<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995 COMMISSION FILE NUMBER 1-9254
UNUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 01-0405657
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2211 CONGRESS STREET, PORTLAND, MAINE 04122
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 770-2211
NONE
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1995
COMMON STOCK, $0.10 PAR VALUE 72,780,079 SHARES
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income (Loss) - Three Months and
Nine Months Ended September 30, 1995, and 1994 (Unaudited)
Consolidated Balance Sheets as of September 30, 1995,
(Unaudited) and December 31, 1994
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1995, and 1994 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Independent Accountant's Review Report
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
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 ( L O S S )
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ---------------
1995 1994 1995 1994
(Unaudited - Dollars in millions,
except per common share data)
- ---------------------------------------------------------------------------
REVENUES
Premiums $738.0 $667.4 $2,201.2 $2,018.7
Investment income 207.8 192.3 599.0 575.8
Net realized investment gains 2.9 11.6 221.9 36.0
Fees and other income 18.9 16.3 56.7 57.4
- --------------------------------------------------------------------------
Total revenues 967.6 887.6 3,078.8 2,687.9
BENEFITS AND EXPENSES
Benefits to policyholders 568.7 705.7 1,858.2 1,701.5
Interest credited 56.8 59.7 170.3 181.6
Operating expenses 171.6 169.5 531.4 508.6
Commissions 90.8 88.9 278.5 263.7
Increase in deferred policy
acquisition costs (21.6) (36.1) (83.5) (108.9)
Interest expense 10.2 5.0 26.8 12.5
- --------------------------------------------------------------------------
Total benefits and expenses 876.5 992.7 2,781.7 2,559.0
- --------------------------------------------------------------------------
Income (loss) before income taxes 91.1 (105.1) 297.1 128.9
INCOME TAXES (BENEFIT)
Current 6.5 (2.1) 100.0 30.1
Deferred 17.9 (41.3) (21.9) (1.9)
- ---------------------------------------------------------------------------
Total income taxes (benefit) 24.4 (43.4) 78.1 28.2
- ---------------------------------------------------------------------------
NET INCOME (LOSS) $ 66.7 $(61.7) $219.0 $ 100.7
============================================================================
NET INCOME (LOSS) PER COMMON SHARE $ 0.92 $(0.84) $ 3.02 $ 1.35
============================================================================
See notes to consolidated financial statements.
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
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
September 30, 1995 December 31,
(Dollars in millions) (Unaudited) 1994
- ---------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities:
Held to maturity-principally at amortized cost
(fair value: 1995-$6,098.3; 1994-$6,168.6) $ 5,835.6 $ 6,227.2
Available for sale-at fair value (amortized cost:
1995-$3,020.5; 1994-$1,701.4) 3,104.3 1,640.6
Equity securities available for sale-at fair value
(cost: 1995-$21.3; 1994-$492.2) 24.8 627.9
Mortgage loans 1,136.1 1,216.3
Real estate, net 196.6 190.8
Policy loans 215.5 201.0
Other long-term investments 33.0 38.1
Short-term investments 514.7 291.9
- ----------------------------------------------------------------------------
Total investments 11,060.6 10,433.8
Cash 34.4 36.1
Accrued investment income 195.1 195.9
Premiums due 213.6 189.7
Deferred policy acquisition costs 1,111.7 1,035.2
Property and equipment, net 152.6 153.4
Other assets 814.7 737.2
Separate account assets 505.8 345.9
- ----------------------------------------------------------------------------
Total assets $14,088.5 $13,127.2
============================================================================
(Continued on next page)
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
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
September 30, 1995 December 31,
(Dollars in millions) (Unaudited) 1994
- ---------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits $ 1,784.4 $ 1,591.6
Unpaid claims and claim expenses 4,322.3 3,853.9
Other policyholder funds 3,886.8 4,058.8
Income taxes
Current 31.1 12.4
Deferred 333.3 348.6
Notes payable 588.3 428.7
Other liabilities 536.9 571.9
Separate account liabilities 505.8 345.9
- ----------------------------------------------------------------------------
Total liabilities 11,988.9 11,211.8
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 1,085.2 1,080.5
Unrealized gains on available for sale
securities, net of deferred taxes 57.4 49.6
Unrealized foreign currency translation adjustment (19.0) (23.7)
Retained earnings 1,670.3 1,507.2
- ----------------------------------------------------------------------------
2,803.9 2,623.6
Less:
Treasury stock, at cost (1995-27,207,879 shares;
1994-27,575,430 shares) 697.4 706.6
Restricted stock deferred compensation 6.9 1.6
- ----------------------------------------------------------------------------
Total stockholders' equity 2,099.6 1,915.4
- ----------------------------------------------------------------------------
Total liabilities and stockholders' equity $14,088.5 $13,127.2
============================================================================
See notes to consolidated financial statements.
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
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
Nine Months Ended
September 30,
---------------
(Unaudited - Dollars in millions) 1995 1994
- --------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 219.0 $ 100.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in future policy benefits and unpaid
claims and claim expenses 688.9 579.5
Increase in amounts receivable under reinsurance
agreements (56.4) (16.1)
Decrease in income tax liability (1.2) (13.0)
Increase in deferred policy acquisition costs (83.5) (108.9)
Realized investment gains (237.7) (47.8)
Other (36.4) 18.0
- --------------------------------------------------------------------------
Net cash provided by operating activities 492.7 512.4
- --------------------------------------------------------------------------
INVESTING ACTIVITIES:
Maturities of fixed maturities held to maturity 594.7 404.2
Maturities of fixed maturities available for sale 67.5 27.0
Sales of fixed maturities held to maturity 2.8 --
Sales of fixed maturities available for sale 480.9 273.5
Sales of equity securities available for sale 836.7 217.3
Sales and maturities of other investments 236.9 290.7
Purchases of fixed maturities held to maturity (223.4) (548.7)
Purchases of fixed maturities available for sale (1,870.9) (640.8)
Purchases of equity securities available for sale (131.3) (166.3)
Purchases of other investments (198.7) (57.9)
Net increase in short-term investments (222.8) (10.8)
Net additions to property and equipment (6.8) (16.0)
- ---------------------------------------------------------------------------
Net cash used in investing activities (434.4) (227.8)
- ---------------------------------------------------------------------------
FINANCING ACTIVITIES:
Deposits and interest credited to investment contracts 501.0 460.3
Maturities and withdrawals from investment contracts (673.0) (648.2)
Dividends to stockholders (55.9) (51.0)
Treasury stock acquired -- (177.6)
Proceeds from notes payable 241.5 54.6
Repayment of notes payable (1.3) (1.2)
Net increase (decrease) in short-term debt (80.6) 89.9
Other 7.6 (1.0)
- ---------------------------------------------------------------------------
Net cash used in financing activities $ (60.7) $ (274.2)
- ---------------------------------------------------------------------------
(Continued on next page)
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
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
Nine Months Ended
September 30,
---------------
(Unaudited - Dollars in millions) 1995 1994
- --------------------------------------------------------------------------
Effect of exchange rate changes on cash $ 0.7 $ 0.1
- --------------------------------------------------------------------------
Net increase (decrease) in cash (1.7) 10.5
Cash at beginning of year 36.1 20.8
- --------------------------------------------------------------------------
Cash at end of period $ 34.4 $ 31.3
==========================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 64.1 $ 44.3
Interest $ 20.2 $ 9.4
==========================================================================
See notes to consolidated financial statements.
