate liability, if any, arising from this litigation is
not expected to have a material adverse effect on the consolidated
financial position or the consolidated operating results of UNUM.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders, through solicitation
of proxies or otherwise, during the fourth quarter 1993.
17
<PAGE>
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, 1993, there were 26,092 shareholders of
record of common stock. Information concerning restrictions on the ability
of UNUM's subsidiaries to transfer funds to UNUM in the form of cash
dividends is described in Item 8 (Note 14).
The market price (as quoted by the New York Stock Exchange) and cash
dividends paid, per share of UNUM's common stock, by calendar quarter for
the past two years are as follows:
<TABLE>
<CAPTION>
1993 1992
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $54.750 $60.125 $57.750 $58.375 $54.375 $45.000 $41.750 $40.625
Low $47.750 $53.250 $51.000 $49.250 $41.250 $38.500 $32.000 $35.750
Close $52.500 $54.500 $54.000 $56.500 $53.000 $42.750 $41.250 $35.750
Dividend Paid $ 0.20 $ 0.20 $ 0.20 $0.16 1/2 $0.16 1/2 $0.16 1/2 $0.16 1/2 $ 0.13
</TABLE>
18
<PAGE>
Item 6. SELECTED FINANCIAL DATA
UNUM Corporation and Subsidiaries
S E L E C T E D C O N S O L I D A T E D F I N A N C I A L D A T A
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in millions, except per
common share data) 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data (a)
Revenues:
Premiums and other income (expense):
Employee Benefits $1,362.6 $1,116.2 $1,000.0 $ 909.8 $ 769.3 $ 723.3 $ 670.5
Related Businesses 402.5 354.4 324.2 269.2 192.9 -- --
Colonial Companies 407.4 371.9 325.4 281.1 241.0 216.6 192.1
Individual Disability 322.5 292.9 253.4 169.4 147.2 134.7 126.1
Retirement Security 36.3 32.3 28.0 21.7 22.7 17.1 9.1
Other Operations 25.9 29.3 41.9 74.4 108.1 162.9 229.3
Corporate -- 0.8 -- (0.1) 0.2 0.1 0.9
Total premiums and other income 2,557.2 2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0
Net investment income (expense): (b)
Employee Benefits 234.7 234.4 196.1 176.5 160.8 151.3 133.7
Related Businesses 85.5 91.6 95.3 63.5 38.3 -- --
Colonial Companies 41.4 35.4 38.5 25.2 26.7 22.3 19.0
Individual Disability 82.5 75.0 67.5 67.3 64.1 54.4 46.2
Retirement Security 235.5 228.8 227.8 209.6 196.8 172.4 157.6
Other Operations 154.0 181.6 184.9 218.0 227.8 240.7 260.6
Corporate 6.2 3.9 1.5 (9.0) 6.0 20.3 19.1
Total net investment income 839.8 850.7 811.6 751.1 720.5 661.4 636.2
Total revenues 3,397.0 3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2
Benefits and expenses:
Employee Benefits 1,358.2 1,128.1 1,002.2 915.6 779.7 743.5 703.7 Related Businesses
Related Businesses 430.7 392.6 358.4 298.3 213.4 -- --
Colonial Companies 378.4 346.8 306.4 259.6 225.5 201.1 178.6 Individual Disabilit
Individual Disability 336.0 323.3 284.2 210.8 195.0 192.3 169.8
Retirement Security 250.7 254.4 257.9 230.9 212.9 176.2 151.1
Other Operations 159.1 194.4 243.3 271.9 326.5 404.5 533.7
Corporate 23.6 10.4 12.5 10.8 12.4 9.5 15.8
Total benefits and expenses $2,936.7 $2,650.0 $2,464.9 $2,197.9 $1,965.4 $1,727.1 $1,752.7
(a) Prior year data has been restated to include the accounts of Colonial Companies, Inc., pursuant to the
March 26, 1993, merger with UNUM.
(b) Includes investment income and net realized investment gains.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in millions, except per
common share data) 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data (a)
Income (loss) before income taxes:
Employee Benefits $ 239.1 $ 222.5 $ 193.9 $ 170.7 $ 150.4 $ 131.1 $ 100.5
Related Businesses 57.3 53.4 61.1 34.4 17.8 -- --
Colonial Companies 70.4 60.5 57.5 46.7 42.2 37.8 32.5
Individual Disability 69.0 44.6 36.7 25.9 16.3 (3.2) 2.5
Retirement Security 21.1 6.7 (2.1) 0.4 6.6 13.3 15.6
Other Operations 20.8 16.5 (16.5) 20.5 9.4 (0.9) (43.8)
Corporate (17.4) (5.7) (11.0) (19.9) (6.2) 10.9 4.2
Total income before income taxes 460.3 398.5 319.6 278.7 236.5 189.0 111.5
Income taxes (credit) 148.3 107.3 74.3 60.9 51.1 30.1 (4.7)
Cumulative effects of accounting
changes (12.1)(d) -- -- -- -- -- --
Net income $ 299.9 $ 291.2 $ 245.3 $ 217.8 $ 185.4 $ 158.9 $ 116.2
Per common share: (c)
Net income $ 3.81(d) $ 3.71 $ 3.15 $ 2.73 $ 2.03 $ 1.57 $ 1.06
Dividends paid $0.76 1/2 $0.62 1/2 $ 0.49 $0.37 1/2 $0.28 1/2 $ 0.23 $ 0.20
(a) Prior year data has been restated to include the accounts of Colonial Companies, Inc., pursuant to the
March 26, 1993, merger with UNUM.
(b) Includes investment income and net realized investment gains.
(c) Per common share data reflects the effect of the February 14, 1992, two-for-one common stock split.
(d) 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.
</TABLE>
20
<PAGE>
UNUM Corporation and Subsidiaries
S E L E C T E D C O N S O L I D A T E D F I N A N C I A L D A T A
<TABLE>
<CAPTION>
December 31,
(Dollars and shares
in millions) 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data (a)
Assets $12,437.3 $11,959.8 $11,310.9 $10,063.4 $ 9,045.7 $ 8,592.3 $ 7,783.0 $ 7,333.8 $6,019.0 $5,205.7
Long-term $ 128.6 $ 77.2 $ 51.5 $ 77.2 $ 1.5 $ 1.5 $ 1.7 1.4 -- --
Stockholders'
equity $ 2,102.7 $ 2,010.9 $ 1,755.5 $ 1,490.1 $ 1,445.0 $ 1,512.3 $ 1,463.8 $ 1,471.1 $770.0(c) $617.2(c)
Shares
outstanding(b) 76.0 79.1 78.2 77.4 82.0 96.8 104.2 111.4 NA(c) NA(c)
Weighted
outstanding during
the year (b) 78.8 78.5 77.8 79.9 91.4 101.3 109.1 NA(c) NA(c) NA(c)
(a) Prior year data has been restated to include the accounts of Colonial Companies, Inc., pursuant to the
March 26, 1993, merger with UNUM.
(b) Share data reflects the effect of the February 14, 1992, two-for-one stock split.
(c) In November 1986, UNUM converted to a stock company from a mutual company.
</TABLE>
21
<PAGE>
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, 1993, and the consolidated
results of operations for the past three years and, where appropriate,
factors that may affect future financial performance are identified and
discussed. Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Consolidated
Financial Statements, Notes to Consolidated Financial Statements and
Selected Consolidated Financial Data.
CONSOLIDATED OVERVIEW
(Dollars in millions, except per share amounts, and
percentage increase (decrease) over prior year)
1993 1992 1991
Revenues
Premiums $2,474.1 15.5% $2,142.4 10.5% $1,938.9
Investment income 790.4 (2.3) 809.2 2.9 786.6
Net realized investment gains 49.4 19.0 41.5 66.0 25.0
Fees and other income 83.1 50.0 55.4 62.9 34.0
Total revenues 3,397.0 11.4 3,048.5 9.5 2,784.5
Benefits and expenses 2,936.7 10.8 2,650.0 7.5 2,464.9
Income before income taxes 460.3 15.5 398.5 24.7 319.6
Income taxes 148.3 38.2 107.3 44.4 74.3
Income before cumulative
effects of accounting changes 312.0 7.1 291.2 18.7 245.3
Cumulative effects of accounting
changes
Income taxes 20.0 nm -- --
Postretirement benefits other
than pensions, net of tax (32.1) nm -- --
Net income $ 299.9 3.0% $ 291.2 18.7% $ 245.3
Per common share
Income before cumulative effects
of accounting changes $ 3.96 $ 3.71 $ 3.15
Cumulative effects of
accounting changes
Income taxes 0.25 -- --
Postretirement benefits other
than pensions, net of tax (0.40) -- --
Net income $ 3.81 $ 3.71 $ 3.15
22
<PAGE>
Summary of income (loss) before
income taxes
Employee Benefits Segment $ 239.1 7.5% $ 222.5 14.7% $ 193.9
Related Businesses Segment 57.3 7.3 53.4 (12.6) 61.1
Colonial Companies Segment 70.4 16.4 60.5 5.2 57.5
Individual Disability Segment 69.0 54.7 44.6 21.5 36.7
Retirement Security Segment 21.1 nm 6.7 nm (2.1)
Other Operations Segment 20.8 26.1 16.5 nm (16.5)
Corporate (17.4) nm (5.7) nm (11.0)
Total income before income
taxes $ 460.3 15.5% $ 398.5 24.7% $ 319.6
Balance Sheet Data
Assets $12,437.3 $11,959.8 $11,310.9
Long-term debt $ 128.6 $ 77.2 $ 51.5
Stockholders' equity $ 2,102.7 $ 2,010.9 $ 1,755.5
Shares outstanding 76.0 79.1 78.2
Weighted average shares outstanding
during the year 78.8 78.5 77.8
nm = not meaningful or in excess of 100%
COLONIAL MERGER
As described in Notes 1 and 2 of the Consolidated Financial Statements,
UNUM's consolidated financial statements have been restated to include the
accounts of Colonial Companies, Inc., pursuant to the March 26, 1993,
merger, which has been accounted for as a pooling of interests. As a
result of the merger, UNUM formed a new business segment called "Colonial
Companies," which exclusively reports the historical results of Colonial
Companies, Inc., for all periods presented. Reflected in 1993 net income
is a one time charge of $9.6 million, or $0.12 per share, for expenses
incurred to effect the merger.
ACCOUNTING CHANGES
Included in 1993 net income were the cumulative and incremental effects of
the adoption of Financial Accounting Standards ("FAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," and No. 109,
"Accounting for Income Taxes."
Effective January 1, 1993, UNUM adopted FAS 106, which changed the method
for recognition of the cost of postretirement benefits other than pensions
from a cash basis to an accrual basis over the years in which employees
render the related services. UNUM elected to recognize the FAS 106
liability at January 1, 1993, of $48.8 million as a cumulative effect of an
accounting change which decreased net income by $32.1 million, or $0.40 per
share, in 1993. The incremental effect of FAS 106 for 1993 was increased
operating expenses of approximately $6.0 million.
23
<PAGE>
Also effective January 1, 1993, UNUM adopted FAS 109, which changed the
method for calculating and reporting deferred income taxes in the financial
statements from the deferred method to the liability method. The cumulative
effect of this accounting change amounted to a $20.0 million increase, or
$0.25 per share, in 1993 net income.
UNUM also adopted FAS 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," effective January 1, 1993,
which resulted in an increase in other assets of $80.0 million and a
corresponding increase in future policy benefits and unpaid claims and
claim expenses, but did not affect 1993 net income.
INCOME BEFORE INCOME TAXES
1993 Compared With 1992
Continued successful expense management, favorable claims experience in the
Individual Disability segment and unusually favorable interest spread
margins on tax sheltered annuities in the Retirement Security segment were
primary factors in the increase in income before income taxes in 1993.
Expenses incurred in connection with the merger of UNUM and Colonial
Companies, Inc., included in Corporate, and unfavorable group life claims
experience in the Employee Benefits segment partially offset these results.
Net realized investment gains increased by $7.9 million in 1993 to $49.4
million from $41.5 million in 1992.
1992 Compared With 1991
Favorable group long term disability claims experience in the Employee
Benefits segment, coupled with decreased expenses associated with the
withdrawal from the 401(k) market reported in the Other Operations segment
were two primary factors that resulted in increased income before income
taxes in 1992. Additionally, net realized investment gains increased by
$16.5 million in 1992.
INCOME TAXES
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 ("OBRA")
was enacted. OBRA increased the federal income tax rate of 34% to 35%,
retroactive to January 1, 1993, and generally serves to limit corporate tax
deductions for years after 1993. The change in tax rates resulted in
increased 1993 income tax expense of $3.6 million related to 1993 pretax
income and an additional $7.8 million related to the adjustment of deferred
tax liabilities, for a total charge of $11.4 million, or $0.15 per share.
The effective tax rate reflects income tax expense as a percentage of
pretax income. The effective rates were 32.2% for 1993, 26.9% for 1992 and
23.2% for 1991. Excluding the adjustment to deferred income tax expense of
$7.8 million for the enacted tax rate change, the 1993 effective tax rate
would have been 30.5%. Reported income tax expense was below the federal
statutory tax rate of 35% for 1993, and 34% for 1992 and 1991, primarily
due to tax savings from investment in tax-exempt securities. UNUM's growth
in pretax income has outpaced the growth of income from tax-exempt
securities, which has resulted in increased effective tax rates for 1993
and 1992.
24
<PAGE>
The effect of the 1993 tax rate increase on future income taxes is
dependent on the levels of pretax income and UNUM's investment in tax exempt
securities. Other provisions of OBRA include: the denial of a tax
deduction for lobbying expenses; a decrease in the amount of meals and
entertainment expenses deductible for tax purposes; and denial of a tax
deduction for some amounts of compensation paid in excess of $1 million to
certain individuals in a single year. These provisions are not expected to
have a material effect on UNUM's future income tax expense.
ECONOMIC ENVIRONMENT
The majority of UNUM's businesses have been affected by the economic
conditions that have existed in the United States during the past two
years. The United States has experienced reduced salary growth due to low
inflation, the elimination of jobs due to corporate restructurings,
depressed real estate markets and lower interest rates. Due to these
economic conditions, UNUM's disability businesses have experienced higher
incidence of new claims and lower recovery rates which management believes
are linked to the recessionary pressures experienced by UNUM's insureds.
Additionally, UNUM's United Kingdom affiliate, UNUM Limited, has been
affected by the United Kingdom's depressed economic conditions,
lower interest rates and the decline in the value of the British pound
sterling against the U.S. dollar.
During 1993, long-term interest rates dropped to their lowest levels in
more than 20 years, the prime rate averaged 6%, and short-term rates
hovered around 3%. The declining interest rate environment during the past
two years has reduced investment yields on new fixed income purchases, and
has resulted in decreased investment income for 1993, despite a continued
growth in invested assets. UNUM has also experienced increased levels of
prepayments and refinancings on its fixed rate investments during the past
two years due to the lower interest rate environment. If the current
interest rate environment persists, 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 investment portfolio yields.
The current interest rate environment has decreased the average rate used
to discount claim reserves, which is expected to increase claim reserve
liabilities. 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 implements new risk management programs and underwriting
guidelines. Conversely, the impact of a declining interest rate
environment on UNUM's tax sheltered annuity business is decreased amounts
of interest credited to funds on deposit.
25
<PAGE>
During the past two years, new additions to the allowance for probable
losses on invested assets and real estate held for sale have declined.
Additions to the allowance for probable losses were $19.8 million, $32.7
million and $53.2 million for the years ended December 31, 1993, 1992 and
1991, respectively. UNUM's incidence of new problem mortgage loans and
foreclosure activity declined in 1993 as overall economic activity improved
modestly, and many of the real estate markets in which UNUM has mortgage
loans stabilized.
Economic indicators at the end of 1993 and early 1994 were predicting
modest growth for the United States in 1994. In February 1994, the Federal
Reserve Board tightened credit policy, due to market concerns about rising
inflation, by raising the federal-funds rate for the first time in nearly
five years to 3.25% from 3.0%. Since long-term yields are based on market
dynamics, management cannot predict the impact of a higher short-term rate
on long-term yields.
HEALTH CARE REFORM
The United States spends close to one trillion dollars, more than 14
percent of its Gross Domestic Product and more than any other
industrialized nation, on health care. In September 1993, President
Clinton's Administration proposed comprehensive changes to overhaul the
U.S. health care system under the Health Security Act of 1993. While final
legislation cannot be predicted, all U.S. citizens and legal residents
would be guaranteed access to a federally mandated standard health package
by January 1, 1998, under the Administration's proposal. Health care would
be provided through "managed competition," which uses a balance of
government regulation and free market competition to control costs and
provide access to quality services.
President Clinton's plan defines two types of coverage -- "basic" and
"supplemental." Basic coverage would provide core health benefits;
supplemental coverage would include additional medical benefits. This
proposed plan will permit purchasing alliances to offer only basic or
supplementary health insurance benefits. Voluntary types of coverage such
as those offered by the UNUM enterprise are outside the scope of the
President's proposal and would not be subject to regulation by the national
health board. The purchasing alliances and a national health board
would be created as intermediaries under the President's plan.
The ambiguity surrounding health care reform did impact UNUM's business
growth for certain products in 1993. While President Clinton's reform plan
is unlikely to affect UNUM's core disability and special risk businesses,
which would be considered voluntary coverages, the proposed plan still
leaves uncertainty surrounding long term care insurance.