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1995
NOTE 1. BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
applicable to stock life insurance companies for interim financial
information and with the requirements of Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles applicable to stock life insurance companies
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation have been included. Interim results for the three
month and nine month periods ended September 30, 1995, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1995. For further information, refer to the audited consolidated
financial statements and footnotes included in the 1994 annual report to
stockholders of UNUM Corporation and subsidiaries ("UNUM").
Certain 1994 amounts have been reclassified in 1995 for comparative
purposes.
NOTE 2. CHANGES IN ACCOUNTING ESTIMATE
- ---------------------------------------
During the second quarter of 1995, UNUM sold virtually all of the common
stock portfolio of its United States subsidiaries. The sale of the common
stock portfolio, which partially supported certain disability reserves, and
the intended reinvestment of the proceeds into high quality fixed income
assets at yields below the average portfolio yield, resulted in lower
reserve discount rates for certain disability products reported in the
Disability Insurance segment. This change in accounting estimate to lower
certain discount rates, resulted in an increase of $128.6 million to the
reserve liabilities in the Consolidated Balance Sheet and benefits to
policyholders in the Consolidated Statement of Income, and decreased net
income by $83.6 million, or $1.15 per share, for the nine months ended
September 30, 1995. The discount rate used to determine the group long
term disability reserves was reduced to 8.00% at June 30, 1995, as compared
with 9.18% at December 31, 1994.
During the second quarter of 1995, UNUM increased the group long term
disability reserves for incurred but not reported ("IBNR") claims, as
reported in the Disability Insurance segment. The increased IBNR reserves
were based on management's judgment that claims currently incurred but not
yet reported will reflect increased levels of claims incidence and
severity. This change in accounting estimate resulted in an increase to
benefits to policyholders in the Consolidated Statement of Income of $38.4
million, and a decrease to net income of $25.0 million, or $0.34 per share,
for the nine months ended September 30, 1995.
In the third quarter of 1994, UNUM increased reserves for existing claims
of the individual disability business, as reported in the Disability
Insurance segment, by $83.3 million and established a reserve for estimated
future losses of $109.1 million. These increased reserves reflect
management's expectations of morbidity trends for the existing individual
disability business. This change in accounting estimate resulted in an
increase to benefits to policyholders in the Consolidated Statement of
Income (Loss) of $192.4 million, and a decrease to net income of $125.1
million, or $1.70 per share, and $1.67 per share, for the three months and
nine months ended September 30, 1994, respectively.
NOTE 3. ACCOUNTING CHANGES
- ---------------------------
Effective January 1, 1995, UNUM adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and FAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures," which define the principles to measure and
record an impaired loan. When it is probable that UNUM will be unable to
collect all amounts of principal and interest due according to the
contractual terms of a loan agreement, the loan is deemed
impaired. Once a loan is determined to be impaired, an allowance for
probable losses is established for the difference between the carrying
amount of the loan and its estimated value. The estimated value is
based on either the present value of expected future cash flows discounted
using the loan's effective interest rate, the loan's observable market
price or the fair value of the collateral. The adoption of FAS 114 and FAS
118 did not have a material effect on UNUM's results of operations or
financial position.
NOTE 4. BUSINESS RESTRUCTURING AND OTHER CHARGES
- ------------------------------------------------
Charges of $8.4 million and $14.4 million were recorded in the second
quarter of 1995 and the fourth quarter of 1994, respectively, related to
the previously announced decision to discontinue the individual disability
non-cancellable product and the acceleration of organizational changes
within UNUM Life Insurance Company of America. Partially offsetting the
charge recorded in the second quarter of 1995, was a $3.4 million
curtailment gain, related to workforce reductions in UNUM Corporation's
noncontributory defined benefit plan. The combined $22.8 million of
restructuring and other charges, excluding the $3.4 million curtailment
gain, was comprised of $13.7 million for severance and salary continuation
costs and $9.1 million for exit costs of certain leased facilities and
equipment, expiring through 1998. All employee related costs are expected
to be paid by the end of 1995.
Of the total $22.8 million charge, UNUM utilized $4.2 million and $14.3
million, for the three months and nine months ended September 30, 1995,
respectively. The $4.2 million, which was paid in the third quarter of
1995, was comprised of $3.6 million for severance and salary continuation
costs and $0.6 million of lease costs. The $14.3 million was comprised of
$12.5 million for severance costs for 126 field and 229 home office
employees and $1.8 million of lease costs.
NOTE 5. INVESTMENTS
- --------------------
During 1995, UNUM sold fixed maturities of two issuers classified as held
to maturity with an amortized cost of $4.0 million, and realized a net loss
of $1.2 million on the sales. The bonds were sold due to significant
deterioration of the issuers' creditworthiness, as evidenced by bankruptcy
filings.
NOTE 6. EARNINGS PER SHARE
- ---------------------------
The weighted average number of shares outstanding used to calculate
earnings per share was approximately 72,721,000 and 73,830,000 for third
quarter 1995 and 1994, respectively. Weighted average shares outstanding
for the nine months ended September 30, 1995, and 1994, were approximately
72,603,000 and 74,751,000, respectively. The assumed exercise of
outstanding stock options would not result in a material dilution of
earnings per share.
NOTE 7. DIVIDENDS TO STOCKHOLDERS
- ----------------------------------
On October 13, 1995, UNUM's Board of Directors declared a twenty-six and
one half cents per share cash dividend. The dividend is payable on
November 17, 1995, to common stockholders of record at the close of
business on October 30, 1995. During the first nine months of 1995, cash
dividends of twenty-six and one half cents per share were paid on August
18, 1995, and May 19, 1995, and a twenty-four cents per share cash dividend
was paid on February 17, 1995.