Sales of long term care insurance were unfavorably affected in 1993 by the
Administration's proposal to include a limited home care benefit for
severely disabled individuals. Management believes that the Administration
will ultimately restrict long term care benefits to those who cannot
otherwise afford coverage, a situation which would not affect UNUM's target
markets. UNUM has since introduced a new program, LTC Assurance Plus, that
offers a premium credit on home long term care if duplicate federal
insurance is provided under enacted health care legislation.
26
<PAGE>
President Clinton's reform plan has been met with opposition, and several
parties have drafted and support alternative legislation. It is likely
that congressional deliberations on health care reform will result in final
legislation that is different from President Clinton's original proposal.
Management is not able to predict the effect that any such legislation
might have on UNUM's businesses but believes that health care reform
presents opportunities for business growth as brokers and other
intermediaries search for a means to replace income lost from selling
medical insurance products and as employers seek to differentiate their
benefit packages by providing additional benefits. Management also
believes that health care reform could allow UNUM to leverage its expertise
in individual payroll-deduction marketing through its new affiliate,
Colonial Companies, Inc., which is the leader in payroll deducted, voluntary
employee benefits offered to employees at their worksites.
27
<PAGE>
EMPLOYEE BENEFITS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1993 1992 1991
Revenues
Premiums
Group LTD $ 933.4 20.4% $ 775.2 8.8% $ 712.7
Group life insurance 272.0 28.2 212.2 23.8 171.4
Other employee benefits 147.4 22.2 120.6 9.7 109.9
Total premiums 1,352.8 22.1 1,108.0 11.5 994.0
Investment income 211.9 5.4 201.0 11.0 181.1
Net realized investment
gains 22.8 (31.7) 33.4 nm 15.0
Fees and other income 9.8 19.5 8.2 36.7 6.0
Total revenues 1,597.3 18.3 1,350.6 12.9 1,196.1
Benefits and expenses
Benefits to policyholders 1,018.3 26.0 808.0 10.7 729.9
Operating expenses 284.6 9.7 259.5 13.6 228.5
Commissions 97.9 10.7 88.4 13.3 78.0
Increase in unamortized
deferred policy acquisition
costs (42.6) 53.2 (27.8) (18.7) (34.2)
Total benefits and
expenses 1,358.2 20.4 1,128.1 12.6 1,002.2
Income before income taxes $ 239.1 7.5% $ 222.5 14.7% $ 193.9
Sales (annualized new premiums)
Group LTD $ 196.2 $ 160.0 $ 147.8
Group life insurance $ 89.4 $ 77.6 $ 60.8
Other employee benefits $ 52.9 $ 46.7 $ 41.7
Persistency (premiums)
Group LTD 88.7% 90.3% 89.7%
Group life insurance 89.2% 89.2% 88.7%
Benefit ratio (% of premiums) 75.3% 72.9% 73.4%
Operating expense ratio
(% of premiums) 21.0% 23.4% 23.0%
nm = not meaningful or in excess of 100%
The Employee Benefits segment includes group long term disability ("group
LTD"), group life and other employee benefits products including short term
disability, accidental death and dismemberment and dental insurance, which
are sold by UNUM Life Insurance Company of America ("UNUM America") and
First UNUM Life Insurance Company ("First UNUM").
28
<PAGE>
Record sales were reported in all of the Employee Benefits segment's
product lines in 1993, which contributed to a 22.1% growth in premiums.
Premium growth also reflected selected price increases and slight growth of
the employment and salary levels for group LTD's existing customer base.
Renewal rate actions for group LTD had a minimal impact on the premium
persistency rate for 1993. In 1993, group LTD was active in acquiring
closed blocks of claims which generated one-time premiums totaling $58.3
million. Management intends to pursue additional claim block acquisitions
in the future.
The 11.5% premium increase in 1992 reflected improved persistency, which
was partially offset by slower sales for group LTD. Sales in the first
half of 1992 were affected by economic conditions in North America which
also contributed to sluggish salary and employment growth of existing
customers.
In 1993, the group life business experienced unfavorable claims results
which contributed to the increased benefit ratio for the Employee Benefits
segment from 1992. Management attributes group life's 1993 claims
experience to antiselection and adverse mortality. Mortality risk has a
random element, and it is not uncommon to experience adverse or favorable
mortality swings. To address the antiselection experienced during 1993,
management has imposed more stringent underwriting requirements and has
targeted specific business segments to pursue risk and pricing actions. In
1993, group LTD experienced a slightly higher incidence of new claims which
was expected by management due to a changing mix in the customer base, and
lower claim terminations.
During 1992, the Employee Benefit segment's benefit ratio improved
primarily due to more favorable group LTD claims experience resulting from
risk management improvements, which was partially offset by lower claim
recoveries and less favorable claims experience in the group life business.
During 1992, claims experience in the group life business returned to a
more normal level, following better than expected experience rates in 1991.
The discount rate used to determine group LTD reserves decreased from 9.7%
at December 31, 1992, to 9.3% at December 31, 1993. The rate is a
composite yield of assets backing the group LTD reserves and has decreased
since cash flows are invested in high quality assets at current yields,
which are below the yields of existing assets. If the current interest
rate environment persists and the level of growth of the group LTD product
continues, management anticipates that the overall rate used to discount
group LTD reserves will continue to decline, which is expected to increase
current reserve requirements. 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 implements new risk management programs
and underwriting guidelines.
29
<PAGE>
The ratio of operating expenses to premiums was 21.0%, 23.4% and 23.0% in
1993, 1992 and 1991, respectively. The decrease in 1993 is attributable
to increased premium from claim block purchases which do not have
proportionally higher expenses, and continued efforts to manage expense
growth. The increase in operating expenses in 1992 was attributable to
increased claims management activity, significant investments in new
strategic and administrative systems and increased marketing costs to
support higher sales. Unamortized deferred policy acquisition costs
increased in 1993 due primarily to higher sales. The increase in
unamortized deferred policy acquisition costs was lower in 1992 than in
1991 primarily due to higher amortization as a result of the timing and
characteristics of policy terminations and lower deferrals of marketing
costs.
Strong premium growth and lower operating expenses that were partially
offset by unfavorable claims experience in the group life business and
lower realized investment gains resulted in increased income before income
taxes for 1993 as compared to 1992. The improvement in income before
income taxes for the Employee Benefits segment in 1992 was primarily due to
more favorable group LTD claims experience and increased realized
investment gains, which were partially offset by less favorable claims
experience in the group life business.
30
<PAGE>
RELATED BUSINESSES SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1993 1992 1991
Revenues
Premiums $ 353.4 4.9% $ 336.8 4.2% $ 323.2
Investment income 82.1 (6.2) 87.5 (2.9) 90.1
Net realized investment
gains 3.4 (17.1) 4.1 (21.2) 5.2
Fees and other income 49.1 nm 17.6 nm 1.0
Total revenues 488.0 9.4 446.0 6.3 419.5
Benefits and expenses
Benefits to policyholders 268.7 2.3 262.7 3.4 254.0
Operating expenses 122.9 30.1 94.5 29.3 73.1
Commissions 46.8 9.1 42.9 13.5 37.8
Increase in unamortized
deferred policy acquisition
costs (7.9) 3.9 (7.6) 16.9 (6.5)
Interest expense 0.2 nm 0.1 nm --
Total benefits and
expenses 430.7 9.7 392.6 9.5 358.4
Income before income taxes $ 57.3 7.3% $ 53.4 (12.6)% $ 61.1
Benefit ratio
(% of premiums) 76.0% 78.0% 78.6%
nm = not meaningful or in excess of 100%
The Related Businesses segment includes: UNUM Limited, the United Kingdom's
leader in group disability insurance; Commercial Life Insurance Company
("Commercial Life"), a leader in special risk insurance and professional
association insurance marketing; and Reinsurance Operations, which includes
Duncanson & Holt, Inc., and other specialty reinsurance operations.
UNUM Limited
The United Kingdom has experienced depressed economic conditions during the
last two years that have affected UNUM Limited's ability to sell employee
benefits to a stagnant workforce. UNUM reallocated capital from UNUM
Limited in 1992, which resulted in decreased investment income for the
Related Businesses segment in 1993 and 1992. The decreasing interest rate
environment further pressured UNUM Limited's investment income. UNUM
Limited, which experienced favorable claims levels in 1991, experienced
more normal claims levels in 1992 and 1993. Collaborative efforts between
UNUM's U.S. and U.K. group long term disability specialists have provided
UNUM the opportunity to leverage expertise among the companies. Operating
expenses increased during 1993 and 1992 primarily due to continued
investment in administrative procedures and systems.
31
<PAGE>
The economic recession in the United Kingdom could continue to negatively
affect UNUM Limited's and the Related Businesses segment's growth and
earnings. During the last two years the U.S. dollar continued to
strengthen against the British pound sterling, which decreased earnings for
UNUM Limited as reported in U.S. dollars. The weighted average exchange
rate was approximately $1.51, $1.78 and $1.78 for the years ended December
31, 1993, 1992 and 1991. At December 31, 1993, the spot rate had declined
to $1.48.
Commercial Life
Premiums increased during 1993 and 1992 due to modest growth in Commercial
Life's major product lines. During 1993, the benefit ratio decreased from
1992, due primarily to more favorable claims experience in the franchise
disability business. The benefit ratio improvement in 1992 from 1991 was
primarily due to unusually favorable claims experience in the specialty
group accident product line, which was partially offset by unfavorable
claims experience in the franchise disability business. Due to the nature
of the risks underwritten, the specialty group accident product line
exhibits claims variability.
Reinsurance Operations
Acquired in third quarter 1992, Duncanson & Holt, Inc. ("D&H"), is a
leading accident and health reinsurance underwriting manager which provides
pool management services to client companies but does not bear insurance
risk. In return for services provided, D&H collects a management fee which
is primarily based on the level of pool insurance business and is intended
to offset expenses incurred as a result of providing pool management
services. Due to the full year and half-year inclusion of D&H, fee income
and operating expenses increased in the Related Businesses segment for both
1993 and 1992. The benefit ratio for the reinsured disability business
decreased in 1993 and increased in 1992, which reflects the underlying
claims experience of the insureds.
Summary
The principal reason for the increase in income before income taxes for the
Related Businesses segment in 1993 is the inclusion of D&H results for a
full year, which was partially offset by less favorable earnings for UNUM
Limited due to a lower weighted average exchange rate. Income before
income taxes decreased in the Related Businesses segment for 1992 compared
with 1991 primarily due to increased claims levels in the disability
businesses, investment in administrative procedures and systems at UNUM
Limited and decreased investment income, which were partially offset by
unusually favorable claims experience in Commercial Life's specialty group
accident product line.
32
<PAGE>
COLONIAL COMPANIES SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1993 1992 1991
Revenues
Premiums $ 403.9 10.8% $ 364.6 12.9% $ 322.8
Investment income 29.8 (0.3) 29.9 10.7 27.0
Net realized investment gains 11.6 nm 5.5 (52.2) 11.5
Fees and other income 3.5 (52.1) 7.3 nm 2.6
Total revenues 448.8 10.2 407.3 11.9 363.9
Benefits and expenses
Benefits to policyholders 207.5 10.4 187.9 16.6 161.2
Interest credited 4.2 16.7 3.6 20.0 3.0
Operating expenses 94.2 1.0 93.3 2.5 91.0
Commissions 92.7 8.0 85.8 12.9 76.0
Increase in unamortized
deferred policy
acquisition costs (20.3) (15.1) (23.9) (4.0) (24.9)
Interest expense 0.1 -- 0.1 -- 0.1
Total benefits and
expenses 378.4 9.1 346.8 13.2 306.4
Income before income taxes $ 70.4 16.4% $ 60.5 5.2% $ 57.5
Sales
(first month's premiums) $ 12.9 $ 13.5 $ 13.0
Benefit ratio (% of premiums) 51.4% 51.5% 49.9%
Operating expense ratio
(% of premiums) 23.3% 25.6% 28.2%
nm = not meaningful or in excess of 100%
The Colonial Companies segment, which includes Colonial Life & Accident
Insurance Company and affiliates, offers payroll-deducted, voluntary
employee benefits to employees at their worksites. The Colonial Companies
segment ("Colonial") markets its accident and sickness, cancer, and life
insurance products primarily through independent sales representatives.
Due to the nature of the products sold, Colonial measures sales by first
month's premiums. In 1993, Colonial experienced a slight decrease in
sales, which management attributes to uncertainty in the marketplace about
the types of coverage that would be included in the President's health care
reform proposal. However, Colonial's products would be excluded from the
President's plan and, therefore, would not be considered part of the
universal coverage package. Management views health care reform as an
opportunity for UNUM by allowing Colonial the ability to leverage its
expertise in individual payroll-deduction marketing, since the workplace is
considered to be a primary means of access to insurance benefits under the
proposed plan.
33
<PAGE>
The weaker level of sales for the past two years has slowed the rate of
growth in premiums. However, premium growth was supplemented by improved
persistency through enhanced customer conservation programs. Management is
focusing on strategies to improve sales, which include increasing the sales
force and offering a number of new products.
During 1993, investment income declined primarily due to the realignment of
Colonial's investment portfolio to reflect UNUM's investment philosophy.
As a result, Colonial sold higher yielding but callable investments, which
resulted in increased realized investment gains. Fees and other income for
1992 reflect $4.0 million received from the settlement of a lawsuit that
was initiated against a competitor.
Colonial's benefit ratio increased to 51.5% in 1992 from 49.9% in 1991 and
has remained relatively flat at 51.4% during 1993. For the past several
years, Colonial has shifted its product mix toward products with higher
benefit ratios, lower expense ratios and better policyholder retention. In
addition, the decline in the expense ratio for 1993 and 1992 reflects
management's efforts to control expenditures and improve operational
efficiencies.
Income before income taxes for Colonial increased in 1993 primarily through
continued expense control and a higher level of realized investment gains
attributed to the investment portfolio realignment. For 1992, the increase
in income before income taxes resulted primarily from the reduced expense
ratio, which was partially offset by an increased benefit ratio.
34
<PAGE>
INDIVIDUAL DISABILITY SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1993 1992 1991
Revenues
Premiums $ 312.0 10.6% $ 282.2 16.2% $ 242.9
Investment income 74.6 5.5 70.7 8.4 65.2
Net realized investment gains 7.9 83.7 4.3 87.0 2.3
Fees and other income 10.5 (1.9) 10.7 1.9 10.5
Total revenues 405.0 10.1 367.9 14.6 320.9
Benefits and expenses
Benefits to policyholders 212.0 3.7 204.4 17.6 173.8
Operating expenses 103.5 3.5 100.0 4.0 96.2
Commissions 75.6 6.0 71.3 19.6 59.6
Increase in unamortized
deferred policy acquisition
costs (55.1) 5.2 (52.4) 15.4 (45.4)
Total benefits and expenses 336.0 3.9 323.3 13.8 284.2
Income before income taxes $ 69.0 54.7% $ 44.6 21.5% $ 36.7
Sales
(annualized new premiums) $ 63.2 $ 60.1 $ 58.1
Persistency (premiums) 92.1% 91.7% 91.9%
Benefit ratio (% of premiums) 67.9% 72.4% 71.6%
Operating expense ratio
(% of premiums) 33.2% 35.4% 39.6%
The Individual Disability segment includes disability income products sold
in the United States and Canada through UNUM America and First UNUM, and
private label agreements. Private label agreements expand UNUM's
distribution channels in the individual disability market by providing
other insurance companies the right to market Individual Disability's
CUSTOMAX (registered trademark) product under their own names.
Premium growth continued during 1993 and 1992 on slightly increased sales
and the continued development of private label agreements. UNUM continues
its investment in the private label business and proceeds to form new
strategic alliances with private label partners to continue the growth of
this business.
The benefit ratio improved during 1993 to 67.9% from 72.4% in 1992. This
favorable experience was a result of lower incidence of new claims, which
management partially attributes to the success of a market segmentation
strategy and disciplined underwriting. Additionally, during 1993
management continued to dedicate resources to develop and implement
strategies to address the claim trends that developed during 1992. During
1992, the benefit ratio increased to 72.4% from 71.6% in 1991
primarily due to higher incidence of new claims with an increased average
claim size and lower recovery rates, which management believes were linked
to recessionary pressures experienced by the segment's insureds.
35
<PAGE>
The Individual Disability segment has reported a decreasing expense ratio
for the past two years, which management attributes to focused expense
management and productivity gains, as premium growth outpaced expense
growth. Management expects to invest for future growth, which may reduce
the current rate of reduction of the expense ratio.
The Individual Disability segment's increase in income before income taxes
in 1993 was primarily due to more favorable claims experience and continued
expense management. The increase in income before income taxes for the
Individual Disability segment in 1992 from 1991 was primarily due to a
decreased expense ratio, which was partially offset by less favorable
claims experience.
36
<PAGE>
RETIREMENT SECURITY SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1993 1992 1991
Revenues
Premiums $ 32.0 17.6% $ 27.2 19.8% $ 22.7
Investment income 233.8 0.3 233.0 2.4 227.6
Net realized investment
gains (losses) 1.7 nm (4.2) nm 0.2
Fees and other income 4.3 (15.7) 5.1 (3.8) 5.3
Total revenues 271.8 4.1 261.1 2.1 255.8
Benefits and expenses
Benefits to policyholders 31.7 -- 31.7 13.6 27.9
Interest credited 164.9 (8.4) 180.0 (8.3) 196.2
Operating expenses 53.2 43.4 37.1 26.6 29.3
Commissions 12.6 41.6 8.9 53.4 5.8
Increase in unamortized
deferred policy
acquisition costs (11.7) nm (3.3) nm (1.3)
Total benefits and
expenses 250.7 (1.5) 254.4 (1.4) 257.9
Income (loss) before
income taxes $ 21.1 nm% $ 6.7 nm% $ (2.1)
Invested assets under
management, at end of
period $3,033.0 $2,929.9 $2,713.0
nm = not meaningful or in excess of 100%
The Retirement Security segment includes tax sheltered annuities ("TSAs")
and long term care insurance, and beginning in 1993, lifestyle security
protection products, all of which are marketed by UNUM America and First
UNUM.