NOTE 8. NOTES PAYABLE
- ----------------------
Notes payable consisted of the following at September 30, 1995:
(Dollars in millions)
- ----------------------------------------------------------------------------
Short-term debt:
Commercial paper $135.6
Other notes payable, with weighted average interest rate of 1.0% 30.4
Medium-term notes payable, due 1996, with interest rate of 6.2% 15.0
- ----------------------------------------------------------------------------
Total short-term debt 181.0
- ----------------------------------------------------------------------------
Long-term debt:
Medium-term notes payable, due 1997 to 2024,
with interest rates ranging from 5.1% to 7.5% 240.6
Monthly income debt securities, due 2025, with interest rate of 8.8%,
$172.5 million issued net of unamortized offering costs of $5.8
million 166.7
- ----------------------------------------------------------------------------
Total long-term debt 407.3
- ----------------------------------------------------------------------------
Total notes payable $588.3
============================================================================
At September 30, 1995, UNUM Corporation had a $500 million committed
revolving credit facility which expires on October 1, 1999. UNUM's
commercial paper program is supported by the revolving credit facility and
is available for general liquidity needs, capital expansion, acquisitions
or stock repurchase. The committed revolving credit facility contains
certain covenants which, among other provisions, require maintenance of
certain levels of stockholders' equity and limits on debt levels. At
September 30, 1995, approximately $365 million was available for additional
financing under the existing revolving credit facility. The commercial
paper outstanding at September 30, 1995, had a weighted average interest
rate of approximately 5.9%.
On October 26, 1995, UNUM Corporation issued $50.0 million of medium-term
notes, due 2000, with interest rates ranging from 6.3% to 6.4%. UNUM
intends to use the net proceeds from the issuance of the medium-term notes
to repay commercial paper and for general corporate purposes.
NOTE 9. 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 September 30, 1995. In the opinion of
management, the ultimate liability, if any, arising from this litigation is
not expected to have a material adverse effect on the consolidated
financial position or the consolidated operating results of UNUM.
On December 29, 1993, UNUM filed a suit in the United States District Court
for the District of Maine, seeking a federal income tax refund. The suit
is based on a claim for a deduction in certain prior tax years, for $652
million in cash and stock distributed to policyholders in connection with
the 1986 conversion of Union Mutual Life Insurance Company to a stock
company. Although UNUM believes its claims are meritorious, the United
States is aggressively resisting the claims and the ultimate recovery, if
any, cannot be determined at this time.
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. UNUM is required to adopt FAS
121 by January 1, 1996. The adoption of FAS 121 is not expected to have a
material effect on UNUM's results of operations or financial position.
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting
standards for stock-based employee compensation plans. UNUM is required to
adopt FAS 123 effective January 1, 1996. FAS 123 defines a new method of
accounting for employee stock compensation plans using a fair value based
method, under which compensation cost is measured and recognized in results
of operations. Alternatively, FAS 123 allows an entity to retain the
accounting method for employee stock compensation plans defined under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." If an entity
retains the accounting defined under APB 25, certain pro forma disclosures
of net income and earnings per share must be made as if the fair value
based method defined under FAS 123 had been applied. UNUM has not yet
determined what method of accounting it will elect or what effect the
adoption of FAS 123 may have on its results of operations or financial
position.
NOTE 11. SEGMENT INFORMATION
- -----------------------------
To more clearly reflect UNUM's management of its businesses and to more
appropriately group its product portfolios, UNUM began reporting its
operations, effective January 1, 1995, principally in four business
segments: Disability Insurance, Special Risk Insurance, Colonial Products
and Retirement Products. For comparative purposes, prior period
information has been restated to reflect reporting in these segments.
The Disability Insurance segment includes disability products offered in
North America, the United Kingdom and Japan including: group long term
disability, individual disability, short term disability, association group
disability, disability reinsurance and long term care insurance. The
Special Risk Insurance segment includes group life, special risk accident
insurance, non-disability reinsurance operations, reinsurance underwriting
management operations and other special risk insurance products.
The Colonial Products segment includes Colonial Companies, Inc. and
subsidiaries, which offer payroll-deducted, voluntary employee benefits
including personal accident and sickness, cancer and life insurance
products to employees at their worksites. The Retirement Products segment
includes tax sheltered annuities and products which are no longer actively
marketed by UNUM including guaranteed investment contracts, deposit
administration accounts and 401(k) plans. Corporate includes transactions
which are generally non-insurance related.
<PAGE>
Summarized financial information for the four business segments and
Corporate was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- --------------
(Dollars in millions) 1995 1994 1995 1994
- --------------------------------------------------------------------------
REVENUES
Disability Insurance $ 563.9 $518.4 $1,857.3 $1,563.2
Special Risk Insurance 183.1 161.9 540.3 484.1
Colonial Products 127.9 116.2 393.7 350.6
Retirement Products 88.4 88.0 277.8 283.4
Corporate 4.3 3.1 9.7 6.6
- ----------------------------------------------------------------------------
Total revenues $ 967.6 $887.6 $3,078.8 $2,687.9
============================================================================
INCOME (LOSS) BEFORE INCOME TAXES
Disability Insurance $ 58.0 $(136.3) $164.0 $ 8.9
Special Risk Insurance 9.8 14.9 42.7 50.0
Colonial Products 19.5 13.6 66.3 45.7
Retirement Products 7.1 8.6 40.1 36.5
Corporate (3.3) (5.9) (16.0) (12.2)
- --------------------------------------------------------------------------
Total income (loss) before income taxes 91.1 (105.1) 297.1 128.9
Income taxes (benefit) 24.4 (43.4) 78.1 28.2
- --------------------------------------------------------------------------
Net income (loss) $ 66.7 $ (61.7) $219.0 $100.7
==========================================================================
September 30, December 31,
(Dollars in millions) 1995 1994
- --------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Disability Insurance $ 6,722.3 $ 6,131.9
Special Risk Insurance 957.2 846.8
Colonial Products 941.9 846.2
Retirement Products 4,583.1 4,504.0
Corporate 512.3 451.3
Individual Participating Life and Annuity 371.7 347.0
- --------------------------------------------------------------------------
Total assets $14,088.5 $13,127.2
==========================================================================
<PAGE>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
--------------------------------------
To the Board of Directors and Stockholders
UNUM Corporation
We have reviewed the accompanying consolidated balance sheet of UNUM
Corporation and subsidiaries as of September 30, 1995, and the related
consolidated statements of income (loss) for the three-month and nine-month
periods ended September 30, 1995 and 1994, and the consolidated statements of
cash flows for the nine-month periods then ended. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Portland, Maine
October 25, 1995
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
September 30, 1995
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Financial
Statements (Unaudited) and Notes to Consolidated Financial Statements
(Unaudited) included elsewhere in the Form 10-Q.
Revenues for UNUM for third quarter 1995 were $967.6 million as compared with
$887.6 million for third quarter 1994. Net income for the quarter ended
September 30, 1995, was $66.7 million, or $0.92 per share, as compared with a
net loss of $(61.7) million, or $(0.84) per share, for the same quarter in
1994.
Revenues for UNUM for the nine months ended September 30, 1995, were $3,078.8
million as compared with $2,687.9 million for the same period in 1994. Net
income for the nine months ended September 30, 1995, was $219.0 million, or
$3.02 per share, as compared with net income of $100.7 million, or $1.35 per
share, for the same period in 1994.
Effective January 1, 1995, UNUM began reporting its operations principally in
four business segments: Disability Insurance, Special Risk Insurance, Colonial
Products and Retirement Products. Corporate includes transactions that are
generally non-insurance related. For comparative purposes, the prior period
information has been restated to reflect reporting in these segments.
During the second quarter of 1995, UNUM sold virtually all of the common stock
portfolio of its United States subsidiaries, primarily due to consideration of
statutory capital requirements associated with investment in common stocks, and
to increase future investment income. The sale of the common stock portfolio
contributed to significantly higher realized investment gains for the nine
months ended September 30, 1995. UNUM has reinvested the proceeds from the
sale of the common stock portfolio primarily in investment grade fixed income
assets, which has decreased the required amount of statutory capital for
regulatory purposes and increased investment income. Dependent on capital
considerations and market conditions, UNUM may invest in equity securities in
the future.
Reserves for certain disability products are discounted using an interest rate
which is a composite yield of assets matched with each product. As a result of
the sale of the common stock portfolio, which had partially supported these
disability reserves, and the intended reinvestment of the proceeds into high
quality fixed income assets at yields below the average portfolio yield, certain
reserve discount rates were lowered during second quarter 1995. The effect of
lowering these discount rates was an increase to the reserve liabilities and
benefits to policyholders reported in the Disability Insurance segment of $128.6
million and a decrease in net income of $83.6 million. The discount rate used
to determine the group long term disability ("group LTD") reserves was reduced
to 8.00% at June 30, 1995, as compared with 9.18% at December 31, 1994. In
addition to the initial impact of lowering these reserve discount rates reported
in second quarter 1995, certain disability products' benefit ratios have been,
and will continue to be, negatively affected, as the lower reserve discount
rates require higher reserve levels.
Management expects the reserve discount rates for certain disability products
will further decline, since current cash flows are invested in high quality
assets at current yields, which are below the composite yield of the existing
assets purchased in prior years. UNUM will periodically adjust prices on both
existing and new business in an effort to mitigate the impact of the current
interest rate environment.
During the second quarter of 1995, UNUM increased the group LTD reserves for
incurred but not reported ("IBNR") claims and benefits to policyholders
reported in the Disability Insurance segment by $38.4 million, which
decreased net income by $25.0 million. IBNR reserves, which are established to
fund anticipated case reserves for claims which have been incurred but not
reported to UNUM, are actuarially established based on various factors,
including incidence levels and claims severity. The increased IBNR reserves
were based on management's judgment that claims currently incurred but not yet
reported will reflect increased levels of claims incidence and severity. It is
not possible to predict whether future incidence levels or claims severity will
be consistent with UNUM's current assumptions, or will improve or deteriorate.
Throughout 1994, UNUM's individual disability business experienced a higher
incidence of new claims and a disproportionate number of large claims that
management attributed to certain geographic and occupational segments of the
business, particularly physicians. During the third quarter of 1994,
management concluded that the deterioration of claims experience was not a
temporary fluctuation in certain segments of the business, but was indicative
of expected claim trends for the future. As a result, in third quarter 1994,
UNUM increased reserves for existing claims by $83.3 million and established
a reserve for estimated future losses of $109.1 million. These increased
reserves reflect management's expectations of morbidity trends for the existing
individual disability business. It is not possible to predict whether
morbidity trends will be consistent with UNUM's assumptions; however, as of
September 30, 1995, management believes that the strengthened reserve amounts
continue to be adequate.
<PAGE>
PREMIUMS:
- ---------
Premiums for the three months and nine months ended September 30, 1995, and
1994, are summarized by segment in the table below. For the nine months ended
September 30, 1995, and 1994, claim block acquisitions generated one-time
premium in the Disability Insurance segment of $24.7 million and $2.7 million,
respectively, for group long term disability ("group LTD"), $4.3 million and
$15.0 million, respectively, for long term care, and $25.8 million in 1994 for
UNUM Limited. Management intends to pursue additional claim block
acquisitions in the future.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(Dollars in millions) 1995 1994 Change 1995 1994 Change
- --------------------------------------------------------------------------
Disability Insurance
Group LTD $ 258.6 $ 239.3 8.1 % $ 788.7 $ 705.9 11.7 %
UNUM Limited 32.8 27.2 20.6 91.5 102.6 (10.8)
Individual Disability 89.5 87.6 2.2 266.0 254.4 4.6
Short Term Disability 32.3 27.7 16.6 97.1 78.9 23.1
Other Disability
Insurance 36.6 31.2 17.3 110.2 109.1 1.0
- ---------------------------------------------------------------------------
Total 449.8 413.0 8.9 1,353.5 1,250.9 8.2
Special Risk Insurance
Group Life 92.4 78.3 18.0 264.2 231.7 14.0
Other Special Risk
Products 68.4 63.7 7.4 208.0 188.9 10.1
- ---------------------------------------------------------------------------
Total 160.8 142.0 13.2 472.2 420.6 12.3
Colonial Products 117.0 107.9 8.4 351.8 325.6 8.0
Retirement Products 10.4 4.5 NM 23.7 21.6 9.7
- ---------------------------------------------------------------------------
Total premiums $ 738.0 $ 667.4 10.6 % $2,201.2 $2,018.7 9.0 %
===========================================================================
NM - not meaningful
<PAGE>
INCOME (LOSS) BEFORE INCOME TAXES:
- ----------------------------------
Income (loss) before income taxes for the four business segments and
Corporate for the three months and nine months ended September 30, 1995, and
1994, was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
(Dollars in millions) 1995 1994 Change 1995 1994 Change
- --------------------------------------------------------------------------
Disability Insurance $ 58.0 $ (136.3) $194.3 $164.0 $ 8.9 $155.1
Special Risk Insurance 9.8 14.9 (5.1) 42.7 50.0 (7.3)
Colonial Products 19.5 13.6 5.9 66.3 45.7 20.6
Retirement Products 7.1 8.6 (1.5) 40.1 36.5 3.6
Corporate (3.3) (5.9) 2.6 (16.0) (12.2) (3.8)
- ---------------------------------------------------------------------------
Total $ 91.1 $ (105.1) $196.2 $297.1 $128.9 $168.2
==========================================================================
The increase in income before income taxes for the three months ended September
30, 1995, as compared with the same period in 1994, is primarily attributable to
the $192.4 million individual disability reserve strengthening which was
recorded in third quarter 1994. Additionally, income before income taxes for
the quarter was favorably impacted by increased investment income and a lower
benefit ratio in the individual disability line of business. Partially
offsetting these items were higher benefit ratios in certain disability and
special risk lines of business, reduced realized investment gains, and increased
interest expense.