During 1993 and 1992, assets under management for TSA contracts grew by
$103.1 million and $216.9 million, respectively. During 1993, UNUM offered
the holders of certain types of TSA contracts the opportunity to modify
such contracts. The proposed contract amendments provide for UNUM to
increase the minimum guaranteed credited rates in return for
contractholders relinquishing the right to make lump-sum withdrawals
without an associated fee. Expected levels of contract withdrawals
affected the overall growth of assets under management for TSAs.
37
<PAGE>
The declining interest rate environment during the past two years has
reduced the investment yields on TSA assets. As a result, net investment
income increased by only $6.7 million and $1.0 million, during 1993 and
1992, respectively. If the current interest rate environment persists,
management anticipates that the average investment yield will further
decline since UNUM invests its cash flows in high quality assets that
currently have yields below the existing average investment portfolio
yields. As interest rates have declined, the rate and level of interest
credited to TSA contractholders have declined as well, and in 1993 resulted
in unusually favorable interest spread margins. In 1993, 1992 and 1991,
the amount of interest credited to funds on deposit amounted to 70.5%,
77.3% and 86.2% of investment income, respectively.
Increased operating expenses were incurred during 1993 for the development
of product and market initiatives for the lifestyle security protection
products and investments in key business initiatives for the continued
growth of TSAs and the Retirement Security segment. Additionally, UNUM
continued its investment in the development of long term care products in
1993 and 1992.
Income before income taxes increased in 1993 primarily due to unusually
favorable interest spread margins on tax sheltered annuities. Management
does not expect interest spread margins experienced in 1993 on tax
sheltered annuities to continue at the same level, which may reduce future
earnings for the Retirement Security segment. Favorable interest spread
margins on tax sheltered annuities were the primary reason for increased
income before income taxes in 1992.
The 1993 results of the Retirement Security segment were also affected by
lower than expected growth for the long term care products due to the
announcement of the President's health care reform proposal that includes
long term care coverage. While management cannot predict whether health
care reform legislation will be adopted with provisions for long term care,
management expects that Congress will ultimately restrict long term care
benefits to those who cannot otherwise afford coverage, which would not
affect UNUM's target markets.
38
<PAGE>
OTHER OPERATIONS SEGMENT
(Dollars in millions and percentage increase (decrease)
over prior year) 1993 1992 1991
Revenues $ 179.9 (14.7)% $ 210.9 (7.0)% $ 226.8
Benefits and expenses
Benefits to policyholders 37.5 (1.1) 37.9 (6.0) 40.3
Interest credited 111.9 (22.7) 144.8 (8.6) 158.5
Operating expenses 6.0 (11.8) 6.8 (80.8) 35.4
Commissions 1.2 (25.0) 1.6 -- 1.6
Decrease in unamortized
deferred policy
acquisition costs 2.5 (24.2) 3.3 (56.0) 7.5
Total benefits and
expenses 159.1 (18.2) 194.4 (20.1) 243.3
Income (loss) before
income taxes $ 20.8 26.1% $ 16.5 nm% $ (16.5)
nm = not meaningful or in excess of 100%
The Other Operations segment includes 401(k) plans, guaranteed investment
contracts ("GICs"), deposit administration contracts ("DAs"), individual
life insurance business of UNUM Life Insurance Company of America and group
medical insurance, all of which are no longer actively marketed by UNUM.
The reduced invested asset base under management for GICs, DAs and 401(k)
plans resulted in lower revenues from investment income and reduced amounts
of interest credited. Management expects continued decreases in the
amounts of investment income and interest credited as the related GIC, DA
and 401(k) contracts mature or terminate. Revenues also decreased due to
reduced premiums from group medical business, which UNUM announced its exit
from in 1990. Management expects future earnings in the Other Operations
segment to decline, reflecting the run-off nature of these closed blocks of
businesses.
In the fourth quarter of 1991, UNUM announced plans to withdraw from the
401(k) market by the end of 1992, and recorded a $16.0 million pretax
charge to provide for the costs of withdrawal, reassignment of employees
and to write-off deferred acquisition costs associated with the 401(k)
business. The $16.0 million provision was charged to the 1991 Consolidated
Statement of Income as deferred policy acquisition costs expense and
operating expenses of $4.1 million and $11.9 million, respectively.
During 1992, UNUM released the restructuring reserve for the costs of
withdrawal from the 401(k) business since actual costs were less than
expected, resulting in increased pretax income of $5.3 million. The gain
associated with the release of this restructuring reserve reduced operating
expenses in the 1992 Consolidated Statement of Income. UNUM has
transferred 401(k) service responsibilities to its formerly whollyowned
subsidiary, Preferred Benefits Corporation, which was sold in the second
quarter of 1992.
39
<PAGE>
CORPORATE 1993 1992 1991
Loss before income taxes $(17.4) $(5.7) $(11.0)
Corporate includes transactions that are generally non-insurance related,
expenses incurred in conjunction with UNUM's long-term strategic investment
in Japan and interest expense on corporate borrowings. In September 1992,
UNUM opened a representative office in Tokyo to prepare for licensing of a
disability product for this market.
The increased loss before income taxes in Corporate in 1993 was primarily
due to the expenses incurred in connection with the March 26, 1993, merger
of UNUM Corporation and Colonial Companies, Inc., decreased interest income
and increased investment in the Tokyo, Japan office. The decreased loss
before income taxes in 1992 was primarily due to increased interest income
partially offset by lower realized investment gains and increased expense
associated with UNUM's various incentive compensation plans.
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 closely monitors the risk associated with the
invested asset portfolio and regularly reviews and adjusts the allowance
for probable losses appropriately.
At December 31, 1993, the composition of UNUM's $10,095.9 million of
invested assets was 73.6% fixed maturities, 14.1% mortgage loans, 1.9% real
estate, 7.2% equity securities and 3.2% other invested assets. Gross
realized investment gains were $85.2 million, $94.4 million and $97.9
million, and gross realized investment losses were $35.8 million, $52.9
million and $72.9 million for the years ended December 31, 1993, 1992 and
1991, respectively.
40
<PAGE>
Fixed Maturities:
At December 31, 1993, and December 31, 1992, fixed maturities, which
include bonds, notes and redeemable preferred stock, had an amortized cost
of $7,432.7 million and $7,104.7 million, respectively. Market values of
$8,079.8 million and $7,566.7 million at December 31, 1993, and December
31, 1992, respectively, were 109% and 107% of amortized cost. Market 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.
Fixed maturities that are classified as held to maturity are carried at
amortized cost because UNUM has the ability and intent to hold these assets
to maturity. Sales of such assets are infrequent and are generally in
response to significant deterioration in the issuers' credit worthiness.
Fixed maturities not intended to be held to maturity are considered to be
available for sale and are carried at the lower of aggregate cost or fair
value as of the balance sheet date, and any temporary reduction in value is
reported as an unrealized loss in stockholders' equity. Approximately
11.7% and 9.4% of the fixed maturity portfolio was considered to be
available for sale at December 31, 1993, and December 31, 1992,
respectively.
At December 31, 1993, and December 31, 1992, the fixed maturity portfolio
included $263.3 million and $164.1 million of below investment grade bonds
(below "Baa"), which represented 3.5% and 2.3% of the fixed maturity
portfolio, respectively. These bonds had associated market values of
$279.1 million and $168.6 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 0.24% at December 31, 1993, and
0.47% at December 31, 1992.
41
<PAGE>
Mortgages:
At December 31, 1993, and December 31, 1992, UNUM's mortgage loans were
$1,423.2 million and $1,649.9 million, respectively. The percentage of
mortgage loans to total invested assets has decreased to 14.1% as of
December 31, 1993, from 16.5% as of December 31, 1992, and is not
anticipated to change significantly since prepayments and scheduled
maturities 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.
Mortgage loans in the amount of $26.1 million were delinquent sixty days or
more on a contract delinquency basis at December 31, 1993, representing
1.8% of the mortgage loan portfolio. This compares with $32.9 million or
2.0% of the mortgage loan portfolio at December 31, 1992.
Overall, management believes that its mortgage loan portfolio is well
diversified geographically and among property types. UNUM's incidence of
new problem mortgage loans declined in 1993 as overall economic activity
improved modestly, and many of the real estate markets in which UNUM has
mortgage loans stabilized. Foreclosure activity and new reserve additions
have declined in 1993 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 December 31, 1993.
Restructured loans are loans whose terms have been modified to interest
rates less than market at the time of restructure and are currently
performing 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, 1993, and 1992,
restructured mortgage loans totaled $65.9 million and $80.9 million,
respectively. Interest lost on restructured loans was not material in
1993, 1992 or 1991.
UNUM has identified other problem loans and potential problem loans in the
amount of $10.0 million and $87.6 million, respectively, at December 31,
1993, and $58.7 million and $55.7 million, respectively, at December 31,
1992. UNUM defines other problem loans as those which are not delinquent
over 60 days and not restructured, but which are being accounted for on a
nonaccrual basis. Potential problem loans are defined by UNUM as current
and performing loans which management has doubts as to the ability of the
borrower to comply with present loan terms and whose book value exceeds the
market value of the underlying collateral. Interest lost on problem loans
was not material in 1993, 1992 and 1991.
During 1993, UNUM realized investment losses related to delinquent,
restructured and problem mortgage loans of $4.8 million, compared with
$26.5 million and $39.0 million for 1992 and 1991, respectively. Delinquent
and problem mortgage loans as of December 31, 1993, are not expected to
have a significant impact on UNUM's liquidity and capital resources.
42
<PAGE>
Real Estate:
At December 31, 1993, investment real estate and real estate held for sale
amounted to $193.5 million and $24.7 million, respectively. This compares
with $214.6 million of investment real estate and $48.6 million of real
estate held for sale at December 31, 1992. UNUM continues to limit its
real estate exposure as a percentage of invested assets through an active
sales program. UNUM sold $40.5 million and $58.0 million of real estate
at 105% of carrying value during 1993 and 1992, respectively.
Real estate which meets certain investment criteria and is intended to be
held long term is carried at cost less accumulated depreciation. Real
estate that has been acquired through foreclosure is valued at fair value
at the date of foreclosure. Real estate held for sale is included in other
assets in the Consolidated Balance Sheets and is valued net of an allowance
which reduces the carrying value to the lower of fair value less estimated
costs to sell, or cost. Occasionally, investment real estate is
reclassified and revalued as real estate held for sale when it no longer
meets UNUM's investment criteria. Additions to allowances for probable
losses related to real estate held for sale resulted in realized investment
losses of $18.8 million, $7.2 million and $10.7 million for the years ended
December 31, 1993, 1992 and 1991, 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.
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 March 11,
1994, and June 1, 1996, respectively. UNUM anticipates renewing the $100
million revolving credit facility with a committed revolving credit
facility of a similar amount. 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.
43
<PAGE>
At December 31, 1993, UNUM had short-term and long-term debt totaling
$110.0 million and $128.6 million, respectively, and approximately $190
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.
For the year ended December 31, 1993, UNUM acquired approximately
3.7 million shares of its common stock in the open market at an
aggregate cost of $192.5 million that was primarily funded through
additional borrowings. This share repurchase contributed to the decrease
in the number of shares outstanding at December 31, 1993, to 76.0 million,
from 79.1 million at December 31, 1992. Prior to the resumption of this
repurchase program, UNUM had not acquired any shares in the open market
since 1990. At December 31, 1993, approximately 1.5 million outstanding
shares remained authorized for repurchase. On February 11, 1994, UNUM's
Board of Directors voted to expand UNUM's authorization to repurchase an
additional 5.0 million shares. Stock repurchase is one element of
management's financial strategy for delivering long-term value to UNUM's
shareholders.
During 1993 and 1992, withdrawals of contracts reported in the Other
Operations segment, including contract terminations, payments to
participants and transfers to other carriers, were approximately $309
million and $277 million, respectively. Withdrawals during 1993 and 1992
were at levels expected by management and reflect the run-off nature of
these closed blocks of businesses. UNUM manages liquidity objectives by
including certain conditions in pension contracts which prohibit or
restrict availability of funds.
UNUM was committed at December 31, 1993, to purchase fixed maturities and
other invested assets in the amount of $32.9 million. Management
anticipates that the cash flows of UNUM will be sufficient to meet its
planned investment commitments, benefit obligations and operational needs.
From time to time, dividend payments are made from the insurance
subsidiaries to UNUM Corporation which may be subject to approval by
insurance regulatory authorities. See Note 14 of the Consolidated
Financial Statements for a discussion of dividend restrictions.
44
<PAGE>
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. In addition, lower
interest rates can lead to early payoffs and refinancing of some of UNUM's
fixed rate investments. Management generally invests in fixed rate
instruments that are structured to limit the exposure to such reinvestment
risk.
RATINGS
Standard & Poor's Corporation ("S&P"), Moody's Investors Service
("Moody's") and A.M. Best Company ("Best's") are among the third parties
that provide UNUM independent assessments of overall financial position.
Ratings from these agencies for financial strength and claims-paying
ability are available for the United States domiciled insurance company
subsidiaries rather than on a consolidated basis, since the financial
information used to develop the ratings is based on statutory accounting
practices in the United States.
UNUM's largest affiliate, UNUM Life Insurance Company of America ("UNUM
America"), had its financial strength rating upgraded to "A++" (Superior),
the highest rating assigned by Best's, in July 1993. In November 1993,
UNUM America's financial strength rating was confirmed by Moody's as "Aa1"
(Excellent). S&P confirmed UNUM America's claims-paying ability rating
as "AA+" (Excellent), in December 1993.
First UNUM Life Insurance Company ("First UNUM") also had its financial
strength rating upgraded, to "A+" (Superior), by Best's in July 1993. In
November 1993, Moody's confirmed First UNUM's financial strength rating as
"Aa2" (Excellent). S&P also confirmed First UNUM's claims-paying ability
rating as "AA+" (Excellent), in December 1993.
Colonial Life & Accident Insurance Company ("Colonial Life") had its
financial strength rating confirmed as "A+" (Superior) by Best's in July
1993. In April 1993, Moody's assigned a financial strength rating of "Aa2"
(Excellent).
Commercial Life Insurance Company ("Commercial Life") is also rated by
Best's, and was confirmed at the rating of "A-" (Excellent) in July 1993.
UNUM has the following debt ratings based on consolidated financial
information under generally accepted accounting principles. The senior
debt ratings from S&P and Moody's are "AA" (Excellent) and Aa3"(Excellent),
respectively. UNUM also has commercial paper ratings from S&P and Moody's
of "A1+" (Highest Quality) and "P1" (Superior), respectively.
45
<PAGE>
INSURANCE REGULATION
The National Association of Insurance Commissioners adopted a set of Risk
Based Capital standards for the life and health insurance industry, which
became effective in 1993. These Risk-Based Capital standards are one way
to measure the risk that insurance companies assume in the course of
conducting insurance and investment activities.
The Risk-Based Capital standards for life insurance companies are based on
a formula that established capital requirements relating to 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 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 insurance
department for companies below 70% of ACL.
At December 31, 1993, the ACL ratios for UNUM America, First UNUM, Colonial
Life and Commercial Life were approximately 350%, 390%, 450% and 380%,
respectively.
46
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Certain Investments in Debt and Equity Securities
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 115, which specifies the
accounting and reporting for certain investments in equity securities and
for all investments in debt securities. Upon adoption of FAS 115, UNUM
will classify and account for these investments as follows:
- - Fixed maturities that UNUM has the positive intent and ability to hold to
maturity will be classified as "held to maturity" and will be reported at
amortized cost.
- - Fixed maturities and equity securities that are bought and held
principally for the purpose of selling them in the near term will be
classified as "trading" and will be reported at fair value with
unrealized holding gains and losses included in earnings, net of taxes.
Since UNUM does not trade its debt or equity securities, a trading account
will not be established under the provisions of FAS 115.
- - Fixed maturities and equity securities not classified as "held to
maturity" or "trading" will be classified as "available for sale"
and will be reported at fair value with unrealized holding gains and
losses reported in a separate component of stockholders' equity, net of
taxes.
Commencing December 31, 1991, UNUM began classifying fixed maturities as
held to maturity, which are valued principally at amortized cost, and
available for sale, which are currently reported at the lower of aggregate
amortized cost or fair value. Equity securities are currently reported
using the same provisions of the "available for sale" category of FAS 115.
On January 20, 1994, the Securities and Exchange Commission ("SEC")
announced that they would expect SEC insurance registrants to adjust, upon
adoption of FAS 115, certain assets and liabilities, namely deferred policy
acquisition costs and policyholder liabilities, to the amount that would
have been reported if the unrealized gains and losses from securities
classified as available for sale had been realized. The SEC and the
accounting profession continue to discuss the accounting and reporting
implications of FAS 115 for the insurance industry.
UNUM is required to adopt this standard effective January 1, 1994, and
estimates that the impact of valuing its fixed maturities available for
sale at fair value will result in an increase to stockholders' equity of
approximately $38 million. The adoption of FAS 115 will not affect UNUM's
results of operations. UNUM continues to monitor the emerging
implementation guidance offered by the SEC and the accounting profession,
which could change the estimated impact of adopting FAS 115.
47
<PAGE>
Accounting by Creditors for Impairment of a Loan
In May 1993, the FASB issued FAS No. 114, which defines the principles to
measure and record a loan when it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Adoption of FAS 114 is not expected to have a material
effect on UNUM's results of operations or financial position. UNUM is
required to adopt FAS 114 by January 1, 1995.
Employers' Accounting for Postemployment Benefits
In November 1992, the FASB issued FAS No. 112, which requires employers to
recognize obligations for certain postemployment benefits provided to
former or inactive employees after employment but before retirement. UNUM
will adopt FAS 112 effective January 1, 1994. Adoption of FAS 112 is not
expected to have a material effect on UNUM's results of operations or
financial position.
48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
Year Ended December 31,
(Dollars in millions, except per
common share data) 1993 1992 1991
(Note 2)
Revenues
Premiums $2,474.1 $2,142.4 $1,938.9
Investment income 790.4 809.2 786.6
Net realized investment gains 49.4 41.5 25.0
Fees and other income 83.1 55.4 34.0
Total revenues 3,397.0 3,048.5 2,784.5
Benefits and expenses
Benefits to policyholders 1,775.7 1,532.6 1,387.1
Interest credited 281.0 328.4 357.7
Operating expenses 675.6 590.9 554.8
Commissions 326.8 298.9 258.8
Increase in unamortized deferred
policy acquisition costs (135.1) (111.7) (104.8)
Interest expense 12.7 10.9 11.3
Total benefits and expenses 2,936.7 2,650.0 2,464.9
Income before income taxes 460.3 398.5 319.6
Income taxes
Current 73.4 68.0 36.9
Deferred 74.9 39.3 37.4
Total income taxes 148.3 107.3 74.3
Income before cumulative
effects of accounting changes 312.0 291.2 245.3
Cumulative effects of accounting changes
Income taxes 20.0 -- --
Postretirement benefits other
than pensions, net of tax (32.1) -- --
Net income $ 299.9 $ 291.2 $ 245.3
Per common share
Income before cumulative
effects of accounting changes $ 3.96 $ 3.71 $ 3.15
Cumulative effects of
accounting changes
Income taxes 0.25 -- --
Postretirement benefits other
than pensions, net of tax (0.40) -- --
Net income $ 3.81 $ 3.71 $ 3.15
See notes to consolidated financial statements.
49
<PAGE>
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
December 31,
(Dollars in millions) 1993 1992
(Note 2)
Assets
Investments
Fixed maturities:
Held to maturity-principally at amortized cost
(market: 1993-$7,149.9; 1992-$6,872.6) $ 6,560.7 $ 6,437.6
Available for sale-principally at amortized
cost (market: 1993-$929.9; 1992-$694.1) 872.0 667.1
Equity securities-at market (cost: 1993-$508.3;
1992-$466.7) 730.0 645.2
Mortgage loans 1,423.2 1,649.9
Real estate, net 193.5 214.6
Policy loans 187.9 191.2
Other long-term investments 59.0 73.1
Short-term investments 69.6 107.4
Total investments 10,095.9 9,986.1
Cash 20.8 20.4
Accrued investment income 184.0 185.0
Premiums due 165.5 153.3
Unamortized deferred policy acquisition costs 879.1 753.8
Property and equipment, net 143.5 126.4
Other assets 681.8 472.9
Separate account assets 266.7 261.9
Total assets $12,437.3 $11,959.8
(Continued on next page)
50
<PAGE>
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
December 31,
(Dollars in millions) 1993 1992
(Note 2)
Liabilities and Stockholders' Equity
Liabilities
Future policy benefits $ 4,009.6 $ 3,543.3
Unpaid claims and claim expenses 676.3 637.6
Other policyholder funds 4,268.8 4,554.8
Federal income taxes
Current 31.5 28.8
Deferred 376.7 298.1
Notes payable 238.6 199.9
Other liabilities 466.4 424.5
Separate account liabilities 266.7 261.9
Total liabilities 10,334.6 9,948.9
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 1,078.4 1,066.6
Unrealized gains on equity securities, net of
deferred taxes 149.1 121.1
Unrealized foreign currency translation adjustment (24.1) (20.9)
Retained earnings 1,420.8 1,182.3
2,634.2 2,359.1
Less:
Treasury stock, at cost (1993-24,006,816 shares;
1992-20,928,716 shares) 529.8 345.5
Restricted stock deferred compensation 1.7 2.7
Total stockholders' equity 2,102.7 2,010.9
Total liabilities and stockholders' equity $12,437.3 $11,959.8
See notes to consolidated financial statements.
51
<PAGE>
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
S T O C K H O L D E R S ' E Q U I T Y
<TABLE>
<CAPTION>
Unrealized
Common Gains Unrealized
Stock On Equity Foreign Restricted
(Dollars in millions, $0.10 Additional Securities, Net Currency Stock
except per common share data) Par Paid-in Of Deferred Translation Retained Treasury Deferred
(Note 2) Value Capital Taxes Adjustment Earnings Stock Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991
1991 Transactions $ 5.0 $1,062.6 $ 43.5 $ 8.9 $ 744.0 $(371.9) $(2.0) $1,490.1
Net income 245.3 245.3
Unrealized gains on equity
securities, net of
deferred taxes 55.2 55.2
Unrealized foreign currency
translation adjustment (1.8) (1.8)
Dividends to stockholders
($0.49 per common share) (43.4) (43.4)
Treasury stock acquired (0.3) (0.3)
Employee stock option and
other transactions (1.5) 12.1 (0.2) 10.4
Balance at December 31, 1991 5.0 1,061.1 98.7 7.1 945.9 (360.1) (2.2) 1,755.5
1992 Transactions:
Net income 291.2 291.2
Unrealized gains on equity
securities, net of
deferred taxes 22.4 22.4
Unrealized foreign currency
translation adjustment (28.0) (28.0)
Two-for-one stock split 5.0 (5.0) --
Dividends to stockholders
($0.62 1/2 per common share) (53.1) (53.1)
Employee stock option and
other transactions 10.5 (1.7) 14.6 (0.5) 22.9
Balance at December 31, 1992 10.0 1,066.6 121.1 (20.9) 1,182.3 (345.5) (2.7) 2,010.9
1993 Transactions:
Net income 299.9 299.9
Unrealized gains on equity
securities, net of
deferred taxes 28.0 28.0
Unrealized foreign currency
translation adjustment (3.2) (3.2)
Dividends to stockholders
($0.76 1/2 per common share) (61.4) (61.4)
Treasury stock acquired (192.5) (192.5)
Employee stock option and
other transactions 11.8 8.2 1.0 21.0
Balance at December 31, 1993 $ 10.0 $1,078.4 $ 149.1 $ (24.1) $1,420.8 $(529.8) $(1.7) $2,102.7
</TABLE>
See notes to consolidated financial statements.
52
<PAGE>
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
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
(Note 2)
Operating activities:
Net income $ 299.9 $ 291.2 $ 245.3
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 411.7 335.7 456.5
(Increase) decrease in amounts receivable
under reinsurance agreements (129.1) 6.1 (133.8)
Increase in federal income tax liability 109.8 51.6 43.2
Increase in unamortized deferred policy
acquisition costs (125.5) (111.7) (106.0)
Other (22.8) 26.5 1.5
Net cash provided by operating activities 556.1 599.4 506.7
Investing activities:
Maturities of fixed maturities 924.6 783.7 478.5
Sales of fixed maturities held to maturity 45.7 122.4 594.7
Sales of fixed maturities available for sale 218.2 477.2 --
Sales of other investments 550.2 825.0 667.7
Purchases of investments (1,832.2) (2,700.7) (2,528.6)
Net decrease in short-term investments 38.8 21.8 78.2
Net additions to property and equipment (18.2) (23.1) (52.7)
Investments in subsidiaries, net 0.9 (49.3) --
Net cash used in investing activities (72.0) (543.0) (762.2)
Financing activities:
Deposits and interest credited to
investment contracts 735.2 835.7 842.7
Maturities and withdrawals from
investment contracts (1,021.2) (871.3) (618.2)
Dividends to stockholders (61.4) (53.1) (43.4)
Treasury stock acquired (192.5) -- (0.3)
Proceeds from notes payable 51.5 74.6 9.5
Repayment of notes payable (50.1) (34.6) (0.8)
Net increase (decrease) in short-term debt 37.3 (42.9) 75.7
Other 15.1 21.2 14.0
Net cash provided by (used in)
financing activities (486.1) (70.4) 279.2
Effect of exchange rate changes on cash 2.4 0.1 0.4
Net increase (decrease) in cash 0.4 (13.9) 24.1
Cash at beginning of year 20.4 34.3 10.2
Cash at end of year $ 20.8 $ 20.4 $ 34.3
(Continued on next page)
53
<PAGE>
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
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
(Note 2)
Disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 67.3 $ 41.6 $ 28.6
Interest $ 13.3 $ 11.7 $ 12.3
See notes to consolidated financial statements.
54
<PAGE>
UNUM Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of UNUM Corporation and
subsidiaries ("UNUM") have been prepared on the basis of generally accepted
accounting principles for stock life insurance companies and give
retroactive effect to the March 26, 1993, merger with Colonial Companies,
Inc., as discussed in Note 2 "Colonial Merger."
Principles of Consolidation
The consolidated financial statements include the accounts of UNUM
Corporation and subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
Reclassification
Certain December 31, 1992, and 1991 amounts have been reclassified in 1993
for comparative purposes.
Investments
Investments are reported as follows:
- - Fixed maturities held to maturity (certain bonds, notes and
redeemable preferred stocks) - principally at amortized cost
less an allowance for probable losses.
- - Fixed maturities available for sale (certain bonds and preferred
stocks) - at lower of aggregate amortized cost less an
allowance for probable losses, or fair value.
- - Equity securities (common stocks and non-redeemable preferred
stocks) - at market value.
- - Mortgage loans - at amortized cost less an allowance for
probable losses.
- - Real estate - at cost less accumulated depreciation.
- - Policy loans - at unpaid principal balance.
- - Other long-term investments - at cost plus UNUM's equity in
undistributed net earnings since acquisition.
- - Short-term investments - at amortized cost.
Fixed maturities classified as held to maturity are valued principally at
amortized cost less an allowance for probable losses, as it is UNUM's
intent to hold these assets to maturity. Periodic sales may be necessary
in response to significant deterioration in credit quality.
55
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments (Continued)
Fixed maturities available for sale are valued at lower of aggregate
amortized cost less an allowance for probable losses, or fair value, as
they may be sold in response to changes in interest rates, resultant
prepayment risk, liquidity and capital needs and other similar economic
factors.
Real estate held for sale, which is included in other assets in the
Consolidated Balance Sheets, is valued at the lower of fair value less
estimated costs to sell, or cost. UNUM has provided an allowance for
probable losses on real estate held for sale which reduces the carrying
value of the asset to fair value. Real estate held for sale amounted to
$24.7 million at December 31, 1993, and $48.6 million at December 31, 1992.
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 accounted for as a realized investment loss.
UNUM discontinues the accrual of investment income on invested assets when
it is determined that collectibility is doubtful.
Gains and losses on interest rate futures contracts used as hedges are
deferred and recognized as an adjustment of the carrying amount of the
hedged investment or anticipated investments.
Realized investment gains or 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.
Unrealized investment gains or losses on equity securities, adjusted for
related deferred income taxes, are reported directly in stockholders'
equity.
Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management
program. 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.
Recognition of Premium Revenues and Policy Benefits for Life and Health
Insurance Products
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 amortizing deferred policy acquisition costs.
56
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recognition of Revenues, Contract Benefits and Expenses for Investment-
Type and Universal Life Products
For UNUM's retirement and universal life products accounted for under
Financial Accounting Standard No. 97, revenues consist of policy and
surrender charges assessed during the year. Charges related to services
to be performed in the future are deferred. Benefits and expenses for
these products include amounts incurred during the year
for benefit claims in excess of related account balances, policy
maintenance expenses, interest credited and amortization of deferred policy
acquisition costs. Fund balance liabilities for these contracts, included
in other policyholder funds in the Consolidated Balance Sheets, are
accumulated with interest at various rates.
Deferred Policy Acquisition Costs
The costs of acquiring new business that vary with and are related
primarily to the production of new business, have been deferred to the
extent such costs are deemed recoverable from future profits. Such costs
include commissions, certain costs of policy issue and underwriting, and
certain variable field office expenses.
For individual disability, group disability, and group life and health
business, the costs are amortized in proportion to expected future
premiums. For universal life and certain retirement products, the costs
are amortized in proportion to estimated gross profits from interest
margins, mortality and other elements of performance under the contracts.
The amounts deferred and amortized were as follows:
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Deferred $282.8 $237.6 $216.6
Less amortized (147.7) (125.9) (111.8)
Increase in unamortized deferred
policy acquisition costs $135.1 $111.7 $104.8
57
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liabilities for Future Policy Benefits
Reserves for future payments on claims already incurred.
Reserves for future payments on claims already incurred are estimated
based on UNUM's historical experience and other actuarial assumptions.
Such estimates and assumptions are continually reviewed and updated
with any resulting adjustments to reserves reflected in current
operating results.
The interest rates used in the calculation of disability product reserves
at December 31, 1993, and 1992, were as follows:
1993 1992
Group long term disability
(North America) 9.3% 9.7%
Group long term disability
(United Kingdom) 10.5% 11.0%
Individual disability 8.0% to 10.0% 8.0% to 10.0%
The interest rates used to discount the disability reserves are a composite
of the yields on assets specifically matched with these blocks of business.
The composite yield decreased in 1993, since current cash flows are
invested in high quality assets at current yields, which are below the
yields of existing assets purchased in prior years.
For other group accident and health business, reserves are based on
projections of historical claim runout patterns.
Reserves for future benefits
Reserves for future benefits are calculated by the net-level premium
method, and are based on current morbidity and mortality tables, UNUM's
historical experience and various interest rate assumptions. These
reserves represent the portion of premiums received, accumulated with
interest and held to provide for claims that have not yet been incurred.
Reserves for group insurance policies consist primarily of unearned
premiums, and are included in other policyholder funds in the Consolidated
Balance Sheets.
The interest rates used in the calculation of reserves for future benefits
at December 31, 1993, and 1992, principally ranged from:
1993 1992
Individual disability 7.0% to 9.5% 8.5% to 9.5%
Individual life 5.0% to 9.0% 5.0% to 9.0%
Individual accident and health 6.0% to 11.8% 7.0% to 11.8%
Individual and group annuities 5.0% to 9.0% 5.0% to 9.0%
Certain reserve calculations are based on interest rates within these
ranges graded down over periods from 15 to 20 years.
58
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Separate Account
Certain assets of UNUM's defined benefit pension plans, 401(k) contracts
and tax sheltered annuity contracts are in separate accounts that are
pooled investment funds of securities. Assets carried at market value and
liabilities of the separate account are shown separately in the
Consolidated Balance Sheets.
Accounting for Participating Individual Life Insurance
Subsequent to the November 1986 conversion of UNUM Life Insurance Company
(formerly Union Mutual Life Insurance Company) to a stock life insurance
company, selected assets of UNUM Life Insurance Company ("UNUM Life") were
designated as a Participation Fund Account. Effective December 31, 1991,
UNUM Life and UNUM Pension and Insurance Company ("UPIC") were merged with
UNUM Life Insurance Company of America ("UNUM America"), with UNUM America
remaining as the surviving company. UNUM Life, UPIC and UNUM America were
all wholly-owned subsidiaries of UNUM Corporation. As a result of the
merger, the assets of the Participation Fund Account were transferred to
UNUM America.
The assets of the Participation Fund Account 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 Participation Fund Account
and its operations have been excluded from the Consolidated Statements of
Income. Included in the Consolidated Balance Sheets are statutory-basis
assets and liabilities for this line of business, which approximate amounts
calculated on the basis of generally accepted accounting principles for
stock life insurance companies, and represent approximately 3.0% of total
assets and 3.5% of total liabilities at December 31, 1993, and 1992.
Federal Income Taxes
The provision for federal income taxes includes amounts currently payable
and deferred income taxes computed under the provisions of Financial
Accounting Standard No. 109, "Accounting for Income Taxes." Deferred U.S.
income taxes have not been provided on the accumulated earnings of UNUM's
foreign subsidiaries, as it is UNUM's intention to reinvest those earnings
in the growth of the business outside the United States.
Earnings Per Share
The weighted average number of shares outstanding used to calculate
earnings per share was 78,779,241 in 1993, 78,542,106 in 1992 and
77,790,959 in 1991. The assumed exercise of outstanding stock options
would not result in a material dilution of earnings per share.
Dividends
Cash dividends per share prior to the March 26, 1993, merger with Colonial
Companies, Inc., are as reported for UNUM historically.
59
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Values of Financial Instruments
Financial Accounting Standard No. 107 ("FAS 107"), "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value
information about certain financial instruments for which it is practicable
to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Valuation techniques require management to develop a
significant number of assumptions, including discount rates and estimates
of future cash flow. The derived fair value estimates cannot be
substantiated by comparison to independent markets or to disclosures by
other companies with similar financial instruments. FAS 107 fair value
disclosures do not purport to be the amount which could be realized in
immediate settlement of the financial instrument.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Cash, short-term investments and accrued investment income: The carrying
amounts reported in the balance sheet for these financial instruments
approximate their fair values.