Income before income taxes decreased for the nine months ended September 30,
1995, as compared with the same period in 1994, when the following items are
excluded: the increased realized investment gains resulting from the sale of the
common stock portfolio, the increased reserves resulting from the lowering of
certain disability product reserve discount rates and the increased group LTD
reserves for IBNR claims, all of which took place in second quarter 1995; and
the individual disability reserve strengthening recorded in third quarter 1994.
The decrease was primarily driven by higher benefit ratios at UNUM Limited and
in group LTD and group life, increased interest expense, and lower interest
spread margins on the tax sheltered annuity business. Partially offsetting
these items were increased investment income and a lower benefit ratio in the
individual disability line of business.
DISABILITY INSURANCE SEGMENT:
- -----------------------------
The increase in income before income taxes for the Disability Insurance segment
for the three months ended September 30, 1995, as compared with the same period
in 1994, was primarily due to the $192.4 million individual disability reserve
strengthening recorded in third quarter 1994. In addition, increased investment
income, a lower benefit ratio in individual disability, and continued expense
management favorably affected income before income taxes. Partially offsetting
these items were lower realized investment gains, and a higher benefit ratio in
group LTD, UNUM Limited, and Commercial Life's association group line of
business.
The Disability Insurance segment reported decreased income before income taxes
for the nine months ended September 30, 1995, as compared with the same period
in 1994, when the following items are excluded: the increased realized
investment gains resulting from the sale of the common stock portfolio, the
increased reserves resulting from the lowering of certain disability product
reserve discount rates and the increased group LTD reserves for IBNR claims, all
of which took place in second quarter 1995; and the individual disability
reserve strengthening recorded in third quarter 1994. This decrease was
primarily attributable to a higher benefit ratio at UNUM Limited and in group
LTD, partially offset by increased investment income, continued expense
management, and a lower benefit ratio in the individual disability business.
Increased investment income in the Disability Insurance segment for the three
months and nine months ended September 30, 1995, as compared with the same
periods in 1994, was primarily a result of the reinvestment of the proceeds from
the sale of the common stock portfolio into investment grade fixed income
assets. Since reserves for certain disability products are discounted using an
interest rate which is a composite yield of assets matched with each product,
the sale of the common stock portfolio, and subsequent reinvestment of the
proceeds into assets with yields below the average portfolio yield, resulted in
lower reserve discount rates, the effects of which, partially offset this
increase in investment income. In addition to the initial impact of lowering
these reserve discount rates reported in second quarter 1995, certain disability
products' benefit ratios have been, and will continue to be, negatively
affected, as the lower discount rates require higher reserve levels.
While group LTD's income before income taxes excluding: realized investment
gains, the increased reserves resulting from lowering the group LTD reserve
discount rate and the increased group LTD reserves for IBNR claims; was lower
for the nine months ended September 30, 1995, as compared with the same period
in 1994, there has been gradual improvement in each sequential quarter of 1995.
Group LTD's income before income taxes increased for the three months ended
September 30, 1995, as compared with the same period in 1994, primarily due to
greater investment income, partially offset by a higher benefit ratio. While
claim incidence rates and claim recoveries have continued to improve during
1995, which management attributes to risk management programs, an increase in
claims severity and the lower reserve discount rate have negatively affected
group LTD's benefit ratio. Management continues to address the unfavorable
claim trends in group LTD by periodically adjusting prices on selected new and
inforce business, implementing more stringent underwriting guidelines, and
strengthening risk management programs. Management believes these actions have
strengthened UNUM's ability to deal with these claim trends and the current
interest rate environment. The level of earnings of the group LTD product will
be a function of the effectiveness of these continuing actions over time.
During the three months and nine months ended September 30, 1995, UNUM Limited's
group long term disability business has continued to be adversely affected by
unfavorable claims experience, which began to emerge in late 1994. UNUM Limited
has experienced a higher incidence of new claims and a disproportionate number
of large claims that management has attributed to certain segments of the
business. To address the current claims environment, management has increased
prices on those segments of the business that have experienced a higher
incidence of new claims and continues to evaluate underwriting standards and
risk management programs.
Commercial Life's association group line of business has been negatively
affected by unfavorable claims experience, which management has attributed to
certain geographical and occupational segments, particularly dentists and
physicians. Management is taking pricing actions and strengthening underwriting
standards to address this claims experience.
During the second quarter of 1995, UNUM introduced the guaranteed renewable
Lifelong Disability Protection product, which will replace the traditional,
fixed price, non-cancellable individual disability product. At the end of the
third quarter of 1995, the new product had been approved in over two-thirds of
the states, and management expects to have approval in most states by the end of
1995. Sales of the traditional, fixed price, non-cancellable individual
disability product are being discontinued in each state following approval of
the new product.
SPECIAL RISK INSURANCE SEGMENT:
- -------------------------------
The decrease in income before income taxes for the three months ended September
30, 1995, as compared with the same period in 1994, was primarily attributable
to adverse mortality in the group life business and in Commercial Life's special
risk business, partially offset by continued premium growth and expense
management. For the nine months ended September 30, 1995, income before income
taxes decreased as compared with the same period in 1994, primarily due to
adverse mortality in the group life business and in Commercial Life's special
risk business, and reduced fee income from the reinsurance underwriting
management operations. Partially offsetting these decreases was continued
premium growth and increased realized investment gains from the sale of the
common stock portfolio. Premium growth for the Special Risk segment resulted
primarily from sales growth and rate increases imposed on certain portions of
the group life business, as well as increased participation in certain
reinsurance pools. Due to the nature of the risks underwritten and the relative
size of the blocks of businesses, several of the Special Risk Insurance
segment's products can exhibit claims variability.
COLONIAL PRODUCTS SEGMENT:
- --------------------------
The Colonial Products segment reported increased income before income taxes for
the three months ended September 30, 1995, as compared with the corresponding
period in 1994. The increase was primarily attributable to increased investment
income, favorable claims experience and continued expense management. For the
nine months ended September 30, 1995, income before income taxes increased as
compared with the same period in 1994, primarily due to higher realized
investment gains from the sale of the common stock portfolio and increased
investment income. In addition, premium growth, attributable to higher sales
levels and continued benefits from enhanced customer conservation programs,
favorably affected income before income taxes for the three months and nine
months ended September 30, 1995.
RETIREMENT PRODUCTS SEGMENT:
- ----------------------------
Lower interest rate spread margins on tax sheltered annuities contributed to
lower income before income taxes for the three months ended September 30, 1995,
as compared with the same period in 1994. Income before income taxes increased
for the nine months ended September 30, 1995, as compared with the same period
in 1994, primarily due to increased realized investment gains from the sale of
the common stock portfolio during second quarter 1995, which were partially
offset by lower interest spread margins on tax sheltered annuities. Investments
in tax-exempt securities, which result in increased consolidated net income,
reduced the Retirement Products segment's income before income taxes by $1.9
million and $6.5 million for the three months and nine months ended September
30, 1995, respectively. This compares with $1.8 million and $4.6 million for
the same periods in 1994.
The reduced asset base under management for guaranteed investment contracts
("GICs"), deposit administration contracts ("DAs") and 401(k) plans has also
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 GICs, DAs and 401(k)
contracts mature or terminate. Management expects future earnings for these
closed blocks of businesses to decline, reflecting their run-off nature.
On September 11, 1995, UNUM announced plans to withdraw from the tax sheltered
annuity business, which at September 30, 1995, represented approximately $3,415
million of UNUM's consolidated assets, to focus greater attention on core
disability and special risk businesses. Management is pursuing the possibility
of selling the tax sheltered annuity business; however, no definitive plan of
withdrawal or sales agreement was in place as of November 9, 1995.
CORPORATE:
- ----------
The decreased loss before income taxes in Corporate for the three months ended
September 30, 1995, as compared with the same period in 1994, was primarily
attributable to decreased operating expenses partially offset by increased
interest expense. For the nine months ended September 30, 1995, the increased
loss before income taxes as compared with the same period in 1994, was primarily
due to increased interest expense partially offset by decreased operating
expenses. Effective January 1, 1995, the operations of UNUM Japan are reported
in the Disability Insurance segment. Costs related to the investment in Japan
prior to January 1, 1995, are reported as operating expenses in Corporate.
BUSINESS RESTRUCTURING AND OTHER CHARGES:
- -----------------------------------------
Charges of $8.4 million and $14.4 million were recorded in the second quarter of
1995 and the fourth quarter of 1994, respectively, related to the previously
announced decision to discontinue the individual disability non-cancellable
product and the acceleration of organizational changes within UNUM Life
Insurance Company of America. Partially offsetting the charge recorded in the
second quarter of 1995, was a $3.4 million curtailment gain, related to
workforce reductions in UNUM Corporation's noncontributory defined benefit plan.
The combined $22.8 million of restructuring and other charges, excluding the
$3.4 million curtailment gain, was comprised of $13.7 million for severance and
salary continuation costs and $9.1 million for exit costs of certain leased
facilities and equipment, expiring through 1998. All employee related costs are
expected to be paid by the end of 1995.
Of the total $22.8 million charge, UNUM utilized $4.2 million and $14.3 million,
for the three months and nine months ended September 30, 1995, respectively.
The $4.2 million, which was paid in the third quarter of 1995, was comprised of
$3.6 million for severance and salary continuation costs and $0.6 million of
lease costs. The $14.3 million was comprised of $12.5 million for severance
costs for 126 field and 229 home office employees and $1.8 million of lease
costs.
INVESTMENTS:
- ------------
UNUM's investment portfolio is concentrated in investment grade bonds. UNUM
evaluates total expected return after consideration of all associated expenses
and losses, within criteria established for each product line. Product line
investment strategies are developed to complement business risks by meeting the
liquidity and solvency requirements of each product. UNUM purchases assets
whose maturities, expected cash flows and prepayment conditions are consistent
with these strategies. The nature and quality of the types of investments
comply with policies established by management, which are more stringent overall
than the statutes and regulations imposed by the jurisdictions in which UNUM's
insurance subsidiaries are licensed.
UNUM's investments are reported in the consolidated financial statements net of
any allowances for probable losses. Allowances are established based on a
review of specific assets as well as the overall portfolio, considering the
carrying value of the underlying assets. If a decline in market value is
considered to be other than temporary, the investment is reduced to estimated
net realizable value and the reduction is recorded as a realized investment
loss. UNUM discontinues the accrual of investment income on invested assets
when it is determined that collectability is doubtful. Management monitors the
risk associated with the invested asset portfolio and regularly reviews and
adjusts the allowance for probable losses.
During the second quarter of 1995, UNUM sold virtually all of the common stock
portfolio of its United States subsidiaries, primarily due to consideration of
statutory capital requirements associated with investment in common stocks, and
to increase future investment income. UNUM has reinvested the proceeds from the
sale of the common stock portfolio primarily in investment grade fixed income
assets.
At September 30, 1995, the composition of UNUM's $11,060.6 million of invested
assets was 80.8% fixed maturities, 10.3% mortgage loans, 1.8% real estate, 0.2%
equity securities and 6.9% other invested assets.
FIXED MATURITIES:
- -----------------
At September 30, 1995, and December 31, 1994, the fixed maturity portfolio
included $132.2 million and $193.8 million of below investment grade bonds
(below "Baa"), which represented 1.5% and 2.5% of the fixed maturity portfolio,
respectively. These bonds had associated market values of $139.4 million and
$193.4 million, respectively. Virtually all of the nonconvertible, below
investment grade bonds were purchased at investment grade, but were subsequently
downgraded. UNUM's investment policy is to invest primarily in fixed maturities
of investment grade quality. Selected purchases of convertible subordinated
debentures, which UNUM considered part of its investment strategy for equity
securities, have contributed to the amount of below investment grade bonds.
Fixed maturity ratings are obtained from external rating agencies, and if not
externally rated, are determined by UNUM internally using similar methods.