Fixed maturities: Fair values for fixed maturities are based on quoted
market prices, where available. For fixed maturities not actively traded
in the market, 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: The fair values for equity securities are based on
quoted market prices and are reported in the balance sheet 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: The carrying amounts reported in the balance sheet for
policy loans approximate their fair values.
Off-balance-sheet financial instruments: Fair values for UNUM's off-
balance-sheet financial instruments (interest rate futures contracts) are
based on current settlement values, and at December 31, 1993, and 1992,
were $0.3 million and $0.1 million, respectively.
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Values of Financial Instruments (Continued)
Investment-type insurance contracts: Fair values for UNUM's liabilities
under investment-type insurance contracts with no defined maturities are
the amounts payable on demand after surrender charges at the balance sheet
date. Fair values for UNUM's liabilities under investment-type insurance
contracts with defined maturities are estimated using discounted cash flow
calculations based on interest rates that would be offered currently for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
The carrying amount and estimated fair value of liabilities for investment-
type insurance contracts included in other policyholder funds in the
Consolidated Balance Sheets at December 31, 1993, and 1992, were as
follows:
Carrying Estimated
(Dollars in millions) Amount Fair Value
1993 1992 1993 1992
Liabilities with defined maturities $ 847 $1,105 $ 956 $1,227
Liabilities with no defined maturities 3,044 3,092 2,952 2,972
$3,891 $4,197 $3,908 $4,199
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: The carrying amounts included in other policyholder
funds for these financial instruments approximate their fair values.
Short-term and long-term debt: The carrying amount of UNUM's
commercial paper borrowings approximates its fair value. The fair value
of UNUM's short-term and long-term debt is estimated using discounted
cash flow analyses based on UNUM's current incremental borrowing rates
for similar types of borrowing arrangements.
61
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
Accounting for Certain Investments in Debt and Equity Securities
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 115, which specifies the
accounting and reporting for certain investments in equity securities and
for all investments in debt securities. Upon adoption of FAS 115,
UNUM will classify and account for these investments as follows:
- - Fixed maturities that UNUM has the positive intent and ability
to hold to maturity will be classified as "held to maturity"
and will be reported at amortized cost.
- - Fixed maturities and equity securities that are bought and held
principally for the purpose of selling them in the near term will be
classified as "trading" and will be reported at fair value with
unrealized holding gains and losses included in earnings, net of taxes.
Since UNUM does not trade its debt or equity securities, a trading
account will not be established under the provisions of FAS 115.
- - Fixed maturities and equity securities not classified as "held
to maturity" or "trading" will be classified as "available for sale"
and will be reported at fair value with unrealized holding gains and
losses reported in a separate component of stockholders' equity, net of
taxes.
Commencing December 31, 1991, UNUM began classifying fixed maturities as
held to maturity, which are valued principally at amortized cost, and
available for sale, which are currently reported at the lower of
aggregate amortized cost or fair value. Equity securities are currently
reported using the same provisions of the "available for sale" category
of FAS 115.
On January 20, 1994, the Securities and Exchange Commission ("SEC")
announced that they would expect SEC insurance registrants to adjust,
upon adoption of FAS 115, certain assets and liabilities, namely
deferred policy acquisition costs and policyholder liabilities, to the
amount that would have been reported if the unrealized gains and losses
from securities classified as available for sale had been realized. The
SEC and the accounting profession continue to discuss the accounting and
reporting implications of FAS 115 for the insurance industry.
UNUM is required to adopt this standard effective January 1, 1994, and
estimates that the impact of valuing its fixed maturities available for
sale at fair value will result in an increase to stockholders' equity of
approximately $38.0 million. The adoption of FAS 115 will not affect
UNUM's results of operations. UNUM continues to monitor the emerging
implementation guidance offered by the SEC and the accounting
profession, which could change the estimated impact of adopting
FAS 115.
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements (Continued)
Accounting by Creditors for Impairment of a Loan
In May 1993, the FASB issued FAS No. 114, which defines the principles to
measure and record a loan when it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Adoption of FAS 114 is not expected to have a material
effect on UNUM's results of operations or financial position. UNUM is
required to adopt FAS 114 by January 1, 1995.
Employers' Accounting for Postemployment Benefits
In November 1992, the FASB issued FAS No. 112, which requires employers to
recognize obligations for certain postemployment benefits provided to
former or inactive employees after employment but before retirement. UNUM
will adopt FAS 112 effective January 1, 1994. Adoption of FAS 112 is not
expected to have a material effect on UNUM's results of operations or
financial position.
NOTE 2. COLONIAL MERGER
On December 3, 1992, UNUM and Colonial Companies, Inc. ("Colonial"), signed
a definitive merger agreement. On March 26, 1993, Colonial Class A common
stock shareholders voted to approve the merger. Under the agreement, UNUM
exchanged .731 shares of its common stock for each share of Colonial
Class A and Class B common stock outstanding on March 26, 1993. UNUM
issued approximately 11.4 million shares of common stock from treasury
in connection with the merger. In addition, outstanding options to
acquire shares of Colonial Class B common stock were converted into
options to acquire shares of UNUM common stock. The merger qualified as
a tax-free reorganization.
The merger has been accounted for as a pooling of interests and,
accordingly, UNUM's consolidated financial statements have been restated to
include the accounts of Colonial for all periods presented.
Net income for the year ended December 31, 1993, includes a $9.6 million
charge, or $0.12 per share, for expenses incurred to effect the merger.
63
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NOTE 2. COLONIAL MERGER (Continued)
Combined and separate results of UNUM and Colonial for periods prior to the
merger were as follows:
Year Ended December 31,
(Dollars in millions) 1992 1991
Revenues
UNUM $2,641.2 $2,420.6
Colonial 407.3 363.9
Total $3,048.5 $2,784.5
Net income
UNUM $ 248.8 $ 205.0
Colonial 42.4 40.3
Total $ 291.2 $ 245.3
NOTE 3. ACQUISITIONS
On July 30, 1992, UNUM purchased Duncanson & Holt, Inc. ("D&H"), a leading
accident and health reinsurance underwriting manager. As a reinsurance
manager, D&H provides pool management as well as marketing, underwriting,
administration, claims payment and actuarial services for client companies,
but does not bear any insurance risk.
This acquisition has been accounted for as a purchase and, accordingly, the
acquired assets and liabilities have been recorded at their estimated fair
values as of the date of acquisition. The results of operations for the
acquired business have been included in UNUM's Consolidated Statements of
Income from the date of acquisition. The effect of this acquisition on
UNUM's consolidated results of operations is not significant. Accordingly,
pro forma financial information has not been presented.
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NOTE 4. INVESTMENTS
The following tables summarize the components of investment income,
realized investment gains (losses) and change in unrealized investment
gains (losses):
Investment Income
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Fixed maturities:
Held to maturity $570.1 $568.2 $575.2
Available for sale 59.5 56.9 --
Equity securities 12.6 14.7 16.9
Mortgage loans 165.2 187.2 201.0
Real estate 12.8 14.1 13.0
Policy loans 10.4 10.6 11.2
Other long-term investments 4.5 2.1 5.2
Short-term investments 7.1 7.1 16.4
Gross investment income 842.2 860.9 838.9
Less investment expenses (26.6) (25.8) (25.7)
Less investment income on participating
individual life insurance policies and
annuity contracts (25.2) (25.9) (26.6)
Investment income $790.4 $809.2 $786.6
Realized Investment Gains (Losses)
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Fixed maturities:
Held to maturity $ 9.5 $ 7.6 $ 20.8
Available for sale 7.8 9.1 --
Equity securities 48.3 38.3 48.3
Mortgage loans, real estate and other (16.2) (13.5) (44.1)
Net realized investment gains $ 49.4 $ 41.5 $ 25.0
Change in Unrealized Investment Gains (Losses)
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Fixed maturities:
Held to maturity $154.2 $ 14.2 $364.9
Available for sale 30.9 (1.3) 28.3
Total $185.1 $ 12.9 $393.2
Equity securities $ 43.2 $ 34.0 $ 87.5
Deferred federal income taxes 15.2 11.6 32.3
Change in unrealized investment
gains on equity securities $ 28.0 $ 22.4 $ 55.2
65
<PAGE>
NOTE 4. INVESTMENTS (Continued)
Fixed Maturities
The amortized cost and estimated fair values of fixed maturities at
December 31, 1993, are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
Held to maturity:
United States Government and
government agencies and
authorities $ 10.0 $ 0.6 $ -- $ 10.6
States, municipalities and
political subdivisions 718.7 64.5 (0.2) 783.0
Foreign governments 255.3 50.3 (0.2) 305.4
Public utilities 1,333.7 98.6 (1.6) 1,430.7
Corporate bonds 4,186.8 377.7 (5.0) 4,559.5
Certificates of deposit 36.4 1.1 -- 37.5
Mortgage-backed securities 15.2 2.6 -- 17.8
Other debt securities 4.6 0.8 -- 5.4
Total held to maturity $6,560.7 $ 596.2 $ (7.0) $7,149.9
Available for sale:
United States Government and
government agencies and
authorities $ 388.9 $ 27.7 $ (0.3) $ 416.3
States, municipalities and
political subdivisions 73.5 5.1 -- 78.6
Foreign governments 13.7 1.3 -- 15.0
Public utilities 107.3 6.5 -- 113.8
Corporate bonds 166.0 10.1 (0.6) 175.5
Redeemable preferred stocks 105.8 7.7 (1.0) 112.5
Mortgage-backed securities 16.8 1.4 -- 18.2
Total available for sale $ 872.0 $ 59.8 $ (1.9) $ 929.9
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NOTE 4. INVESTMENTS (Continued)
Fixed Maturities (Continued)
The amortized cost and estimated fair values of fixed maturities at
December 31, 1992, are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
Held to maturity:
United States Government and
government agencies and
authorities $ 108.7 $ 7.8 $ -- $ 116.5
States, municipalities and
political subdivisions 461.8 45.1 -- 506.9
Foreign governments 199.4 27.1 -- 226.5
Public utilities 1,305.0 62.9 (2.6) 1,365.3
Corporate bonds 4,240.3 291.1 (5.7) 4,525.7
Certificates of deposit 72.4 3.7 -- 76.1
Redeemable preferred stocks 0.9 -- (0.1) 0.8
Mortgage-backed securities 42.3 4.2 -- 46.5
Other debt securities 6.8 1.5 -- 8.3
Total held to maturity $6,437.6 $443.4 $ (8.4) $6,872.6
Available for sale:
United States Government and
government agencies and
authorities $ 327.8 $ 16.6 $ (0.1) $ 344.3
States, municipalities and
political subdivisions 144.8 7.4 (0.4) 151.8
Public utilities 2.7 -- (0.4) 2.3
Corporate bonds 106.3 2.4 (3.4) 105.3
Redeemable preferred stocks 40.4 4.8 -- 45.2
Mortgage-backed securities 45.1 0.2 (0.1) 45.2
Total available for sale $ 667.1 $ 31.4 $ (4.4) $ 694.1
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NOTE 4. INVESTMENTS (Continued)
Fixed Maturities (Continued)
The amortized cost and estimated fair value of fixed maturities at December
31, 1993, by contractual maturity date, are shown below. Expected
maturities will differ from contractual maturities since certain borrowers
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Estimated
(Dollars in millions) Cost Fair Value
Held to maturity:
Due in one year or less $ 481.4 $ 494.1
Due after one year through five years 2,612.0 2,798.8
Due after five years through ten years 2,346.5 2,574.6
Due after ten years 1,105.6 1,264.6
6,545.5 7,132.1
Mortgage-backed securities
(primarily due after 10 years) 15.2 17.8
Total held to maturity $6,560.7 $7,149.9
Available for sale:
Due in one year or less $ 11.7 $ 11.9
Due after one year through five years 468.7 500.9
Due after five years through ten years 133.4 140.1
Due after ten years 241.4 258.8
855.2 911.7
Mortgage-backed securities
(primarily due after 10 years) 16.8 18.2
Total available for sale $ 872.0 $ 929.9
Gross gains and losses realized in 1993, 1992 and 1991 on sales of fixed
maturities are as follows:
(Dollars in millions) 1993 1992 1991
Gross gains $ 12.4 $ 18.9 $ 25.6
Gross losses $ 1.3 $ 3.5 $ 1.3
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NOTE 4. INVESTMENTS (Continued)
Equity Securities
The market values, which also represent carrying amounts, and the cost of
equity securities are as follows at December 31, 1993:
Market
(Dollars in millions) Cost Value
Common stocks:
Public utilities $ 72.2 $ 78.5
Industrial, miscellaneous and all other 436.1 651.5
Total $508.3 $730.0
At December 31, 1993, cumulative gross unrealized investment gains on
equity securities totaled $238.4 million and losses totaled $16.7 million.
Mortgage Loans
The carrying amount and estimated fair value of mortgage loans at December
31, 1993, and 1992, are as follows:
(Dollars in millions) 1993 1992
Carrying amount $1,423.2 $1,649.9
Fair value $1,558.4 $1,782.9
Fair values were determined using methods discussed in the Fair Values of
Financial Instruments section of Note 1 "Summary of Significant Accounting
Policies."
Restructured mortgage loans at amortized cost amounted to $65.9 million and
$80.9 million at December 31, 1993, and 1992, respectively. Troubled debt
restructurings represent loans that are refinanced with terms more
favorable to the borrower. Interest foregone on these loans was not
significant for the years ended December 31, 1993, 1992 and 1991.
Other
Real estate acquired in satisfaction of debt cumulatively amounts to $123.1
million at December 31, 1993.
At December 31, 1993, bonds with an amortized cost of $16.1 million, real
estate with a depreciated cost of $5.2 million and mortgage loans with an
amortized cost of $2.7 million were nonincome producing for the twelve
months ended December 31, 1993.
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NOTE 4. INVESTMENTS (Continued)
Financial Instruments With Off-Balance-Sheet Risk
UNUM had interest rate futures contracts with commitments to purchase
treasury securities with total par values of $207.0 million and $140.0
million at December 31, 1993, and 1992, respectively. UNUM uses these
contracts to hedge the interest rate risk on future investments that match
certain insurance liabilities. UNUM is subject to the risk that the
counterparties to such contracts would fail to deliver the securities to
UNUM on settlement date, if UNUM were to hold the contract on that date.
Actual future cash flow required due to these contracts is not significant
to UNUM's total cash flow because UNUM intends to sell these contracts
prior to their settlement dates.
UNUM was committed at December 31, 1993, to purchase fixed maturities and
other invested assets in the amount of $32.9 million.
NOTE 5. 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 are as follows:
Balance at Balance
beginning Addi- Deduc- at end
(Dollars in millions) of year tions tions of year
Year Ended December 31, 1993
Fixed maturities held to maturity
and available for sale $ 4.1 $(3.8) $ -- $ 0.3
Mortgage loans 51.5 4.8 (7.7) 48.6
Real estate held for sale 13.6 18.8 (11.5) 20.9
Total $69.2 $19.8 $(19.2) $69.8
Year Ended December 31, 1992
Fixed maturities held to maturity $ 5.5 $(1.0) $ (0.4) $ 4.1
Mortgage loans 43.1 26.5 (18.1) 51.5
Real estate held for sale 15.9 7.2 (9.5) 13.6
Total $64.5 $32.7 $(28.0) $69.2
Year Ended December 31, 1991
Fixed maturities held to maturity $12.0 $ 3.5 $(10.0) $ 5.5
Mortgage loans 34.1 39.0 (30.0) 43.1
Real estate held for sale 15.8 10.7 (10.6) 15.9
Total $61.9 $53.2 $(50.6) $64.5
Additions represent charges to net realized investment gains less
recoveries, and deductions represent reserves released upon disposal or
restructuring of the related asset.
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NOTE 6. REINSURANCE
UNUM, through its life insurance subsidiaries, is involved in both the
cession and assumption of reinsurance with other companies. Risks are
reinsured with other companies to reduce UNUM's exposure to large losses
and permit recovery of a portion of direct losses. UNUM remains liable to
the insured for the payment of policy benefits if the reinsurers cannot
meet their obligations under the reinsurance agreements. Deferred policy
acquisition costs, premiums and expenses are stated net of reinsurance
ceded to other companies. Reinsurance premiums ceded were $51.5 million
and $49.8 million for 1992 and 1991, respectively. Reinsurance premiums
assumed were $136.2 million and $146.6 million for 1992 and 1991,
respectively.
In connection with private labeling agreements, UNUM has assumed certain
insurance liabilities in exchange for notes receivable. At December 31,
1993, and 1992, the amounts outstanding under these agreements were $115.4
million and $116.7 million, respectively, and are included as both
liabilities and assets in the Consolidated Balance Sheets.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No.
113 ("FAS 113"), "Accounting and Reporting for Reinsurance of Short-
Duration and Long-Duration Contracts," which eliminated the current
practice by insurance enterprises of reporting assets and liabilities
relating to reinsured contracts net of the effects of reinsurance. The new
standard required prepaid reinsurance premiums and reinsurance receivables,
for amounts related to claims incurred but not reported and liabilities for
future policy benefits, to be reported as assets. It also prescribed
conditions required for a contract with a reinsurer to be accounted for as
reinsurance and defines accounting standards for short-duration and long-
duration reinsurance contracts. As permitted, prior year consolidated
financial statements have not been restated. The impact of the adoption on
the Consolidated Balance Sheet was an increase in other assets of $80.0
million and a corresponding increase in future policy benefits and unpaid
claims and claim expenses.