Management does not expect any risks or uncertainties associated with below
investment grade bonds to have a significant effect on UNUM's consolidated
financial position or results of operations. UNUM had no fixed maturities
delinquent 60 days or more at September 30, 1995. The percentage of fixed
maturities delinquent 60 days or more, compared to total fixed maturities, was
0.25% at December 31, 1994.
During 1995, UNUM sold fixed maturities of two issuers classified as held to
maturity with an amortized cost of $4.0 million, and realized a net loss of $1.2
million on the sales. The bonds were sold due to significant deterioration of
the issuers' creditworthiness, as evidenced by bankruptcy filings.
MORTGAGES:
- ----------
At September 30, 1995, and December 31, 1994, UNUM's mortgage loans were
$1,136.1 million and $1,216.3 million, respectively. Management establishes
allowances for mortgage loans based upon a review of individual loans and the
overall loan portfolio, considering the value of the underlying collateral.
UNUM uses a comprehensive rating system to evaluate the investment and credit
risk of each mortgage loan and to target specific properties for inspection and
reevaluation. The percentage of mortgage loans delinquent sixty days or more on
a contract delinquency basis was 0.5% and 1.8% at September 30, 1995, and
December 31, 1994, respectively.
Overall, management believes that its mortgage loan portfolio is well
diversified geographically and among property types. UNUM's incidence of new
problem mortgage loans has continued to decline in the first nine months of 1995
as overall economic activity improved modestly, and many of the real estate
markets in which UNUM has mortgage loans stabilized. Management expects a
modest level of additional delinquencies and problem loans in the future.
Management believes the allowance provided for mortgage loans as of September
30, 1995, is adequate to cover probable losses.
Realized investment losses related to restructured and impaired mortgage loans
during the first nine months of 1995 amounted to $9.2 million, compared with
$9.0 million for the same period in 1994. Impaired mortgage loans as of
September 30, 1995, are not expected to have a significant impact on UNUM's
results of operations, liquidity, or capital resources.
Effective January 1, 1995, UNUM adopted Financial Accounting Standard ("FAS")
No. 114, "Accounting by Creditors for Impairment of a Loan," and FAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," which defined the principles to measure and record a loan when it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The adoption of FAS 114 and FAS
118 did not have a material effect on UNUM's results of operations or financial
position. In general, impaired loans as defined by FAS 114 compare with loans
previously defined and disclosed as problem and potential problem loans.
REAL ESTATE:
- ------------
At September 30, 1995, investment real estate amounted to $196.6 million
compared with $190.8 million at December 31, 1994. UNUM purchases investment
real estate in selected markets when certain investment criteria are met.
Investment real estate is intended to be held long-term and is carried at cost
less accumulated depreciation. Occasionally, investment real estate is
reclassified and revalued as real estate held for sale when it no longer meets
UNUM's investment criteria.
At September 30, 1995, real estate held for sale amounted to $47.0 million
compared with $31.0 million at December 31, 1994. 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.
Additions to the allowance for probable losses related to real estate held for
sale resulted in realized investment losses of $4.9 million and $1.8 million
for the nine months ended September 30, 1995, and 1994, respectively. Additions
to the allowance represent charges to net realized investment gains less
recoveries.
Given the current real estate environment, additional foreclosures are
anticipated, but at a reduced level from the early 1990s. Current and
anticipated real estate acquired through foreclosure is not expected to have a
significant affect on UNUM's results of operations, liquidity, or capital
resources.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
UNUM's businesses produce positive cash flows, which are invested primarily in
intermediate, fixed maturity investments intended to reflect the nature of
anticipated cash obligations of insurance benefit payments and insurance
contract maturities and to optimize investment returns at appropriate risk
levels. To meet unexpected cash requirements and liquidity needs, UNUM maintains
part of its investment portfolio in fixed maturities classified as available for
sale, equity securities, cash and short-term investments.
During the second quarter of 1995, UNUM sold virtually all of the common stock
portfolio of its United States subsidiaries, primarily due to consideration of
statutory capital requirements. UNUM has reinvested the proceeds from the sale
of the common stock portfolio primarily in investment grade fixed income assets.
From time to time, dividend payments, which may be subject to approval by
insurance regulatory authorities, are made from UNUM's affiliates and insurance
subsidiaries to UNUM Corporation. These dividends, along with other funds, are
used to service the needs of UNUM Corporation including: debt service, common
stock dividends, stock repurchase, administrative costs and corporate
development. Income determined using statutory accounting is one of the major
determinants of an insurance company's dividend capacity to its parent in the
following fiscal year. Statutory accounting rules and practices, which differ
in certain respects from generally accepted accounting principles, are mandated
by regulators in an insurance company's state of domicile.
At September 30, 1995, UNUM Corporation had a $500 million committed revolving
credit facility which expires on October 1, 1999. UNUM's commercial paper
program is supported by the revolving credit facility and is available for
general liquidity needs, capital expansion, acquisitions and stock repurchase.
The committed revolving credit facility contains certain covenants which, among
other provisions, require maintenance of certain levels of stockholders' equity
and limits on debt levels.
In September 1993, UNUM announced the filing of an omnibus shelf registration
statement with the Securities and Exchange Commission which became effective on
October 8, 1993, relating to $450 million of securities (including debt
securities, preferred stock, common stock and other securities). On October 8,
1993, UNUM filed a prospectus supplement to establish a $250 million medium-term
note program under the shelf registration. The medium-term note program and the
unsold portion of the shelf registration carry ratings of "A1" (Upper-Medium
Grade) and "(P)A1" (Upper-Medium Grade), respectively, from Moody's Investors
Service, and "A+" (Strong) from Standard & Poor's Corporation. The unsold
portion of the shelf registration relating to subordinated debt and preferred
stock carries ratings of "(P)A2" (Upper-Medium Grade) and "(P)"a1"" (Upper-
Medium Grade), respectively, from Moody's Investors Service.
On May 11, 1995, UNUM Corporation issued $172.5 million of 8.80% Monthly Income
Debt Securities ("MIDS") (Junior Subordinated Deferrable Interest Debentures,
Series A), under the shelf registration. The MIDS mature in 2025, and carry
ratings of "A2" (Upper-Medium Grade) from Moody's Investors Service and "A"
(Strong) from Standard & Poor's Corporation. UNUM used the net MIDS proceeds to
repay short-term debt and for general corporate purposes.
At September 30, 1995, UNUM had short-term and long-term debt totaling $181.0
million and $407.3 million, respectively. At September 30, 1995, approximately
$365 million was available for additional financing under the existing revolving
credit facility and approximately $145 million of investment grade debt
instruments was available for issuance under the shelf registration. Contingent
upon market conditions and corporate needs, management may refinance short-term
notes payable with longer term securities.
On October 26, 1995, UNUM Corporation issued $50.0 million of medium-term notes,
due 2000, with interest rates ranging from 6.3% to 6.4%. UNUM intends to use
the net proceeds from the issuance of the medium-term notes to repay commercial
paper and for general corporate purposes.
RATINGS:
- --------
In May 1995, A.M. Best Company ("Best's") affirmed UNUM Life Insurance Company
of America's financial strength rating at "A++" (Superior), the highest rating
assigned by Best's. Additionally, Best's affirmed First UNUM Life Insurance
Company at "A+" (Superior); Colonial Life & Accident Insurance Company at "A+"
(Superior); and Commercial Life & Accident Insurance Company was confirmed at
"A" (Excellent).
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 September 30, 1995. In the opinion of management, the
ultimate liability, if any, arising from this litigation is not expected to have
a material effect on the consolidated financial position or the consolidated
operating results of UNUM.
On December 29, 1993, UNUM filed a suit in the United States District Court for
the District of Maine, seeking a federal income tax refund. The suit is based
on a claim for a deduction in certain prior tax years, for $652 million in cash
and stock distributed to policyholders in connection with the 1986 conversion of
Union Mutual Life Insurance Company to a stock company. Although UNUM believes
its claims are meritorious, the United States is aggressively resisting the
claims and the ultimate recovery, if any, cannot be determined at this time.
NEW ACCOUNTING PRONOUNCEMENTS:
- ------------------------------
In March 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard ("FAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. UNUM is required to adopt FAS 121 by January 1, 1996. The
adoption of FAS 121 is not expected to have a material effect on UNUM's results
of operations or financial position.
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting standards
for stock-based employee compensation plans. UNUM is required to adopt FAS 123
effective January 1, 1996. FAS 123 defines a new method of accounting for
employee stock compensation plans using a fair value based method, under which
compensation cost is measured and recognized in results of operations.
Alternatively, FAS 123 allows an entity to retain the accounting method for
employee stock compensation plans defined under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." If an entity retains the accounting defined
under APB 25, certain pro forma disclosures of net income and earnings per share
must be made as if the fair value based method defined under FAS 123 had been
applied. UNUM has not yet determined what method of accounting it will elect or
what effect the adoption of FAS 123 may have on its results of operations or
financial position.
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
September 30, 1995
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
12. Statement re: Computation of ratio of earnings to fixed charges.
15. Letter re: Unaudited interim financial information.
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant with the Securities and
Exchange Commission during the quarter ended September 30, 1995.
<PAGE>
UNUM Corporation and Subsidiaries
Form 10-Q
September 30, 1995
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 9, 1995 /s/ ROBERT W. CRISPIN
-------------------- -----------------------------
Robert W. Crispin
Executive Vice President and
Chief Financial Officer
Date November 9, 1995 /s/ STEPHEN D. ROBERTS
-------------------- ------------------------------
Stephen D. Roberts
Vice President and
Corporate Controller
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1995
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------
(Unaudited - Dollars in millions) 1995 1994 1995 1994
- --------------------------------------------------------------------
Earnings:
Income (loss) from continuing operations
before income taxes $ 91.1 $(105.1) $297.1 $128.9
Add: Fixed charges 12.8 7.8 34.9 20.7
- ---------------------------------------------------------------------
Earnings as adjusted $103.9 $ (97.3) $332.0 $149.6
=====================================================================
Fixed charges:
Interest expense $ 10.2 $ 5.0 $ 26.8 $ 12.5
Interest portion of rent expense 2.6 2.8 8.1 8.2
- ---------------------------------------------------------------------
Total fixed charges $ 12.8 $ 7.8 $ 34.9 $ 20.7
======================================================================
Ratio of earnings to fixed charges 8.1 (12.5) 9.5 7.2
=====================================================================
For purposes of computing the ratio of earnings to fixed charges, earnings
as adjusted consist of net income (loss) plus income taxes and fixed
charges. Fixed charges consist of interest expense and the estimated
interest portion of rent expense.
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
We are aware that our report dated October 25, 1995, on our review of interim
financial information of UNUM Corporation for the three-month and nine-month
periods ended September 30, 1995 and 1994, and included in the Company's
quarterly report on Form 10-Q for the quarter then ended is incorporated by
reference in the following Registration Statements:
o Form S-8 No. 33-31270 pertaining to the UNUM Employees Retirement Savings
Plan and Trust
o Form S-8 No. 33-19090 pertaining to the 1987 Executive Stock Option Plan
o Form S-8 No. 33-38225 pertaining to the 1990 Long-Term Stock Incentive Plan
o Form S-8 No. 33-52741 pertaining to the 1990 Long-Term Stock Incentive Plan
o Form S-3 No. 33-36873
o Form S-3 No. 33-69132
o Form S-8 No. 33-60124 pertaining to the Colonial Companies, Inc. Security
Saver Plan
o Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on
Form S-4 No. 33-55870
Pursuant to Rule 436 (c) under the Securities Act of 1933, this report should
not be considered a part of the registration statements prepared or certified by
accountants within the meaning of Sections 7 and 11 of that Act.
/s/ COOPERS & LYBRAND L.L.P.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THE
QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS OF UNUM CORPORATION AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONTAINED IN UNUM
CORPORATION'S SEC FORM 10-Q DATED SEPTEMBER 30, 1995.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 3104300
<DEBT-CARRYING-VALUE> 5835600
<DEBT-MARKET-VALUE> 6098300
<EQUITIES> 24800
<MORTGAGE> 1136100
<REAL-ESTATE> 196600
<TOTAL-INVEST> 11060600
<CASH> 34400
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1111700
<TOTAL-ASSETS> 14088500
<POLICY-LOSSES> 6106700
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 3886800
<NOTES-PAYABLE> 588300
<COMMON> 10000
0
0
<OTHER-SE> 2089600
<TOTAL-LIABILITY-AND-EQUITY> 14088500
2201200
<INVESTMENT-INCOME> 599000
<INVESTMENT-GAINS> 221900
<OTHER-INCOME> 56700
<BENEFITS> 1858200
<UNDERWRITING-AMORTIZATION> (83500)<F1>
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 297100
<INCOME-TAX> 78100
<INCOME-CONTINUING> 219000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 219000
<EPS-PRIMARY> 3.02
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>THIS ITEM CONTAINS THE AMOUNTS OF DEFERRED AND AMORTIZED POLICY ACQUISITION
COSTS FOR THE PERIOD PRESENTED.
</FN>
</TABLE>