The effect of reinsurance on premiums earned and written for the year ended
December 31, 1993, is as follows:
(Dollars in millions) Earned Written
Direct $2,331.5 $2,335.6
Assumed 192.6 196.2
Ceded (50.0) (50.5)
Premiums $2,474.1 $2,481.3
For the year ended December 31, 1993, recoveries recognized under
reinsurance agreements reduced benefits to policyholders by $22.8 million.
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NOTE 7. BUSINESS RESTRUCTURING
In the fourth quarter of 1991, UNUM announced plans to withdraw from the
401(k) market by the end of 1992, and recorded a $16.0 million pretax
charge to establish a restructuring reserve to provide for the costs
of withdrawal and reassignment of employees and to write off
deferred acquisition costs associated with the 401(k) business. The $16.0
million provision was charged to the 1991 Consolidated Statement of Income
as deferred policy acquisition costs expense and operating expenses of $4.1
million and $11.9 million, respectively.
During 1992, UNUM released the restructuring reserve for the costs of
withdrawal and reassignment of employees associated with the 401(k)
business in excess of amounts incurred, since actual costs were less than
expected, which resulted in a pretax gain of $5.3 million. The gain
associated with the release of this restructuring reserve reduced operating
expenses in the 1992 Consolidated Statement of Income. At December 31,
1992, there was no restructuring reserve remaining associated with the
withdrawal from the 401(k) business.
UNUM has transferred 401(k) service responsibilities to its formerly wholly-
owned subsidiary, Preferred Benefits Corporation, which was sold in May
1992. UNUM will continue to manage the approximately $300.0 million in
assets remaining as of December 31, 1993, associated with its 401(k)
business until maturity.
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NOTE 8. EMPLOYEE BENEFIT PLANS
Pension Plans
UNUM has a noncontributory defined benefit pension plan covering
substantially all domestic employees, excluding employees of Colonial
Companies, Inc., and Duncanson & Holt, Inc. The plan provides benefits
based on the employee's years of service and compensation during the
highest five years out of the last ten years of employment. UNUM funds the
plan in accordance with the requirements of the Employee Retirement Income
Security Act of 1974, as amended. Plan assets consist primarily of group
annuity contracts and include approximately 224,392 shares of UNUM
Corporation common stock.
Net pension cost included the following components:
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Service cost - benefits earned during the year $ 8.6 $ 7.5 $ 6.4
Interest cost on projected benefit obligation 10.9 9.4 7.6
Actual return on plan assets (16.5) (14.5) (29.5)
Net amortization and deferral 5.2 4.1 22.4
Net pension cost $ 8.2 $ 6.5 $ 6.9
The funded status of the plan and amounts recognized in UNUM's Consolidated
Balance Sheets, as determined by the plan's actuaries, are as follows:
December 31,
(Dollars in millions) 1993 1992
Actuarial present value of benefit obligation:
Vested benefit obligation $ 102.3 $ 85.2
Accumulated benefit obligation $ 104.8 $ 88.1
Projected benefit obligation for
service rendered to date $(147.6) $(132.7)
Plan assets at fair value 156.7 137.6
Projected benefit obligation less than plan assets 9.1 4.9
Unrecognized net gain (21.6) (22.5)
Unrecognized prior service cost (6.1) (0.5)
Unamortized net obligation 3.1 3.5
Accrued pension cost $ (15.5) $ (14.6)
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NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
Pension Plans (Continued)
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation were 7.25% and 4.70%, respectively, at
December 31, 1993, and 7.50% and 5.20%, respectively, at December 31,
1992. The expected long-term rate of return on plan assets was 8.25% in
1993, 1992 and 1991. 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 in the years ended December 31, 1993,
1992 and 1991.
Retirement Savings Plans
UNUM has several retirement savings and profit sharing plans for
substantially all full-time and part-time employees who work 40 or more
hours bi-weekly and have been employed for at least one year. Dependent
upon which plan the employee participates in, eligible employees may
contribute up to 10% of their annual salary, and UNUM matches a portion
of each employee's contribution up to 6% of the employee's bi-weekly
compensation. Participants may become 100% vested immediately upon
becoming eligible to participate, or incrementally over a five year
period. In 1993, 1992 and 1991, expense for these plans amounted to
$8.3 million, $6.5 million and $5.5 million, respectively.
Annual Incentive Plans
UNUM has several annual incentive plans for certain employees and
executive officers, which provide additional compensation based on
achievement of predetermined annual corporate financial and non-
financial goals. In 1993, 1992 and 1991, expense for these plans was
$27.9 million, $24.6 million and $21.6 million, respectively.
Long-Term Stock Incentive Plan and Executive Stock Option Plan
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for
granting of restricted shares of UNUM Corporation common stock to key
officers. The Incentive Plan also provides for granting of options to
officers, non-employee directors of UNUM Corporation and key employees,
to purchase UNUM Corporation common stock over ten years at a price not
less than 100% of the fair market value on the date of grant. The
maximum number of shares reserved for issuance under the Incentive Plan
is 6,800,000 in 1993 and 3,500,000 in 1992 and 1991. At December 31,
1993, 1992 and 1991, 3,316,734 shares, 1,006,684 shares, and 1,998,452
shares, respectively, were available for grant under the Incentive Plan.
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NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
Long-Term Stock Incentive Plan and Executive Stock Option Plan (Continued)
The restriction period for each restricted stock award under the Incentive
Plan is in excess of three years, with the restrictions lapsing as a result
of the achievement of prescribed financial performance objectives during
each three year period. Plan participants are entitled to cash dividends
and voting rights on their respective shares. At December 31, 1993, 1992
and 1991, all restricted stock shares issued remained subject to
restrictions.
The market value of the restricted shares issued under the Incentive Plan
has been recorded as deferred compensation and is included as a reduction
of stockholders' equity in the Consolidated Balance Sheets.
The 1987 Executive Stock Option Plan ("Option Plan") provides for granting
to officers and key employees options to purchase UNUM Corporation common
stock over ten years at a price not less than 100% of the fair market value
on the date of grant. An aggregate of 2,500,000 shares of UNUM Corporation
common stock has been reserved for issuance under the Option Plan. Total
shares available for grant under the Option Plan at December 31, 1993, 1992
and 1991, were 848,728 shares, 844,278 shares and 825,078 shares,
respectively.
Both the Incentive Plan and the Option Plan also provide for the granting
of stock appreciation rights ("SARs") in relation to stock options. SARs
entitle the optionee to receive appreciation in the value of shares in
cash, shares or a combination thereof. SARs utilize the same shares
reserved for issuance of stock options and upon exercise automatically
cancel the related stock options. There have been no SARs outstanding
since December 31, 1991.
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NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
Long-Term Stock Incentive Plan and Executive Stock Option Plan (Continued)
Beginning in 1991, certain officers were granted limited stock appreciation
rights ("LSARs") in tandem with their outstanding options. LSARs afford
the optionee the right to receive payment upon a change in control as
defined in the plans equal to the higher of the excess of the highest price
per share paid in connection with such change in control or the fair market
value per share, over the option price per share. As an underlying stock
option is exercised, the LSARs are automatically canceled. At December 31,
1993, 1992 and 1991, there were 556,500 LSARs, 685,550 LSARs, and 750,550
LSARs outstanding, respectively.
The following is a summary of stock options, SARs and restricted stock
information:
Restricted
Options SARs Stock
Outstanding at January 1, 1991 4,047,602 707,674 80,800
1991 Activity:
Granted at $28.73 to $47.88 per share 86,758 -- --
Exercised at $6.28 to $40.00 per share (704,272) (290,350) --
Cancelled/reissued (345,074) (417,324) --
Outstanding at December 31, 1991 3,085,014 -- 80,800
1992 Activity:
Granted at $33.17 to $40.70 per share 1,043,969 -- --
Granted for restricted stock -- -- 34,600
Exercised at $7.13 to $54.00 per share (860,147) -- --
Cancelled/reissued (141,954) -- --
Outstanding at December 31, 1992 3,126,882 -- 115,400
1993 Activity:
Granted at $52.88 to $57.75 per share 1,031,650 -- --
Granted for restricted stock -- -- 32,525
Exercised at $9.03 to $36.75 per share (655,300) -- --
Cancelled/reissued (100,278) -- (1,500)
Outstanding at December 31, 1993 3,402,954 -- 146,425
The number of exercisable shares as of December 31, 1993, 1992 and 1991,
were 1,396,182 shares, 1,305,720 shares, and 1,481,948 shares,
respectively.
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NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
Long-Term Stock Incentive Plan and Executive Stock Option Plan (Continued)
In connection with the March 26, 1993, merger with Colonial Companies, Inc.
("Colonial"), outstanding options to acquire shares of Colonial Class B
common stock were converted into options to acquire shares of UNUM common
stock, and are included in the preceding summary of stock options.
Pursuant to the merger, no further options will be granted under the
Colonial stock option plans.
Postretirement Health Care and Life Insurance Benefits
UNUM provides certain health care and life insurance benefits for retired
employees and covered dependents. Substantially all domestic employees of
UNUM may become eligible for these benefits if they meet minimum age and
service requirements, if they are eligible for retirement benefits and if
they agree to contribute a portion of the cost. UNUM has the right to
modify or terminate these benefits. The underlying plans are not
currently funded.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No.
106 ("FAS 106"), "Employers' Accounting for Postretirement Benefits Other
than Pensions," which changed the method for recognition of the cost of
these benefits from a cash basis to an accrual basis over the years in
which the employees render the related services. UNUM elected to
immediately recognize the FAS 106 liability at January 1, 1993, of $48.8
million as a cumulative effect of an accounting change, which decreased net
income by $32.1 million, or $0.40 per share, during 1993.
Postretirement benefits expense included the following components:
Year Ended
(Dollars in millions) December 31, 1993
Service cost $ 3.4
Interest cost 4.0
Postretirement benefits expense $ 7.4
The following represents the unfunded accumulated postretirement benefits
obligation as determined by the plans' actuaries:
(Dollars in millions) December 31, 1993
Retirees $19.6
Active employees fully eligible 6.5
Other active participants 29.7
Accumulated postretirement benefits obligation 55.8
Unrecognized other amounts 1.2
Accrued postretirement benefits cost $57.0
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NOTE 8. EMPLOYEE BENEFIT PLANS (Continued)
Postretirement Health Care and Life Insurance Benefits (Continued)
The cost of covered health care benefits is assumed to increase 10.85% and
11.10% for retirees less than 65 years old, and 7.75% and 8.00% for
retirees 65 years and older for 1994. These rates are assumed to
decrease incrementally to 5.25% and 5.50% in 1999, and remain at that
level thereafter. The weighted average discount rates used in determining
the accumulated postretirement benefits obligation were 7.25% and 7.50%.
A 1% increase in the trend rate for health care costs would increase
the accumulated postretirement benefits obligation by $9.4 million and
postretirement benefits expense by $1.5 million.
NOTE 9. INCOME TAXES
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No.
109 ("FAS 109"), "Accounting for Income Taxes," which changed the method
for calculating and reporting deferred income taxes in the financial
statements from the deferred method to the liability method. The liability
method of accounting for income taxes, as prescribed in FAS No. 109,
requires that deferred tax liabilities or assets at the end of each period
be determined using the tax rate expected to be in effect when taxes are
actually paid or recovered. Under this method, income tax will increase or
decrease in the same period in which a change in tax rate is enacted. The
cumulative effect of this accounting change amounted to a $20.0 million
increase in net income, or $0.25 per share, for the year ended December 31,
1993.
On August 10, 1993, legislation was enacted to increase the federal income
tax rate of 34% to 35%, retroactive to January 1, 1993. The tax rate
increase resulted in a charge to net income totaling $11.4 million, or
$0.15 per share, which includes $3.6 million, or $0.05 per share, related
to 1993 pretax income, and a $7.8 million, or $0.10 per share, adjustment
to the deferred income tax liability.
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NOTE 9. INCOME TAXES (Continued)
A reconciliation of income taxes computed by applying the federal
income tax rate to income before income taxes and the consolidated income
tax expense charged to operations follows:
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Tax at federal statutory rate (35%
for 1993,34% for other years) $161.1 $135.5 $108.7
Tax-exempt income (29.4) (31.8) (34.7)
Prior years' taxes (2.0) (2.0) (7.6)
State income tax 3.9 3.7 1.5
Tax on foreign operations 0.1 0.1 2.8
Adjustment to deferred tax liability
due to tax rate increase 7.8 -- --
Other 6.8 1.8 3.6
Income taxes $148.3 $107.3 $ 74.3
Deferred income tax liabilities and assets are comprised of the following
at December 31, 1993, and January 1, 1993:
(Dollars in millions) December 31, January 1,
1993 1993
Deferred tax liabilities:
Deferred policy acquisition costs $257.8 $225.3
Policy reserve adjustments 69.6 16.3
Net unrealized gains 79.4 61.3
Value of business acquired 19.0 21.0
Invested assets 10.5 19.1
Other 7.4 3.9
Total deferred tax liabilities 443.7 346.9
Deferred tax assets:
Alternative minimum tax credit carryforwards 20.2 22.0
Net realized losses 17.3 21.6
Postretirement benefits 19.7 16.7
Loss carryforward 8.0 --
Other 1.8 7.0
Total deferred tax assets 67.0 67.3
Net deferred tax liability $376.7 $279.6
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NOTE 9. INCOME TAXES (Continued)
Deferred income taxes relating to cumulative net unrealized gains on equity
securities are $79.4 million, $57.4 million and $45.8 million at December
31, 1993, 1992 and 1991, respectively. At December 31, 1993, $6.8 million
of the $79.4 million deferred income taxes is reflected in retained
earnings, while the remaining $72.6 million is netted against the
unrealized gains component of stockholders' equity.
As of December 31, 1993, deferred U.S. income taxes have not been provided
on the accumulated earnings of UNUM's foreign subsidiaries. These earnings
would become subject to U.S. tax if remitted to UNUM Corporation. The tax
effect of such a distribution is not expected to be material.
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, 1993. 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, 1993, for all life insurance subsidiaries, the tax would have amounted
to $11.1 million.
UNUM's Consolidated Statements of Income for 1993, 1992 and 1991, include
the following amounts of foreign income and related income tax expense:
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Foreign income $ 20.9 $ 32.7 $ 44.9
Income tax expense (credit):
Current $(12.5) $ 1.6 $ 9.0
Deferred 20.2 10.4 8.6
Total $ 7.7 $ 12.0 $ 17.6
UNUM subsidiaries had operating loss carryforwards totalling $24.0 million
and alternative minimum tax ("AMT") credit carryforwards totalling $20.2
million as of December 31, 1993. Substantially all of the operating loss
carryforwards relate to foreign operations and can be carried forward
indefinitely. The AMT credits can be carried forward indefinitely.
Deferred taxes for years prior to the adoption of FAS 109 resulted
primarily from deferred policy acquisition costs, policy reserve
adjustments, alternative minimum tax or credit and net realized losses.
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NOTE 10. NOTES PAYABLE
The carrying amounts and estimated fair values of short-term and long-term
debt consist of the following at December 31, 1993, and 1992:
Carrying Estimated
(Dollars in millions) Amount Fair Value
1993 1992 1993 1992
Short-term debt:
Commercial paper $109.9 $ 72.3 $109.9 $ 72.3
8.81% bank notes payable -- 25.0 -- 26.0
8.88% bank notes payable -- 25.0 -- 26.1
Other notes payable 0.1 0.4 0.1 0.4
Total short-term debt 110.0 122.7 110.0 124.8
Long-term debt:
Medium term notes payable due
1997 to 2023 with interest rates
ranging from 5.1% to 7.5% 126.1 74.6 129.4 74.7
Other notes payable 2.5 2.6 2.5 2.6
Total long-term debt 128.6 77.2 131.9 77.3
Total notes payable $238.6 $199.9 $241.9 $202.1
Fair values were determined using methods discussed in the Fair Values of
Financial Instruments section of Note 1, "Summary of Significant Accounting
Policies."
As of December 31, 1993, UNUM Corporation has committed revolving credit
facilities of $100 million and $200 million, which expire on March 11,
1994, and June 1, 1996, respectively. UNUM anticipates renewing the $100
million revolving credit facility with a committed revolving credit
facility of a similar amount. The commercial paper program is supported by
the revolving credit facilities and is available for general liquidity
needs, capital expansion, acquisitions or 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. The commercial paper outstanding at December
31, 1993, and 1992, had a weighted average rate of approximately 3.41% and
3.81%, respectively.
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NOTE 11. CAPITAL STOCK
In September 1993, UNUM announced the resumption of its repurchase program
and during 1993 acquired 3,704,600 shares of its common stock in the open
market at an aggregate cost of $192.5 million. No shares were acquired in
the open market during 1992 or 1991.
As of December 31, 1993, 1.5 million shares remained authorized for
purchase under UNUM's Stock Repurchase Program. In February 1994, UNUM's
Board of Directors approved an increase of 5.0 million shares in UNUM's
Stock Repurchase Program.
Under the Long-Term Stock Incentive Plan and Executive Stock Option Plan
and the plans of Colonial Companies, Inc. (see Note 8 "Employee Benefit
Plans"), 687,825 shares, 894,747 shares and 732,030 shares were issued in
1993, 1992 and 1991, respectively.
NOTE 12. STOCK SPLIT
On February 14, 1992, UNUM's Board of Directors authorized a two-for-one
common stock split effected through the distribution of one additional
share for each share of stock already issued, which was distributed on or
about March 9, 1992, to holders of record on February 25, 1992.
Accordingly, all numbers of common shares and per common share data have
been restated to reflect the stock split. The par value of $5.0 million
for the additional shares of common stock issued in connection with the
stock split was transferred to common stock from additional paid in capital
in first quarter 1992.
NOTE 13. PREFERRED STOCK PURCHASE RIGHTS
On March 13, 1992, UNUM's Board of Directors ordered redemption of the 1988
Rights Agreement and adopted a new Shareholder Rights Plan. Shareholders
of record on March 23, 1992, received $0.05 for every two shares of common
stock held, which was distributed April 2, 1992. The total amount of the
redemption was $1.7 million.
As a result of the adoption of a new Shareholder Rights Plan, a dividend
distribution was declared of one Right for each share of outstanding Common
Stock to stockholders of record at the close of business on March 23, 1992.
Each Right under certain specific circumstances entitles the holder to
purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock at a purchase price of $150.
The Rights become exercisable at a specified time after (1) a person or
group acquires 10% or more of UNUM's Common Stock or (2) a tender or
exchange offer for 10% or more of UNUM's Common Stock.
The Rights expire at the close of business on March 13, 2002, unless
earlier redeemed by the Company under certain circumstances at a price of
$0.01 per Right.
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NOTE 14. DIVIDEND RESTRICTIONS
UNUM is subject to various state insurance regulatory restrictions that
limit the maximum amount of dividends available from its United States
domiciled insurance subsidiaries without prior approval. Under current
law, during 1994 approximately $176.8 million will be available for payment
of dividends to UNUM Corporation without state insurance regulatory
approval. Dividends in excess of this amount may only be paid with state
insurance regulatory approval. The aggregate statutory capital and
surplus of the United States domiciled insurance subsidiaries of UNUM
Corporation was approximately $953.9 million and $845.7 million, at
December 31, 1993, and 1992, respectively. The aggregate statutory net
income of UNUM Corporation's United States domiciled insurance subsidiaries
was approximately $216.0 million, $154.1 million and $125.8 million for
1993, 1992 and 1991, 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.
NOTE 15. LITIGATION
In the normal course of its business operations, UNUM is involved in
litigation from time to time with claimants, beneficiaries and others, and
a number of lawsuits were pending at December 31, 1993. 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.
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NOTE 16. SEGMENT INFORMATION
UNUM reports its operations principally in six business segments: Employee
Benefits, Related Businesses, Colonial Companies, Individual Disability,
Retirement Security and Other Operations.
Investment income and net realized investment gains are allocated to the
segments based on designation of ownership of assets identified to the
segments. Operating expenses are allocated to the segments based on direct
association with a product whenever possible. If, however, the expense
cannot be readily associated with a particular product, the costs are
allocated based on ratios of the relative time spent, extent of usage or
varying volume of work performed for each segment.
The Employee Benefits segment includes group long term disability, group
life and other employee benefits products, including short term disability,
accidental death and dismemberment and dental insurance. The Related
Businesses segment includes UNUM Limited in the United Kingdom, Commercial
Life Insurance Company, and reinsurance operations including Duncanson &
Holt, Inc. The Colonial Companies segment includes Colonial Companies,
Inc. and subsidiaries, which offer payroll deducted, voluntary employee
benefits to employees at their worksites. The Individual Disability
segment includes disability income products. The Retirement Security
segment includes tax sheltered annuities, long term care insurance and
lifestyle security protection products. The Other Operations segment
includes individual life insurance business of UNUM Life Insurance Company
of America, group medical operations, guaranteed investment contracts,
deposit administration accounts, and 401(k) plans, all of which are no
longer actively marketed by UNUM. Corporate includes transactions which
are generally noninsurance related and expenses incurred to effect the
March 26, 1993, merger of UNUM and Colonial.
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NOTE 16. SEGMENT INFORMATION (Continued)
Summarized financial information for the six business segments and
Corporate is as follows:
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Revenues:
Employee Benefits $ 1,597.3 $ 1,350.6 $ 1,196.1
Related Businesses 488.0 446.0 419.5
Colonial Companies 448.8 407.3 363.9
Individual Disability 405.0 367.9 320.9
Retirement Security 271.8 261.1 255.8
Other Operations 179.9 210.9 226.8
Corporate 6.2 4.7 1.5
Total revenues $ 3,397.0 $ 3,048.5 $ 2,784.5
Income (loss) before income taxes:
Employee Benefits $ 239.1 $ 222.5 $ 193.9
Related Businesses 57.3 53.4 61.1
Colonial Companies 70.4 60.5 57.5
Individual Disability 69.0 44.6 36.7
Retirement Security 21.1 6.7 (2.1)
Other Operations 20.8 16.5 (16.5)
Corporate (17.4) (5.7) (11.0)
Income before income taxes 460.3 398.5 319.6
Income taxes 148.3 107.3 74.3
Income before cumulative effects of
accounting changes 312.0 291.2 245.3
Cumulative effects of accounting changes (12.1) -- --
Net income $ 299.9 $ 291.2 $ 245.3
December 31,
(Dollars in millions) 1993 1992 1991
Identifiable Assets:
Employee Benefits $ 3,294.5 $ 2,936.4 $ 2,610.2
Related Businesses 1,269.0 1,113.2 1,134.8
Colonial Companies 819.2 745.9 642.8
Individual Disability 1,516.3 1,349.1 1,206.7
Retirement Security 3,249.3 3,051.7 2,799.5
Other Operations 1,493.9 1,982.7 2,167.5
Corporate 452.3 442.8 394.4
Individual Participating
Life and Annuity 342.8 338.0 355.0
Total assets $12,437.3 $11,959.8 $11,310.9
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NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
1993 and 1992:
(Dollars in millions, except per common share data)
1993
4th 3rd 2nd 1st
Premiums $647.7 $622.9 $624.6 $578.9
Investment income 193.2 196.4 200.3 200.5
Net realized investment gains 8.5 10.6 9.8 20.5
Benefits to policyholders 460.5 446.9 449.8 418.5
Net income $ 83.1 $ 72.1 $ 80.8 $ 63.9
Net income per common share $ 1.08 $ 0.91 $ 1.02 $ 0.81
1992
4th 3rd 2nd 1st
Premiums $551.7 $538.6 $525.3 $526.8
Investment income 204.9 206.5 199.2 198.6
Net realized investment gains 6.7 11.9 11.7 11.2
Benefits to policyholders 400.3 383.4 371.2 377.7
Net income $ 69.9 $ 74.8 $ 73.9 $ 72.6
Net income per common share $ 0.89 $ 0.95 $ 0.94 $ 0.93
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 2, 1993, the Registrant determined not to reappoint Ernst &
Young as the Registrant's independent auditors for 1993. Also on August 2,
1993, the Registrant engaged Coopers & Lybrand as the Registrant's
independent auditors for 1993. In connection with the audits of the fiscal
years ended December 31, 1991, and December 31, 1992, and for the interim
period dating from January 1, 1993, until August 2, 1993, there were no
disagreements between Ernst & Young and the Registrant on any matter of
accounting principles or practices, financial statements disclosure, or
auditing scope or procedure, which, if not resolved to the satisfaction of
Ernst & Young, would have resulted in reference or disclosure in Ernst &
Young's reports.
Ernst & Young's reports for the fiscal years ended December 31, 1991, and
December 31, 1992, contained no adverse opinions, no disclaimers of opinion
and no qualifications or modifications of opinion as to uncertainty, audit
scope, or accounting principles.
The change of independent auditors was recommended by the Audit Committee
of the Registrant's Board of Directors and approved by the Board of
Directors.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors of the Registrant
The information under the caption "Election of Directors" included in
UNUM's proxy statement dated March 28, 1994, 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, 1994) Position held with UNUM Since
James F. Orr III 51 Chairman, President and 1986
Chief Executive Officer
W. Francis Brennan 57 Executive Vice President 1984
Stephen B. Center 56 Executive Vice President 1972
Rodney N. Hook 47 Senior Vice President and 1989
Chief Financial Officer
Peter J. Moynihan 50 Senior Vice President 1979
Kevin P. O'Connell* 48 Senior Vice President, 1987
Marketing, UNUM America
Robert G. Ostrander* 47 Senior Vice President,
Individual Disability 1989
Division, UNUM America
Elaine D. Rosen* 41 Senior Vice President, 1983
Employee Benefits Disability
Division, UNUM America
Robert E. Staton* 47 Chairman, Colonial Life 1984
*Denotes an executive of UNUM America or Colonial Life who is not an
officer of the Corporation but who is considered an "executive officer"
under regulations of the Securities and Exchange Commission.
The officers are elected annually and hold office until their respective
successors have been chosen and qualified, or until death, resignation or
removal. The UNUM Board may also appoint or delegate the appointment of
officers, assistant officers and agents as it may deem necessary for such
periods as the President, the By-Laws or the UNUM Board may prescribe.
Mr. Orr was elected Chairman of the Board of UNUM in February 1988. He
has served as President and Chief Executive Officer since September 1987.
He joined UNUM in 1986.
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Mr. Brennan was elected Executive Vice President of UNUM in May 1991.
Previously, he served as Senior Vice President for the Related Businesses
Division from September 1988 to May 1991. He joined UNUM America in 1984.
Mr. Brennan is a registered principal of the National Association of
Securities Dealers.
Mr. Center was elected President of UNUM America and Executive Vice
President of UNUM in September 1992. Previously, he served as Group
Executive Vice President of UNUM America from May 1990 to August 1992,
Executive Vice President for the Employee Benefits Division from September
1989 to May 1990, and Senior Vice President for the Employee Benefits
Division from October 1985 to September 1989. He joined UNUM America in
1963.
Mr. Hook was elected Senior Vice President and Chief Financial Officer
in April 1989. He served additionally as Treasurer from May 1989 to
September 1992. Prior to joining UNUM in April 1989, Mr. Hook served as a
consultant to The Equitable Life Assurance Society of New York from
September 1988 to April 1989.
Mr. Moynihan was elected Senior Vice President of UNUM in September 1993
and Senior Vice President for Investments of UNUM America in October 1987.
He joined UNUM America in 1973.
Mr. O'Connell was elected Senior Vice President, Marketing, of UNUM
America in January 1992. Previously, he served as Senior Vice President
for Group Life and Health from November 1988 to January 1992 and
additionally for Group Retirement Products from May 1990 to January 1992.
He joined UNUM America in 1968.
Mr. Ostrander was elected Senior Vice President, Individual Disability,
of UNUM America in May 1990. Previously, he served as Vice President,
Individual Disability from May 1989 to May 1990, and as an Employee
Benefits field office manager from 1983 until May 1989. He joined UNUM
America in 1972.
Ms. Rosen was elected Senior Vice President, Employee Benefits Disability
Division, of UNUM America in January 1991. Previously, she served as
Senior Vice President for Long Term Disability from November 1988 to
January 1991. She joined UNUM America in 1975.
Mr. Staton was elected Chairman of Colonial Life in December 1993.
Previously, he served as Senior Vice President from February 1990 to
December 1993 and Vice President from August 1985 to February 1990; and
additionally as General Counsel from August 1985 to November 1993, and
Corporate Secretary from February 1992 to August 1993. He joined Colonial
Life in 1984.
The information under the caption "Officer Securities Reports" included
in UNUM's proxy statement dated March 28, 1994, is incorporated by
reference.
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Item 11. EXECUTIVE COMPENSATION
The information under the captions "Compensation of Directors" and
"Executive Compensation" included in UNUM's proxy statement dated March 28,
1994, is incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership" included in
UNUM's proxy statement dated March 28, 1994, is incorporated by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Executive Compensation" included in
UNUM's proxy statement dated March 28, 1994, is incorporated by reference.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed:
1. The following Consolidated Financial Statements of UNUM
Corporation and subsidiaries are included in Item 8.
Consolidated Statements of Income for the Years Ended
December 31, 1993, 1992 and 1991
Consolidated Balance Sheets as of December 31, 1993,
and 1992
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. See Index to Financial Statement
Schedules on page 96 of this report.
3. Exhibits. See Index to Exhibits on page 105 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 1993.
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.
91
<PAGE>
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, 1994.
UNUM Corporation
By /s/ JAMES F. ORR III
James F. Orr III (Chairman of the
Board, 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 of the Board, President March 25, 1994
(James F. Orr III) and Chief Executive Officer
/s/ RODNEY N. HOOK Senior Vice President and Chief March 25, 1994
(Rodney N. Hook) Financial Officer
/s/ STEPHEN D. ROBERTS Vice President and Corporate March 25, 1994
(Stephen D. Roberts) Controller
* Director March 25, 1994
(Gayle O. Averyt)
Director March 25, 1994
(Kenneth S. Axelson)
* Director March 25, 1994
(Robert E. Dillon, Jr.)
* Director March 25, 1994
(Gwain H. Gillespie)
Director March 25, 1994
(Ronald E. Goldsberry)
* Director March 25, 1994
(Donald W. Harward)
92
<PAGE>
Name Title Date
* Director March 25, 1994
(Cynthia A. Montgomery)
* Director March 25, 1994
(James L. Moody, Jr.)
* Director March 25, 1994
(Lawrence R. Pugh)
* Director March 25, 1994
(Lois Dickson Rice)
* Director March 25, 1994
(John W. Rowe)
* Director March 25, 1994
(Robert L. Swiggett)
* /s/ JOHN-PAUL DEROSA
(John-Paul DeRosa, as Attorney-in-fact
for each of the persons indicated)
(Assistant Secretary)
93
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
UNUM Corporation
We have audited the consolidated financial statements and the financial
statement schedules of UNUM Corporation and subsidiaries listed in Item
14(a) of this Form 10-K as of and for the year ended December 31, 1993.
These consolidated financial statements and financial statement schedules
are the responsibility of the Corporation's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audit provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of UNUM Corporation and subsidiaries as of December 31, 1993, and
the consolidated results of their operations and their cash flows for the
year then ended 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.
As discussed in Notes 8 and 9 of the consolidated financial statements, the
Corporation changed its method of accounting for postretirement benefits
other than pensions, and accounting for income taxes in 1993.
/s/ COOPERS & LYBRAND
Portland, Maine
February 8, 1994
94
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Directors and Stockholders
UNUM Corporation
Portland, Maine
We have audited the consolidated balance sheet of UNUM Corporation and
subsidiaries as of December 31, 1992, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1992. Our audits also included
the financial statement schedules for 1992 and 1991 listed in the Index at
Item 14(a). These financial statements and schedules are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements and schedules
based on our 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 financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our 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 at December 31, 1992, and the
consolidated results of their operations and their cash flows for each of
the two years in the period then ended, in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG
Boston, Massachusetts
March 26, 1993
95
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedules
The following financial statement schedules of UNUM Corporation and
subsidiaries are included in Item 14(a):
Page(s)
III Condensed Financial Information of UNUM
Corporation (Registrant) 97-100
V Supplementary Insurance Information 101-102
VI Reinsurance 103
IX Short-term Borrowings 104
96
<PAGE>
UNUM CORPORATION (Parent Company)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Revenues
Dividends from subsidiaries* $131.8 $110.8 $ 90.5
Investment income 0.2 0.8 0.4
Net realized investment gains -- 1.9 --
Interest income on loans to subsidiaries* -- -- 3.1
Total revenues 132.0 113.5 94.0
Expenses
Operating expenses 11.6 9.2 0.4
Interest expense 12.4 10.7 11.2
Interest expense on loans from subsidiaries* 0.1 -- 8.0
Total expenses 24.1 19.9 19.6
Income before income taxes 107.9 93.6 74.4
Income tax expense (benefit) (5.7) 3.5 (3.5)
Income before equity in undistributed net
income of subsidiaries 113.6 90.1 77.9
Equity in undistributed net income of
subsidiaries* 186.3 201.1 167.4
Net income $299.9 $291.2 $245.3
*Eliminated in consolidation
See notes to condensed financial statements.
97
<PAGE>
UNUM CORPORATION (Parent Company)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31,
(Dollars in millions) 1993 1992
Assets
Investments
Investment in subsidiaries* $2,376.9 $2,159.7
Short-term investments 4.4 2.1
Total investments 2,381.3 2,161.8
Cash 1.3 0.7
Amounts receivable from subsidiaries, net* 12.4 19.9
Property and equipment, net 17.3 17.6
Other assets -- 1.2
Total assets $2,412.3 $2,201.2
Liabilities and Stockholders' Equity
Liabilities
Notes payable $ 236.0 $ 176.4
Notes payable to subsidiary* 60.0 --
Federal income taxes 2.3 --
Other liabilities 11.3 13.9
Total liabilities 309.6 190.3
Stockholders' Equity
Preferred stock, par value $0.10 per share,
authorized 10,000,000 shares, none issued
Common stock, par value $0.10 per share,
authorized 120,000,000 shares, issued
99,987,958 shares 10.0 10.0
Additional paid-in capital 1,062.3 1,057.8
Unrealized gains on equity securities of
subsidiaries, net of deferred taxes 165.2 129.9
Unrealized foreign currency translation adjustment (24.1) (20.9)
Retained earnings (including undistributed
earnings of subsidiaries of $1,039.1 million and
$852.8 million in 1993 and 1992, respectively) 1,420.8 1,182.3
2,634.2 2,359.1
Less:
Treasury stock, at cost (1993-24,006,816 shares;
1992-20,928,716 shares) 529.8 345.5
Restricted stock deferred compensation 1.7 2.7
Total stockholders' equity 2,102.7 2,010.9
Total liabilities and stockholders' equity $2,412.3 $2,201.2
*Eliminated in consolidation
See notes to condensed financial statements.
98
<PAGE>
UNUM CORPORATION (Parent Company)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Operating activities:
Net income $ 299.9 $ 291.2 $ 245.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase (decrease) in federal income taxes 2.3 3.2 (5.0)
Decrease in amounts due to/from subsidiaries (7.5) (1.2) (16.9)
Other 19.6 (5.4) 21.2
Equity in undistributed net income of
subsidiaries* (186.3) (201.1) (167.4)
Net cash provided by operating activities 128.0 86.7 77.2
Investing activities:
Sales of investments -- 86.2 --
Purchases of investments (2.0) (88.5) (0.9)
Investment in subsidiaries, net* 0.9 (43.8) (4.7)
Net additions to property and equipment (2.4) (1.7) (5.8)
Net cash used in investing activities (3.5) (47.8) (11.4)
Financing activities:
Dividends to stockholders (61.4) (41.9) (32.8)
Treasury stock acquired (192.5) -- (0.3)
Proceeds from notes payable 51.5 74.6 --
Repayment of notes payable (50.0) (25.0) --
Increase (decrease) in short-term debt 58.1 (58.1) 70.4
Net proceeds from (repayment of) notes payable
to subsidiaries* 60.0 (2.5) (113.7)
Net repayment (issuance) of loans to subsidiaries* -- 3.8 (0.7)
Other 10.4 10.7 11.1
Net cash used in financing activities (123.9) (38.4) (66.0)
Net increase (decrease) in cash 0.6 0.5 (0.2)
Cash at beginning of year 0.7 0.2 0.4
Cash at end of year $ 1.3 $ 0.7 $ 0.2
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Income taxes $ (8.1) $ (4.7) $ (3.0)
Interest $ 12.1 $ 11.0 $ 11.1
Interest to subsidiaries* $ -- $ -- $ 9.9
*Eliminated in consolidation
See notes to condensed financial statements.
99
<PAGE>
UNUM CORPORATION (Parent Company)
SCHEDULE III -- 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. These
condensed financial statements have been prepared giving retroactive effect
to the March 26, 1993, merger with Colonial Companies, Inc.
Certain December 31, 1992, amounts have been reclassified in 1993 for
comparative purposes.
100
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in millions)
<TABLE>
<CAPTION>
Segment
(1)(2)
Unamortized Future policy (4)(5) Amortization
deferred benefits, and Net Benefits to of deferred (5)
policy unpaid claims (3) investment policyholders policy Other (6)
acquisition and claim Premium income and interest acquisition operating Premiums
costs expenses revenue (expense) credited costs expenses written
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Employee Benefits $249.4 $2,044.0 $1,362.6 $234.7 $1,018.3 $ 42.1 $297.8 $1,060.6
Related Businesses 25.6 795.1 402.5 85.5 268.7 1.1 160.9 282.2
Colonial Companies 206.0 274.3 407.4 41.4 211.7 56.1 110.6 365.4
Individual Disability 348.2 943.3 322.5 82.5 212.0 35.3 88.7 313.1
Retirement Security 47.5 105.3 36.3 235.5 196.6 10.6 43.5 34.4
Other Operations 2.4 524.4 25.9 154.0 149.4 2.5 7.2 14.0
Corporate -- (0.5) -- 6.2 -- -- 23.6 --
Total $879.1 $4,685.9 $2,557.2 $839.8 $2,056.7 $147.7 $732.3 $2,069.7
Year Ended December 31, 1992
Employee Benefits $206.8 $1,840.4 $1,116.2 $234.4 $ 808.0 $ 34.4 $285.7 $ 895.1
Related Businesses 18.0 696.1 354.4 91.6 262.7 (2.9) 132.8 287.1
Colonial Companies 185.7 233.0 371.9 35.4 191.5 50.5 104.8 330.8
Individual Disability 293.1 823.0 292.9 75.0 204.4 31.2 87.7 283.5
Retirement Security 35.8 89.0 32.3 228.8 211.7 9.4 33.3 11.9
Other Operations 14.4 499.4 29.3 181.6 182.7 3.3 8.4 0.9
Corporate -- -- 0.8 3.9 -- -- 10.4 --
Total $753.8 $4,180.9 $2,197.8 $850.7 $1,861.0 $125.9 $663.1 $1,809.3
Year Ended December 31, 1991
Employee Benefits $179.0 $1,704.6 $1,000.0 $196.1 $ 729.9 $ 23.8 $248.5 $ 822.2
Related Businesses 11.9 723.4 324.2 95.3 254.0 (1.8) 106.2 303.3
Colonial Companies 161.7 196.7 325.4 38.5 164.2 44.8 97.4 291.8
Individual Disability 240.8 741.6 253.4 67.5 173.8 32.2 78.2 243.4
Retirement Security 32.5 70.3 28.0 227.8 224.1 5.0 28.8 5.7
Other Operations 17.7 484.6 41.9 184.9 198.8 7.8 36.7 18.7
Corporate -- -- -- 1.5 -- -- 12.5 --
Total $643.6 $3,921.2 $1,972.9 $811.6 $1,744.8 $111.8 $608.3 $1,685.1
(Continued on next page)
</TABLE>
101
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in millions)
(1) Excludes other policyholder funds, as follows:
December 31,
Segment 1993 1992 1991
Employee Benefits $ 10.5 $ 7.4 $ 7.4
Related Businesses 4.3 9.2 10.1
Colonial Companies 83.9 66.9 53.2
Individual Disability 5.8 4.7 3.2
Retirement Security 2,911.8 2,837.3 2,658.1
Other Operations 1,252.5 1,629.3 1,859.8
Total $4,268.8 $4,554.8 $4,591.8
(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.
102
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE VI -- REINSURANCE
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
(Dollars in millions) Amount companies companies Amount to net
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Life insurance in force $130,323.4 $2,247.9 $ -- $128,075.5 nm
Premiums
Life insurance and individual annuities $ 487.2 $ 11.9 $ 1.6 $ 476.9 0.3%
Accident and health insurance 1,818.6 38.1 191.0 1,971.5 9.7%
Group annuities 25.7 -- -- 25.7
Total premiums $ 2,331.5 $ 50.0 $ 192.6 $ 2,474.1
Year Ended December 31, 1992
Life insurance in force $105,361.0 $ 586.8 $ -- $104,774.2 nm
Premiums
Life insurance and individual annuities $ 409.9 $ 6.2 $ 0.5 $ 404.2 0.1%
Accident and health insurance 1,615.7 45.3 135.7 1,706.1 8.0%
Group annuities 32.1 -- -- 32.1
Total premiums $ 2,057.7 $ 51.5 $ 136.2 $ 2,142.4
Year Ended December 31, 1991
Life insurance in force $ 90,151.7 $ 520.4 $ 27.7 $ 89,659.0 nm
Premiums
Life insurance and individual annuities $ 338.6 $ 4.6 $ 18.7 $ 352.7 5.3%
Accident and health insurance 1,479.3 45.2 127.9 1,562.0 8.2%
Group annuities 24.2 -- -- 24.2
Total premiums $ 1,842.1 $ 49.8 $ 146.6 $ 1,938.9
nm = not meaningful
</TABLE>
103
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE IX -- SHORT-TERM BORROWINGS
(Dollars in millions)
<TABLE>
<CAPTION>
(1) (2) (3)
Maximum Average Weighted
Category of Weighted amount amount average
aggregate average outstanding outstanding interest rate
short-term Balance at interest during the during the during the
borrowings end of period rate period period period
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Commercial paper (A) $109.9 3.41% $140.0 $ 70.1 3.24%
Other notes payable (C) 0.1 7.00% $ 0.4 $ 0.3 7.37%
$110.0
Year Ended December 31, 1992
Commercial paper (A) $ 51.8 3.81% $108.5 $ 90.1 4.03%
Bank notes payable (B) 20.5 3.90% $ 32.4 $ 9.8 3.60%
Bank notes payable (C) 50.0 8.85% $ 50.0 $ 50.0 8.85%
Other notes payable (C) 0.4 7.37% $ 0.4 $ 0.4 8.09%
$122.7
Year Ended December 31, 1991
Commercial paper (A) $109.9 5.09% $138.8 $ 90.2 6.17%
Bank notes payable (B) 5.3 4.90% $ 5.3 $ 0.7 5.20%
Bank notes payable (C) 9.9 11.50% $ 9.9 nm 11.50%
Bank notes payable (C) 25.0 8.64% $ 25.0 $ 25.0 8.64%
$150.1
</TABLE>
nm = not meaningful since bank notes payable originated in December 1991.
(A) Commercial paper generally matures within nine months from the date of
issue with provision for renewal at prevailing market rates.
(B) Bank notes payable represents borrowings under lines of credit borrowing
arrangements, which have July 31 termination dates but are reviewed
annually for renewal. On July 31, 1993, these lines of credit were not
renewed.
(C) Bank notes payable and other notes payable represent term loans having a
maturity of one year or less with no provision for renewal.
(1) This represents the maximum balance outstanding at any month end during
the period.
(2) The average amount outstanding during the period was calculated on a
daily basis.
(3) The weighted average interest rate during the period was calculated
by dividing actual interest expense by the average amount
outstanding during the period.
104
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description Method of Filing Page(s) No.
<S> <C> <C> <C>
3.1 Certificate of Incorporation of UNUM Filed as Exhibit 3.1 to the Registrant's Annual
Corporation, as amended Report on Form 10-K dated March 25, 1992, and
incorporated herein by reference.
3.2 By-Laws of UNUM Corporation Filed as Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K dated March 25, 1992, and
incorporated herein by reference.
4 Rights Agreement Filed as Exhibit 1 to the Registrant's Current
Report on Form 8-K dated March 18, 1992, and
incorporated herein by reference.
10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K dated March 26, 1991, and
incorporated herein by reference.
10.2 Annual Incentive Plan Filed as Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K dated March 29, 1993, and
incorporated herein by reference.
10.2.1 Annual Incentive Plan- Filed herewith. 107
Summary of Significant Changes
10.3 Executive Stock Option Plan Filed as Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K dated March 29, 1993, and
incorporated herein by reference.
10.4 1990 Long-Term Stock Incentive Plan Filed as Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K dated March 29, 1993, and
incorporated herein by reference.
10.5 Supplementary Retirement Plan Filed as Exhibit 10.4 to the Registrant's Registration
Statement on Form S-1 (Registration No.
33-6571) dated June 18, 1986, and
incorporated herein by reference.
10.6 Supplemental Executive Retirement Filed as Exhibit 10.6 to the Registrant's Annual
Plan Report on Form 10-K dated March 26, 1991, and
incorporated herein by reference.
10.7 Form of Executive Severance Agreement Filed as Exhibit 10.7 to the Registrant's Annual
Report on Form 10-K dated March 25, 1992, and
incorporated herein by reference.
</TABLE>
105
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS (Continued)
<TABLE>
<CAPTION>
Number Description Method of Filing Page(s)
<S> <C> <C> <C>
12 Computation of Ratio of Earnings to Filed herewith. 108
Fixed Charges
16 Letter Regarding Change in Certifying Filed as Exhibit 16 to the Registrant's Current
Accountant Report on Form 8-K dated August 9, 1993, and
incorporated herein by reference.
21 Subsidiaries of UNUM Corporation Filed herewith. 109
23.1 Consent of Independent Accountants Filed herewith. 110
23.2 Consent of Independent Auditors Filed herewith. 111
24 Power of Attorney Filed herewith. 112-113
</TABLE>
106
<PAGE>
EXHIBIT 10.2.1
ANNUAL INCENTIVE PLAN-
SUMMARY OF SIGNIFICANT CHANGES
The Annual Incentive Plan document has been amended and is not yet in final
form. The following provides a summary of the significant changes to the
plan for 1994 which have been approved by the UNUM Life Insurance Company of
America Board of Directors.
- - Eligibility to pariticipate in this plan now generally includes all
full-time and part-time employees of UNUM Life Insurance Company of
America, who meet the criteria stated in the 1993 Plan Document.
- - For employees who work in the UNUM America CVT organization:
- a UNUM America performance measure has been introduced;
- weightings have been changed as stated below; and
- for a payout to be made under the UNUM America CVT and Business
Unit components of this plan, a minimum threshold of UNUM America
CVT performance has to be met.
- - Target payouts and weightings follow:
ORGANIZATION: CORPORATE CORPORATE UNUM AMERICA
STAFF UNITS LINE UNITS CVT
(Investments)
Band Target Weightings
Payout
Corp Bus Corp Bus Corp UA Bus
Unit Unit CVT Unit
1-7 6% 60% 40% 40% 60% 20% 50% 30%
8-10 8% 60% 40% 40% 60% 20% 50% 30%
11-12 10% 60% 40% 40% 60% 20% 50% 30%
13-14 15% 60% 40% 40% 60% 20% 50% 30%
15-16 20% 60% 40% 40% 60% 20% 50% 30%
17-19 25% 60% 40% 40% 60% 20% 50% 30%
20-22 35% 60% 40% 40% 60% 30% 50% 20%
23-24 40% 60% 40% 40% 60% 30% 50% 20%
25-29 50% 100% 100% 100%
CEO 60% 100%
107
<PAGE>
EXHIBIT 12
UNUM CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31,
(Dollars in millions) 1993 1992 1991
Earnings:
Income from continuing operations
before income taxes $460.3 $398.5 $319.6
Add:
Fixed charges 24.2 22.0 24.6
Earnings as adjusted $484.5 $420.5 $344.2
Fixed charges:
Interest expense $ 12.7 $ 10.9 $ 11.3
Capitalized interest -- -- 1.0
Interest portion of rent expense 11.5 11.1 12.3
Total fixed charges $ 24.2 $ 22.0 $ 24.6
Ratio of earnings to fixed charges 20.0 19.1 14.0
For purposes of computing the ratio of earnings to fixed charges, earnings
as adjusted consist of income from continuing operations plus income taxes
and fixed charges. Fixed charges consist of interest expense, capitalized
interest and the estimated interest portion of rent expense.
108
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF UNUM CORPORATION
Listed below are subsidiaries of UNUM Corporation, as of December 31,
1993, with their respective jurisdiction of incorporation.
UNUM Holding Company (Delaware)
First UNUM Life Insurance Company (New York)
UNUM Sales Corporation (Delaware)
Claims Service International, Inc. (Delaware)
UNUM Life Insurance Company of America (Maine)
Colonial Companies, Inc. (Delaware)
Colonial Life & Accident Insurance Company (South Carolina)
BenefitAmerica, Inc. (South Carolina)
Commercial Life Insurance Company (Wisconsin)
UNUM European Holding Company Limited (United Kingdom)
UNUM Limited (United Kingdom)
Duncanson & Holt, Inc. (New York)
Duncanson & Holt Services, Inc. (Maine)
Group Management Services, Inc. (Washington)
Duncanson & Holt Europe Ltd. (United Kingdom)
Duncanson & Holt Underwriters Ltd. (United Kingdom)
109
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following Registration
Statements and related Prospectuses of our report dated February 8, 1994
on our audit of the consolidated financial statements and financial
statement schedules of UNUM Corporation and subsidiaries as of
December 31, 1993 and for the year then ended which report is included
in this Annual Report on Form 10-K:
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 UNUM 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
/s/ COOPERS & LYBRAND
Portland, Maine
March 25, 1994
110
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements and related Prospectuses of our report dated March 26, 1993,
with respect to the 1992 and 1991 consolidated financial statements and
schedules of UNUM Corporation and subsidiaries incorporated by reference
or included in this Annual Report (Form 10-K) for the year ended
December 31, 1993:
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
/s/ ERNST & YOUNG
Boston, Massachusetts
March 24, 1993
111
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EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kevin J. Tierney and John-Paul DeRosa his
true and lawful attorney-infact and agent, with full powers of substitution
and resubstitution, for him and in his name, place and stead, in any and
all capacities to sign the Annual Report on Form 10-K for the year ending
December 31, 1993 of UNUM Corporation pursuant to the Securities Exchange
Act of 1934 and any or all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, and
hereby ratifies and confirms all his said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
Witness our signatures on the date set forth below:
Signature Title Date
/s/ GAYLE O. AVERYT Director March 25, 1994
Gayle O. Averyt
Director March 25, 1994
Kenneth S. Axelson
/s/ ROBERT E. DILLON, JR. Director March 25, 1994
Robert E. Dillon, Jr.
/s/ GWAIN H. GILLESPIE Director March 25, 1994
Gwain H. Gillespie
Director March 25, 1994
Ronald E. Goldsberry
112
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Signature Title Date
/s/ DONALD W. HARWARD Director March 25, 1994
Donald W. Harward
/s/ CYNTHIA A. MONTGOMERY Director March 25, 1994
Cynthia A. Montgomery
/s/ JAMES L. MOODY, JR. Director March 25, 1994
James L. Moody, Jr.
/s/ LAWRENCE R. PUGH Director March 25, 1994
Lawrence R. Pugh
/s/ LOIS DICKSON RICE Director March 25, 1994
Lois Dickson Rice
/s/ JOHN W. ROWE Director March 25, 1994
John W. Rowe
/s/ ROBERT L. SWIGGETT Director March 25, 1994
Robert L. Swiggett
113
